<PAGE> 1
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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 JUNE 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 -- 33,520,748 SHARES (JULY 31, 1998)
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PLD TELEKOM INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PLD Telekom Inc.
Consolidated Condensed Balance Sheets as of June 30,
1998 (Unaudited) and December 31, 1997..............
Consolidated Condensed Statements of Operations
(Unaudited) for the three and six months ended June
30, 1998 and 1997...................................
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1998
and 1997............................................
Notes to Consolidated Condensed Financial Statements
(Unaudited) for the three and six months ended June
30, 1998............................................
NWE Capital (Cyprus) Ltd.
Consolidated Condensed Balance Sheets as of June 30,
1998 (Unaudited) and December 31, 1997..............
Consolidated Condensed Statements of Operations
(Unaudited) for the three and six months ended June
30, 1998 and 1997...................................
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1998
and 1997............................................
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three and six months
ended June 30, 1998.................................
Technocom Limited and Subsidiaries
Consolidated Condensed Balance Sheets as of June 30,
1998 (Unaudited) and March 31, 1997.................
Consolidated Condensed Statements of Operations
(Unaudited) for the three and six months ended June
30, 1998 and 1997...................................
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1998
and 1997............................................
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three and six months
ended June 30, 1998.................................
Wireless Technology Corporations Limited
Consolidated Condensed Balance Sheets as of June 30,
1998 (Unaudited) and December 31, 1997..............
Consolidated Condensed Statements of Operations
(Unaudited) for the three and six months ended June
30, 1998 and 1997...................................
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1998
and 1997............................................
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three and six months
ended June 30, 1998.................................
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.........
Item 6. Exhibits and Reports on Form 8-K..................
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLD TELEKOM INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
----------- ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,023 $ 17,256
Trade receivables, net of allowances...................... 19,015 17,078
Other receivables and prepaids............................ 8,497 8,615
Inventory................................................. 2,988 2,802
Due from related parties.................................. 9,514 6,320
-------- --------
Total current assets.............................. 56,037 52,071
Escrow funds................................................ 21,658 33,868
Property and equipment, net................................. 148,129 134,998
Telecommunications licenses, net............................ 73,746 78,837
Due from related parties.................................... 2,011 3,011
Other investments........................................... 9,185 7,036
Other assets................................................ 24,144 25,765
-------- --------
Total assets...................................... $334,910 $335,586
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... 17,524 20,320
Accounts payable.......................................... 8,730 13,597
Accrued liabilities....................................... 4,541 5,750
Taxes payable............................................. 2.750 944
Due to related parties.................................... 3,859 5,336
Deferred revenues......................................... 2,314 3,128
Customer deposits......................................... 3,616 3,070
Other current liabilities................................. 1,790 1,312
-------- --------
Total current liabilities......................... 45,124 53,457
Long-term debt.............................................. 142,747 133,516
Minority interest........................................... 27,666 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 -- 33,520,748.............................. 335 333
Additional paid-in capital................................ 206,014 204,007
Accumulated deficit....................................... (86,980) (77,113)
-------- --------
Total shareholders' equity........................ 119,373 127,231
-------- --------
Total liabilities and shareholders' equity........ $334,910 $335,586
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
<PAGE> 4
PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications...................... $ 38,813 $ 25,892 $ 73,532 $ 49,272
Finance lease income.................... 427 497 874 1,008
---------- ---------- ---------- ----------
39,240 26,389 74,406 50,280
Direct costs.............................. 12,164 9,165 22,960 17,686
---------- ---------- ---------- ----------
Gross profit......................... 27,076 17,224 51,446 32,594
Operating expenses:
General and administrative.............. 12,524 8,850 22,224 16,098
Depreciation............................ 3,534 2,405 6,633 4,730
Amortization............................ 2,866 2,031 5,558 4,059
Taxes other than income taxes........... 2,230 1,304 3,910 2,592
---------- ---------- ---------- ----------
21,154 14,590 38,325 27,479
---------- ---------- ---------- ----------
Operating income..................... 5,922 2,634 13,121 5,115
Other income/(expense):
Share of loss from equity investments... (48) (269) (258) (547)
Interest and other income............... 946 2,261 1,817 3,403
Interest expense........................ (5,359) (4,120) (10,549) (8,389)
Amortization of deferred financing
costs................................ (400) (288) (801) (576)
Foreign exchange loss................... (373) (120) (489) (159)
Loss on disposal of investments and
property and equipment............... (3) -- (3) (251)
---------- ---------- ---------- ----------
Earnings/(loss) before income taxes
and minority interest.............. 685 98 2,838 (1,404)
Income taxes............................ 2,174 2,366 5,171 3,440
---------- ---------- ---------- ----------
Loss before minority interest........ (1,489) (2,268) (2,333) (4,844)
Minority interest......................... 3,869 1,457 7,534 3,223
---------- ---------- ---------- ----------
Net loss............................. $ (5,358) $ (3,725) $ (9,867) $ (8,067)
========== ========== ========== ==========
Net loss per common share:
Basic................................... $ (0.16) $ (0.12) $ (0.30) $ (0.25)
Diluted................................. $ (0.16) $ (0.12) $ (0.30) $ (0.25)
---------- ---------- ---------- ----------
Weighted average common shares
outstanding............................. 33,520,748 31,730,934 33,422,519 31,730,984
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 5
PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (9,867) $(8,067)
Adjustments to reconcile net loss to net cash provided
by/(used in) operating activities:
Depreciation and amortization........................... 12,992 9,365
Gain on sale of SPMMTS.................................. -- (1,001)
Share of loss of equity investments..................... 258 547
Accrued interest on senior discount notes............... 8,091 6,843
Minority interest....................................... 7,534 3,223
Non-cash compensation expense........................... 400 --
Other................................................... -- 253
Changes in operating assets and liabilities, net of
effects of acquisitions:
Decrease/(increase) in trade receivables, net of
allowances........................................... (1,937) (2,591)
Decrease/(increase) in other receivables and
prepaids............................................. 118 (1,296)
Decrease/(increase) in inventory...................... (186) 75
Change in due from or to related parties.............. (3,671) 453
Increase/(decrease) in accounts payable, accrued
liabilities, customer deposits, taxes payable and
other current liabilities............................ (4,956) 1,793
Increase/(decrease) in deferred revenue............... (814) 741
-------- -------
7,962 10,338
Cash flows from investing activities:
Capital expenditures...................................... (12,308) (23,663)
Proceeds from sale SPMMTS................................. -- 17,180
Escrow funds.............................................. 12,210 (888)
Cash paid for acquired business........................... (500) --
Investments and other assets.............................. 196 (646)
-------- -------
(402) (8,017)
Cash flows from financing activities:
Issuance of common stock.................................. -- 94
Registration costs........................................ (141) --
Short-term debt borrowings (repayments), net.............. (7,402) (10,229)
Cash dividends paid to minority shareholders.............. (1,250) (200)
-------- -------
(8,793) (10,335)
-------- -------
Decrease in cash and cash equivalents....................... (1,233) (8,014)
Cash and cash equivalents, beginning of period.............. 17,256 40,674
-------- -------
Cash and cash equivalents, end of period.................... $ 16,023 $32,660
======== =======
Supplemental disclosures:
Non-cash investing and financing activities:
Issued shares for acquired business....................... $ 1,750 --
======== =======
Supplier financing........................................ $ 7,457 $ 8,347
======== =======
Interest paid............................................. $ 3,018 $ 1,773
======== =======
Income taxes paid......................................... $ 5,387 $ 4,070
======== =======
</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 SIX MONTHS ENDED JUNE 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 13,234,380 and 11,560,080 at June 30, 1997 and 1998,
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 six months ended June 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. 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 way public companies 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
<PAGE> 7
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
financial statements of prior periods. At the current time the Company does not
utilize derivative instruments and accordingly it is anticipated that the
adoption of SFAS 133 will not have a material impact on the Company's
consolidated financial position and results of operations.
(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, 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) 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 June 30, 1998 under these supplier financing
agreements secured by bank guarantees is approximately $865,000. In addition,
pursuant to the terms of the Company's $149.5 million private placement
completed on June 12, 1996, $21.7 million remained in escrow on June 30, 1998.
These funds will be released in the future for telecommunications equipment and
investments in Russia and Kazakhstan.
(4) 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 Russian subsidiaries have accrued profits and
other taxes based on interpretations of the law which may ultimately be disputed
by the Russian taxation authorities. The exposure to additional profits and
other taxes, fines and penalties is not determinable, although the Company
believes such amounts will not be material.
(c) At June 30, 1998, PeterStar has commitments of approximately $600,000
related to the acquisition of telecommunications equipment. The PeterStar supply
contract provides for financing of the entire amount over approximately five
years.
6
<PAGE> 8
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(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 the date from which charges will
be levied, have yet to be determined, but the Company does not believe that such
payments will have a material adverse effect on the Company's financial position
or results of operations.
(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 $1,066,500 for the remainder of its
term.
(5) RECENT DEVELOPMENTS
On April 19, 1998, the Company entered into separate agreements with News
America Incorporated ("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. The considerations given
have been recorded as investments and will be allocated to the appropriate asset
classification.
(6) CONSOLIDATING CONDENSED FINANCIAL INFORMATION
NWE Capital (Cyprus) Limited ("NWE Cyprus"), Wireless Technology
Corporations Limited ("WTC"), BCL, PLD Asset Leasing Limited ("PLD Asset
Leasing") 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 June 30,
1998 and consolidating statements of operations for the three and six months
ended June 30, 1998 and 1997, and consolidating statements of cash flows for the
six months ended June 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. Separate financial statements for the Subsidiary Guarantors are
not presented because they are not material to investors.
7
<PAGE> 9
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
8
<PAGE> 10
PLD TELEKOM INC.
CONSOLIDATING BALANCE SHEET
(UNAUDITED)
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES PLD
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 4,836 $ 926 $ 10,261 $ -- $ 16,023
Trade Receivables, net of
allowances......................... -- 1,897 17,118 -- 19,015
Other receivables and prepaids........ 422 194 7,881 -- 8,497
Inventory............................. -- 106 2,882 -- 2,988
Due from related parties.............. 648 2,100 6,766 -- 9,514
-------- -------- -------- --------- --------
Total current assets.......... 5,906 5,223 44,908 -- 56,037
Escrow funds............................ 21,658 -- -- -- 21,658
Intercompany investments and advances... 220,891 159,800 235 (380,926) --
Property and equipment, net............. 208 5,844 143,426 (1,349) 148,129
Telecommunications licenses, net........ -- -- 34,465 39,281 73,746
Due from related parties................ 2,011 -- -- 2,011
Other investments....................... 10,059 8 3,245 (4,127) 9,185
Other assets............................ 9,935 60 11,321 2,828 24,144
-------- -------- -------- --------- --------
Total assets.................. $268,657 $172,946 $237,600 $(344,293) $334,910
======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings................. 16,624 -- 900 -- 17,524
Accounts payable...................... 1,377 2,130 5,223 -- 8,730
Accrued liabilities................... 600 150 3,791 -- 4,541
Due to related parties................ -- -- 3,859 -- 3,859
Deferred revenue...................... -- 4 2,310 -- 2,314
Customer deposits..................... -- 26 3,590 -- 3,616
Other current liabilities............. 378 -- 1,412 -- 1,790
-------- -------- -------- --------- --------
Total current liabilities..... 18,979 2,338 23,807 -- 45,124
Long-term debt.......................... 130,305 -- 12,442 -- 142,747
Intercompany payables................... -- 36,605 42,837 (79,442) --
Minority interest....................... -- -- 27,666 27,666
Commitments and contingencies...........
Shareholders' equity:
Preferred stock....................... 4 -- 40,000 (40,000) 4
Common stock.......................... 335 132,278 79,781 (212,059) 335
Additional paid-in capital............ 206,014 -- -- -- 206,014
Accumulated deficit................... (86,980) 1,725 38,733 (40,458) (86,980)
-------- -------- -------- --------- --------
Total shareholders' equity.... 119,373 134,003 158,514 (292,517) 119,373
-------- -------- -------- --------- --------
Total liabilities and
shareholders' equity........ $268,657 $172,946 $237,600 $(344,293) $334,910
======== ======== ======== ========= ========
</TABLE>
9
<PAGE> 11
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications............. $ -- $ 2,888 $35,925 $ -- $38,813
Finance lease income........... -- -- 427 -- 427
Management fees................ 644 -- -- (644) --
------- ------- ------- -------- -------
Total revenues......... 644 2,888 36,352 (644) 39,240
Direct costs..................... -- 1,406 10,758 -- 12,164
------- ------- ------- -------- -------
Gross profit........... 644 1,482 25,594 (644) 27,076
Operating expenses:
General and administrative..... 3,021 722 8,694 87 12,524
Depreciation................... (51) 206 3,379 -- 3,534
Amortization................... -- 1,220 3,013 (1,367) 2,866
Management fees................ -- -- 644 (644) --
Taxes other than income
taxes....................... 166 372 1,692 -- 2,230
------- ------- ------- -------- -------
Total operating
expenses............. 3,136 2,520 17,422 (1,924) 21,154
------- ------- ------- -------- -------
Operating
income/(loss)........ (2,492) (1,038) 8,172 593 5,922
Other income/(expense):
Share of income/(loss) from
equity investments.......... 1,234 6,663 (48) (7,897) (48)
Interest and other income...... 1,121 207 178 (560) 946
Interest expense............... (5,138) (210) (571) 560 (5,359)
Amortization of deferred
financing costs............. (400) -- -- -- (400)
Foreign exchange loss.......... -- 26 (399) -- (373)
Loss on disposals.............. 317 -- (403) 83 (3)
------- ------- ------- -------- -------
Income/(loss) before
income taxes and
minority interest.... (5,358) 5,648 6,929 (6,534) 685
Income taxes..................... -- 90 2,084 -- 2,174
------- ------- ------- -------- -------
Income (loss) before
minority interest.... (5,358) 5,558 4,845 (6,534) (1,489)
Minority interest................ -- -- -- 3,869 3,869
------- ------- ------- -------- -------
Net income/(loss)...... $(5,358) $ 5,558 $ 4,845 $(10,403) $(5,358)
======= ======= ======= ======== =======
</TABLE>
10
<PAGE> 12
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
-------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications............ $ -- $ 5,130 $68,402 $ -- $ 73,532
Finance lease income.......... -- -- 874 -- 874
Management fees............... 1,669 -- -- (1,669) --
-------- ------- ------- -------- --------
Total revenues........ 1,669 5,130 69,276 (1,669) 74,406
Direct costs.................... -- 2,550 20,410 -- 22,960
-------- ------- ------- -------- --------
Gross profit.......... 1,669 2,580 48,866 (1,669) 51,446
Operating expenses:
General and administrative.... 4,574 1,444 16,220 (14) 22,224
Depreciation.................. (104) 414 6,323 -- 6,633
Amortization.................. -- 2,441 3,092 25 5,558
Management fees............... -- -- 1,669 (1,669) --
Taxes other than income
taxes...................... 296 550 3,064 -- 3,910
-------- ------- ------- -------- --------
Total operating
expenses............ 4,766 4,849 30,368 (1,658) 38,325
-------- ------- ------- -------- --------
Operating
income/(loss)....... (3,097) (2,269) 18,498 (11) 13,121
Other income/(expense):
Share of income/(loss) from
equity investments......... 2,561 12,357 (258) (14,918) (258)
Interest and other income..... 1,636 343 398 (560) 1,817
Interest expense.............. (10,166) -- (943) 560 (10,549)
Amortization of deferred
financing costs............ (801) -- -- -- (801)
Foreign exchange loss......... -- (47) (442) -- (489)
Loss on disposals............. -- -- (3) -- (3)
-------- ------- ------- -------- --------
Income/(loss) before
income taxes and
minority interest... (9,867) 10,384 17,250 (14,929) (2,838)
Income taxes.................... -- 162 5,009 -- 5,171
-------- ------- ------- -------- --------
Income (loss) before
minority interest... (9,867) 10,222 12,241 (14,929) (2,333)
Minority interest............... -- -- -- 7,534 7,534
-------- ------- ------- -------- --------
Net income/(loss)..... $ (9,867) $10,222 $12,241 $(22,463) $ (9,867)
======== ======= ======= ======== ========
</TABLE>
11
<PAGE> 13
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications............. $ -- $ 1,906 $23,986 $ -- $25,892
Finance lease income........... 20 176 497 (196) 497
Management fees................ -- 526 -- (526) --
------- ------- ------- -------- -------
Total revenues......... 20 2,608 24,483 (722) 26,389
Direct costs..................... -- 809 8,356 -- 9,165
------- ------- ------- -------- -------
Gross profit........... 20 1,799 16,127 (722) 17,224
Operating expenses:
General and administrative..... 729 1,164 6,459 498 8,850
Depreciation................... (69) 192 2,282 -- 2,405
Amortization................... 796 1,222 13 -- 2,031
Management fees................ 767 -- (241) (526) --
Taxes other than income
taxes....................... 35 156 1,113 -- 1,304
------- ------- ------- -------- -------
Total operating
expenses............. 2,258 2,734 9,626 (28) 14,590
------- ------- ------- -------- -------
Operating
income/(loss)........ (2,238) (935) 6,501 (694) 2,634
Other income/(expense):
Share of income/(loss) from
equity investments.......... 1,234 3,166 (269) (4,400) (269)
Interest and other income...... 2,005 279 (177) 154 2,261
Interest expense............... (4,089) -- (227) 196 (4,120)
Amortization of deferred
financing costs............. (288) -- -- -- (288)
Foreign exchange loss.......... (349) 21 208 -- (120)
Loss on disposals.............. -- -- -- -- --
------- ------- ------- -------- -------
Income/(loss) before
income taxes and
minority interest.... (3,725) 2,531 6,036 (4,744) 98
Income taxes..................... -- 56 2,618 (308) 2,366
------- ------- ------- -------- -------
Income (loss) before
minority interest.... (3,725) 2,475 3,418 (4,436) (2,268)
Minority interest................ -- -- (386) 1,843 1,457
------- ------- ------- -------- -------
Net income/(loss)...... $(3,725) $ 2,475 $ 3,804 $ (6,279) $(3,725)
======= ======= ======= ======== =======
</TABLE>
12
<PAGE> 14
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
NON-
GUARANTOR GUARANTOR
SUBSIDIARIES SUBSIDIARIES
PARENT (COMBINED) (COMBINED) ELIMINATIONS CONSOLIDATED
------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications............. $ -- $ 3,685 $45,587 $ -- $49,272
Finance lease income........... 20 380 1,008 (400) 1,008
Management fees................ -- 1,088 -- (1,088) --
------- ------- ------- -------- -------
Total revenues......... 20 5,153 46,595 (1,488) 50,280
Direct costs..................... -- 1,100 16,586 -- 17,686
------- ------- ------- -------- -------
Gross profit........... 20 4,053 30,009 (1,488) 32,594
Operating expenses:
General and administrative..... 1,339 2,324 12,228 207 16,098
Depreciation................... (138) 384 4,484 -- 4,730
Amortization................... 1,592 2,442 25 -- 4,059
Management fees................ 772 -- 316 (1,088) --
Taxes other than income
taxes....................... 120 253 2,219 -- 2,592
------- ------- ------- -------- -------
Total operating
expenses............. 3,685 5,403 19,272 (881) 27,479
------- ------- ------- -------- -------
Operating
income/(loss)........ (3,665) (1,350) 10,737 (607) 5,115
Other income/(expense):
Share of income/(loss) from
equity investments.......... 1,837 5,736 (547) (7,573) (547)
Interest and other income...... 2,612 279 325 187 3,403
Interest expense............... (8,059) (204) (730) 604 (8,389)
Amortization of deferred
financing costs............. (576) -- -- -- (576)
Foreign exchange loss.......... (216) 113 (56) -- (159)
Loss on disposals.............. -- (251) -- -- (251)
------- ------- ------- -------- -------
Income/(loss) before
income taxes and
minority interest.... (8,067) 4,323 9,729 (7,389) (1,404)
Income taxes..................... -- 88 3,368 (16) 3,440
------- ------- ------- -------- -------
Income (loss) before
minority interest.... (8,067) 4,235 6,361 (7,373) (4,844)
Minority interest................ -- -- (265) 3,488 3,223
------- ------- ------- -------- -------
Net income/(loss)...... $(8,067) $ 4,235 $ 6,626 $(10,861) $(8,067)
======= ======= ======= ======== =======
</TABLE>
13
<PAGE> 15
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 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............................ $ 3,955 $ 3,621 $ 25,495 $(25,109) $ 7,962
-------- -------- -------- -------- --------
Cash flows from investing activities:
Escrow funds.......................... 12,210 -- -- -- 12,210
Capital expenditures.................. (52) (103) (19,834) 7,681 (12,308)
Cash paid for acquired business....... (500) -- -- -- (500)
Investments and other assets.......... (16,365) 2,512 211 13,838 196
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities........ (4,707) 2,409 (19,623) 21,519 (402)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Short-term borrowings/(repayments),
net................................ (2,796) -- (4,606) -- (7,402)
Issuance of stock..................... -- 6,638 -- (6,638) --
Registration costs.................... (141) -- -- -- (141)
Dividends paid to minorities.......... -- (1,250) (2,500) 2,500 (1,250)
Related party advances and other...... 3,012 (10,733) (7) 7,728 --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities............. 75 (5,345) (7,113) 3,590 (8,793)
-------- -------- -------- -------- --------
(Decrease)/Increase in cash and
cash equivalents................. (677) 685 (1,241) (1,233)
Cash and cash equivalents at beginning
of period............................. 5,513 241 11,502 17,256
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period................................ $ 4,836 $ 926 $ 10,261 $ -- $ 16,023
======== ======== ======== ======== ========
</TABLE>
14
<PAGE> 16
PLD TELEKOM INC.
CONSOLIDATING STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 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............................. $ 13,192 $(1,591) $ 11,381 $(12,644) $ 10,338
-------- ------- -------- -------- --------
Cash flows from investing activities:
Escrow funds........................... (888) -- -- -- (888)
Capital expenditures................... -- (504) (23,907) 748 (23,663)
Investments and other assets........... (8,316) 359 103 24,388 16,534
-------- ------- -------- -------- --------
Net cash provided by (used in)
investing activities......... (9,204) (145) (23,804) 25,136 (8,017)
-------- ------- -------- -------- --------
Cash flows from financing activities:
Short-term borrowings/(repayments),
net................................. 5,600 -- (15,698) (131) (10,229)
Issuance of stock...................... 94 -- 10,775 (10,775) 94
Dividends paid to minorities........... -- -- (400) 200 (200)
Related party advances and other....... (481) 1,615 652 (1,786) --
-------- ------- -------- -------- --------
Net cash provided by (used in)
financing activities.............. 5,213 1,615 (4,671) (12,492) (10,335)
-------- ------- -------- -------- --------
(Decrease)/Increase in cash and cash
equivalents....................... 9,201 (121) (17,094) (8,014)
Cash and cash equivalents at beginning of
period................................. 7,271 331 33,072 40,674
-------- ------- -------- -------- --------
Cash and cash equivalents at end of
period................................. $ 16,472 $ 210 $ 15,979 $ -- $ 32,660
======== ======= ======== ======== ========
</TABLE>
15
<PAGE> 17
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
16
<PAGE> 18
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 9,143 $ 7,849
Trade receivables, net of allowances...................... 13,411 12,725
Other receivables and prepaids............................ 4,370 3,266
VAT receivable............................................ 3,936 2,154
Due from related parties.................................. -- 468
Inventory................................................. 2,882 2,566
-------- --------
Total current assets.............................. 33,742 29,028
Property and equipment, net................................. 90,216 79,002
Telecommunications licenses, net............................ 39,882 42,286
Other receivables........................................... -- 3,012
Goodwill, net............................................... 1,472 1,580
Other assets................................................ 2,299 280
-------- --------
Total assets...................................... $167,611 $155,188
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank indebtedness......................................... 900 900
Accounts payable.......................................... 1,966 3,064
Accrued liabilities....................................... 3,636 3,044
Advances from other group companies....................... 30,012 32,810
Due to related parties.................................... 1,387 818
Customer deposits and advances............................ 5,691 5,978
Current portion of long term debt......................... 3,770 3,988
-------- --------
Total current liabilities......................... 47,362 50,602
-------- --------
Long term debt.............................................. 13,365 12,458
Due to related parties...................................... 2,144 2,144
Minority interest........................................... 26,005 19,391
Commitments and contingencies (note 3)
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....................................... 63,722 63,723
Accumulated surplus (deficit)............................. 7,931 (212)
-------- --------
Total shareholder's equity........................ 78,735 70,593
-------- --------
Total liabilities and shareholder's equity........ $167,611 $155,188
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
17
<PAGE> 19
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Telecommunications revenue............................ $30,838 $19,450 $57,938 $35,507
Direct costs.......................................... 8,096 4,677 15,541 8,945
------- ------- ------- -------
Gross profit................................ 22,742 14,773 42,397 26,562
Operating expenses:
General and administrative.......................... 6,066 4,145 11,311 8,175
Management fees..................................... 419 -- 819 --
Depreciation........................................ 2,621 1,658 4,696 3,403
Amortization........................................ 1,221 1,236 2,455 2,470
Taxes other than income taxes....................... 1,266 792 2,191 1,540
------- ------- ------- -------
Total operating expenses.................... 11,593 7,831 21,472 15,588
------- ------- ------- -------
Operating income............................ 11,149 6,942 20,925 10,974
Other income/(expense):
Interest and other income........................... 115 159 651 223
Interest on long term debt.......................... (151) (200) (380) (405)
Foreign exchange loss............................... (110) (24) (220) (227)
------- ------- ------- -------
Income before income taxes and minority
interest.................................. 11,003 6,877 20,976 10,565
Income taxes.......................................... 2,460 2,601 4,970 3,221
------- ------- ------- -------
Income before minority interest............. 8,543 4,276 16,006 7,344
Minority interest..................................... 4,128 2,234 7,863 4,153
------- ------- ------- -------
Net income.................................. $ 4,415 $ 2,042 $ 8,143 $ 3,191
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
18
<PAGE> 20
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ 8,143 $ 3,191
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 7,151 5,873
Minority interest...................................... 7,863 4,153
Changes in operating assets and liabilities:
Increase in accounts receivable...................... (686) (3,019)
Decrease (increase) in other receivables and
prepaids............................................ (1,104) 50
Increase in VAT receivable........................... (1,782) (398)
(Decrease) increase in inventory..................... (316) 56
Change in amounts due from and to related parties.... 1,037 404
(Decrease) increase in customer deposits and
advances............................................ (287) 1,201
Increase (decrease) in accounts payable and accrued
liabilities......................................... (4,041) 2,511
-------- --------
Net cash provided by operating activities......... 15,978 14,022
Cash flows from investing activities:
Capital expenditures...................................... (8,364) (16,496)
Other assets.............................................. (1,962) (10)
-------- --------
Net cash used in investing activities............. (10,326) (16,506)
Cash flows from financing activities:
Long term debt............................................ (3,233) (136)
Advances from other group companies....................... (2,887) 6,090
Dividends................................................. (1,250) (200)
Other receivables......................................... 3,012 --
-------- --------
Net cash (used in)/provided by financing
activities...................................... (4,358) 5,754
-------- --------
Increase in cash and cash equivalents............. 1,294 3,270
Cash and cash equivalents at beginning of year.............. 7,849 5,185
-------- --------
Cash and cash equivalents at end of year.................... $ 9,143 $ 8,455
======== ========
Supplemental Information:
Non-cash investing and financing activities:
Purchase of equipment with PLD advances and under
long-term contracts.................................... $ 7,547 $ 8,697
======== ========
Interest paid............................................. $ 723 $ 329
======== ========
Income taxes paid......................................... $ 5,075 $ 3,945
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
19
<PAGE> 21
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 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.
(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 operating
subsidiaries, PeterStar Company Limited ("PeterStar"), Wireless Technology
Corporations Limited ("WTC") and C.P.Y. Yellow Pages Limited ("Yellow Pages")
are 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) COMMITMENTS AND CONTINGENCIES
(a) Russian Taxation
PeterStar and ALTEL (formerly known as BECET International) subsidiaries
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.
(b) Purchase Commitments
At June 30, 1998, PeterStar has commitments of approximately $600,000
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
June 30, 1998 approximately $4,000) per month plus 1.0% of monthly gross
revenues.
20
<PAGE> 22
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(d) Guarantee
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of the debt under the terms of the related indentures.
(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 in 1998. The exact fee, and the date from which charges will be levied,
have yet to be determined, but the Company does not believe that such payments
will have a material adverse effect on the Company's financial position or
results of operations.
(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 six months
ended June 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 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 does not utilize derivative instruments and accordingly it is
anticipated that the adoption of SFAS 133 will not have a material impact on the
Company's consolidated financial position and results of operations.
21
<PAGE> 23
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
22
<PAGE> 24
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
(THOUSANDS OF U.S.
DOLLARS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,787 $ 4,671
Trade receivables, net of allowances...................... 3,707 2,942
Other receivables......................................... 1,417 2,806
Due from related parties.................................. 6,766 5,591
-------- --------
TOTAL CURRENT ASSETS.............................. 13,677 16,010
Property and equipment, net................................. 53,088 50,656
Telecommunications licenses, net............................ 34,047 36,632
Due from related parties.................................... 2,377 2,253
Goodwill, net............................................... 10,851 11,129
Other investments and assets, net........................... 995 1,307
-------- --------
TOTAL ASSETS...................................... $115,035 $117,987
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... 3,190 6,078
Accrued liabilities....................................... 659 1,590
Taxes Payable............................................. 2,487 1,942
Due to related parties.................................... 19,816 21,867
Other current liabilities................................. 465 765
-------- --------
TOTAL CURRENT LIABILITIES......................... 26,617 32,242
Other liabilities........................................... -- 337
Due to related parties...................................... 8,000 336
Supplier financing.......................................... 3,034 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........................................ 45,872 45,756
Accumulated deficit....................................... (8,879) (4,402)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 77,384 81,745
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $115,035 $117,987
======== ========
</TABLE>
See accompanying notes to the consolidated condensed financial statements
23
<PAGE> 25
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS
ENDED JUNE 30
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
------------------ -----------------
1998 1997 1998 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Telecommunications.................................... $ 5,085 $4,536 $10,462 $10,080
Finance lease income.................................. 427 398 874 1,008
------- ------ ------- -------
TOTAL REVENUES................................ 5,512 4,934 11,336 11,088
DIRECT COSTS............................................ 2,662 3,453 4,840 7,233
------- ------ ------- -------
GROSS PROFIT............................................ 2,850 1,481 6,496 3,855
OPERATING EXPENSES:
General and administrative............................ 2,503 1,304 4,499 2,815
Depreciation.......................................... 904 591 1,758 1,014
Amortization.......................................... 2,957 23 3,022 46
Taxes other than income taxes......................... 556 393 990 751
------- ------ ------- -------
TOTAL OPERATING EXPENSES...................... 6,920 2,311 10,269 4,626
OPERATING INCOME........................................ (4,070) (830) (3,773) (771)
OTHER (EXPENSES)/INCOME:
Share of losses of equity investments................. (48) (269) (258) (547)
Interest income....................................... 36 63 117 499
Interest expenses..................................... (420) 99 (563) (251)
------- ------ ------- -------
INCOME/(LOSS) BEFORE TAXATION AND MINORITY INTEREST..... (4,502) (937) (4,477) (1,070)
Income taxes............................................ 377 (9) -- (137)
------- ------ ------- -------
LOSS BEFORE MINORITY INTEREST................. (4,125) (946) (4,477) (1,207)
Minority interest....................................... -- 385 -- 265
------- ------ ------- -------
NET LOSS................................................ $(4,125) $ (561) $(4,477) $ (942)
======= ====== ======= =======
</TABLE>
See accompanying notes to the consolidated condensed financial statements
24
<PAGE> 26
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(4,477) $ (942)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 4,780 1,060
Share of loss of equity investments....................... 258 547
Minority interest......................................... -- (265)
Changes in operating assets and liabilities:
(Increase)/decrease in trade receivables.................. (765) 911
Decrease/(increase) in other receivables.................. 1,031 (3,362)
Changes in due from/to related parties.................... 4,314 6,429
(Decrease)/increase in accounts payable and deferred
taxes.................................................. (1,808) 9,083
Decrease in accrued liabilities........................... (931) (3,079)
Decrease in other liabilities............................. (92) --
------- --------
CASH PROVIDED BY OPERATING ACTIVITIES....................... 2,310 10,382
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on long-term indebtedness........................... (1,373) --
Repayment of bank borrowings................................ -- (15,829)
------- --------
CASH USED IN FINANCING ACTIVITIES........................... (1,373) (15,829)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (3,575) (15,608)
Other investments and assets................................ (246) 69
------- --------
CASH USED IN INVESTING ACTIVITIES........................... (3,821) (15,539)
Decrease in cash and cash equivalents....................... (2,884) (20,986)
Cash and cash equivalents at beginning of period............ 4,671 27,997
------- --------
CASH AT CASH EQUIVALENTS AT END OF PERIOD................... $ 1,787 $ 7,011
======= ========
Supplemental disclosure:
Interest paid............................................... $ 129 $ 251
======= ========
Income taxes paid........................................... $ -- $ --
======= ========
</TABLE>
See accompanying notes to the consolidated condensed financial statements
25
<PAGE> 27
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 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
June 30, 1998 reflects the effect of this push down accounting treatment, with
an amortization charge arising of $2,786,000 relating to 1998.
The cost of the telecommunications licenses is 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 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 $1,066,500 for the
remainder of its term.
26
<PAGE> 28
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
As of June 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, 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 June 30, 1998 amounted to $865,000.
(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 six months
ended June 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 does not
utilize derivative instruments and accordingly it is anticipated that the
adoption of SFAS 133 will not have a material impact on the Company's
consolidated financial position and results of operations.
27
<PAGE> 29
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
28
<PAGE> 30
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
--------- ------------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,959 $ 5,294
Trade receivables, net of allowance....................... 3,706 3,462
Inventory................................................. 1,371 1,640
Prepaid expenses and other current assets................. 1,227 798
------- -------
Total current assets.............................. 12,263 11,194
Property and equipment, net................................. 24,372 23,362
Telecommunications license, net............................. 22,493 23,693
------- -------
Total assets...................................... $59,128 $58,249
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. 1,204 1,197
Due to related parties.................................... 588 1,875
Customer deposits and advances............................ 3,590 3,070
Income tax payable........................................ -- 58
------- -------
Total current liabilities......................... 5,382 6,200
------- -------
Commitments and contingencies (note 3)
Minority interest........................................... 5,851 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....................................... (2,908) (3,243)
------- -------
Total shareholder's equity........................ 47,895 47,560
------- -------
Total liabilities and shareholder's equity........ $59,128 $58,249
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
29
<PAGE> 31
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
----------------- ------------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
Telecommunications revenues.......................... $10,128 $6,692 $19,677 $12,759
Direct costs......................................... 1,954 1,590 3,902 3,022
------- ------ ------- -------
Gross profit......................................... 8,174 5,102 15,775 9,737
Operating expenses:
General and administrative......................... 2,444 1,546 4,757 3,306
Management fees.................................... 419 226 819 488
Depreciation and amortization...................... 1,634 1,237 3,022 2,680
Taxes other than income tax........................ 149 97 284 171
------- ------ ------- -------
Total operating expenses................... 4,646 3,106 8,882 6,645
------- ------ ------- -------
Operating income..................................... 3,528 1,996 6,893 3,092
Other income (expense):
Interest and other income.......................... 94 50 185 79
Foreign exchange gain/(loss)....................... (81) 7 (191) (112)
------- ------ ------- -------
Net income before income tax and minority
interest...................................... 3,541 2,053 6,887 3,059
Income tax........................................... 1,344 916 2,690 1,057
------- ------ ------- -------
Net income before minority interest........ 2,197 1,137 4,197 2,002
Minority interest.................................... 1,355 825 2,612 1,514
------- ------ ------- -------
Net income........................................... $ 842 $ 312 $ 1,585 $ 488
======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
30
<PAGE> 32
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Cash flows provided by operating activities:
Net income................................................ $ 1,585 $ 488
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,022 2,680
Gain on disposal....................................... 89 --
Bad debt expense....................................... 180 150
Minority interest...................................... 2,612 1,514
Changes in operating assets and liabilities:
Increase in trade receivables........................ (520) (537)
Decrease in inventory................................ 269 163
Increase in prepaid expenses and other current
assets.............................................. (429) (141)
Increase (decrease) in accounts payable and accrued
liabilities......................................... 7 (810)
(Decrease) increase in due to related parties........ (1,287) 544
Increase in customer deposits and advances........... 520 610
(Decrease) increase in income tax payable............ (58) 407
------- -------
Net cash provided by operating activities......... 5,990 5,068
------- -------
Cash flows used in investing activities -- purchase of
property and equipment.................................... (2,825) (1,863)
------- -------
Cash flows from financing activities -- dividend payments... (2,500) (400)
------- -------
Increase in cash and cash equivalents............. 665 2,805
Cash and cash equivalents at beginning of period............ 5,294 5,957
------- -------
Cash and cash equivalents at end of period.................. $ 5,959 $ 8,762
======= =======
Supplemental disclosures:
Interest paid............................................. -- --
======= =======
Income taxes paid......................................... $ 3,083 $ 2,653
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
31
<PAGE> 33
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 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 (consisting of normal recurring
accruals) necessary for a fair presentation.
Certain information and footnote disclosures generally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. Results for interim periods are not necessarily indicative of the
results for a full year.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the fiscal year
ended December 31, 1997.
(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
The Company's parent, PLD Telekom Inc.("PLD"), issued senior discount notes
and convertible subordinated notes with an aggregate principal amount of $149.5
million in June 1996. 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
June 30, 1998 approximately $4,000) 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 other taxes,
fines and penalties will not have material effect on the financial position or
results of operations of the Company.
32
<PAGE> 34
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(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 six months
ended June 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 does not
utilize derivative instruments and accordingly it is anticipated that the
adoption of SFAS 133 will not have a material impact on the Company's
consolidated financial position and results of operations.
(6) DIVIDEND PAYMENTS
Total dividends declared and paid were $2.5 million and $400,000 for the
six months ended June 30, 1998 and 1997, respectively.
33
<PAGE> 35
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 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 this Report.
BASIS OF PRESENTATION
The Company's key interests at June 30, 1998 include a 60% equity interest
in PeterStar, which provides telecommunications services in St. Petersburg,
Russia; a 50% equity interest in ALTEL, which provides cellular services in
Kazakhstan; and a 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 (ie, 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 SIX MONTHS ENDED JUNE 30, 1998 VERSUS THREE AND SIX MONTHS ENDED
JUNE 30, 1997
Overview. The Company reported a net loss of $5.4 million ($0.16 per
share) and operating income of $5.9 million on revenues of $39.2 million for the
three months ended June 30, 1998 compared to a net loss of $3.7 million ($0.12
per share) and operating income of $2.6 million on revenues of $26.4 million
reported in second quarter of 1997. EBITDA of $11.9 million reported in the
second quarter of 1998 compared with $6.7 million in the second quarter of 1997.
For the six months ended June 30, 1998, the Company reported a net loss of $9.9
million ($0.30 per share) and operating income of $13.1 million on revenues of
$74.4 million compared to a net loss of $8.1 million ($0.25 per share) and
operating income of $5.1 million on revenues of $50.3 million reported in the
first half of 1997. EBITDA of $24.6 million reported in the first half of 1998
compared with $13.2 million in the first half of 1997.
The following narrative discusses the major line items comprising the
Company's net loss for the three and six months ended June 30, 1998 compared to
the three and six months ended June 30, 1997.
Revenues. Revenues increased 48.5% from $26.4 million in the second
quarter of 1997 to $39.2 million in the second quarter of 1998. For the six
months ended June 30, 1998, revenues increased 47.9% from $50.3 million recorded
in 1997 to $74.4 million. These increases were primarily a result of the strong
revenue growth at PeterStar and ALTEL, which together accounted for 77.3% of the
Company's consolidated revenues for the
34
<PAGE> 36
six months ended June 30, 1998. PeterStar's subscriber line numbers reached
161,000 by the end of the second quarter, up 137% over the previous year, while
ALTEL's number of subscribers increased to 13,700, up 54% over the second
quarter of 1997.
The following table shows the Company's consolidated revenues by principal
operating subsidiary for the three and six months ended June 30, 1998 and 1997
and the percentage growth in revenues between the periods:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED % SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 CHANGE JUNE 30, 1998 JUNE 30, 1997
-------------------- -------------------- OVER -------------------- --------------------
($ MILLIONS) % ($ MILLIONS) % PRIOR PERIOD ($ MILLIONS) % ($ MILLIONS) %
------------ ----- ------------ ----- ------------ ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PeterStar............ 20.3 51.8% 12.3 46.6% 65.0% 37.8 50.8% 22.3 44.3%
ALTEL................ 10.1 25.8% 6.7 25.4% 50.7% 19.7 26.5% 12.8 25.4%
Technocom............ 5.5 14.0% 4.9 18.6% 12.2% 11.3 15.2% 11.1 22.1%
BCL.................. 2.9 7.4% 1.9 7.2% 52.6% 5.1 6.9% 3.7 7.4%
Other................ 0.4 1.0% 0.6 2.2% (33.3) 0.5 0.6% 0.4 0.8%
---- ----- ---- ----- ----- ---- ----- ---- -----
39.2 100.0% 26.4 100.0% 48.5% 74.4 100.0% 50.3 100.0%
==== ===== ==== ===== ===== ==== ===== ==== =====
<CAPTION>
%
CHANGE OVER
PRIOR PERIOD
--------------
<S> <C>
PeterStar............ 69.5%
ALTEL................ 53.9%
Technocom............ 1.8%
BCL.................. 37.8%
Other................ .25%
----
47.9%
====
</TABLE>
Management expects overall revenues to continue to grow at a relatively
high rate in the near term. The extent of unsatisfied demand and lack of
competition in many of the markets in which the Company currently operates will
continue to sustain this growth rate. Growth will be fuelled primarily by
increasing line penetration. Overall revenues per line however are expected to
decrease as a result of gradual tariff reductions and a continuing shift in call
patterns towards local vs international long distance usage. As the build-out of
Teleport-TP's pan-Russian satellite-based network continues throughout 1998,
Technocom's revenues are expected to provide a larger contribution to the
Company's consolidated revenues.
Gross profit. Gross profit increased 57.2% to $27.1 million for the three
months ended June 30, 1998 from $17.2 million recorded in the second quarter of
1997. For the six months ended June 30, 1998, gross profit increased 57.8% to
$51.4 million from $32.6 million recorded a year ago. As a percentage of
revenues, gross profit for the six months increased to 69.1% from 64.8% a year
earlier. Gross profits, as a percentage of revenues, are expected to remain
relatively stable over the near term as gradual tariff reductions experienced at
the operating level have generally been offset by reductions in carrier charges
with the operating companies' carriers.
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 41.5%
to $12.5 million for the three months ended June 30, 1998 from $8.9 million
recorded in the second quarter of 1997. For the six months ended June 30, 1998,
general and administrative expenses increased 38.1% to $22.2 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 significant growth in revenues. As a
percentage of revenues, general and administrative expenses for the six months
decreased to 29.9% from 32.0% in 1997 reflecting continued leveraging of the
Company's fixed operating costs. This downward trend, as a percentage of
revenues, is likely to continue in the near future.
Depreciation. Depreciation increased 46.9% to $3.5 million in the second
quarter of 1998 compared to $2.4 million incurred in the second quarter of 1997.
For the six months ended June 30, 1998, depreciation increased 40.2% over the
prior year to $6.6 million reflecting the investment of over $27.6 million in
property and equipment over the past 12 months. Depreciation will continue to
grow in absolute terms as capital expenditures will continue over the course of
1998. Depreciation represented 8.9% of revenues for the six months ended June
30, 1998 compared to 9.4% a year earlier and is expected 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 June 30, 1998, the
Company incurred amortization charges of $3.3 million compared to $2.3 million a
year earlier. In the first half of 1998, the Company incurred total amortization
charges of $6.4 million compared to $4.6 million incurred in the first half of
1997. Of this
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<PAGE> 37
amount, $5.4 million related to the amortization of telecommunications licenses
held by PeterStar, ALTEL and Teleport-TP and $0.8 million related to
amortization of deferred finance costs. Deferred finance costs relating to the
June 1996 offering are being amortized over 8 years, the term of the Senior
Notes, while deferred finance costs relating to the November 1997 issuance will
be fully amortized during 1998.
The increase in amortization expense in the three and six months ended June
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. This resulted in additional amortization
charges of $1.5 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 value allocated to
goodwill ($11.1 million) is being amortized over 20 years and the value
allocated to Teleport-TP's licenses ($16.0 million) is being amortized over the
remaining term, which expires in 2004.
PeterStar and ALTEL's telecommunications licenses expire in 2004 and 2009,
respectively, and their values, recorded on the Company's consolidated balance
sheet, are being amortized over their remaining terms. The Company does not
anticipate any problems renewing the telecommunications licenses currently held
by any of these companies upon their expiry.
Share of loss from equity investments. Share of loss from equity
investments, primarily Rosh Telecom and MTR Sviaz, decreased from $0.3 million
in the second quarter of 1997 to $48,000 in the second quarter of 1998. For the
six month period, this figure decreased from $0.5 million in 1997 to $0.3
million in 1998 and consisted of a 50% share of MTR Sviaz's six month loss of
$0.8 million offset by a 50% share of Rosh Telecom's six month net profit of
$0.2 million.
Interest and other income. Interest and other income of $0.9 million in
the second quarter of 1998 compared with $2.3 million earned in the second
quarter of 1997. For the six months ended June 30, 1998, interest and other
income of $1.8 million compared with $3.4 million a year earlier. The 1998 first
half figure included $0.8 million earned on the Company's funds held in escrow
and a $0.5 million payment from Cable & Wireless relating to taxes paid by BCL
subsequent to the Company's acquisition of BCL from Cable & Wireless in early
1996. Pursuant to the terms of the acquisition, PLD was indemnified for these
taxes which related to prior periods. Both 1997 comparative figures include 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 $5.4 million in the second quarter
of 1998 compared with $4.1 million incurred in the second quarter of 1997. For
the six months, interest expense of $10.5 million in 1998 compared to $8.4
million in 1997 and consisted of interest on bank indebtedness and short-term
borrowings of $1.3 million, interest accreted on the Senior Notes of $8.0
million and interest accrued on the Convertible Notes of $1.2 million. Interest
on the Senior Notes becomes payable semi-annually commencing June 1999 while
interest on the Convertible Notes is currently paid semi-annually. The increase
in interest expense in both the three and six month periods reflects primarily
the interest paid on the Travelers Notes, totalling $15.4 million, which carried
an annual interest rate of 12%. On June 1, 1998, the interest rate on these
notes increased to 15% (see "Liquidity and Capital Resources" section).
Income taxes. The income tax charge for the three months ended June 30,
1998 was $2.2 million compared with $2.4 million in 1997. For the six months
ended June 30, 1998, the Company's income tax charge of $5.2 million compared
with $3.4 million incurred in 1997. The provision for income taxes relates
substantially to current income taxes in the Company's Russian and Kazak
businesses and its increase reflects the improved profitability of these
subsidiaries overall.
Minority interest. Minority interest relates to the minority shareholdings
held principally in three of the Company's subsidiaries -- PeterStar (40%),
ALTEL (50%) and Technocom (19.6%). Minority interest of $3.9 million for the
three months ended June 30, 1998 compared with $1.5 million in 1997. For the
half year, minority interest of $7.5 million compared with $3.2 million a year
ago. As with the income tax charge, the increase in minority interest in both
the three and six month periods reflects the overall improved profitability of
the Company's subsidiaries.
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<PAGE> 38
The following table compares the results of operations of the Company's
principal operating subsidiaries for the three and six months ended June 30,
1998 with the three and six months ended June 30, 1997:
<TABLE>
<CAPTION>
PETERSTAR ALTEL TECHNOCOM BCL
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
------------- ------------ -------------- --------------
1998 1997 1998 1997 1998 1997 1998 1997
----- ---- ---- ---- ----- ----- ----- -----
(MILLIONS OF U.S. DOLLARS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues -- $.......................... 20.3 12.3 10.1 6.7 5.5 4.9 2.9 1.9
Gross profit -- $...................... 14.1 9.2 8.1 5.1 2.8 1.5 1.5 0.8
Gross profit -- %...................... 69.5% 74.8% 80.2% 76.1% 50.9% 30.6% 51.7% 42.1%
Operating income -- $.................. 8.7 5.4 4.0 2.6 (3.8) (0.8) 0.4 0.1
Operating income -- %.................. 42.9% 43.9% 39.6% 38.8% (69.0)% (16.3)% 13.8% 5.3%
Net income -- $ 6.9 3.5 2.7 1.6 (4.5) (0.6) 0.2 0.0
Net income -- %........................ 34.0% 28.5% 26.7% 23.9% (81.8)% (12.2)% 6.9% 0.0%
EBITDA -- $............................ 9.6 6.5 5.1 3.3 (0.3) (0.5) 0.6 0.0
EBITDA -- %............................ 47.3% 52.8% 50.5% 49.3% (5.5)% (10.2)% 20.7% 0.0%
% PLD ownership........................ 60.0% 60.0% 50.0% 50.0% 80.4% 50.8% 100.0% 100.0%
</TABLE>
<TABLE>
<CAPTION>
PETERSTAR ALTEL TECHNOCOM BCL
SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30 JUNE 30 JUNE 30 JUNE 30
------------- ------------ -------------- --------------
1998 1997 1998 1997 1998 1997 1998 1997
----- ---- ---- ---- ----- ----- ----- -----
(MILLIONS OF U.S. DOLLARS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues -- $.......................... 37.8 22.3 19.7 12.8 11.3 11.1 5.1 3.7
Gross profit -- $...................... 26.1 16.5 15.7 9.7 6.5 3.9 2.6 2.3
Gross profit -- %...................... 69.0% 74.0% 79.7% 75.8% 57.5% 35.1% 51.0% 62.2%
Operating income -- $.................. 15.8 9.1 7.9 4.1 (3.8) (0.8) 0.4 0.4
Operating income -- %.................. 41.8% 40.8% 40.1% 32.0% (33.6)% (7.2)% 7.8% 10.8%
Net income -- $........................ 13.1 6.6 5.2 3.0 (4.5) (1.0) 0.2 0.5
Net income -- %........................ 34.7% 29.6% 26.4% 23.4% (39.8)% (9.0)% 3.9% 13.5%
EBITDA -- $............................ 18.4 10.8 9.7 5.7 0.7 (0.3) 0.7 0.9
EBITDA -- %............................ 48.7% 48.4% 49.2% 44.5% 6.2% (2.7)% 13.7% 24.3%
% PLD ownership........................ 60.0% 60.0% 50.0% 50.0% 80.4% 50.8% 100.0% 100.0%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, a total of $8.0 million in cash was
generated from operations (1997 -- $10.3 million), $0.4 million was used in net
investing activities (1997 -- $8.0 million) and $8.8 million was used in
financing activities (1997 -- $10.3 million). Investments during the six months
on telecommunications equipment and infrastructure totalled $19.8 million,
primarily within PeterStar, ALTEL and Teleport-TP. The Company's escrow account
was drawn down by $12.2 million to fund, in part, these capital expenditures.
Cash used in financing activities of $8.8 million related primarily to the
repayment of $7.4 million in short term borrowings and the payment of $1.3
million in dividends to minority shareholders.
Funds held in escrow at June 30, 1998 decreased to $21.7 million from $33.9
million at the end of 1997 reflecting the draw down discussed above. As of June
30, 1998, the Company had working capital, not including funds held in escrow,
of $10.9 million compared to a working capital deficit of $1.4 million at the
end of 1997.
As of June 30, 1998, the Company reported consolidated total assets of
$334.9 million compared to $335.6 million as of December 31, 1997, which
consisted of $56.0 million in current assets, (including $16.0 million in cash
and cash equivalents), $148.1 million in property and equipment, $73.7 million
in unamortized telecommunications licenses relating to PeterStar, ALTEL and
Teleport-TP, escrow funds of $21.7 million and other assets and investments of
$33.3 million including $10.9 million in goodwill, net of amortization, relating
to the Company's November 1997 acquisition of an additional 29.65% interest in
Technocom. Also
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<PAGE> 39
included in other investments is $2.9 million associated with the Company's
acquisition of common shares and assets of Ultra Pass Systems Limited in April
1998. Ultra Pass, working with Cardlink ZAO, a company recently incorporated by
the Company to operate in Russia, has developed innovative data networking
services aimed at the Russian retail banking industry.
Long-term indebtedness of $142.7 million, consisting primarily of the
Company's Senior and Convertible Notes, as a percentage of total assets, was
42.6% as of June 30, 1998 compared to $133.5 million or 39.8% of total assets as
of December 31, 1997.
Shareholders' equity of $119.4 million as of June 30, 1998 compared with
$127.2 million as of December 31, 1997 and consisted of $206.3 million in common
stock and additional paid-in capital offset by the Company's deficit of $87.0
million. The Company's ratio of long-term indebtedness to equity at June 30,
1998 was 119.6% 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 failed to do so, and as a result, the
interest rate on the Senior Notes has automatically increased to 14.5% 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 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 issued in November 1997 in connection
with the Company's additional investment in Technocom. The annual interest rate
on the 12% Series A and B Notes, which mature on December 30, 1998 and September
30, 1998, respectively, automatically increased to 15% as of June 1, 1998. The
Company was also required under the terms of the Revolving Credit Notes to
reduce the aggregate commitments of such Notes by $1 million on July 31, 1998
and is required to make further $1 million reductions on the last day of each
month thereafter. The July 31, 1998 payment of $1 million has been made.
However, the Company did not effect an additional "targeted reduction in
commitment" payment of $0.5 million on July 31, 1988, which will result in the
issuance of 46,000 warrants to acquire common shares of the Company at an
exercise price of $8.625 per share to the holders of the Notes.
The Company expects to complete an equity financing later this year with
proceeds to be used, among other things, to pay off the Revolving Credit Notes.
The Company's operations will continue to be financed with the Company's
existing cash balances, escrow funds, internally generated cash flow from
operations and supplier financing. However, to the extent that the Company
experiences lower than expected revenues, higher operating costs, or higher
development costs associated with the build-out of the PeterStar, ALTEL or
Teleport-TP networks, the Company may be required to seek additional debt or
equity financing for operations.
In addition, the Company is constantly assessing acquisition opportunities
throughout the C.I.S. which could 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 equity financing may be required. There can be no assurance that such
financing can or will be obtained on satisfactory terms.
RECENT DEVELOPMENTS
TRANSACTIONS WITH NEWS AMERICA AND CABLE & WIRELESS
On April 19, 1998, the Company entered into separate agreements with News
America Incorporated ("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
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
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<PAGE> 40
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.
News Corporation Limited, one of the largest media companies in the world
with total assets of $32.7 billion and total annual revenues in excess of $12
billion as of December 31, 1997, manages diversified global operations in the
U.S., the U.K., Australia, Latin America and the Pacific Basin. These operations
include: the production and distribution of motion pictures and television
programming; television, satellite and cable broadcasting; the publication of
newspapers, magazines, books and promotional free-standing inserts; the
development of digital broadcasting, conditional access and subscription
management systems; and the provision of computer information services.
RUSSIAN FINANCIAL MARKETS
In recent months, there has been considerable turmoil and uncertainty in
the Russian financial markets, prompted in large part by the crisis in the Asian
financial markets which began in late 1997 and is still continuing, and the
economic and political problems being experienced by a number of Asian
countries. The Russian ruble has been under significant pressure, requiring the
Russian government to raise interest rates substantially, and to seek special
assistance from the International Monetary Fund in order to defend its currency.
These developments have been accompanied by a substantial decline in the Russian
stock market, the Moscow Times Index having dropped over 70% since January 1,
1998.
At the present time it is not possible to predict whether the Russian
government will be successful in avoiding a devaluation of the ruble, or when
stability will return to its financial markets. Any devaluation of the ruble
could exacerbate existing economic problems in Russia. Such devaluation would
not immediately affect the Company's operating subsidiaries which, although they
receive payment in local currencies, invoice by reference to U.S. Dollars.
However, increased economic difficulties in Russia could have an impact on the
Company's operating subsidiaries in that country, the effect of which it is
impossible to assess at the present time. There can be no assurance that these
developments will not have a material adverse effect upon the Company in the
future.
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 way public companies 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 does not
utilize derivative instruments and accordingly it is anticipated that the
adoption of SFAS 133 will not have a material impact on the Company's
consolidated financial position and results of operations.
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,
39
<PAGE> 41
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 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). Such survey
has indicated that, except in a few instances, all such equipment and software
is Year 2000 compliant. Where possible, steps are being taken to upgrade 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 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.
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, 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, and that the possible disruptions to all such operations
arising from Year 2000 problems is likely to be relatively minimal.
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<PAGE> 42
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 1998, the following issuances of
unregistered securities of the Company were made:
(a) On May 29, 1998, the Company issued an aggregate of 196,458 shares (the
"Ultra Pass Shares") of the Company's Common Stock to the shareholders of Ultra
Pass Systems Limited, a Scottish company, in connection with the Company's
acquisition of 98% of the share capital of Ultra Pass. The Ultra Pass Shares,
which were issued in reliance upon Section 4(2) of the Securities Act of 1933 as
a transaction not involving a public offering, are "restricted" securities but
the holders thereof have demand registration rights. 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 shares.
(b) In connection with the Company's consent solicitation relating to
certain amendments to the indentures governing the Company's Senior Notes and
Convertible Notes intended to give the Company more flexibility in conducting
its business and also to clarify certain provisions of those indentures, the
Company agreed to issue warrants (the "Consent Warrants") to those holders of
the Senior Notes and the Convertible Notes which consented to the amendments.
The Consent Warrants have not yet been issued pending resolution of their
eligibility for the depositary and settlement procedures administered by The
Depository Trust Company. The Company anticipates that these issues will be
resolved shortly and the Consent Warrants will then be issued. The Consent
Warrants will be issued in reliance upon Section 4(2) of the Securities Act of
1933 as a transaction not involving a public offering. The Company has agreed to
register the resale of the shares issuable upon exercise of the Consent
Warrants.
The Company will issue a total of 123,000 five-year Consent Warrants to
purchase 1.8 shares of Common Stock at $6.90 per share to the holders of the
Senior Notes, and a total of 22,700 five-year Consent Warrants to purchase 2
shares of Common Stock at a price of $6.90 per share to the holders of the
Convertible Notes. If all of the Consent Warrants are exercised, the Company
will issue a total of 266,800 shares of Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Second Supplemental Indenture, dated as of June 15, 1998, among the
Company as Issuer, NWE Capital (Cyprus) Limited, PLD Asset Leasing
Limited, PLD Capital Limited, Baltic Communications Limited and
Wireless Technology Corporations Limited as Guarantors, Clayton A.
Waite and Apropos Investments Ltd., as nominee shareholders, and The
Bank of New York, as Trustee.
(b) Reports on Form 8-K
(i) A Current Report on Form 8-K was filed with the Commission on
April 3, 1998, and amended by a Current Report on Form 8-K/A filed with the
Commission on April 8, 1998, to file with the Commission the Company's
consolidated financial statements for the year ended December 31, 1997, as
amended, and the financial statements of NWE Capital (Cyprus) Limited,
Technocom Limited and Wireless Technology Corporations Limited, as pledgors
under the Company's Senior and Convertible Notes.
(ii) A Current Report on Form 8-K was filed with the Commission on
April 22, 1998 with respect to the signing of the agreements relating to
the Company's transactions with News America Incorporated and Cable and
Wireless plc. See "Recent Developments."
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<PAGE> 43
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: August 14, 1998 By: /s/ SIMON EDWARDS
--------------------------------------
Simon Edwards
Senior Vice President, Chief Financial
Officer and Treasurer
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<PAGE> 44
EXHIBIT INDEX
4.1 Second Supplemental Indenture, dated as of June 15, 1998, among the Company
as Issuer, NWE Capital (Cyprus) Limited, PLD Asset Leasing Limited, PLD
Capital Limited, Baltic Communications Limited and Wireless Technology
Corporations Limited as Guarantors, Clayton A. Waite and Apropos
Investments Ltd., as nominee shareholders, and The Bank of New York, as
Trustee.
43
<PAGE> 1
EXHIBIT 4.1
SECOND SUPPLEMENTAL INDENTURE
SECOND SUPPLEMENTAL INDENTURE, dated as of June 15, 1998, among (i) PLD
TELEKOM INC. (formerly known as Petersburg Long Distance Inc.), a Delaware
corporation (formerly an Ontario company, that became a Delaware corporation
pursuant to Section 388 of the General Corporation Law of the State of Delaware
pursuant to a Certificate of Domestication filed in Delaware on February 28,
1997) (the "Company"), as issuer, (ii) NWE CAPITAL (CYPRUS) LIMITED, a Cypriot
corporation ("NWE Cyprus"), PLD ASSET LEASING LIMITED, a Cypriot corporation
("PLD Leasing"), PLD CAPITAL LIMITED, a Cypriot corporation ("PLD Capital"), PLD
CAPITAL ASSET (U.S.) INC., a Delaware corporation ("PLD Capital Asset"),
WIRELESS TECHNOLOGY CORPORATIONS LIMITED, a British Virgin Islands corporation
("WTC"), and BALTIC COMMUNICATIONS LIMITED, a Russian joint stock company of the
closed type ("BCL"), as Guarantors, (iii) CLAYTON WAITE, shareholder of NWE
Cyprus as nominee of the Company, and APROPOS INVESTMENTS LTD., shareholder of
PLD Leasing and PLD Capital as nominee of the Company, and (iv) THE BANK OF NEW
YORK, a New York banking corporation ("BONY"), as Senior Note Trustee under the
Senior Note Indenture and Convertible Note Trustee under the Convertible Note
Indenture (as each term is defined below).
RECITALS
WHEREAS, the Company, NWE Cyprus, PLD Leasing, PLD Capital, WTC, BCL and
BONY, as trustee thereunder (the "Senior Note Trustee"), have entered into the
Indenture (as supplemented and amended, the "Senior Note Indenture"), dated as
of May 31, 1996, pursuant to which the Company issued $123,000,000 in principal
amount at Stated Maturity of its 14% Senior Discount Notes due 2004 (the "Senior
Notes"; capitalized terms used herein without definition have the respective
meanings defined in the Senior Note Indenture as in effect on the date hereof);
WHEREAS, the Company, NWE Cyprus, PLD Leasing, PLD Capital, WTC, BCL and
BONY, as trustee thereunder (the "Convertible Note Trustee"), have entered into
the Indenture (as supplemented and amended, the "Convertible Note Indenture";
together with the Senior Note Indenture, collectively the "Indentures"), dated
as of May 31, 1996, pursuant to which the Company issued $26,500,000 in
principal amount at Stated Maturity of its 9% Convertible Subordinated Notes due
2006 (the "Convertible Notes");
WHEREAS, the Company has formed PLD Capital Asset for the limited
purpose of operating as a Leasing Company;
WHEREAS, Section 10.5 of each Indenture requires that the Company shall
cause each Subsidiary which, after the date of the Indentures, is required by
Section 4.10(a) of each Indenture to become a Guarantor to execute and deliver
to the Trustee a supplemental indenture in form and substance reasonably
satisfactory to the Trustee which subjects such Restricted Subsidiary to the
provisions of each of the Indentures as a Guarantor;
<PAGE> 2
WHEREAS, PLD Capital Asset desires to enter into this Second Supplemental
Indenture and to become bound by the terms of each of the Indentures as a
Guarantor;
WHEREAS, concurrently herewith, PLD Capital Asset and BONY, in its
capacities as Senior Note Trustee and Convertible Note Trustee and as collateral
agent thereunder (the "PLD Capital Asset Collateral Agent"), have entered into
the Leasing Company Security and Pledge Agreement (PLD Capital Asset) dated as
of the date hereof;
WHEREAS, concurrently herewith, PLD Capital Asset and BONY, in its
capacities as Senior Note Trustee and Convertible Note Trustee and as escrow
agent thereunder (the "PLD Capital Asset Escrow Agent"), have entered into the
Leasing Company Escrow Account Agreement (PLD Capital Asset) dated as of the
date hereof;
WHEREAS, all acts and things prescribed by the Indentures, by law and by
the Certificate of Incorporation and the Bylaws of the Company, of the
Guarantors and of BONY necessary to make this Second Supplemental Indenture a
valid instrument legally binding on the Company, the Guarantors and BONY in the
capacities in which it is a party hereto, in accordance with its terms, have
been duly done and performed;
WHEREAS, all conditions precedent to amend or supplement the Indentures
have been met;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Effect of this Second Supplemental Indenture. This Second
Supplemental Indenture is supplemental to the Indentures and does and shall be
deemed to form a part of, and shall be construed in connection with and as part
of, the respective Indentures for any and all purposes. Except as specifically
modified herein, the Indentures, the Senior Notes and the Convertible Notes are
in all respects ratified and confirmed and shall remain in full force and effect
in accordance with their terms.
SECTION 2. Agreement to Become a Guarantor Under the Indentures. PLD
Capital Asset shall become party to each of the Indentures as a Guarantor
thereunder and agrees to be bound by all the terms binding on a Guarantor
thereunder.
SECTION 3. APPLICABLE LAW. THIS SECOND SUPPLEMENTAL INDENTURE
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK.
SECTION 4. Counterparts. The parties may sign any number of counterparts
or copies of this Second Supplemental Indenture. Each signed counterpart or copy
shall be an original, but all of such executed counterparts or copies together
shall represent the same agreement.
2
<PAGE> 3
SECTION 5. Severability. In case one or more of the provisions in
this Second Supplemental Indenture shall be held invalid, illegal or
unenforceable, in any respect for any reason, the validity, illegality and
enforceability of any such provision in every other respect and of the remaining
provisions shall not in any way be affected or impaired thereby, it being
intended that all of the provisions hereof shall be enforceable to the full
extent provided by law.
SECTION 6. Headings. The headings, the language preceding the text of
the amendments and the sections in this Second Supplemental Indenture have been
inserted for convenience of reference only, are not considered a part hereof
and in no way modify or restrict any of the terms or provisions hereof.
[Signature pages to follow.]
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereby have caused this Second
Supplemental Indenture to be duly executed as of the date first written above.
PLD TELEKOM INC. (formerly known as
Petersburg Long Distance Inc.)
By: /s/ CLAYTON A. WAITE
-------------------------------
Name: Clayton A. Waite
Title: Vice President
By: /s/ E. CLIVE ANDERSON
-------------------------------
Name: E. Clive Anderson
Title: Senior Vice President
NWE CAPITAL (CYPRUS) LIMITED
By: /s/ CLAYTON A. WAITE
-------------------------------
Name: Clayton A. Waite
Title: Authorized Representative
PLD ASSET LEASING LIMITED
By: /s/ CLAYTON A. WAITE
-------------------------------
Name: Clayton A. Waite
Title: Director
PLD CAPITAL LIMITED
By: /s/ CLAYTON A. WAITE
-------------------------------
Name: Clayton A. Waite
Title: Director
4
<PAGE> 5
PLD CAPITAL ASSET (U.S.) INC.
By: /s/ E. CLIVE ANDERSON
-------------------------------
Name: E. Clive Anderson
Title: Senior Vice President
WIRELESS TECHNOLOGY CORPORATIONS
LIMITED
By: /s/ E. CLIVE ANDERSON
-------------------------------
Name: E. Clive Anderson
Title: Authorized Representative
BALTIC COMMUNICATIONS LIMITED
By: /s/ E. CLIVE ANDERSON
-------------------------------
Name: E. Clive Anderson
Title: Authorized Representative
/s/ CLAYTON A. WAITE
-------------------------------
CLAYTON WAITE
APROPOS INVESTMENTS LTD.
By: /s/ CLAYTON A. WAITE
-------------------------------
Name: Clayton A. Waite
Title: Authorized Representative
THE BANK OF NEW YORK, as Senior Note Trustee
and Convertible Note Trustee.
By: /s/ THOMAS E. TABOR
-------------------------------
Name: Thomas E. Tabor
Title: Assistant Vice President
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLD TELEKOM
INC.'S FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q AND THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR PLD TELEKOM INC. AT AND FOR THE THREE AND
SIX MONTHS ENDED JUNE 30, 1998 CONTAINED THEREIN.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 16,023
<SECURITIES> 0
<RECEIVABLES> 22,276
<ALLOWANCES> 3,261
<INVENTORY> 2,988
<CURRENT-ASSETS> 56,037
<PP&E> 178,814
<DEPRECIATION> 30,685
<TOTAL-ASSETS> 334,910
<CURRENT-LIABILITIES> 45,124
<BONDS> 130,305
0
4
<COMMON> 335
<OTHER-SE> 119,034
<TOTAL-LIABILITY-AND-EQUITY> 334,910
<SALES> 0
<TOTAL-REVENUES> 74,406
<CGS> 0
<TOTAL-COSTS> 22,960
<OTHER-EXPENSES> 38,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,549
<INCOME-PRETAX> 2,838
<INCOME-TAX> 5,171
<INCOME-CONTINUING> (9,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,867)
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
