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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20444
------------------------
PLD TELEKOM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3950002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
680 FIFTH AVENUE, 24TH FLOOR, NEW YORK, NEW YORK 10019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE -- 37,846,789 SHARES (OCTOBER 30, 1998)
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PLD TELEKOM INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PLD Telekom Inc.
Consolidated Condensed Balance Sheets as of September
30, 1998 (Unaudited) and December 31, 1997.......... 2
Consolidated Condensed Statements of Operations
(Unaudited) for the three and nine months ended
September 30, 1998 and 1997......................... 3
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the nine months ended September 30,
1998 and 1997....................................... 4
Notes to Consolidated Condensed Financial Statements
(Unaudited) for the three and nine months ended
September 30, 1998.................................. 5
NWE Capital (Cyprus) Ltd.
Consolidated Condensed Balance Sheets as of September
30, 1998 (Unaudited) and December 31, 1997.......... 18
Consolidated Condensed Statements of Operations
(Unaudited) for the three and nine months ended
September 30, 1998 and 1997......................... 19
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the nine months ended September 30,
1998 and 1997....................................... 20
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three and nine months
ended September 30, 1998............................ 21
Technocom Limited and Subsidiaries
Consolidated Condensed Balance Sheets as of September
30, 1998 (Unaudited) and December 31, 1997.......... 24
Consolidated Condensed Statements of Operations
(Unaudited) for the three and nine months ended
September 30, 1998 and 1997......................... 25
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the nine months ended September 30,
1998 and 1997....................................... 26
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three and nine months
ended September 30, 1998............................ 27
Wireless Technology Corporations Limited
Consolidated Condensed Balance Sheets as of September
30, 1998 (Unaudited) and December 31, 1997.......... 30
Consolidated Condensed Statements of Operations
(Unaudited) for the three and nine months ended
September 30, 1998 and 1997......................... 31
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the nine months ended September 30,
1998 and 1997....................................... 32
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three and nine months
ended September 30, 1998............................ 33
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 35
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......... 46
Item 6. Exhibits and Reports on Form 8-K.................. 46
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLD TELEKOM INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
------------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,610 $ 17,256
Trade receivables, net of allowances...................... 17,246 17,078
Other receivables and prepaids............................ 8,352 8,615
Inventory................................................. 3,299 2,802
Due from related parties.................................. 12,076 6,320
----------- --------
Total current assets.............................. 51,583 52,071
Escrow funds................................................ 16,609 33,868
Property and equipment, net................................. 161,565 134,998
Telecommunications licenses, net............................ 75,365 78,837
Due from related parties.................................... 2,011 3,011
Other investments........................................... 11,418 7,036
Goodwill, net............................................... 36,437 12,709
Other assets................................................ 12,083 13,056
----------- --------
Total assets...................................... $ 367,071 $335,586
=========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... 14,320 20,320
Accounts payable.......................................... 17,252 13,597
Accrued liabilities....................................... 4,753 5,750
Taxes payable............................................. 3,086 944
Due to related parties.................................... 1,279 5,336
Deferred revenues......................................... 2,190 3,128
Customer deposits......................................... 4,097 3,070
Other current liabilities................................. 3,424 1,312
----------- --------
Total current liabilities......................... 50,401 53,457
Long-term debt.............................................. 148,572 133,516
Minority interest........................................... 22,372 21,382
Shareholders' equity:
Preferred stock, par value $0.01 per share,
authorized -- 100,000,000, issued and
outstanding -- 446,884................................. 4 4
Common stock, par value $0.01 per share,
authorized -- 100,000,000, issued and
outstanding -- 37,846,789.............................. 378 333
Additional paid-in capital................................ 244,258 204,007
Accumulated deficit....................................... (98,914) (77,113)
----------- --------
Total shareholders' equity........................ 145,726 127,231
----------- --------
Total liabilities and shareholders' equity........ $ 367,071 $335,586
=========== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
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PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications.................. $ 37,181 $ 29,052 $ 110,713 $ 78,324
Finance lease income................ 402 482 1,276 1,490
----------- ----------- ----------- -----------
37,583 29,534 111,989 79,814
Direct costs.......................... 12,805 10,608 35,765 28,294
----------- ----------- ----------- -----------
Gross profit..................... 24,778 18,926 76,224 51,520
Operating expenses:
General and administrative.......... 16,335 9,804 38,559 25,902
Depreciation........................ 3,667 3,138 10,300 7,868
Amortization........................ 2,617 1,755 8,175 5,814
Taxes other than income taxes....... 793 1,357 4,703 3,949
----------- ----------- ----------- -----------
23,412 16,054 61,737 43,533
----------- ----------- ----------- -----------
Operating income................. 1,366 2,872 14,487 7,987
Other income/(expense):
Share of income/(loss) from equity
investments...................... 114 (193) (144) (740)
Interest and other income........... 298 625 2,115 4,028
Interest expense.................... (5,714) (4,457) (16,263) (12,846)
Amortization of deferred financing
costs............................ (473) (288) (1,274) (864)
Foreign exchange loss............... (3,819) (497) (4,308) (656)
Loss on disposal of investments and
property and equipment........... (13) -- (16) (251)
----------- ----------- ----------- -----------
Loss before income taxes and
minority interest.............. (8,241) (1,938) (5,403) (3,342)
Income taxes........................ 2,490 2,048 7,661 5,488
----------- ----------- ----------- -----------
Loss before minority interest.... (10,731) (3,986) (13,064) (8,830)
Minority interest..................... 1,203 1,391 8,737 4,614
----------- ----------- ----------- -----------
Net loss......................... $ (11,934) $ (5,377) $ (21,801) $ (13,444)
=========== =========== =========== ===========
Net loss per common share:
Basic............................... $ (0.33) $ (0.17) $ (0.64) $ (0.42)
Diluted............................. $ (0.33) $ (0.17) $ (0.64) $ (0.42)
Weighted average common shares
outstanding......................... 35,755,077 31,899,328 34,179,889 31,787,099
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(21,801) $(13,444)
Adjustments to reconcile net loss to net cash provided
by/(used in) operating activities:
Depreciation and amortization........................... 19,749 14,546
Gain on sale of SPMMTS.................................. -- (1,001)
Share of loss of equity investments..................... 144 740
Accrued interest on senior discount notes............... 12,542 10,500
Minority interest....................................... 8,737 4,614
Non-cash compensation expense........................... 688 --
Other................................................... -- 251
Changes in operating assets and liabilities, net of
effects of acquisitions:
Decrease/(increase) in trade receivables, net of
allowances........................................... (168) (3,537)
Decrease/(increase) in other receivables and
prepaids............................................. 266 (4,271)
Decrease/(increase) in inventory...................... (497) (235)
Change in due from or to related parties.............. (8,019) (120)
Increase/(decrease) in accounts payable, accrued
liabilities, customer deposits, taxes payable and
other current liabilities............................ 2,498 (782)
Increase/(decrease) in deferred revenue............... (938) 1,029
-------- --------
Net cash provided by operating activities.......... 13,201 8,290
Cash flows from investing activities:
Capital expenditures...................................... (22,996) (29,080)
Proceeds from sale of SPMMTS.............................. -- 17,180
Escrow funds.............................................. 17,259 (1,325)
Cash received from acquisition............................ 82 --
Cash paid for acquired business........................... (500) --
Investments and other assets.............................. (1,881) (565)
-------- --------
Net cash used in investing activities.............. (8,036) (13,790)
Cash flows from financing activities:
Proceeds from issuance of common stock.................... -- 1,738
Registration costs........................................ (342) --
Repayment of notes payable................................ (4,000) --
Short-term debt borrowings/(repayments), net.............. (2,000) (10,068)
Long-term debt repayments................................. (3,469) --
Cash dividends paid to minority shareholders.............. (2,000) (200)
Recapitalization of PeterStar............................. -- 1,427
-------- --------
Net cash used in financing activities.............. (11,811) (7,103)
-------- --------
Decrease in cash and cash equivalents....................... (6,646) (12,603)
Cash and cash equivalents, beginning of period.............. 17,256 40,674
-------- --------
Cash and cash equivalents, end of period.................... $ 10,610 $ 28,071
======== ========
Supplemental disclosures:
Non-cash investing and financing activities:
Issued shares for acquired businesses................. $ 39,560 --
======== ========
Recapitalization of PeterStar......................... -- 4,012
======== ========
Supplier financing.................................... $ 8,660 $ 8,692
======== ========
Issuance of warrants.................................. $ 390 $ --
======== ========
Acquisition of equipment under capital leases......... $ 4,000 $ --
======== ========
Interest paid............................................. $ 3,704 $ 1,554
======== ========
Income taxes paid......................................... $ 8,644 $ 7,278
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 6
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation. The accompanying consolidated condensed
financial statements are unaudited and have been prepared by PLD Telekom Inc.
(the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). In the opinion of management, the consolidated
financial statements include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation. Certain information and footnote
disclosures generally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Results for the interim
period are not necessarily indicative of the results for a full year. These
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
(b) Net loss per share. The Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), on
December 31, 1997. SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS") and supersedes Accounting Principles Board Opinion
No. 15. "Earnings Per Share". SFAS 128 requires dual presentation of basic and
diluted EPS on the face of the statement of operations and a separate
reconciliation of both EPS amounts. 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 that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock at the beginning of the period presented. Basic loss per share for 1997
has been restated to give effect to SFAS 128 and was not different from net loss
per share measured under APB No. 15. Potentially dilutive common stock
equivalents totalling 13,358,880 and 11,282,914 at September 30, 1998 and 1997,
respectively, have not been included in the computation of diluted net loss per
common share because they were antidilutive for the periods presented.
(c) Comprehensive income. Statement of Financial Accounting Standards No.
130 (SFAS 130), "Reporting Comprehensive Income," was issued in June 1997. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 as of January 1, 1998. For
the three and nine months ended September 30, 1998 comprehensive loss was equal
to consolidated net loss reported on the consolidated statement of operations.
As SFAS 130 only requires additional disclosures in the Company's consolidated
financial statements, its adoption did not have any impact on the Company's
consolidated financial position or results of operations.
(d) New pronouncements. Statement of Financial Accounting Standards No.
131 (SFAS 131), "Disclosure about Segments of an Enterprise and Related
Information," was issued in June 1997. SFAS 131 establishes standards for the
manner in which public companies should report information about operating
segments in annual financial statements and requires that those companies report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
will adopt SFAS 131 for its annual reporting in 1998.
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 cannot be applied retroactively to
5
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PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
financial statements of prior periods. At the current time the Company has not
evaluated the impact SFAS 133 will have, if any.
(e) Reclassifications. Certain reclassifications have been made to the
prior year's financial statements to conform to the current year's presentation.
(2) FUTURE ACTIVITIES
The Company's telecommunications businesses are developing 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. In
addition, Teleport-TP's satellite-based long distance network is at an early
stage of its development and operation and is therefore subject not only to the
general risks and uncertainties of operating in Russia, but also those involved
in the launching of a new telecommunications service. In addition, this national
long-distance service is being developed in various regions of Russia and its
implementation and results of operations will therefore be affected by, among
other things, the often uncertain economic conditions and growth rates in such
regions.
Ultimate recoverability of the Company's investments in its operating
subsidiaries, PeterStar Company Limited ("PeterStar"), Baltic Communications
Limited ("BCL"), ALTEL, formerly known as BECET International ("ALTEL"), and
Teleport-TP and its investee companies, is dependent upon each of these
subsidiaries and investees achieving and maintaining 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.
(3) RESTRICTED CASH
Technocom Limited 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 amount outstanding as of September 30, 1998 under these supplier
financing agreements secured by bank guarantees is approximately $934,000. In
addition, pursuant to the terms of the Company's $149.5 million private
placement completed on June 12, 1996, $16.6 million remained in escrow on
September 30, 1998. The Company intends that these funds will be released in the
future for the purchase of telecommunications equipment and for the payment of
interest on the Company's senior discount notes.
(4) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Under the terms of the Company's $123.0 million Senior Note offering placed
in June 1996, the Company was required to raise $20.0 million in an equity
financing by May 31, 1998. The Company did not do so, and as a result, the
interest rate on the Senior Notes increased from 14% to 14.5% as of June 1,
1998, and will remain at 14.5% until the end of the semi-annual interest period
in which such an offering is completed.
The obligation to raise $20.0 million in equity by May 31, 1998 was also a
requirement under the terms of the $12.32 million Series A and $3.1 million
Series B Revolving Credit Notes (the "Revolving Credit Notes") issued to the
Travelers Insurance Company and the Travelers Indemnity Company (collectively,
"Travelers") in November 1997 in connection with the Company's additional
investment in Technocom. Accordingly, the annual interest rate on the Series A
and B Notes increased from 12% to 15% as of June 1, 1998.
The Series A Revolving Credit Notes come due in full on December 31, 1998,
and the Series B Revolving Credit Notes would have come due in full on September
30, 1998, but for the deferral described below. The Company was obliged to make
required amortization payments in respect of the Series B Notes of $1 million on
each of July 31 and August 31, and a final payment of $1.1 million on September
30. In relation
6
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PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
to the Series A Notes, the Company was obliged to make a required amortization
payment of $1 million on October 31 and is obliged to make a further required
amortization payment of $1 million on November 30 and a final payment of $10.32
million on December 31, 1998.
The Company made the required payments due with respect to the Series B
Notes on July 31 and August 31 and by agreement with the holders of the Series B
Notes the final payment of $1.1 million due on September 30 has been deferred to
November 30, 1998. Payment of this amount has been guaranteed by News America
Incorporated ("News America"), which owns approximately 38% of the Company's
common stock.
In addition to the above payments, the Company did not effect certain
voluntary amortization (or "targeted reduction in commitment") payments in
respect of the Revolving Credit Notes of $0.5 million on July 31, 1998, $0.5
million on August 31, 1998 and $1.0 million on September 30, 1998, which
resulted in the issuance of 122,000 warrants to Travelers to acquire shares of
common stock of the Company at an exercise price of $8.625 per share.
The $1 million required payment due on the Series A Notes on October 31 has
been deferred to December 31, 1998 and likewise guaranteed by News America. The
Company anticipates that the $1 million payment due on November 30 will also be
deferred to December 31, 1998, and also anticipates that it will be guaranteed
by News America. The Company is currently in discussions with News America
regarding the financial terms and conditions under which News America will
provide its guarantees. In addition, the Company did not effect the voluntary
amortization payment of $1.5 million due on October 31, 1998, which resulted in
the issuance of 30,000 warrants to Travelers to acquire shares of common stock
of the Company at an exercise price of $8.625 per share. The Company does not
anticipate making the $1.5 million voluntary amortization payment due on
November 30, 1998 and so expects to issue a further 30,000 warrants to Travelers
with an exercise price of $8.625 per share at that time.
(5) CONTINGENCIES
(a) 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. Management does not believe that such fines and penalties would be
material.
(b) Certain of the Company's subsidiaries have accrued profits and other
taxes based on interpretations of the law which may ultimately be disputed by
the local taxation authorities. The exposure to additional profits and other
taxes, fines and penalties is not determinable, although the Company believes
such amounts will not be material.
(c) At September 30, 1998, PeterStar has commitments of approximately
$4,137,000 related to the acquisition of telecommunications equipment. The
PeterStar supply contract provides for financing of the entire amount over
approximately five years.
(d) 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 Network in 1998. The exact fee and 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.
(e) 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 $1.3 million for the remainder of its
term.
7
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PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(6) RECENT DEVELOPMENTS
On April 19, 1998, the Company entered into separate agreements with News
America, a wholly owned subsidiary of News Corporation Limited, and Cable and
Wireless plc ("Cable & Wireless") regarding, among other things, the acquisition
by the Company of: (i) an additional 11% interest in its subsidiary PeterStar
from News America (after its acquisition of such interest from Cable &
Wireless); and (ii) a 50% interest in BELCEL, a mobile telephone business in
Belarus, together with certain intercompany indebtedness, from Cable & Wireless.
In connection with these acquisitions, the Company agreed to issue an aggregate
of 4.3 million shares of its Common Stock, valued at approximately $37.6 million
to News America and Cable & Wireless. In addition, Cable & Wireless and News
America entered into an agreement providing for the sale by Cable & Wireless to
News America of its complete stake in the Company (including the Common Stock
being issued by the Company to Cable & Wireless in exchange for the interest in
BELCEL) and a warrant to purchase 250,000 shares of Common Stock. The final
condition to the transactions was satisfied on August 13, 1998 when the
shareholders of the Company approved the acquisition of the additional PeterStar
interest. The transactions were consummated on August 14, 1998.
During the second quarter of 1998, the Company purchased 98% of the
authorized and issued share capital of Ultra Pass Systems Limited ("Ultra
Pass"), from the shareholders of Ultra Pass. In consideration for the purchase
of the Ultra Pass shares, the Company issued 196,458 of shares of its Common
Stock, par value $0.01 per share, having an aggregate market value of
approximately $1.8 million and paid $500,000 in cash. The acquisition has been
accounted for by the purchase method of accounting and the final purchase price
allocation will be made during the fourth quarter of 1998.
(7) CONSOLIDATING CONDENSED FINANCIAL INFORMATION
NWE Capital (Cyprus) Limited ("NWE Cyprus"), Wireless Technology
Corporations Limited ("WTC"), BCL, PLD Asset Leasing Limited ("PLD Asset
Leasing"), PLD Capital Asset Inc. and PLD Capital Limited ("PLD Capital")
(collectively, the "Subsidiary Guarantors") have guaranteed the Company's Senior
Notes and Convertible Notes issued in June 1996. The following consolidating
balance sheet as of September 30, 1998 and consolidating statements of
operations for the three and nine months ended September 30, 1998 and 1997, and
consolidating statements of cash flows for the nine months ended September 30,
1998 and 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.
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. PLD Capital Asset Inc. is a special purpose holding company
incorporated in Delaware which sells equipment on an installment basis 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, all
of which are incorporated in jurisdictions outside the United States, can be
enforced easily, if at all. Persons seeking to enforce these 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.
8
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PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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 in 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 ability 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 judgement 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.
9
<PAGE> 11
PLD TELEKOM INC.
CONSOLIDATING BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES PLD
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 1,309 $ 473 $ 8,828 $ -- $ 10,610
Trade receivables, net of allowances..... -- 1,451 15,795 -- 17,246
Other receivables and prepaids........... 433 193 7,725 1 8,352
Inventory................................ -- 93 3,206 -- 3,299
Due from related parties................. 600 2,045 9,315 116 12,076
-------- -------- -------- --------- ---------
Total current assets.............. 2,342 4,255 44,869 117 51,583
Escrow funds............................... 16,609 -- -- -- 16,609
Intercompany investments and advances...... 264,079 164,216 936 (429,231) --
Property and equipment, net................ 4,215 7,993 150,638 (1,281) 161,565
Telecommunications licenses, net........... -- -- 32,812 42,553 75,365
Due from related parties................... -- 2,012 -- (1) 2,011
Other investments.......................... 5,891 8 5,405 114 11,418
Other assets............................... 11,488 59 12,372 24,601 48,520
-------- -------- -------- --------- ---------
Total assets...................... 304,625 178,543 247,031 (363,128) 367,071
======== ======== ======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.................... 13,420 -- 900 -- 14,320
Accounts payable......................... 3,133 1,547 12,915 (343) 17,252
Accrued liabilities...................... 1,413 148 3,192 -- 4,753
Taxes payable............................ -- 93 3,037 44 3,086
Due to related parties................... -- -- 1,236 (43) 1,279
Deferred revenue......................... -- 4 2,186 -- 2,190
Customer deposits........................ -- 26 4,071 -- 4,097
Other current liabilities................ 2,207 -- 1,215 -- 3,422
-------- -------- -------- --------- ---------
Total current liabilities......... 20,174 1,818 28,751 (344) 50,399
Long-term debt............................. 138,724 -- 9,848 1 148,572
Intercompany payables...................... -- 37,344 48,165 (85,508) --
Minority interest.......................... -- -- -- 22,372 22,372
Commitments and contingencies..............
Shareholders' equity:
Preferred stock.......................... 4 -- 40,000 (40,000) 4
Common stock............................. 378 132,278 81,185 (213,463) 378
Additional paid-in capital............... 244,258 -- -- -- 244,258
Accumulated deficit...................... (98,914) 7,103 39,082 (46,186) (98,914)
-------- -------- -------- --------- ---------
Total shareholders' equity........ 145,727 139,382 160,267 (299,649) 145,727
-------- -------- -------- --------- ---------
Total liabilities and
shareholders' equity............ $304,625 $178,543 $247,031 $(363,128) $ 367,071
======== ======== ======== ========= =========
</TABLE>
10
<PAGE> 12
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications............ $ -- $ 2,299 $34,883 $ -- $ 37,182
Finance lease income.......... -- 547 1,245 (1,390) 402
Management fees............... 1,039 1,875 -- (2,914) --
-------- -------- ------- ------- --------
Total revenues........ 1,039 4,721 36,128 (4,304) 37,584
Direct costs.................... -- 1,272 11,532 -- 12,805
-------- -------- ------- ------- --------
Gross profit.......... 1,039 3,448 24,596 (4,304) 24,779
Operating expenses:
General and administrative.... 3,928 2,508 11,751 (1,851) 16,336
Depreciation.................. (50) 210 3,508 -- 3,667
Amortization.................. 879 1,272 1,360 (894) 2,617
Management fees............... -- -- 1,002 (1,002) --
Taxes other than income
taxes...................... 213 201 379 -- 794
-------- -------- ------- ------- --------
Total operating
expenses............ 4,970 4,192 17,999 (3,747) 23,415
-------- -------- ------- ------- --------
Operating
income/(loss)....... (3,931) (744) 6,596 (557) 1,365
Other income/(expense):
Share of income/(loss) from
equity investments......... 751 2,285 114 (3,036) 114
Interest and other income..... 203 (342) (122) 560 299
Interest expense.............. (5,159) -- (1,385) 830 (5,714)
Amortization of deferred
financing costs............ (473) -- -- -- (473)
Foreign exchange loss......... (3,325) 2,836 (3,330) -- (3,818)
Loss on disposals............. -- (12) (1) -- (13)
-------- -------- ------- ------- --------
Income/(loss) before
income taxes and
minority interest... (11,934) 4,024 1,873 (2,204) (8,241)
Income taxes.................... -- (57) 2,547 -- 2,490
-------- -------- ------- ------- --------
Income (loss) before
minority interest... (11,934) 4,081 (674) (2,204) (10,731)
Minority interest............... -- -- -- 1,203 1,203
-------- -------- ------- ------- --------
Net income/(loss)..... $(11,934) $ 4,081 $ (674) $(3,407) $(11,934)
======== ======== ======= ======= ========
</TABLE>
11
<PAGE> 13
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications............ $ -- $ 7,429 $ 103,285 $ -- $110,714
Finance lease income.......... -- 547 2,119 (1,390) 1,276
Management fees............... 2,708 1,875 -- (4,583) --
-------- -------- --------- -------- --------
Total revenues........ 2,708 9,851 105,404 (5,973) 111,990
Direct costs.................... -- 3,822 31,942 -- 35,765
-------- -------- --------- -------- --------
Gross profit.......... 2,708 6,028 73,462 (5,973) 76,225
Operating expenses:
General and administrative.... 8,502 3,952 27,971 (1,865) 38,560
Depreciation.................. (154) 624 9,831 -- 10,300
Amortization.................. 879 3,713 4,452 (869) 8,175
Management fees............... -- -- 2,671 (2,671) --
Taxes other than income
taxes...................... 509 751 3,443 -- 4,704
-------- -------- --------- -------- --------
Total operating
expenses............ 9,736 9,041 48,367 (5,405) 61,740
-------- -------- --------- -------- --------
Operating
income/(loss)....... (7,028) (3,013) 25,094 (568) 14,486
Other income/(expense):
Share of income/(loss) from
equity investments......... 3,312 14,642 (144) (17,954) (144)
Interest and other income..... 1,839 1 276 -- 2,116
Interest expense.............. (15,325) -- (2,328) 1,390 (16,263)
Amortization of deferred
financing costs............ (1,274) -- -- -- (1,274)
Foreign exchange loss......... (3,325) 2,789 (3,772) -- (4,307)
Loss on disposals............. -- (12) (4) -- (16)
-------- -------- --------- -------- --------
Income/(loss) before
income taxes and
minority interest... (21,801) 14,408 19,123 (17,133) (5,403)
Income taxes.................... -- 105 7,556 -- 7,661
-------- -------- --------- -------- --------
Income (loss) before
minority interest... (21,801) 14,303 11,567 (17,133) (13,064)
Minority interest............... -- -- -- 8,737 8,737
-------- -------- --------- -------- --------
Net income/(loss)..... $(21,801) $ 14,303 $ 11,567 $(25,870) $(21,801)
======== ======== ========= ======== ========
</TABLE>
12
<PAGE> 14
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications............. $ -- $2,002 $27,050 $ -- $29,052
Finance lease income........... (20) 229 482 (209) 482
Management fees................ -- 611 -- (611) --
------- ------ ------- ------- -------
Total revenues......... (20) 2,842 27,532 (820) 29,534
Direct costs..................... -- 713 9,895 -- 10,608
------- ------ ------- ------- -------
Gross profit........... (20) 2,129 17,637 (820) 18,926
Operating expenses:
General and administrative..... 1,144 1,239 7,640 (219) 9,805
Depreciation................... (70) 216 2,992 -- 3,138
Amortization................... 412 1,220 122 -- 1,754
Management fees................ 3 -- 611 (614) --
Taxes other than income
taxes....................... 81 174 1,102 -- 1,357
------- ------ ------- ------- -------
Total operating
expenses............. 1,570 2,849 12,467 (833) 16,053
------- ------ ------- ------- -------
Operating
income/(loss)........ (1,590) (720) 5,170 13 2,873
Other income/(expense):
Share of income/(loss) from
equity investments.......... 55 3,920 (184) (3,984) (193)
Interest and other income...... 687 (252) 377 (187) 625
Interest expense............... (4,264) 204 (397) -- (4,457)
Amortization of deferred
financing costs............. (288) -- -- -- (288)
Foreign exchange loss.......... (3) (95) (400) -- (498)
Loss on disposals.............. -- -- -- -- --
------- ------ ------- ------- -------
Income/(loss) before
income taxes and
minority interest.... (5,403) 3,057 4,566 (4,158) (1,938)
Income taxes..................... (26) 129 1,929 16 2,048
------- ------ ------- ------- -------
Income (loss) before
minority interest.... (5,377) 2,928 2,637 (4,174) (3,986)
Minority interest................ -- -- (373) 1,765 1,392
------- ------ ------- ------- -------
Net income/(loss)...... $(5,377) $2,927 $ 3,012 $(5,939) $(5,378)
======= ====== ======= ======= =======
</TABLE>
13
<PAGE> 15
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications............ $ -- $ 5,687 $72,637 $ -- $ 78,324
Finance lease income.......... -- 609 1,490 (609) 1,490
Management fees............... -- 1,699 -- (1,699) --
-------- ------- ------- -------- --------
Total revenues........ -- 7,995 74,127 (2,308) 79,814
Direct costs.................... -- 1,813 26,481 -- 28,294
-------- ------- ------- -------- --------
Gross profit.......... -- 6,182 47,646 (2,308) 51,520
Operating expenses:
General and administrative.... 2,483 3,563 19,868 (12) 25,903
Depreciation.................. (208) 600 7,476 -- 7,868
Amortization.................. 2,004 3,662 147 -- 5,813
Management fees............... 775 -- 927 (1,702) --
Taxes other than income
taxes...................... 201 427 3,321 -- 3,949
-------- ------- ------- -------- --------
Total operating
expenses............ 5,255 8,252 31,739 (1,714) 43,532
-------- ------- ------- -------- --------
Operating
income/(loss)....... (5,255) (2,070) 15,907 (594) 7,988
Other income/(expense):
Share of income/(loss) from
equity investments......... 1,892 9,656 (726) (11,561) (740)
Interest and other income..... 3,299 27 702 -- 4,028
Interest expense.............. (12,323) -- (1,132) 609 (12,846)
Amortization of deferred
financing costs............ (864) -- -- -- (864)
Foreign exchange loss......... (219) 18 (456) -- (657)
Loss on disposals............. -- (251) -- -- (251)
-------- ------- ------- -------- --------
Income/(loss) before
income taxes and
minority interest... (13,470) 7,380 14,295 (11,546) (3,342)
Income taxes.................... (26) 217 5,297 -- 5,488
-------- ------- ------- -------- --------
Income (loss) before
minority interest... (13,444) 7,163 8,998 (11,546) (8,830)
Minority interest............... -- -- (638) 5,253 4,615
-------- ------- ------- -------- --------
Net income/(loss)..... $(13,444) $ 7,163 $ 9,636 $(16,799) $(13,445)
======== ======= ======= ======== ========
</TABLE>
14
<PAGE> 16
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
NON-
SUBSIDIARY GUARANTOR
GUARANTORS SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by/(used in) operating
activities............................ $ (5,932) $ 3,521 $ 22,916 $ 7,304 $ 13,201
-------- -------- -------- -------- --------
Cash flows from investing activities:
Escrow funds.......................... 17,259 -- -- -- 17,259
Capital expenditures.................. 1,334 (2,436) (30,688) 8,795 (22,996)
Cash paid for acquired business....... -- -- -- -- --
Investments and other assets.......... (1,250) 21,092 (47,718) 25,577 (2,299)
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities........ 17,343 18,656 (78,406) 34,372 (8,036)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Long-term borrowings/(repayments),
net................................ -- -- (1,454) (2,014) (3,469)
Short-term borrowings/(repayments),
net................................ (6,000) -- -- -- (6,000)
Issuance of stock..................... -- 6,638 47,277 (53,916) --
Dividends paid to minorities.......... (2,000) (2,000)
Related party advances and other...... (9,616) (28,583) 6,994 30,862 (342)
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities............. (15,616) (21,945) 52,816 (27,067) (11,811)
-------- -------- -------- -------- --------
(Decrease)/Increase in cash and
cash equivalents................. (4,205) 232 (2,674) 1 (6,646)
Cash and cash equivalents at beginning
of period............................. 5,513 241 11,502 0 17,256
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period................................ $ 1,308 $ 473 $ 8,828 $ 1 $ 10,610
======== ======== ======== ======== ========
</TABLE>
15
<PAGE> 17
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net cash provided by/(used in) operating
activities............................. $ (3,627) $(11,258) $ 12,720 $ 10,456 $ 8,291
Cash flows from investing activities:
Escrow funds........................... (1,325) -- -- -- (1,325)
Capital expenditures................... 430 (376) (29,790) 656 (29,080)
Proceeds from sale of SPMMTS........... 17,180 -- -- -- 17,180
Investments and other assets........... (4,435) 11,670 348 (8,147) (564)
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities......... 11,850 11,294 (29,442) (7,491) (13,789)
Cash flows from financing activities:
Short-term borrowings/(repayments),
net................................. 5,761 -- (15,829) -- (10,068)
Issuance of stock...................... 1,738 12,210 13,599 (25,808) 1,739
Dividends paid to minorities........... -- (200) (400) 400 (200)
Related party advances and other....... (9,717) (12,068) 768 22,444 1,427
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities.............. (2,218) (58) (1,862) (2,964) (7,102)
-------- -------- -------- -------- --------
(Decrease)/Increase in cash and cash
equivalents....................... 6,005 (22) (18,584) -- (12,600)
Cash and cash equivalents at beginning of
period................................. 7,271 331 33,072 -- 40,674
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period................................. $ 13,276 $ 309 $ 14,488 $ -- $ 28,074
======== ======== ======== ======== ========
</TABLE>
16
<PAGE> 18
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
17
<PAGE> 19
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(THOUSANDS OF U.S. DOLLARS
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,823 $ 7,849
Trade receivables, net of allowances...................... 13,336 12,725
Other receivables and prepaids............................ 5,662 3,266
VAT receivable............................................ 2,224 2,154
Due from related parties.................................. -- 468
Inventory................................................. 3,206 2,566
-------- --------
Total current assets.............................. 31,251 29,028
Property and equipment, net................................. 95,869 79,002
Telecommunications licenses, net............................ 38,745 42,286
Other receivables........................................... -- 3,012
Goodwill, net............................................... 1,419 1,580
Other assets................................................ 2,399 280
-------- --------
Total assets...................................... $169,683 $155,188
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank indebtedness......................................... $ 900 $ 900
Accounts payable.......................................... 2,373 3,064
Accrued liabilities....................................... 2,397 3,044
Advances from other group companies....................... 29,346 32,810
Due to related parties.................................... 433 818
Customer deposits and advances............................ 6,257 5,978
Current portion of long term debt......................... 3,610 3,988
-------- --------
Total current liabilities......................... 45,316 50,602
-------- --------
Long-term debt.............................................. 18,187 12,458
Due to related parties...................................... -- 2,144
Minority interest........................................... 26,845 19,391
Commitments and contingencies
Shareholder's equity:
Common stock, par value CYP 1 per share. Authorized
3,246,174 shares in 1998 and 1997; issued and
outstanding 1,000 shares in 1998 and 1997.............. 7,082 7,082
Contributed surplus....................................... 63,723 63,723
Accumulated surplus (deficit)............................. 8,530 (212)
-------- --------
Total shareholder's equity........................ 79,335 70,593
-------- --------
Total liabilities and shareholder's equity........ $169,683 $155,188
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
18
<PAGE> 20
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Telecommunications revenue............................ $29,583 $22,588 $87,521 $58,095
Direct costs.......................................... 8,042 6,864 23,583 15,809
------- ------- ------- -------
Gross profit................................ 21,541 15,724 63,938 42,286
Operating expenses:
General and administrative.......................... 9,328 5,314 20,639 13,489
Management fees..................................... 14 -- 833 --
Depreciation........................................ 2,513 2,332 7,209 5,735
Amortization........................................ 1,247 1,239 3,702 3,709
Taxes other than income taxes....................... 820 762 3,011 2,302
------- ------- ------- -------
Total operating expenses.................... 13,922 9,647 35,394 25,235
------- ------- ------- -------
Operating income............................ 7,619 6,077 28,544 17,051
Other income/(expense):
Interest and other income........................... (518) (61) 133 162
Interest on long-term debt.......................... (179) (211) (559) (616)
Foreign exchange loss............................... (2,243) (56) (2,463) (283)
------- ------- ------- -------
Income before income taxes and minority
interest.................................. 4,679 5,749 25,655 16,314
Income taxes.......................................... 2,489 1,361 7,459 4,582
------- ------- ------- -------
Income before minority interest............. 2,190 4,388 18,196 11,732
Minority interest..................................... 1,590 2,414 9,454 6,567
------- ------- ------- -------
Net income/(loss)........................... $ 600 $ 1,974 $ 8,742 $ 5,165
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
19
<PAGE> 21
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ 8,742 $ 5,165
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 10,911 9,444
Minority interest...................................... 9,454 6,567
Changes in operating assets and liabilities:
Increase in accounts receivable...................... (611) (4,050)
Decrease (increase) in other receivables, prepaids
and VAT receivable.................................. (2,466) (1,965)
(Decrease) increase in inventory..................... (640) (229)
Change in amounts due from and to related parties.... (2,061) 3,361
(Decrease) increase in customer deposits and
advances............................................ 279 (85)
Increase (decrease) in accounts payable and accrued
liabilities......................................... (2,137) 3,295
Increase (decrease) intercompany advances............ (3,464) --
-------- --------
Net cash provided by operating activities......... 18,007 21,503
Cash flows from investing activities:
Capital expenditures...................................... (16,620) (20,531)
Other investments and assets.............................. 893 (296)
-------- --------
Net cash used in investing activities............. (15,727) (20,827)
Cash flows from financing activities:
Long-term debt............................................ (1,306) 996
Dividends................................................. (2,000) (200)
PeterStar recapitalization................................ -- 1,427
-------- --------
Net cash (used in)/provided by financing
activities...................................... (3,306) 2,223
-------- --------
Increase in cash and cash equivalents............. (1,026) 2,899
Cash and cash equivalents at beginning of year.............. 7,849 5,185
-------- --------
Cash and cash equivalents at end of year.................... $ 6,823 $ 8,084
======== ========
Supplemental Disclosures:
Non-cash investing and financing activities:
Purchase of equipment with advances from PLD Telekom
Inc. and under long-term contracts.................... $ 7,456 $ 8,697
======== ========
Interest paid............................................. $ 798 $ 329
======== ========
Income taxes paid......................................... $ 8,592 $ 6,951
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
20
<PAGE> 22
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements are unaudited
and have been prepared by NWE Capital (Cyprus) Ltd. (the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of management, the financial statements include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation.
Certain information and footnote disclosures generally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. Results for the interim periods are not necessarily indicative of
the results for a full year. These consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the fiscal year ended December 31, 1997.
The Company's parent is PLD Telekom Inc. ("PLD"). The parent's investment
in the Company has been pushed down into the Company's consolidated financial
statements and allocated to the cost of the telecommunications licenses and
goodwill. The Company's consolidated balance sheet at December 31, 1997 and at
September 30, 1998 reflects the effect of this push down accounting treatment.
The costs of the telecommunications licenses are amortized on a straight line
basis over the terms of the related licenses. Goodwill is amortized on a
straight line basis over 20 years.
(2) FUTURE ACTIVITIES
The Company's telecommunications businesses are developing 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 in its subsidiaries,
PeterStar Company Limited ("PeterStar"), Wireless Technology Corporations
Limited ("WTC") and C.P.Y. Yellow Pages Limited ("Yellow Pages"), is dependent
upon each of these subsidiaries achieving and maintaining 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.
(3) RECENT DEVELOPMENTS
On August 14, 1998, PLD acquired an additional 11% of PeterStar through its
acquisition of 100% of the outstanding stock of PLD Holdings Ltd., a Bermudan
company, from Cable & Wireless.
(4) COMMITMENTS AND CONTINGENCIES
(a) Taxation
PeterStar and ALTEL (an operating subsidiary of WTC formerly known as BECET
International) have accrued profit 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 profit and other taxes,
fines and penalties will not have a material adverse effect on the financial
position or results of operations of the Company.
21
<PAGE> 23
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(b) Purchase Commitments
At September 30, 1998, PeterStar has commitments of approximately
$4,137,000 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, 1998, PLD entered into a two year agreement with ALTEL, under
which PLD would provide certain consulting, informational services, management
support services and personnel expertise. The agreement provides for a fee of
$25,000 per month plus 3.4% of monthly gross revenues.
ALTEL has negotiated an agreement with its other shareholder effective
January 1, 1998 with a two year term. The shareholder will provide certain
consulting services, management support services and personnel expertise.
Payments under this agreement are 300,000 tenge (U.S. dollar equivalent as of
September 30, 1998 approximates $4,900) per month plus 1.0% of monthly gross
revenues.
(d) Guarantee
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. PLD registered these
debt securities with the SEC in 1998. The Company is a guarantor of the debt
under the terms of the related indentures.
(e) Line Rental
While is 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, an indirect minority shareholder of PeterStar, in 1998. The exact fee
and 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.
(5) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," was issued in June 1997. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence as other financial statements. The
Company adopted SFAS 130 as of January 1, 1998. For the three and nine months
ended September 30, 1998, comprehensive loss was equal to consolidated net loss
reported on the consolidated statement of operations. As SFAS 130 only requires
additional disclosures in the Company's consolidated financial statements, its
adoption did not have any impact on the Company's consolidated financial
position or results of operations.
(6) ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities," was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. SFAS 133 cannot be applied
retroactively to financial statements of prior periods. At the current time the
Company has not evaluated the impact SFAS 133 will have, if any.
22
<PAGE> 24
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
23
<PAGE> 25
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,061 $ 4,671
Trade receivables, net of allowances...................... 2,458 2,942
Other receivables......................................... 1,649 2,806
Due from related parties.................................. 8,410 5,591
-------- --------
TOTAL CURRENT ASSETS.............................. 14,578 16,010
Property and equipment, net................................. 53,415 50,656
Telecommunications licenses, net............................ 33,313 36,632
Due from related parties.................................... 2,154 2,253
Goodwill, net............................................... 10,711 11,129
Other investments and assets, net........................... 971 1,307
-------- --------
TOTAL ASSETS...................................... $115,142 $117,987
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... 6,907 6,078
Accrued liabilities....................................... 785 1,590
Taxes payable............................................. 3,000 1,942
Due to related parties.................................... 18,881 21,867
Other current liabilities................................. 115 765
-------- --------
TOTAL CURRENT LIABILITIES......................... 29,688 32,242
Other liabilities........................................... -- 337
Due to related parties...................................... 8,000 336
Supplier financing.......................................... 3,179 3,327
SHAREHOLDERS' EQUITY
Capital stock............................................... 1 1
Preference shares, par value $1.00 per share, authorized,
issued and fully paid -- 1,000 shares
Ordinary shares, par value IR(pound)1 per share,
authorized -- 1,000 shares, issued and fully
paid -- 199 shares
Share premium............................................. 40,390 40,390
Additional Capital........................................ 46,402 45,756
Accumulated deficit....................................... (12,518) (4,402)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 74,275 81,745
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $115,142 $117,987
======== ========
</TABLE>
See accompanying notes to the consolidated condensed financial statements
24
<PAGE> 26
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS
ENDED SEPTEMBER 30
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ -------------------
1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Telecommunications.................................. $ 5,301 $ 4,462 $15,763 $14,542
Finance lease income................................ 402 482 1,276 1,490
-------- ------- ------- -------
TOTAL REVENUES.............................. 5,703 4,944 17,039 16,032
DIRECT COSTS.......................................... 3,491 3,030 8,331 10,263
-------- ------- ------- -------
GROSS PROFIT.......................................... 2,212 1,914 8,708 5,769
OPERATING EXPENSES:
General and administrative.......................... 2,549 1,861 6,763 4,729
Depreciation........................................ 911 667 2,669 1,681
Amortization........................................ 1,390 131 4,412 177
Taxes other than income taxes....................... (329) 267 661 1,018
-------- ------- ------- -------
TOTAL OPERATING EXPENSES.................... 4,521 2,926 14,505 7,605
OPERATING LOSS........................................ (2,309) (1,012) (5,797) (1,836)
OTHER INCOME/(EXPENSES):
Share of income/(loss) from equity investments...... 114 (193) (144) (740)
Interest income..................................... 18 35 135 534
Interest expense.................................... (363) (264) (926) (515)
Foreign exchange loss............................... (1,099) (71) (1,384) (18)
-------- ------- ------- -------
LOSS BEFORE TAXATION AND MINORITY INTEREST............ (3,639) (1,505) (8,116) (2,575)
Income taxes.......................................... -- (350) -- (487)
-------- ------- ------- -------
LOSS BEFORE MINORITY INTEREST............... (3,639) (1,855) (8,116) (3,062)
Minority interest..................................... -- 535 -- 800
-------- ------- ------- -------
NET LOSS.............................................. $ (3,639) $(1,320) $(8,116) $(2,262)
======== ======= ======= =======
</TABLE>
See accompanying notes to the consolidated condensed financial statements
25
<PAGE> 27
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(8,116) $ (2,262)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 7,081 1,858
Share of loss of equity investments....................... 144 740
Minority interest......................................... -- (800)
Changes in operating assets and liabilities:
(Increase)/decrease in trade receivables.................. 484 972
(Increase)/decrease in other receivables.................. 863 (2,272)
Changes in due from/to related parties.................... 1,957 12,533
Increase/(decrease) in accounts payable and deferred
taxes.................................................. 1,511 522
Increase/(decrease) in accrued liabilities................ 600 (49)
Increase/(decrease) in other liabilities.................. -- --
------- --------
CASH PROVIDED BY OPERATING ACTIVITIES....................... 4,524 11,242
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (4,784) (17,054)
Other investments and assets................................ (187) 107
------- --------
CASH USED IN INVESTING ACTIVITIES........................... (4,971) (16,947)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on long-term indebtedness........................... (2,163) (123)
Repayment of bank borrowings................................ -- (15,829)
------- --------
CASH USED IN FINANCING ACTIVITIES........................... (2,163) (15,952)
Decrease in cash and cash equivalents....................... (2,610) (21,657)
Cash and cash equivalents at beginning of period............ 4,671 27,997
------- --------
CASH AT CASH EQUIVALENTS AT END OF PERIOD................... $ 2,061 $ 6,340
======= ========
Supplemental disclosures:
Interest paid............................................... $ 148 $ 354
======= ========
Income taxes paid........................................... $ -- $ --
======= ========
</TABLE>
See accompanying notes to the consolidated condensed financial statements
26
<PAGE> 28
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(1) BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements are unaudited
and have been prepared by Technocom Limited (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC"). In
the opinion of management, the consolidated financial statements include all
adjustments necessary for a fair presentation. Certain information and footnote
disclosures generally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. Results for the interim period are
not necessarily indicative of the results for a full year. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
December 31, 1997.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
The Company's parent is PLD Telekom Inc. ("PLD"). The parent's investment
in the Company has been pushed down into the Company's consolidated financial
statements and allocated to the cost of the telecommunications licenses and
goodwill. The Company's consolidated balance sheet at December 31, 1997 and at
September 30, 1998 reflects the effect of this push down accounting treatment.
The costs of the telecommunications licenses are amortised on a straight
line basis over the terms of the related licenses. Goodwill is amortised on a
straight line basis over 20 years.
(2) BUSINESS OPERATIONS AND FUTURE ACTIVITIES
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 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, its 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 and affiliates 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.
(3) COMMITMENTS AND CONTINGENCIES
The Company's Russian subsidiary, 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 $1.3 million for
the remainder of its term.
As of September 30, 1998, the Company has a commitment to pay PLD
$8,000,000 on April 20, 2001 in accordance with the terms of an agreement dated
April 21, 1998 between the Company and PLD. In addition,
27
<PAGE> 29
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
according to the terms of the agreement interest accrues at the rate of 14% p.a.
and will be payable annually in arrears on the anniversary of the agreement
date.
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.
The Company has entered into bank guarantees under certain of its
telecommunications equipment supplier financing agreements. The amount of the
guarantees reduce automatically in accordance with installments paid. The
amounts outstanding at September 30, 1998 amounted to $934,000.
(4) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," was issued in June 1997. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence as other financial statements. The
Company adopted SFAS 130 as of January 1, 1998. For the three and nine months
ended September 30, 1998, comprehensive loss was equal to consolidated net loss
reported on the consolidated statement of operations. As SFAS 130 only requires
additional disclosures in the Company's consolidated financial statements, its
adoption did not have any impact on the Company's consolidated financial
position or results of operations.
(5) ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 can not be applied retroactively to
financial statements of prior periods. At the current time the Company has not
evaluated the impact SFAS 133 will have, if any.
28
<PAGE> 30
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
29
<PAGE> 31
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,430 $ 5,294
Trade receivables, net of allowance....................... 3,525 3,462
Inventory................................................. 1,109 1,640
Prepaid expenses and other current assets................. 1,484 798
------- -------
Total current assets.............................. 11,548 11,194
Property and equipment, net................................. 26,061 23,362
Telecommunications license, net............................. 22,010 23,693
------- -------
Total assets...................................... $59,619 $58,249
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. 1,449 1,197
Due to related parties.................................... 706 1,875
Customer deposits and advances............................ 4,071 3,070
Income tax payable........................................ 33 58
------- -------
Total current liabilities......................... 6,259 6,200
------- -------
Commitments and contingencies
Minority interest........................................... 5,914 4,489
Shareholder's equity:
Common stock, par value of $1 per share,
authorized -- 20,001,000 shares, issued and
outstanding -- 20,000,002 shares....................... 20,000 20,000
Contributed capital....................................... 30,803 30,803
Accumulated deficit....................................... (3,357) (3,243)
------- -------
Total shareholder's equity........................ 47,446 47,560
------- -------
Total liabilities and shareholder's equity........ $59,619 $58,249
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
30
<PAGE> 32
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Telecommunications revenues........................... $9,974 $7,883 $29,651 $20,642
Direct costs.......................................... 2,184 1,737 6,086 4,759
------ ------ ------- -------
Gross profit.......................................... 7,790 6,146 23,565 15,883
Operating expenses:
General and administrative.......................... 2,500 2,073 7,257 5,379
Management fees..................................... 414 311 1,233 799
Depreciation and amortization....................... 1,427 1,809 4,449 4,489
Taxes other than income tax......................... 104 133 388 304
------ ------ ------- -------
Total operating expenses.................... 4,445 4,326 13,327 10,971
------ ------ ------- -------
Operating income...................................... 3,345 1,820 10,238 4,912
Other income/(expense):
Interest and other income........................... (173) 83 12 162
Foreign exchange (loss)/gain........................ (62) 33 (253) (79)
------ ------ ------- -------
Net income before income tax and minority
interest....................................... 3,110 1,936 9,997 4,995
Income tax............................................ 1,615 1,083 4,686 2,140
------ ------ ------- -------
Net income before minority interest......... 1,495 853 5,311 2,855
Minority interest..................................... 1,004 683 3,425 2,197
------ ------ ------- -------
Net income............................................ $ 491 $ 170 $ 1,886 $ 658
====== ====== ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
31
<PAGE> 33
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash flows provided by operating activities:
Net income................................................ $ 1,886 $ 658
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 4,449 4,489
Gain on disposal....................................... 55 --
Bad debt expense....................................... 262 263
Minority interest...................................... 3,425 2,197
Changes in operating assets and liabilities:
Increase in trade receivables........................ (396) (927)
Decrease in inventory................................ 531 27
Increase in prepaid expenses and other current
assets.............................................. (686) (247)
Increase (decrease) in accounts payable and accrued
liabilities......................................... 252 (1,022)
(Decrease) increase in due to related parties........ (1,169) (235)
Increase in customer deposits and advances........... 1,001 814
(Decrease) increase in income tax payable............ (25) 194
------- -------
Net cash provided by operating activities......... 9,585 6,211
------- -------
Cash flows used in investing activities -- purchase of
property and equipment.................................... (5,449) (2,572)
------- -------
Cash flows from financing activities -- dividend payments... (4,000) (400)
------- -------
Increase in cash and cash equivalents............. 136 3,239
Cash and cash equivalents at beginning of period............ 5,294 2,733
------- -------
Cash and cash equivalents at end of period.................. $ 5,430 $ 5,972
======= =======
Supplemental disclosures:
Interest paid............................................. $ -- $ --
======= =======
Income taxes paid......................................... $ 4,701 $ 3,952
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
32
<PAGE> 34
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
(1) BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements are unaudited
and have been prepared by Wireless Technology Corporations Limited ("WTC" or
"the Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). In the opinion of management, the consolidated
financial statements include all adjustments necessary for a fair presentation.
Certain information and footnote disclosures generally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such SEC rules and regulations.
Results for interim periods are not necessarily indicative of the results for a
full year. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the fiscal year
ended December 31, 1997.
The Company's ultimate parent is PLD Telekom Inc. ("PLD"). The parent's
investment in the Company has been pushed down into the Company's consolidated
financial statements and allocated to the cost of the telecommunications
license. The Company's consolidated balance sheet at December 31, 1997 and at
September 30, 1998 reflects the effect of this push down accounting treatment.
The cost of the telecommunications license is amortized on a straight line basis
over the term of the license.
(2) FUTURE ACTIVITIES
The Company's results are dependent upon the ability of its subsidiary,
ALTEL, formerly known as BECET International ("ALTEL"), to retain existing
subscribers, to attract new subscribers, and to control operating expenses.
ALTEL's cellular telecommunications system is developing in an emerging economy
which, by its nature, has an uncertain economic, political, and regulatory
environment. The general risks of operating businesses in Kazakhstan include the
possibility for rapid changes in government policies, economic conditions, the
tax regime, and foreign currency regulations.
Ultimate recoverability of the Company's investment in ALTEL is dependent
upon ALTEL maintaining profitability, which is dependent on the stability of the
economy of Kazakhstan, the ability to maintain the necessary telecommunications
licenses, and the ability to obtain adequate financing to meet capital
requirements.
(3) COMMITMENTS AND CONTINGENCIES
PLD issued senior discount notes and convertible subordinated notes with an
aggregate principal amount of $149.5 million in June 1996. PLD registered these
debt securities with the SEC in 1998. The Company, along with other PLD
subsidiaries, is a guarantor of the debt securities under the terms of the
related indentures.
On January 1, 1998, PLD entered into a two year agreement with ALTEL, under
which PLD would provide certain consulting, informational services, management
support services and personnel expertise. The agreement provides for a fee of
$25,000 per month plus 3.4% of monthly gross revenues.
ALTEL has negotiated an agreement with its other shareholder effective
January 1, 1998 with a two year term. The shareholder will provide certain
consulting services, management support services and personnel expertise.
Payments under this agreement are 300,000 tenge (U.S. dollar equivalent as of
September 30, 1998 approximates $4,900) per month plus 1.0% of monthly gross
revenues.
ALTEL has accrued profit 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 profit and
33
<PAGE> 35
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
other taxes, fines and penalties will not have material effect on the financial
position or results of operations of the Company.
(4) COMPREHENSIVE INCOME
Statements of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income," was issued in June 1997. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence as other financial statements. The
Company adopted SFAS 130 as of January 1, 1998. For the three and nine months
ended September 30, 1998, comprehensive loss was equal to consolidated net loss
reported on the consolidated statement of operations. As SFAS 130 only requires
additional disclosures in the Company's consolidated financial statements, its
adoption did not have any impact on the Company's consolidated financial
position or results of operations.
(5) ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 can not be applied retroactively to
financial statements of prior periods. At the current time the Company has not
evaluated the impact SFAS 133 will have, if any.
(6) DIVIDEND PAYMENTS
Total dividends declared and paid were $4.0 million and $400,000 for the
nine months ended September 30, 1998 and 1997, respectively.
34
<PAGE> 36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information relating to political, social and economic conditions in the
countries of the former Soviet Union and the Commonwealth of Independent States,
the commencement of certain programs and the proposed offering of certain
services by the Company's operating subsidiaries, proposed changes in the
Company's corporate structure and centers of operations, the impact of Year 2000
issues on the Company's operations and interpretations and actions of certain
regulatory authorities, including in the United States, Canada, Russia, and
Kazakhstan, as well as information contained elsewhere in this report where
statements are preceded by, followed by, or include the words "believes,"
"expects," "anticipates," and similar expressions. For such statements, the
Company claims the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. Actual events
or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation, those
discussed elsewhere in the Report.
BASIS OF PRESENTATION
The Company's key interests at September 30, 1998 include a 71% equity
interest in PeterStar, which provides telecommunications services in St.
Petersburg, Russia; a 50% equity interest in ALTEL, which provides cellular
services in Kazakhstan; a 50% interest in Belcel, which provides cellular
services in Belarus; and an 80.4% equity interest in Technocom which, through
its 49.3% equity interest in Teleport-TP, operates an international teleport in
Moscow, fiber optic networks in Moscow and its environs and a satellite-based
long distance network across Russia.
EBITDA is used as a measure of operating performance and is defined as
earnings (or loss) from continuing operations before income taxes and minority
interest plus net interest (interest expense less interest and other income)
plus depreciation and amortization. It is presented as supplemental disclosure
because it assists in understanding the Company's operating results. EBITDA,
however, may not be comparable to similarly titled measures of other companies
and should not be considered in isolation or as a substitute for net income,
cash flow provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
Certain of the Company's subsidiaries pay management fees to their
shareholders, including the Company. The figures presented for the subsidiaries
reflect all payments of such fees (i.e. management fees are included in
operating expenses in the same way as other expenses of the subsidiary).
Profitability measures -- EBITDA, operating profit and net income -- are
therefore quoted after accounting for such payments.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1998 Versus Three and Nine Months
Ended September 30, 1997
Overview. The Company reported a net loss of $11.9 million ($0.33 per
share) and operating income of $1.4 million on revenues of $37.6 million for the
three months ended September 30, 1998, compared to a net loss of $5.4 million
($0.17 per share) and operating income of $2.9 million on operating revenues of
$29.5 million reported in the third quarter of 1997. EBITDA of $3.9 million
reported in the third quarter of 1998 compared with $7.1 million in the third
quarter of 1997.
For the nine months ended September 30, 1998, the Company reported a net
loss of $21.8 million ($0.64 per share) and operating income of $14.5 million on
revenues of $112.0 million compared to a net loss of $13.4 million ($0.42 per
share) and operating income of $8.0 million operating on revenues of $79.8
million reported in the nine months ended September 30, 1997. EBITDA of $28.5
million reported in the nine months ended September 30, 1998 compared with $20.0
million reported in 1997.
35
<PAGE> 37
The following narrative discusses the major line items comprising the
Company's net loss for the three and nine months ended September 30, 1998
compared to the three and nine months ended September 30, 1997.
Revenues. Revenues increased 27.5% from $29.5 million in the third quarter
of 1997 to $37.6 million in the third quarter of 1998. For the nine months ended
September 30, 1998 revenues increased 40.4% from $79.8 million recorded in 1997
to $112.0 million in 1998. These increases were primarily a result of the strong
year-on-year revenue growth in PeterStar and ALTEL, which for the nine months
ended September 30, 1998 together accounted for 77.3% of the Company's
consolidated revenues. PeterStar's subscriber line numbers reached 176,000 by
the end of the third quarter, up 88,000 over the previous year. ALTEL's number
of subscribers increased to 18,000, up 8,000 over last year, the accelerated
rate of growth being primarily due to the introduction of prepaid cellular
service in August 1998. In 1998, Teleport-TP has added an additional ten earth
stations in the C.I.S. which are expected to become contributors to overall
revenues as they become fully operational.
The following table shows the Company's consolidated revenues by principal
operating subsidiary for the three and nine months ended September 30, 1998 and
1997 and the percentage growth in revenues between the periods:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, % SEPTEMBER 30, SEPTEMBER 30,
1998 1997 CHANGE 1998 1997
------------------- ------------------- OVER ------------------- -------------------
($ MILLION) % ($ MILLION) % PRIOR PERIOD ($ MILLION) % ($ MILLION) %
----------- ----- ----------- ----- ------------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PeterStar............ 19.1 50.8% 14.2 48.1% 34.5% 56.9 50.8% 36.5 45.7%
ALTEL................ 10.0 26.6% 7.8 26.4% 28.2% 29.7 26.5% 20.6 25.8%
Technocom............ 5.7 15.2% 4.9 16.6% 16.3% 17.0 15.2% 16.0 20.1%
BCL.................. 2.3 6.1% 2.0 6.8% 15.0% 7.4 6.6% 5.7 7.1%
Other................ 0.5 1.3% 0.6 2.1% (16.7) 1.0 0.9% 1.0 1.3%
---- ----- ---- ----- ----- ----- ----- ---- -----
37.6 100.0% 29.5 100.0% 27.5% 112.0 100.0% 79.8 100.0%
==== ===== ==== ===== ===== ===== ===== ==== =====
<CAPTION>
%
CHANGE OVER
PRIOR PERIOD
------------
<S> <C>
PeterStar............ 55.9%
ALTEL................ 44.2%
Technocom............ 6.3%
BCL.................. 29.8%
Other................ 0.0%
----
40.4%
====
</TABLE>
Revenues in the third quarter of 1998 were $1.6 million less than those in
the second quarter (although still $2.4 million more than those in the first
quarter of 1998), as the Company's businesses started to feel the effects of the
Russian economic crisis, which has resulted in the loss of some customers
(principally customers of the three cellular operators in St. Petersburg whose
calls are routed over the PeterStar network), as well as reduced calling
activity among those who have remained customers. In the case of Teleport-TP,
where tariffs to certain customers are quoted in roubles, revenues have been
adversely affected by the rouble devaluation. In addition, collections have
started to slow, and the Company's businesses are having to devote more
resources to the process of collecting receivables.
Management believes that revenue growth for the last quarter of 1998 may
show some increase over the third quarter, but that, based upon the current
economic circumstances in Russia, revenues in 1999 are unlikely to grow at the
same rate as they have in recent years. Given the many uncertainties in the
Russian political and economic situations at the present time, exacerbated by
the absence of strong leadership or effective economic planning, it is extremely
difficult to make any accurate assessment of the prospects for the Company's
businesses in 1999. It is not possible to rule out further deterioration in the
Russian economic situation which would be likely to impact the Company's
businesses adversely. See "Recent Developments -- Russian Economic and Political
Turmoil." While management believes that it is taking all available measures to
protect the Company and its businesses from the negative effects of any further
problems in Russia, there can be no assurance that those measures will be
successful.
Gross profit. Gross profit increased 31.2% to $24.8 million for the three
months ended September 30, 1998 from $18.9 million recorded in the third quarter
of 1997. For the nine months ended September 30, 1998, gross profit increased
48.0% to $76.2 million from $51.5 million recorded a year ago. Gross profit, as
a percentage of revenues, remained relatively stable through the first three
quarters of 1998 as any tariff reductions experienced at the operating level
have generally been offset by reductions in carrier charges levied
36
<PAGE> 38
by the operating companies' carriers. However, margins were reduced during the
third quarter as the effects of the Russian economic crisis began to be felt,
and are expected to continue to remain under pressure.
General and administrative expenses. General and administrative expenses,
which include salaries and sales and marketing expenses in all of the Company's
operating subsidiaries, together with corporate office overhead, increased 66.3%
to $16.3 million for the three months ended September 30, 1998 from $9.8 million
recorded in the third quarter of 1997. For the nine months ended September 30,
1998, general and administrative expenses increased 49.0% to $38.6 million over
the prior year. These increases in all functional areas, including sales and
marketing, customer service, technical, and finance and administration, have
been required to support the Company's efforts to grow revenues during the first
three quarters of 1998. As a percentage of revenues, general and administrative
expenses for the nine months increased to 34.5% from 32.5% in 1997 reflecting
additional costs relating to a number of projects including the Company's
Cardlink business, which is in the process of implementing wireless card
validation systems using proprietary technology, and its new long distance
carrier services business (the "LD Carrier Services Business") (see "Recent
Developments -- Development of Long Distance Services"), as well as
non-recurring professional costs relating to the evaluation of potential
acquisitions by the Company.
Depreciation. Depreciation increased 19.4% to $3.7 million in the third
quarter of 1998 compared to $3.1 million incurred in the third quarter of 1997.
For the nine months ended September 30, 1998, depreciation increased 30.4% over
the prior year to $10.3 million reflecting the investment of over $63.6 million
in property and equipment over the past 12 months. Depreciation will likely
continue to grow as capital expenditures are expected to continue, albeit at a
slower pace, over the coming year. Depreciation represented 9.2% of revenue for
the nine months ended September 30, 1998 compared to 9.9% a year earlier and is
expected to continue to decrease as a percentage of revenues as the Company
nears completion of the first phase build-out of its core networks.
Amortization expense. For the three months ended September 30, 1998, the
Company incurred total amortization charges of $3.1 million compared to $2.0
million a year earlier. In the nine months ended September 30, 1998, the Company
incurred total amortization charges of $9.5 million compared to $6.7 million
incurred in 1997. Of the 1998 year to date charges, $8.2 million related to the
amortization of telecommunications licenses held by PeterStar, ALTEL and
Teleport-TP and $1.3 million related to amortization of deferred finance costs.
Deferred finance costs relating to the June 1996 high yield offering are
amortized over eight years, the term of the Senior Notes, while deferred finance
costs relating to the November 1997 revolving credit financing will be fully
amortized during 1998.
The increase in amortization expense in the three and nine months ended
September 30, 1998 was primarily due to the acquisition by the Company in
November 1997 of an additional 29.65% interest in Technocom for consideration,
including acquisition costs, of $33.3 million. The additional excess of purchase
price over identifiable, tangible assets of $27.1 million arising on the
acquisition was allocated to goodwill and telecommunications licenses. The
amount allocated to goodwill ($11.1 million) is being amortized over 20 years
and the amount allocated to Teleport-TP's licenses ($16.0 million) is being
amortized over its remaining term which expires in 2004. This acquisition has
resulted in additional quarterly amortization charges of $0.7 million.
In addition, effective September 30, 1998, the Company acquired an
additional 11% interest in PeterStar for consideration of $33.4 million. The
additional excess of purchase price over identifiable, tangible assets of $27.8
million arising on the acquisition has been allocated to goodwill and
telecommunications licenses. The value allocated to goodwill ($24.2 million)
will be amortized over 20 years and the value allocated to PeterStar's licenses
($3.4 million) will be amortized over its remaining term which expires in 2004.
This acquisition will result in additional quarterly amortization charges of
$0.4 million commencing in the fourth quarter of 1998.
ALTEL's telecommunications license, which expires in 2009, is also being
amortized over its remaining term and resulted in an amortization charge of $1.5
million for the nine months ended September 30, 1998, unchanged from a year ago.
37
<PAGE> 39
The Company does not anticipate any problems renewing the
telecommunications licenses currently held by any of its subsidiaries upon their
expiry.
Share of income/(loss) from equity investments. The Company's share in
earnings from equity investments, primarily Rosh Telecom and MTR-Sviaz,
increased from a $0.2 million loss position in the third quarter of 1997 to a
$0.1 million earnings position in the third quarter of 1998. For the nine month
period, the share in losses from equity investments decreased from $0.7 million
in 1997 to $0.1 million in 1998, which consisted primarily of a 50% share of
MTR-Sviaz's nine month loss of $0.6 million offset by a 50% share of Rosh
Telecom's nine month net profit of $0.3 million.
Interest and other income. Interest and other income of $0.3 million in
the third quarter of 1998 compared with $0.6 million earned in the third quarter
of 1997. For the nine months ended September 30, 1998, interest and other income
of $2.1 million compared with $4.0 million a year earlier. The 1998 nine month
figure included $1.1 million earned on the Company's funds held in escrow and a
$0.5 million tax indemnity payment from Cable & Wireless relating to Baltic
Communications Limited. The 1997 nine month comparative figure includes a $1.0
million gain related to the Company's disposal of its 10.4% interest in SPMMTS
in June 1997 for gross proceeds of $17.2 million.
Interest expense. Interest expense of $5.7 million in the third quarter of
1998 compared with $4.5 million incurred in the third quarter of 1997. For the
nine months, interest expense of $16.3 million in 1998 compared to $12.8 million
in 1997 and consisted of interest on bank indebtedness and short-term borrowings
of $1.5 million, interest accreted on the Senior Notes of $12.5 million and
interest expense related to the Convertible Notes of $1.8 million. Interest on
the Senior Notes becomes payable in cash semi-annually commencing June 1999
while interest on the Convertible Notes is currently paid in cash semi-annually.
The increase in interest expense in both the three and nine month periods
reflects primarily the interest paid on the $15.4 million Revolving Credit Notes
issued to Travelers, which commenced in November 1997 and carried an annual
interest rate of 12%, increasing to 15% on June 1, 1998. See "Liquidity and
Capital Resources."
Foreign exchange loss. For the three months ended September 30, 1998, the
Company incurred foreign exchange losses of $3.8 million as compared to $0.5
million a year ago. For the nine month period, the Company incurred exchange
losses of $4.3 million in 1998 vs. $0.7 million in 1997. The significant losses
in the third quarter of 1998 relate to the substantial devaluation of the
Company's rouble cash balances in August and September when the extreme market
conditions caused by the Russian financial crisis caused major disruptions in
the Russian banking system, preventing the Company's subsidiaries from
converting roubles into hard currency at a time when the value of the rouble was
depreciating significantly. Payment delays in the banking sector also caused
foreign exchange losses when customers paid in roubles at the then-current
exchange rate but the rouble's value had decreased further by the time the
amounts were actually received by the operating businesses. The Company has
sought, and will continue to seek, to limit the effects of such conditions by
minimizing the amount of rouble balances held by its subsidiaries and by taking
measures to accelerate collection and currency conversion procedures in so far
as this is possible in the current banking and legislative environment.
Income taxes. The income tax charge for the three months ended September
30, 1998 was $2.5 million compared with $2.0 million in 1997. For the nine
months ended September 30, 1998, the Company's income tax charge of $7.7 million
compared with $5.5 million incurred in 1997. The provision for income taxes
relates substantially to current income taxes in the Company's Russian and
Kazakh businesses and its increase reflects the increased profitability of these
subsidiaries overall over the prior year.
Minority interest. Minority interest relates principally to the minority
shareholdings held in three of the Company's subsidiaries -- PeterStar (40%),
ALTEL (50%) and Technocom (19.6%). Minority interest of $1.2 million for the
three months ended September 30, 1998 compared with $1.4 million in 1997
reflecting the weaker results experienced in the third quarter of 1998 as
compared to 1997. For the nine months ended September 30, 1998, minority
interest of $8.7 million compared with $4.6 million a year ago reflecting the
overall improved profitability, year to date, of the Company's subsidiaries.
Effective September 30, 1998, the Company acquired an additional 11% of
PeterStar. Accordingly, PeterStar's minority interest percentage from October 1,
1998 will reduce to 29%.
38
<PAGE> 40
The following table compares the results of operations of the Company's
principal operating subsidiaries for the three and nine months ended September
30, 1998 with the three and nine months ended September 30, 1997:
<TABLE>
<CAPTION>
PETERSTAR ALTEL TECHNOCOM BCL
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------ ------------ -------------- --------------
1998 1997 1998 1997 1998 1997 1998* 1997
---- ---- ---- ---- ----- ----- ----- -----
(UNAUDITED, THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ 19.1 14.2 10.0 7.8 5.7 4.9 2.3 2.0
Gross profit -- $....................... 13.6 9.2 7.8 6.2 2.2 1.5 1.0 1.6
Gross profit -- %....................... 71.2% 64.8% 78.0% 79.5% 38.6% 30.6% 43.5% 80.0%
Operating income/(loss) -- $............ 4.7 5.0 4.0 2.4 (2.3) (1.4) 0.1 0.6
Operating income/(loss) -- %............ 24.6% 35.2% 40.0% 30.8% (40.4)% (28.6)% 4.3% 30.0%
Net income/(loss) -- $.................. 2.0 4.0 1.8 1.7 (3.6) (1.8) (0.1) 0.1
Net income/(loss) -- %.................. 10.5% 28.2% 18.0% 21.8% (63.2)% (36.7)% (4.3)% 5.0%
EBITDA -- $............................. 4.2 5.9 4.8 3.6 (1.0) (0.9) 0.1 0.5
EBITDA -- %............................. 22.0% 41.5% 48.0% 46.2% (17.5)% (18.4)% 4.3% 25.0%
% PLD ownership......................... 60.0% 60.0% 50.0% 50.0% 80.4% 50.8% 100.0% 100.0%
</TABLE>
- - ---------------
* excludes intercompany foreign exchange gain of $3.1 million.
<TABLE>
<CAPTION>
PETERSTAR ALTEL TECHNOCOM BCL
NINE MONTHS NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------ ------------ ------------- --------------
1998 1997 1998 1997 1998 1997 1998* 1997
---- ---- ---- ---- ----- ---- ----- -----
(UNAUDITED, THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................. 56.9 36.5 29.7 20.6 17.0 16.0 7.4 5.7
Gross profit -- $........................ 39.7 25.7 23.5 15.9 8.7 3.9 3.6 3.9
Gross profit -- %........................ 69.8% 70.4% 79.1% 77.2% 51.2% 24.4% 48.6% 68.4%
Operating income/(loss) -- $............. 20.5 14.1 11.9 6.5 (5.8) (0.8) 0.5 1.0
Operating income/(loss) -- %............. 36.0% 38.6% 40.1% 31.6% (34.1)% (5.0)% 6.8% 17.5%
Net income/(loss) -- $................... 15.1 10.6 7.0 4.7 (8.1) (1.0) 0.1 0.6
Net income/(loss) -- %................... 26.5% 29.0% 23.6% 22.8% (47.6)% (6.3)% 1.4% 10.5%
EBITDA -- $.............................. 22.6 16.7 14.5 9.3 (0.2) (0.3) 0.8 1.4
EBITDA -- %.............................. 39.7% 45.8% 48.8% 45.1% (1.2)% (1.9)% 10.8% 24.6%
% PLD ownership.......................... 60.0% 60.0% 50.0% 50.0% 80.4% 50.8% 100.0% 100.0%
</TABLE>
- - ---------------
* excludes intercompany foreign exchange gain of $3.1 million.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, a total of $13.2 million in
cash was generated from operations (1997 -- $8.3 million), $8.0 million was used
in net investing activities (1997 -- $13.8 million) and $11.8 million was used
in financing activities (1997 -- $7.1 million).
Investments during the first nine months of 1998 on telecommunications
equipment and infrastructure within PeterStar, ALTEL and Teleport-TP totaled
$23.0 million. The Company's escrow account was drawn down by $17.3 million to
fund a portion of these capital expenditures. Cash used in financing activities
of $11.8 million related primarily to the repayment of $9.5 million in short and
long-term borrowings and the payment of $2.0 million in dividends to minority
shareholders.
Funds held in escrow at September 30, 1998 decreased to $16.6 million from
$33.9 million at the end of 1997 reflecting the escrow draw down discussed
above. As of September 30, 1998, the Company had working capital of $1.2 million
compared to a working capital deficit of $1.4 million at the end of 1997.
39
<PAGE> 41
As of September 30, 1998, the Company reported consolidated total assets of
$367.1 million ($335.6 million as of December 31, 1997) which consisted of $51.6
million in current assets (including $10.6 million in cash and cash
equivalents), $161.6 million in property and equipment, $75.4 million in
unamortized telecommunications licenses relating to PeterStar, ALTEL and
Teleport-TP, escrow funds of $16.6 million and other assets, and investments of
$59.9 million, including $10.7 million in goodwill, net of amortization,
relating to the Company's November 1997 acquisition of an additional 29.65%
interest in Technocom and $24.2 million in goodwill relating to the Company's
August 1998 acquisition of an additional 11% interest in PeterStar.
Long-term indebtedness of $148.6 million, consisting primarily of the
Company's Senior and Convertible Notes, as a percentage of total assets, was
40.5% as of September 30, 1998, compared to $133.5 million or 39.8% of total
assets as of December 31, 1997.
Shareholders' equity of $145.7 million, as of September 30, 1998, compared
with $127.2 million as of December 31, 1997, and consisted of $244.6 million in
common stock and additional paid-in capital offset by the Company's deficit of
$98.9 million. The Company's ratio of long-term indebtedness to equity at
September 30, 1998 was 102.0% compared to 104.9% at December 31, 1997.
Under the terms of the Company's $123.0 million Senior Note offering placed
in June 1996, the Company was required to raise $20.0 million in an equity
financing by May 31, 1998. The Company did not do so, and as a result, the
interest rate on the Senior Notes increased from 14% to 14.5% as of June 1,
1998, and will remain at 14.5% until the end of the semi-annual interest period
in which such an offering is completed.
The obligation to raise $20.0 million in equity by May 31, 1998 was also a
requirement under the terms of the $12.32 million Series A and $3.1 million
Series B Revolving Credit Notes (the "Revolving Credit Notes") issued to the
Travelers Insurance Company and the Travelers Indemnity Company (collectively,
"Travelers") in November 1997 in connection with the Company's additional
investment in Technocom. Accordingly, the annual interest rate on the Series A
and B Notes, increased from 12% to 15% as of June 1, 1998.
The Series A Revolving Credit Notes come due in full on December 31, 1998,
and the Series B Revolving Credit Notes would have come due in full on September
30, 1998, but for the deferral described below. The Company was obliged to make
required amortization payments in respect of the Series B Notes of $1 million on
each of July 31 and August 31, and a final payment of $1.1 million on September
30. In relation to the Series A Notes, the Company was obliged to make a
required amortization payment of $1 million on October 31 and is obliged to make
a further required amortization payment of $1 million on November 30 and a final
payment of $10.32 million on December 31, 1998.
The Company made the required payments due with respect to the Series B
Notes on July 31 and August 31 and by agreement with the holders of the Series B
Notes the final payment of $1.1 million due on September 30 has been deferred to
November 30, 1998. Payment of this amount has been guaranteed by News America
Incorporated ("News"), which owns approximately 38% of the Company's common
stock. See "Recent Developments -- Transactions with Cable & Wireless and News."
In addition to the above payments, the Company did not effect certain
voluntary amortization (or "targeted reduction in commitment") payments in
respect of the Revolving Credit Notes of $0.5 million on July 31, 1998, $0.5
million on August 31, 1998 and $1.0 million on September 30, 1998, which
resulted in the issuance of 122,000 warrants to Travelers to acquire shares of
common stock of the Company at an exercise price of $8.625 per share.
The $1 million required payment due on the Series A Notes on October 31 has
been deferred to December 31, 1998 and likewise guaranteed by News. The Company
anticipates that the $1 million payment due on November 30 will also be deferred
to December 31, 1998, and also anticipates that it will be guaranteed by News.
The Company is currently in discussions with News regarding the financial terms
and conditions under which News will provide its guarantees. In addition, the
Company did not effect the voluntary amortization payment of $1.5 million due on
October 31, 1998, which resulted in the issuance of 30,000 warrants to Travelers
to acquire shares of common stock of the Company at an exercise price of $8.625
per share. The Company does not anticipate making the $1.5 million voluntary
amortization payment due on
40
<PAGE> 42
November 30, 1998 and so expects to issue a further 30,000 warrants to Travelers
with an exercise price of $8.625 per share at that time.
The Company currently expects to pay off the outstanding balance due under
the Revolving Credit Notes on December 31, 1998 (together with any payments
deferred to that date) out of the proceeds of the issuance of additional shares
of common stock, a new revolving credit facility, or sales of assets, or a
combination of the foregoing.
The first semi-annual cash payment of interest on the Company's 14% Senior
Notes, amounting to $8.9 million, will come due on June 1, 1999. The Company
currently expects to pay most, if not all, of this out of funds in the escrow
account established in respect of these Notes.
In addition, as previously disclosed, the Company anticipates having to
make payments of up to $28.2 million to the minority shareholders of Technocom
in June 1999 in connection with the Company's purchase of the remaining 19.6%
interest in Technocom which it does not currently own. The final amount due to
the minority shareholders will depend upon certain valuation criteria, as well
as whether one shareholder elects to receive shares of Common Stock in lieu of
cash.
The Company's ongoing operations (including advances to and investments in
its existing subsidiaries and affiliates for capital expenditures and
operational expenses) have to date been financed using the Company's cash
balances, the escrow funds, internally generated cash flow from operations and
supplier financing. The Company's operating businesses are now, for the large
part, self-sustaining. However, to the extent that the operating businesses
experience lower than expected revenues, higher operating costs or higher
development costs in connection with the build-out of their networks, or as a
result of continuing economic difficulties in Russia, the Company may need to
seek other sources of financing to fund such operations.
Implementation of the Company's Cardlink business and the LD Carrier
Services Business, both of which are already underway, is expected to accelerate
during the last part of 1998 and the first half of 1999. The Company will be
required to support both businesses until they become self-financing. While
Cardlink is not expected to require significant immediate cash, development of
the first phase of the LD Carrier Services Business is expected to require
approximately $17 million. Some part of the capital expenditures required for
the LD Carrier Services Business is expected to come from the Senior Note escrow
account, and a further part from vendor financing. However, some additional
funding will likely be required to develop the LD Carrier Services Business
until it is able to generate sufficient cash to be self-sustaining (in terms of
generating sufficient cash to fund its operating and capital needs), which is
not expected to occur until 2000.
In addition, the Company continues to assess acquisition opportunities
throughout the C.I.S. which may complement and add value to the Company's
existing businesses. To the extent that the Company enters into any agreements
to acquire or invest in additional companies operating in the C.I.S., additional
debt and/or equity financing may be required.
The Company expects to fund all of the matters described above, as well as
any acquisition opportunities which arise, out of a combination of internally
generated cash, vendor financing, escrow funds, proceeds of sales of assets and
external financing. In addition to any financing initiative undertaken in
connection with the pay off of the Revolving Credit Notes, the Company
anticipates completing some form of equity financing in the first half of 1999.
The Company believes that these various sources of funds will be sufficient to
permit it to meet its obligations through the end of 1999, as well as continuing
the development of its businesses. However there can be no assurance that the
Company will be able to complete such financings.
RECENT DEVELOPMENTS
Transactions with Cable & Wireless and News
On August 14, 1998, following approval by the Company's shareholders, the
Company concluded a series of transactions with News and an affiliate and Cable
and Wireless plc ("Cable & Wireless") which resulted, among other things, in the
acquisition by the Company of: (i) an additional 11% interest in its subsidiary
PeterStar from News (immediately following News' acquisition of such interest
from Cable & Wireless); and
41
<PAGE> 43
(ii) a 50% interest in Belcel and certain intercompany indebtedness, from Cable
& Wireless. In connection with these acquisitions, the Company issued an
aggregate of 4.3 million shares of its Common Stock to News and Cable &
Wireless. In addition, Cable & Wireless sold to News its complete stake in the
Company (including the Common Stock being issued by the Company to Cable &
Wireless in exchange for the interest in Belcel and a warrant to purchase
250,000 shares of Common Stock). As a result of these transactions, News now
holds a 38% interest in the Company and has become the Company's largest
shareholder.
The Company acquired its additional 11% interest in PeterStar by acquiring
100% of the shares of PLD Holdings Limited, a Bermuda company, the owner of that
11% interest. The Company acquired its 50% interest in Belcel by acquiring all
of the shares of CommStruct International Byelorussia BV, a corporation
organized under the laws of the Netherlands, which owns such 50% interest.
Russian Economic and Political Turmoil
In the early part of 1998 there was considerable turmoil and uncertainty in
the Russian financial markets, prompted in large part by a drop in commodity
prices and economic problems in Russia, together with the crisis in the Asian
financial markets which began in late 1997 and is still continuing. These
developments were accompanied by a substantial decline in the Russian stock
market, the Moscow Times Index having dropped over 80% since January 1, 1998.
These developments led the Russian government to raise interest rates
significantly and to seek special assistance from the International Monetary
Fund. In August 1998, the Russian government announced a substantial widening of
the trading band in which the Russian rouble would be permitted to float,
together with a moratorium on certain foreign debt payments. Thereafter the
rouble in fact has dropped substantially in value and traded outside of the high
end of the band, and the Russian government did not intervene to stop this
trading, thereby effectively acquiescing in a major devaluation of the rouble.
More recently, the value of the rouble has stabilized at around 12-13 roubles to
the U.S. dollar, although it is believed that this may be no more than a
"managed float" and that any new pressure on the rouble could lead to a further
significant decline in its value.
The moratorium on debt payments caused considerable difficulties for
Russian banks and businesses with hard currency obligations, as well as
significantly impairing the ability of such banks and businesses, as well as the
Russian government itself, to access the Western capital markets. The Russian
government is engaged in efforts to reach accommodations with the Western
institutions and governments affected by the moratorium but as yet no resolution
of the overall problem has been achieved. Continuation of these conditions for
any significant period of time could have serious long-term effects on the
Russian economy. At the present time, it is impossible to predict whether or
when any resolution of the problems created by this moratorium is likely.
Also in August 1998, the government experienced a significant upheaval,
with the dismissal of the reformist government led by Sergei Kiriyenko and its
replacement by one led by the current Prime Minister Yevgeny Primakov. The
current government has yet to propose a plan to address Russia's economic and
financial difficulties, one result of which has been to cause the International
Monetary Fund to delay further assistance to the Russian government. At the same
time, President Boris Yeltsin appears to be playing a less active role in the
day-to-day governing of the country. These events have created increased
uncertainty about the future political situation in Russia, which in turn have
created additional concern about the strength of the Russian economic system.
At the present time, it is not possible to predict the complete effect of
the continuing economic, financial and political difficulties in Russia,
although they have made for a difficult business environment in Russia. Although
demand for the Company's telecommunications services has continued during the
crisis, the economic difficulties in Russia have adversely affected the
Company's operating subsidiaries and the Company's consolidated results for the
quarter ended September 30, 1998. As described in more detail in "Results of
Operations" above, the Company's operating subsidiaries incurred a significant
foreign exchange loss in the quarter, together with decreased revenue growth and
increased collections problems, and the Company expects that revenue growth and
margins will remain under pressure, and that the average age of its receivables
is likely to continue to grow as collections problems increase. The Company is
not yet able to predict the effects of the ongoing difficulties on its results
for the remainder of the year ended December 31,
42
<PAGE> 44
1998, nor for 1999 as a whole, but the continuing economic difficulties in
Russia will likely continue to have an adverse effect on the Company in current
and future reporting periods, and there can be no assurance that such adverse
effects will not be material.
Development of Long Distance Services
The Company is currently developing the LD Carrier Services Business, which
is aimed primarily at the needs of long distance carriers in the United States
and the United Kingdom to have their traffic delivered in a reliable,
cost-efficient manner to Russia, the C.I.S. and the Baltic States. In its first
phase, expected to commence in the first half of 1999, this business will
aggregate United States long distance traffic bound for those countries (through
a Company-owned switch in New York) and then deliver the traffic over leased
capacity to Russia. The Company will then use the facilities of its local
operating companies in Russia to either terminate the traffic at its ultimate
destination, in the case of Russian traffic, or as hubs to the country of final
destination, in the case of calls to other countries of the C.I.S. and the
Baltic States. The Company expects to offer similar services to U.K. and
European carriers as part of the second stage of development of the LD Carrier
Services Business. The Company has obtained licenses in the United States and
the United Kingdom for the provision of these long distance services. The
development of this business is expected to be financed from a combination of
internally generated cash, vendor financing, funds from the Senior Note escrow
account and new financing.
The Company believes that the LD Carrier Services Business is an important
way to reduce its reliance on and exposure to Russia and the other countries of
the C.I.S., while building on the infrastructure already in place in its local
operating businesses. The Company also expects that it will be able to use the
facilities developed for the LD Carrier Services Business to enable it to
provide private line services to multinational corporations, as well as
providing additional infrastructure and support to its local operating
businesses.
Registration of Outstanding Securities; Completion of Exchange Offer
On July 30, 1998, the Securities and Exchange Commission declared effective
the registration statements relating to (i) the exchange offer (the "Exchange
Offer") pursuant to which the outstanding Senior Notes (the "Outstanding Senior
Notes") which were issued in the Company's June 1996 private placement (the
"Private Placement") would be exchanged for identical Senior Notes which had
been registered under the Securities Act of 1933 (the "Exchange Notes"); (ii)
the resale by the holders thereof of the Convertible Notes and the shares of
Common Stock issuable upon the conversion thereof and (iii) the resale by the
holders thereof of the warrants issued in the Private Placement and the shares
of Common Stock issuable upon the exercise thereof. As a result of the
effectiveness of the registration statement relating to the Convertible Notes
and the Common Stock issuable upon conversion thereof, Special Interest ceased
to be payable with respect to the Convertible Notes on July 30, 1998.
The Exchange Offer with respect to the Senior Notes commenced on August 28,
1998 and was completed at the close of business on October 9, 1998, with the
holders of 100% of the Outstanding Senior Notes tendering such Notes for
Exchange Notes. Upon completion of the Exchange Offer, the Exchange Notes were
issued in exchange for such Outstanding Senior Notes, in the form of a global
Exchange Note held through the facilities of the Depository Trust Company. As a
result of the completion of the Exchange Offer, Special Interest ceased to be
payable with respect to the Senior Notes on October 9, 1998.
Increased Interest Rate on Indebtedness
Under the terms of the Senior Notes and the Revolving Credit Notes, the
interest rate payable increases if the Company has not raised $20,000,000 in
additional equity by May 31, 1998. The Company did not complete such an equity
offering by such date and accordingly the interest rate on the Senior Notes
increased from 14% to 14.5% per annum, and the interest rate on the Revolving
Credit Notes increased from 12% to 15% per annum, in each case effective June 1,
1998. Such rates revert to their former levels once the equity offering has been
completed. The accreted value of the Senior Notes as of September 30, 1998 was
$108.3 million. Interest due thereon (at 14.5% per annum) accretes until
December 1, 1998, and thereafter is payable in cash,
43
<PAGE> 45
semi-annually, on each June 1 and December 1 thereafter. The amount currently
outstanding in respect of the Revolving Credit Notes is $13,420,000, and
interest is payable thereon monthly in cash. See "Liquidity and Capital
Resources."
Effects of Newly-Issued Accounting Pronouncements
SFAS No. 131 (SFAS 131), "Disclosure about Segments of an Enterprise and
Related Information," was issued in June 1997. SFAS 131 establishes standards
for the manner in which public companies should report information about
operating segments in annual financial statements and requires that those
companies report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will adopt SFAS 131 for its annual reporting in 1998.
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS requires that an entity recognize
all derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 cannot be applied retroactively to
financial statements of prior periods. At the current time the Company has not
evaluated the impact SFAS 133 will have, if any.
YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications,
particularly older systems and applications, use a two-digit, rather than a
four-digit, date field to designate a particular year. As a result with the
century change, date-sensitive systems may recognize dates in the twenty-first
century (i.e., after 2000) as dates in the twentieth century (i.e., the
corresponding year commencing with the prefix 19--). Equally, such systems may
not recognize dates in the twenty-first century at all. All of this could lead
to system failures or miscalculations which could lead to disruption of
operations such as data being lost, an inability to process transactions,
incorrect data being generated and critical deadlines being overlooked. The
impact of these disruptions could be significant.
The Company has addressed the Year 2000 issue in the following ways.
First, the Company had identified several members of key management in the
technical and operating areas to oversee the Company's Year 2000 readiness and
preparation of a contingency plan.
The Company has contacted, and has required all of its operating businesses
to contact the manufacturers of equipment and producers of software which they
use in their businesses (or review "websites" or other materials published by
such parties relating to such equipment or software) to establish the suppliers'
compliance with Year 2000 standards. Such survey has indicated that, except in a
few instances, all such equipment and software is Year 2000 compliant. Steps are
being taken to upgrade, in conjunction with the suppliers, or replace equipment
which is not Year 2000 compliant. While there can be no assurance that
disruptions will not occur, the Company believes, based on this survey and the
fact that much of the equipment and software on which its businesses are for the
most part of recent vintage, that it should not encounter material problems in
this particular area.
While it does not appear that any of the parties from whom the Company or
any of its operating businesses have obtained goods or services in the past have
provided specific undertakings regarding Year 2000 compliance, and there is some
doubt whether existing warranties or other undertakings will in fact be
construed to cover Year 2000 compliance, starting in January 1998, all operating
businesses are also being required to use their best efforts to obtain specific
warranties of Year 2000 compliance from parties with which they contract for
products or services thereafter.
Additionally, such operating businesses have been required to review the
terms under which they have heretofore supplied products and/or services to
third parties. No case has been identified in which any operating business has
specifically guaranteed Year 2000 compliance, and the Company has instituted a
policy
44
<PAGE> 46
regarding the giving of such guarantees in the future in order to control and
limit possible exposure thereunder. Further, since none of the operating
businesses manufacture equipment or produce proprietary software for customers
other than in exceptional cases, virtually all such transactions involve the
re-sale or assignment of products and services supplied by others. Accordingly,
the Company believes that, to the extent that such products and services are
either warranted or shown to be Year 2000 compliant, its own exposure is
commensurately reduced.
While the Company believes that the actions taken above will be adequate to
protect it and its operating businesses from any material Year 2000 issues
involving vendors, suppliers and other third parties which are based in the
United States and other Western countries, the Year 2000 compliance and
readiness of the Russian parties with which the Company's operating businesses
interact are substantially behind that of Western parties. The Company is not
yet in a position to determine the possible difficulties that its operating
businesses may face in dealing with Russian parties, but it is continuing to
work with its operating businesses to determine its exposure to Russian parties
which may not be Year 2000 compliant.
In addition, by their nature, the telecommunications businesses in which
the Company's operating businesses are involved rely, directly and indirectly,
on a large number of traffic carriers to carry telecommunications traffic
through a series of interconnected chains of communications. Therefore, despite
the Company's efforts described above to confirm Year 2000 compliance and
readiness by the parties with which it deals directly, the Company can not
ensure that each entity involved in the delivery of telecommunications services
will be Year 2000 compliant. To a large extent, the Company is reliant in these
circumstances on the actions of the other telecommunications operators and
service providers to ensure that their counterparts are Year 2000 compliant. The
Company has been working with other international telecommunications operators
and monitoring their compliance with Year 2000 issues. However, because of the
inherent interconnectivity of telecommunications services, there can be no
assurance that all communications chains will function flawlessly without any
Year 2000 problems.
The Company has investigated the possibility of obtaining insurance against
liability arising out of claims that products or services supplied are not Year
2000 compliant, but has determined that such insurance is not obtainable upon
terms which are sufficiently comprehensive and/or is only obtainable upon terms
which are uneconomical given the level of perceived risk, and accordingly has
elected not to pursue such insurance.
Based on all of the foregoing, the Company believes that it does not have
any material exposure to claims that the products or services it supplies are
not Year 2000 compliant and that the cost of ensuring that equipment and
software used in its operations and the operations of its operating businesses
is likely to be immaterial.
The Company currently estimates that its historical and estimated future
costs relating to the remediation of identified Year 2000 issues will be
approximately $0.9 million, although this estimate is subject to revision as the
Company's analysis of its Year 2000 readiness continues. As its evaluation of
the Year 2000 readiness of third parties with which it does business is ongoing
and not yet completed, the Company is not yet able to predict the "worst case"
Year 2000 scenario for it and its operating businesses. In the course of its
activities outlined above, the Company will continue to analyze the possible
"worst case" scenarios and develop one or more contingency plans to address
those scenarios. The Company expects the review and development of a contingency
plan to be completed by the end of the first half of 1999.
45
<PAGE> 47
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 1998, the following issuances of
unregistered securities of the Company were made:
(a) On August 14, 1998, the Company issued an aggregate of 4,326,041 shares
(the "Transaction Shares") of Common Stock in a series of transactions with
Cable & Wireless and News, as described above. See "Recent
Developments -- Transactions with Cable & Wireless and News." The Company issued
500,000 Transaction Shares to Cable & Wireless in consideration of the
acquisition by the Company of a 50% indirect interest in BELCEL; Cable &
Wireless transferred such Transaction Shares to News as part of the series of
transactions. An additional 3,826,041 Transaction Shares were issued by the
Company to News in consideration of the acquisition by the Company of an
additional 11% interest in PeterStar.
The Transaction Shares, which were issued in reliance upon Section 4(2) of
the Securities Act of 1933 as transactions not involving a public offering, are
"restricted" securities but News, as the holder of all of the Transaction
Shares, has demand registration rights with respect to such Shares. No
commissions were paid to any underwriter, broker or dealer in connection with
such issuance. There were no cash proceeds from the issuance of the Transaction
Shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
46
<PAGE> 48
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: November 16, 1998 By: /s/ SIMON EDWARDS
--------------------------------------
Simon Edwards
Senior Vice President, Chief Financial
Officer and Treasurer
47
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLD TELEKOM
INC.'S FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q AND THE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR PLD TELEKOM INC. AT AND FOR THE THREE AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 CONTAINED THEREIN.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 10,610
<SECURITIES> 0
<RECEIVABLES> 20,365
<ALLOWANCES> 3,119
<INVENTORY> 3,299
<CURRENT-ASSETS> 51,583
<PP&E> 198,140
<DEPRECIATION> 36,575
<TOTAL-ASSETS> 367,071
<CURRENT-LIABILITIES> 50,401
<BONDS> 134,756
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<COMMON> 378
<OTHER-SE> 145,344
<TOTAL-LIABILITY-AND-EQUITY> 367,071
<SALES> 0
<TOTAL-REVENUES> 111,989
<CGS> 0
<TOTAL-COSTS> 35,765
<OTHER-EXPENSES> 61,737
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,263
<INCOME-PRETAX> (5,403)
<INCOME-TAX> 7,661
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