<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 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>
505 PARK AVENUE, 21ST FLOOR, NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(212) 527-3800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE -- 37,846,789 SHARES (AUGUST 9, 1999)
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<PAGE> 2
PLD TELEKOM INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Recent Developments......................................... 3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PLD Telekom Inc.
Consolidated Condensed Balance Sheets as of June 30,
1999 (Unaudited) and December 31, 1998.............. 7
Consolidated Condensed Statements of Operations
(Unaudited) for the three and six months ended June
30, 1999 and 1998................................... 8
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1999
and 1998............................................ 9
Notes to Consolidated Condensed Financial Statements
(Unaudited) for the three and six months ended June
30, 1999............................................ 10
Baltic Communications Limited
Condensed Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998................... 18
Condensed Statements of Operations (Unaudited) for
the three and six months ended June 30, 1999 and
1998................................................ 19
Condensed Statements of Cash Flows (Unaudited) for
the six months ended June 30, 1999 and 1998......... 20
Notes to Condensed Financial Statements (Unaudited)
for the three and six months ended June 30, 1999.... 21
NWE Capital (Cyprus) Ltd.
Consolidated Condensed Balance Sheets as of June 30,
1999 (Unaudited) and December 31, 1998.............. 25
Consolidated Condensed Statements of Operations
(Unaudited) for the three and six months ended June
30, 1999 and 1998................................... 26
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1999
and 1998............................................ 27
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three and six months
ended June 30, 1999................................. 28
PLD Capital Asset (U.S.) Inc.
Condensed Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998................... 32
Condensed Statements of Operations (Unaudited) for
the three and six months ended June 30, 1999 and
1998................................................ 33
Condensed Statements of Cash Flows (Unaudited) for
the six months ended June 30, 1999 and 1998......... 34
Notes to Condensed Financial Statements (Unaudited)
for the three and six months ended June 30, 1999.... 35
Technocom Limited and Subsidiaries
Consolidated Condensed Balance Sheets as of June 30,
1999 (Unaudited) and December 31, 1998.............. 38
Consolidated Condensed Statements of Operations
(Unaudited) for the three and six months ended June
30, 1999 and 1998................................... 39
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1999
and 1998............................................ 40
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three and six months
ended June 30, 1999................................. 41
</TABLE>
1
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Wireless Technology Corporations Limited
Consolidated Condensed Balance Sheets as of June 30,
1999 (Unaudited) and December 31, 1998.............. 45
Consolidated Condensed Statements of Operations
(Unaudited) for the three and six months ended June
30, 1999 and 1998................................... 46
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the six months ended June 30, 1999
and 1998............................................ 47
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three and six months
ended June 30, 1999................................. 48
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 51
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......... 63
Item 6. Exhibits and Reports on Form 8-K.................. 63
</TABLE>
2
<PAGE> 4
RECENT DEVELOPMENTS
Merger with Metromedia International Group, Inc.
On May 18, 1999 PLD Telekom Inc. (the "Company") entered into an agreement
(the "Merger Agreement") with Metromedia International Group, Inc. ("MMG")
pursuant to which the Company would merge with Moscow Communications, Inc., a
newly formed, wholly owned subsidiary of MMG.
MMG is a global communications company engaged in the development and
operation of a variety of communications businesses, including cellular
telecommunications, fixed telephony, international and long distance telephony,
cable television, paging and radio broadcasting, in Eastern Europe, the former
Soviet Union, China and other selected emerging markets. Its common stock is
listed on the American and Pacific Stock Exchanges, under the symbol MMG.
Upon consummation of the merger (the "Merger"), the Company will become a
wholly owned subsidiary of MMG, and the holders of shares of common stock (the
"Common Stock") of the Company will receive shares of MMG on the basis of an
exchange ratio determined in the manner set forth below:
(a) if the Average MMG Stock Price (as defined below) is less than $6.25
and equal to or greater than $5.25, the exchange ratio will be equal to
$3.50 divided by the Average MMG Stock Price;
(b) if the Average MMG Stock Price is equal to or greater than $6.25 and
less than or equal to $8.00, the exchange ratio will be 0.56;
(c) if the Average MMG Stock Price is greater than $8.00, the exchange
ratio will be equal to $4.48 divided by the Average MMG Stock Price;
and
(d) if the Average MMG Stock Price is less than $5.25, then the exchange
ratio will be 0.6667. However, the Company has the right to terminate
the Merger Agreement if the Average MMG Stock Price is less than $5.25
if MMG does not agree to increase (or "top up") the exchange ratio to
an amount equal to $3.50 divided by the Average MMG Stock Price, and
the further right to terminate the Merger Agreement in all events
(without MMG having any "top up" right) if the Average MMG Stock Price
is less than $4.00.
The "Average MMG Stock Price" is to be determined by taking the average of
the daily closing prices of the common stock of MMG on the American Stock
Exchange Composite Transactions Tape for the twenty consecutive trading days
ending on the third business day immediately prior to the meeting of the
shareholders of the Company which will be called to approve the Merger.
The Company's Series II and Series III Preferred Shares will be redeemed
for cash for a redemption price of Cdn. $1.00 per share. Outstanding options and
warrants to acquire the Company's Common Stock will be converted into options
and warrants of MMG on the basis of the exchange ratio, and any of the Company's
9% Convertible Subordinated Notes due 2006 (the "Convertible Notes"), which are
not exchanged under the terms of the exchange offer described below and are
still outstanding, will be assumed by MMG and will be convertible into common
stock of MMG also on the basis of the exchange ratio.
Salomon Smith Barney Inc., who have acted as financial advisors to the
Company, have opined to the Board of Directors of the Company that the exchange
ratio is fair from a financial point of view to the Company, and Donaldson,
Lufkin & Jenrette Securities Corporation, who have acted as financial advisors
to MMG, have opined to the Board of Directors of MMG that the exchange ratio is
fair from a financial point of view to MMG.
In connection with the Merger Agreement, News America Incorporated ("News
America") which, through an affiliate, owns approximately 38% of the Company's
Common Stock, has entered into an agreement (the "Voting Agreement") with MMG
pursuant to which News America has agreed to vote its Common Stock in favor of
the Merger Agreement and not to vote for, solicit, discuss or support any other
transaction involving the Company which could have the effect of interfering
with, preventing or materially delaying the Merger.
3
<PAGE> 5
In addition, MMG has entered into a bridge loan agreement with the Company
pursuant to which MMG has agreed to lend the Company up to $7 million, secured
by an approximately 58% interest in the Company's subsidiary Technocom Limited
("Technocom"), at an annual interest rate of 10% to fund its ongoing operations
during the period from the execution of the Merger Agreement to the date that
the Merger is consummated (or the Merger Agreement is terminated). As of July
31, 1999, the Company had borrowed $4.0 million under such bridge loan
agreement.
The consummation of the Merger Agreement is subject to a number of
conditions, including the approval of the Merger by the shareholders of the
Company and of MMG, the receipt of various governmental clearances and consents,
the absence of any material adverse change in the Company's or MMG's respective
businesses and operations and other customary closing conditions. In addition,
it is subject to a number of other conditions, as follows:
(a) Exchange Offer. At least 95% in aggregate principal amount of each of
the Company's 14% Senior Discount Notes due 2004 (the "Senior Notes")
and of the Convertible Notes (and, together with the Senior Notes, the
"Outstanding Company Notes") shall have agreed to the amendment of the
indentures governing the Outstanding Company Notes (the "Existing
Indentures") and exchanged such Notes for new 10 1/2% Senior Notes due
2007 of MMG (the "New MMG Notes"). In this connection substantially all
of the holders of the Outstanding Company Notes have entered into an
agreement with MMG, subject to the consummation of the Merger and
certain other conditions, to: (i) defer to the date the Merger is
consummated all interest payable on the Outstanding Company Notes
during the period from the execution of the Merger Agreement to the
date the Merger is consummated; (ii) amend the Existing Indentures, and
(iii) tender all Outstanding Company Notes held by them for New MMG
Notes.
(b) Modification of Travelers Revolving Credit Agreement. The Travelers
Insurance Company and The Travelers Indemnity Company (collectively,
the "Travelers Parties") shall have consummated the transactions
contemplated by a note and warrant modification agreement (the
"Travelers Note Modification Agreement") entered into simultaneous with
the execution of the Merger Agreement. Under the Travelers Note
Modification Agreement the Travelers Parties have agreed not to
exercise any warrants held by them, or certain other rights which they
have under the Revolving Credit and Warrant Agreement dated November
26, 1997 with the Company, as amended (the "Travelers Revolving Credit
Agreement"), until the Merger is consummated (or the Merger Agreement
is terminated). In addition, MMG and the Travelers Parties have agreed
that, in the event that the Merger is consummated: (i) the guarantees
given by News America with respect to $3.1 million of the amounts due
to the Travelers Parties will be released; (ii) the amount due to the
Travelers Parties will be paid, as to $8.5 million, on the date the
Merger is consummated, and as to the remaining $4.92 million, on the
earlier of August 2000 or one year after the consummation of the
Merger, together with interest at an annual rate of 10.5%; (iii) in
lieu of their rights under the Travelers Revolving Credit Agreement to
receive warrants to purchase Common Stock of the Company, the Travelers
Parties will receive at closing 100,000 shares of the Company's Common
Stock (which will be converted at closing into shares of MMG at the
applicable exchange ratio) and 10-year warrants to purchase 700,000
shares of common stock of MMG at a price based upon 125% of the average
closing price of such common stock during December 2000, but not to be
less than $10 per share or more than $15 per share; and (iv) the
Travelers Revolving Credit Agreement will be amended and restated to
reflect the foregoing matters and to provide certain additional
guarantees of the amounts due to the Travelers Parties.
(c) News Letter Agreement. News America and MMG shall have consummated the
arrangements contemplated by a letter agreement (the "News Letter
Agreement") entered into between them simultaneous with the execution
of the Merger Agreement. Under the News Letter Agreement News America
has agreed not to exercise any rights under its Revolving Credit
Agreement dated as of September 30, 1998 with the Company, as amended
(the "News Revolving Credit Agreement") until the Merger is consummated
(or the Merger Agreement is terminated), and MMG has agreed that, on
the date that the Merger is consummated, it will cause: (i) the amount
advanced by News
4
<PAGE> 6
America under the News Revolving Credit Agreement, namely, $6.45
million, to be repaid in full, together with interest at an annual rate
of 10% (in lieu of the 20% rate specified in the News Revolving Credit
Agreement); and (ii) the guarantees given by News America to the
Travelers Parties to be cancelled.
(d) Technocom Put/Call Agreement. The Company shall have completed the
purchase of the shares of Technocom from Plicom Limited ("Plicom") and
Elite International Limited ("Elite") in accordance with option
modification agreements with each of them (the "Option Modification
Agreements") entered into simultaneously with the execution of the
Merger Agreement. Under the Option Modification Agreements, Plicom and
Elite have agreed not to exercise their rights under their current put
and call agreements with the Company to require the Company to purchase
their interests in Technocom (currently exercisable after June 30,
1999) until the Merger is consummated (or the Merger Agreement is
terminated), and the Company has agreed that, on the date that the
Merger is consummated, it will purchase Plicom's remaining 14.57%
interest in Technocom for $8.75 million, and Elite's remaining 5.03%
interest in Technocom for $3.85 million, such sums representing 50% of
the amounts to which such parties would have otherwise been entitled
had they exercised their rights under their current put and call
agreements. In addition, the Company has agreed to pay various other
amounts due to Plicom and to cause its release from any guarantees of
obligations undertaken at the request of the Company, and various other
agreements with Plicom and Elite will be terminated.
The Merger Agreement and the Merger have been unanimously approved by the
Boards of Directors of both MMG and the Company, and each Board is recommending
their approval by their respective stockholders.
The Merger Agreement may be terminated in its entirety by either MMG or the
Company in the event that the other is in material breach of the Merger
Agreement, or in the event that the stockholders of both companies do not
approve the Merger or that the Merger is not otherwise consummated by October
31, 1999. MMG also has the right to terminate the Merger Agreement in the event
that the Board of Directors of the Company withdraws or modifies its approval of
the Merger or recommends (or fails to recommend against) a different transaction
to the stockholders of the Company.
In the event that MMG terminates the Merger Agreement as a result of the
Company's Board of Directors withdrawing or modifying its approval of the Merger
or recommending (or failing to recommend against) another transaction, or as a
result of a material breach by the Company of the Merger Agreement, or as a
result of the stockholders of the Company not approving the Merger at a time
when a different transaction had been announced, the Company will pay MMG a
termination fee of $6.25 million plus its expenses (up to a maximum of $1
million).
Russian Economic and Political Turmoil
During 1998 there was considerable turmoil and uncertainty in the Russian
financial markets, prompted in large part by a drop in commodity prices and
economic problems in Russia, together with the crisis in the Asian financial
markets which began in late 1997. These developments were accompanied by a
substantial decline in the Russian stock market. These developments led the
Russian government to raise interest rates significantly and to seek special
assistance from the International Monetary Fund. In August 1998, the Russian
government announced a substantial widening of the trading band in which the
Russian Rouble would be permitted to float, together with a moratorium on
certain foreign debt payments. Thereafter the Rouble dropped substantially in
value and traded outside of the high end of the band, and the Russian government
did not intervene to stop this trading, thereby effectively acquiescing to a
major devaluation of the Rouble. The latter part of 1998 and the first half of
1999 saw further declines in the value of the Rouble and this process is
expected to continue.
Also in August 1998 the Russian government announced a 90-day moratorium on
debt repayments. This moratorium caused considerable difficulties for Russian
banks and businesses with hard currency obligations, as well as significantly
impairing the ability of such banks and businesses, as well as the Russian
government
5
<PAGE> 7
itself, to access the Western capital markets. The difficulties experienced by
the Russian banks in turn caused difficulties for their customers, as bank
transfers and deposits were frozen in many cases. The Russian government itself
has effectively defaulted on substantial amounts of its debt, and is engaged in
negotiations with Western banks and institutions (which reach back several
months) to restructure this indebtedness. Continuation of these conditions for
any significant period of time could have serious long-term effects on the
Russian economy. At the present time, it is impossible to predict whether or
when any resolution of these problems is likely.
In August 1998, the Russian government experienced a significant upheaval,
with the dismissal of the reformist government led by Sergei Kiriyenko and its
replacement by one led by Yevgeny Primakov. The Primakov government did not
propose a plan to address Russia's economic and financial difficulties, one
result of which was to cause the International Monetary Fund to delay further
assistance to the Russian government. In 1999, further political upheavals
occurred, as President Boris Yeltsin first dismissed the Primakov government in
May 1999 and selected Sergei Stepashin as the new Prime Minister, and then in
turn replaced him with Vladimir Putin in August 1999. It is too soon to predict
what policies will be adopted by the new Putin government. These frequent
governmental reshufflings create increased uncertainty about the future
political situation in Russia, which in turn creates additional concern about
the ability of the government to deal with the many problems currently
afflicting the Russian economic system.
At the present time, it is not possible to predict the complete effect of
the continuing economic, financial and political difficulties in Russia,
although they have made for a difficult business environment in Russia. Although
demand for the Company's telecommunications services continued during the
economic and banking crisis in the second half of 1998, the economic
difficulties in Russia have adversely affected the Company's operating
subsidiaries and the Company's consolidated results for the year ended December
31, 1998 and the first six months of 1999. As described in more detail in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's operating subsidiaries experienced a reduction in
revenues in the first half of 1999 as compared to the same period in 1998, and
the Company expects that revenues and margins will remain under pressure. The
Company is not yet able to predict the effects of the ongoing difficulties on
its results for 1999, but the continuing economic difficulties in Russia will
likely continue to have an adverse effect on the Company in current and future
reporting periods, and there can be no assurance that such adverse effects will
not be material.
Weakening Economic Conditions in Kazakhstan
The drop in the prices of the principal commodities on which the Kazakhstan
economy depends, namely oil, gas and gold, in late 1998, coupled with a slow
down in economic activity prompted by the Russian financial crisis and poorer
economic conditions experienced by its other trading partners, led to a
reduction in economic activity in Kazakhstan during the early part of 1999.
Also, in April 1999 the Kazakh government made the determination to cease
supporting the Tenge, with the result that it has experienced a significant
decline in value since then. While the price of oil has since recovered, the
prospects for growth in the Kazakh economy in the near term remains uncertain.
Since ALTEL's business depends in part upon such growth, this is likely to
inhibit its own development, and could exacerbate the negative effect of the
other factors, such as increased competition, with which it has to deal.
6
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLD TELEKOM INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 7,882 $ 4,579
Trade receivables, net of allowances...................... 14,094 14,905
Other receivables and prepaids............................ 4,377 4,609
Inventory................................................. 3,557 4,152
Due from related parties.................................. 9,607 9,152
----------- ---------
Total current assets.............................. 39,517 37,397
Escrow funds................................................ 15,220 14,908
Property and equipment, net................................. 172,171 168,937
Telecommunications licenses, net............................ 71,867 77,359
Due from related parties.................................... -- 2,011
Other investments........................................... 8,607 5,183
Goodwill, net............................................... 35,364 36,368
Other assets................................................ 8,414 9,945
----------- ---------
Total assets...................................... $ 351,160 $ 352,108
=========== =========
Current liabilities:
Short-term borrowings..................................... 24,074 18,124
Accounts payable.......................................... 11,462 10,293
Accrued liabilities....................................... 3,651 3,996
Accrued interest.......................................... 13,480 467
Taxes payable............................................. 6,516 3,664
Due to related parties.................................... 4,561 4,639
Deferred revenues......................................... 2,440 2,869
Customer deposits......................................... 3,907 4,271
Current portion of long-term debt......................... 6,209 5,073
----------- ---------
Total current liabilities......................... 76,300 53,396
Long-term debt.............................................. 150,095 151,814
Minority interest........................................... 23,108 22,021
Shareholders' equity:
Preferred stock, par value $0.01 per share,
authorized -- 100,000,000, issued and
outstanding -- 446,884................................. 4 4
Common stock, par value $0.01 per share,
authorized -- 100,000,000, issued and
outstanding -- 37,846,789.............................. 378 378
Additional paid-in capital................................ 244,590 244,419
Accumulated deficit....................................... (143,315) (119,924)
----------- ---------
Total shareholders' equity........................ 101,657 124,877
----------- ---------
Total liabilities and shareholders' equity........ $ 351,160 $ 352,108
=========== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
7
<PAGE> 9
PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications.................. $ 27,375 $ 38,813 $ 56,091 $ 73,532
Finance lease income................ 599 427 1,237 874
----------- ----------- ----------- -----------
27,974 39,240 57,328 74,406
Operating expenses:
Direct costs (excludes
depreciation).................... 9,080 12,164 17,483 22,960
General and administrative.......... 10,930 12,524 24,084 22,224
Depreciation........................ 5,072 3,534 9,901 6,633
Amortization........................ 3,300 2,866 6,619 5,558
Taxes other than income taxes....... 841 2,230 2,366 3,910
----------- ----------- ----------- -----------
29,223 33,318 60,453 61,285
----------- ----------- ----------- -----------
Operating (loss)/income.......... (1,249) 5,922 (3,125) 13,121
Other income/(expense):
Share of loss from equity
investments...................... (89) (48) (430) (258)
Interest and other income........... 230 946 489 1,817
Interest expense.................... (6,798) (5,359) (13,027) (10,549)
Amortization of deferred financing
costs............................ (299) (400) (598) (801)
Foreign exchange gain/(loss)........ 327 (373) (127) (489)
Gain/(loss) on disposal of
investments and property and
equipment........................ 270 (3) 237 (3)
----------- ----------- ----------- -----------
(Loss)/earnings before income
taxes and minority interest.... (7,608) 685 (16,581) 2,838
Income taxes........................ 2,080 2,174 4,723 5,171
----------- ----------- ----------- -----------
Loss before minority interest.... (9,688) (1,489) (21,304) (2,333)
Minority interest..................... 908 3,869 2,087 7,534
----------- ----------- ----------- -----------
Net loss......................... $ (10,596) $ (5,358) $ (23,391) $ (9,867)
=========== =========== =========== ===========
Net loss per common share:
Basic............................... $ (0.28) $ (0.16) $ (0.62) $ (0.30)
=========== =========== =========== ===========
Diluted............................. $ (0.28) $ (0.16) $ (0.62) $ (0.30)
=========== =========== =========== ===========
Weighted average common shares
outstanding......................... 37,846,789 33,520,748 37,846,789 33,422,519
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
8
<PAGE> 10
PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(23,391) $(9,867)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 17,118 12,992
Share of loss of equity investments.................... 430 258
Accrued interest on senior discount notes.............. 10,090 8,091
Deferred revenues...................................... (429) (814)
Minority interest...................................... 2,087 7,534
Other.................................................. 171 400
Changes in operating assets and liabilities, net of
effects of acquisitions:
Decrease/(increase) in trade receivables, net of
allowances.......................................... 811 (1,937)
(Increase)/decrease in other receivables and
prepaids............................................ 232 118
Decrease/(increase) in inventory..................... 595 (186)
Change in due from or to related parties............. (522) (3,671)
Increase/(decrease) in accounts payable, accrued
liabilities, customer deposits, taxes payable and
other current liabilities........................... 6,430 (4,956)
-------- -------
Net cash provided by operating activities......... 13,622 7,962
Cash flows from investing activities:
Capital expenditures...................................... (13,191) (12,308)
Escrow funds.............................................. (312) 12,210
Cash paid for acquired business........................... -- (500)
Investments and other assets.............................. (988) 196
-------- -------
Net cash used in investing activities............. (14,491) (402)
Cash flows from financing activities:
Registration costs........................................ -- (141)
Short-term debt borrowings/(repayments)................... 3,000 (7,402)
Long-term debt repayments................................. (778) --
Cash dividends paid to minority shareholders.............. (1,000) (1,250)
Loans from shareholders................................... 2,950 --
-------- -------
Net cash provided by/(used in) financing
activities...................................... 4,172 (8,793)
-------- -------
Increase/(decrease) in cash and cash equivalents............ 3,303 (1,233)
Cash and cash equivalents, beginning of period.............. 4,579 17,256
-------- -------
Cash and cash equivalents, end of period.................... $ 7,882 $16,023
======== =======
Supplemental disclosures:
Non-cash investing and financing activities:
Supplier financing................................... $ -- $ 7,457
======== =======
Issued shares for acquired business.................. $ -- $ 1,750
======== =======
Interest paid............................................. $ 1,285 $ 3,018
======== =======
Income taxes paid......................................... $ 3,124 $ 5,387
======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
9
<PAGE> 11
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(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
condensed 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
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 included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
Going Concern
The Company has suffered recurring losses and has a working capital
deficiency. Additionally, the Company has $13.42 million of Series A and Series
B revolving credit notes (the "Revolving Credit Notes") due to The Travelers
Insurance Company and The Travelers Indemnity Company (hereinafter defined as
the "Travelers Parties") outstanding. $1.1 million of the Revolving Credit Notes
were due to have been repaid by September 30, 1998 and the remaining $12.32
million were due to have been repaid by December 31, 1998. The Travelers Parties
have given the Company a series of payment deferrals since December 31, 1998
with respect to the Revolving Credit Notes. The Company does not presently have
sufficient funds on hand to pay its indebtedness to the Travelers Parties.
In addition, the minority shareholders in Technocom have the right to put
their Technocom shares to the Company from mid-1999 onwards.
As noted below (see note 2) on May 17, 1999, the Company entered into an
agreement (the "Merger Agreement") with Metromedia International Group, Inc.
("MMG").
In connection with the merger ("the Merger"), the Travelers Parties have
reached agreement with MMG on the partial repayment of the Revolving Credit
Notes upon the closing of the Merger and the amendment and restatement of the
associated Revolving Credit Agreement and the Revolving Credit Notes (as so
amended, the "Amended and Restated Notes") issued thereunder. Under the terms of
the agreement between the Travelers Parties and MMG, the Travelers Parties will
be paid an aggregate of $8.5 million upon the closing of the Merger, and the
balance of $4.92 million will be evidenced by the Amended and Restated Notes. In
addition, the guarantees given by News America with respect to $3.1 million of
the amounts due to the Travelers Parties will be released. Finally, the
Travelers Parties have agreed to exchange all warrants held by them to purchase
Common Stock of the Company for a combination of shares of Common Stock of the
Company and warrants to purchase shares of common stock of MMG.
As part of the transactions contemplated by the Merger, agreement has been
reached with Plicom and Elite, the minority shareholders of Technocom, to amend
the current put and call arrangements with the Company in relation to their
interests in Technocom. Pursuant to such agreements, upon the closing of the
Merger, Plicom shall receive $8.75 million in full payment for its remaining
14.57% interest in Technocom and Elite shall receive $3.85 million in full
payment for its remaining 5.03% interest in Technocom.
While agreements have been reached with substantially all of the holders of
the Company's outstanding Senior Notes and Convertible Notes, the Travelers
Parties and the minority shareholders of Technocom on a restructuring of the
Company's obligations to such parties, those agreements are conditioned upon the
closing of the Merger. If the Merger did not close, the Company would remain
obligated to pay interest on the Senior
10
<PAGE> 12
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Notes and Convertible Notes and there can be no assurance that the Travelers
Parties would not demand payment in full of the Company's obligations to them.
The Company's failure to make interest payments on the Senior Notes and
Convertible Notes could result in a default under and acceleration of those
Notes. In addition, the Company's failure to make payment in full to the
Travelers Parties could result in a cross-default under and acceleration of the
Senior Notes and Convertible Notes. The manner in which the Company currently
intends to deal with these and other commitments depends on the consummation of
the Merger. If the Merger is not consummated, then the Company could be required
to resort to extraordinary measures, including making sales of assets under
distressed conditions or ultimately seeking protection of the bankruptcy courts.
The Company believes that certain assets, notably its interests in PeterStar and
ALTEL, are readily saleable, but that, given that they would be sold under
distressed conditions, the Company would be unlikely to receive full value for
either of them. Any such events would have a material adverse effect on the
Company and raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated condensed financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
(b) Net loss per share. 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. Potentially dilutive common
stock equivalents totalling 19,614,595 and 13,234,380 at June 30, 1999 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. For the three and six months ended June 30, 1999
comprehensive loss was equal to consolidated net loss reported on the
consolidated condensed statement of operations.
(d) New pronouncements. The American Institute of Certified Public
Accountants issued Statement of Position No. 98-1 (SOP 98-1) "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," and
Statement of Position No. 98-5 (SOP 98-5) "Reporting on the Costs of Start-Up
Activities" in 1998. SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. The
Company was required to adopt both new statements in the first quarter of 1999.
The adoption of these statements did not have a material effect on the Company's
consolidated condensed financial statements for the six months ended June 30,
1999.
(e) Reclassifications. Certain reclassifications have been made to the
prior year's consolidated condensed financial statements to conform to the
current year's presentation.
(2) RECENT DEVELOPMENTS
On May 17, 1999 the Company entered into the Merger Agreement with MMG,
pursuant to which the Company would merge with a newly formed, wholly owned
subsidiary of MMG.
Upon consummation of the Merger, the Company will become a wholly owned
subsidiary of MMG, and the holders of shares of Common Stock of the Company will
receive shares of MMG on the basis of an exchange ratio determined in the manner
set forth in the Merger Agreement.
The Company's Series II and Series III Preferred Shares will be redeemed
for cash for a redemption price of Cdn. $1.00 per share. Outstanding options and
warrants to acquire the Company's Common Stock will be converted into options
and warrants of MMG on the basis of the exchange ratio, and any of the
Convertible Notes still outstanding will be assumed by MMG and will be
convertible into common stock of MMG also on the basis of the exchange ratio.
11
<PAGE> 13
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
In connection with the Merger Agreement, MMG has entered into a bridge loan
agreement with the Company pursuant to which MMG has agreed to lend the Company
up to $7.0 million, secured by an approximately 58% interest in the Company's
subsidiary Technocom, at an annual interest rate of 10% to fund its ongoing
operations during the period from the execution of the Merger Agreement to the
date that the Merger is consummated (or the Merger Agreement is terminated). In
addition, substantially all of the holders of the Senior and Convertible Notes
have agreed to defer until the date of closing of the Merger the payment of
interest on such Notes coming due during the period between the signing of the
Agreements to Exchange and Consent and the date of the closing of the Merger,
and the Travelers Parties and News America have agreed not to exercise any
rights they have under their respective Revolving Credit Agreements with the
Company until the closing of the Merger.
The consummation of the Merger is subject to a number of conditions,
including the approval of the Merger by the shareholders of the Company and of
MMG, the receipt of various governmental clearances and consents, the absence of
any material adverse change in the Company's or MMG's respective businesses and
operations and other customary closing conditions. In addition, it is subject
to: (a) the completion of an exchange of the Senior and Convertible Notes for
New MMG Notes; (b) amendment and restatement of the Revolving Credit Agreement
with the Travelers Parties; (c) completion of the modified put and call
arrangements with the minority stockholders of Technocom; (d) modification of
the Revolving Credit Agreement with News America; and (e) completion of all
arrangements for the Merger by no later than October 31, 1999.
(3) FUTURE ACTIVITIES
The Company's telecommunications businesses are developing 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 operations and is therefore subject not only to the general risks
and uncertainties of operating in Russia, but also those involved in the
launching of a new telecommunications service. In addition, this national
long-distance service is being developed in various regions of Russia and its
implementation and results of operations will therefore be affected by, among
other things, the often uncertain economic conditions and growth rates in such
regions.
Ultimate recoverability of the Company's investments in its operating
subsidiaries, PeterStar Company Limited ("PeterStar"), Baltic Communications
Limited ("BCL"), ALTEL, formerly known as BECET International ("ALTEL"), and
Teleport-TP and its investee companies, is dependent upon each of these
subsidiaries and investees achieving and maintaining profitability, which is
dependent to a certain extent on the stabilization of the economies of the
former Soviet Union, the ability to maintain the necessary telecommunications
licenses and the ability to obtain adequate financing to meet capital
commitments.
(4) RESTRICTED CASH
Pursuant to the terms of the Company's $149.5 million private placement
completed on June 12, 1996, $15.2 million remained in escrow on June 30, 1999.
These funds may only be used for certain specified purposes, principally for the
purchase of telecommunications equipment and the payment of interest on the
Company's Senior Notes.
(5) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Under the terms of the Company's $123.0 million Senior Note offering in
June 1996, the Company was required to raise $20.0 million in an equity
financing by May 31, 1998. The Company did not do so, and as a
12
<PAGE> 14
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
result, the interest rate on the Senior Notes increased from 14% to 14.5% as of
June 1, 1998, and will remain at 14.5% until the end of the semi-annual interest
period in which such an offering is completed.
In connection with the Merger, the Company and MMG have entered into
Agreements to Exchange and Consent with substantially all of the holders of the
Company's outstanding Senior Notes and Convertible Notes with respect to the
exchange of such Notes for New MMG Notes upon the closing of the Merger. In
connection with such agreements, the holders of the Senior Notes and Convertible
Notes have agreed to defer until the date of closing of the Merger, the payment
of interest on such Notes coming due during the period between the signing of
the Agreements to Exchange and Consent and the date of closing of the Merger or
termination of the Merger Agreement. The implementation of these agreements is
conditioned upon the closing of the Merger.
The obligation to raise $20.0 million in equity by May 31, 1998 was also a
requirement under the terms of the $12.32 million Series A and $3.1 million
Series B Revolving Credit Notes issued to the Travelers Parties in November 1997
in connection with the Company's additional investment in Technocom. As a result
of the Company's not raising such equity, the annual interest rate on the Series
A and B Notes increased from 12% to 15% as of June 1, 1998.
The Company was obliged to make required amortization payments in respect
of the Series B Notes of $1.0 million on each of July 31 and August 31, and a
final payment of $1.1 million on September 30, 1998. In relation to the Series A
Notes, the Company was obliged to make a required amortization payment of $1.0
million on October 31, a further payment of $1.0 million on November 30 and a
final payment of $10.32 million on December 31, 1998.
The Company made the required payments due with respect to the Series B
Notes on July 31 and August 31 and by agreement with the holders of the Series B
Notes, the final payment of $1.1 million due on September 30 was deferred to
December 31, 1998. Payment of this amount was guaranteed by News America, which
owns approximately 38% of the Company's Common Stock.
By agreement with the holders of the Series A and Series B Notes, the $1.0
million required payments due on the Series A Notes on October 31 and November
30 were also deferred to December 31, 1998, and these amounts were also
guaranteed by News America.
In addition to the required amortization payments called for under the
terms of the Revolving Credit Notes, the Company did not effect certain
voluntary amortization (or "targeted reduction in commitment") payments in
respect of the Revolving Credit Notes of $0.5 million on July 31, $0.5 million
on August 31, $1.0 million on September 30, $1.5 million on October 31, and $1.5
million on November 30, 1998, which resulted in the issuance of a total of
182,000 warrants to the Travelers Parties to acquire shares of Common Stock of
the Company at an exercise price of $8.625 per share (the "Additional
Warrants").
On December 31, 1998 the Series A Notes and the amounts deferred under the
Series B Notes would have matured and the balance due would have become payable
in full. Taking into account the amounts deferred, the total that would have
been due under the Series A and Series B Notes as of that date was $13.42
million, of which $3.1 million was guaranteed by News America as described
above. Prior to December 31, 1998, the Travelers Parties issued a deferral of
the payment of the amounts due to January 15, 1999. The Travelers Parties then
gave the Company a further series of payment deferrals with respect to the
amounts due under the Series A and Series B Notes, the last of which was given
on May 10, 1999 and deferred payment of the Notes to May 31, 1999. In connection
with the Merger, the Travelers Parties agreed to a restructuring of the
Company's obligations to them, as described below, which included a further
deferral to the date of closing of the Merger or termination of the Merger
Agreement. The Company has continued to make monthly interest payments due on
the Revolving Credit Notes on a current basis.
13
<PAGE> 15
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Under the terms of the Revolving Credit Agreement, if the Series A and
Series B Notes were not repaid in full when due, the exercise price of all
warrants issued to the holders of the Series A and Series B Notes would have
been reset at $0.01 per share. In addition, in the event of such non payment, on
December 31, 1998 and on the last day of each succeeding month until the
Revolving Credit Notes were repaid in full, the holders of the Series A Notes
would have been entitled to receive 70,000 additional warrants to purchase
shares of the Company's Common Stock and the holders of the Series B Notes would
have been entitled to receive 32,000 additional warrants to purchase shares of
the Company's Common Stock, in each case at a price of $0.01 per share. All such
warrants, referred to as "Default Warrants", would have had an expiration date
ten years after their respective dates of issue.
The Travelers Parties had expressly reserved their rights to claim all of
the Default Warrants to which they would be entitled under the formula described
above, and also to claim that the exercise price of the initial 423,000 warrants
issued to the Travelers Parties and the Additional Warrants had been reset at
$0.01 per share. Management of the Company believes that the Travelers Parties
had no basis for such claims and, if asserted, they would not have been
successful.
In connection with the Merger, the Travelers Parties have reached agreement
with MMG on the partial repayment of the Revolving Credit Notes upon the closing
of the Merger and the amendment and restatement of the Revolving Credit
Agreement and the Revolving Credit Notes (as so amended, the "Amended and
Restated Notes") issued thereunder. Under the terms of this agreement, the
Travelers Parties will be paid an aggregate of $8.5 million upon the closing of
the Merger, and the balance of $4.92 million will be evidenced by the Amended
and Restated Notes. In addition, the guarantees of News America described above
will be released. Finally, the Travelers Parties have agreed to exchange all
warrants held by them to purchase Common Stock of the Company for a combination
of shares of Common Stock of the Company and warrants to purchase shares of
common stock of MMG. These agreements with the Travelers Parties are conditioned
upon the completion of the Merger.
Pursuant to an amendment to a supply contract between PLD Capital Asset
(U.S.) Inc., a wholly owned subsidiary of the Company, and Siemens, which was
originally entered into in August 1997, the Company has restructured the amount
outstanding as of June 30, 1999 of $1.1 million, whereby $0.7 million has been
deferred for payment during the period June 30, 2000 to December 31, 2003.
(6) 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, BCL and Teleport-TP have or have applied for all the
necessary licenses, failure to receive the remaining licenses could result in
fines and penalties. Management does not believe that such fines and penalties
would be material.
(b) Certain of the Company's subsidiaries have accrued profits and other
taxes based on interpretations of the law which may ultimately be disputed by
the local taxation authorities. The exposure to additional profits and other
taxes, fines and penalties is not determinable, although the Company believes
such amounts will not be material.
(c) At June 30, 1999, PeterStar had commitments of approximately $1.4
million related to the acquisition of telecommunications equipment. The
PeterStar supply contracts provide for financing of these amounts over
approximately five years.
(d) Teleport-TP currently utilizes capacity on three Intelsat satellites
for the provision of its international and domestic long distance services,
pursuant to rolling fifteen year contracts with Intelsat. These agreements
require quarterly payments of $1.1 million for the remainder of their terms.
14
<PAGE> 16
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(e) The Company periodically guarantees certain obligations of its
subsidiaries. As of June 30, 1999, the only guarantee that is currently
outstanding is to Siemens in the amount of $1.4 million relating to equipment
purchased by Technocom.
(7) OPERATIONS BY GEOGRAPHIC AREA AND INDUSTRY SEGMENT
The Company is a major provider of local, long distance and international
telecommunications services in the Russian Federation and the former Soviet
Union. The activities of the Company are primarily segmented by reference to the
businesses of its principal operating subsidiaries.
PeterStar provides integrated local, long distance and international
telecommunications services in St. Petersburg, Russia, through a fully digital
fiber optic network.
Technocom, through Teleport-TP, provides dedicated international
telecommunications services to customers in Moscow and operates a satellite
based pan-Russian long-distance network.
ALTEL is currently the major provider of national cellular service in
Kazakhstan.
BCL provides dedicated international telecommunications services in St.
Petersburg, Russia.
Other activities of the Company relate principally to its corporate head
office in New York, its operations center in London, and to smaller, less
significant businesses primarily in their start-up phase.
The Company's main financial criteria for assessing the importance and
performance of its segments are by reference to revenues, earnings/(loss) before
income taxes and minority interest, and total assets.
A summary of the Company's operations by segment is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
PeterStar................................. $13,818 $20,281 $27,723 $37,750
Technocom................................. 4,650 5,512 9,034 11,336
ALTEL..................................... 5,839 10,128 13,760 19,677
BCL....................................... 2,289 2,780 4,710 5,104
Other..................................... 1,378 539 2,101 539
------- ------- ------- -------
Total revenues.................... $27,974 $39,240 $57,328 $74,406
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Earnings/(loss) before income taxes and
minority interest:
PeterStar.............................. $ 5,024 $ 8,049 $ 8,623 $ 15,407
Technocom.............................. (2,385) (4,502) (6,658) (4,477)
ALTEL.................................. (342) 3,541 1,184 6,887
BCL.................................... 29 257 202 501
Corporate.............................. (10,527) (8,161) (20,870) (17,169)
Other.................................. 593 1,501 938 1,689
-------- ------- -------- --------
Total (loss)/earnings before
income taxes and minority
interest..................... $ (7,608) $ 685 $(16,581) $ 2,838
======== ======= ======== ========
</TABLE>
15
<PAGE> 17
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Total assets:
PeterStar................................................. $136,458 $132,814
Technocom................................................. 103,288 106,055
ALTEL..................................................... 56,299 59,008
BCL....................................................... 6,953 6,883
Corporate................................................. 31,062 36,491
Other..................................................... 17,100 10,857
-------- --------
Total assets...................................... $351,160 $352,108
======== ========
</TABLE>
A summary of the Company's operations by geographic region is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Russia................................ $ 21,051 $ 29,112 $ 41,845 $ 54,729
Kazakhstan............................ 5,839 10,128 13,760 19,677
Other................................. 1,084 -- 1,723 --
-------- -------- -------- --------
Total revenues................ $ 27,974 $ 39,240 $ 57,328 $ 74,406
======== ======== ======== ========
Earnings/(loss) before income taxes and
minority interest:
Russia................................ $ 2,697 $ 4,088 $ 2,100 $ 11,715
Kazakhstan............................ (342) 3,541 1,184 6,887
North America......................... (9,802) (6,474) (19,404) (15,294)
Other................................. (161) (470) (461) (470)
-------- -------- -------- --------
Total (loss)/earnings before
income taxes and minority
interest.................... $ (7,608) $ 685 $(16,581) $ 2,838
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Total assets:
Russia.................................................... $250,557 $249,658
Kazakhstan................................................ 59,299 59,008
North America............................................. 30,787 38,793
Other..................................................... 10,517 4,649
-------- --------
Total assets...................................... $351,160 $352,108
======== ========
</TABLE>
16
<PAGE> 18
BALTIC COMMUNICATIONS LIMITED
CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
17
<PAGE> 19
BALTIC COMMUNICATIONS LIMITED
CONDENSED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 163,951 $ 266,076
Trade receivables, net.................................... 1,023,220 995,919
Due from related parties.................................. 756,691 531,998
Prepayments............................................... 55,053 80,800
Prepaid taxes............................................. 133,031 171,759
Inventory................................................. 81,687 76,025
---------- ----------
Total current assets.............................. 2,213,633 2,122,577
Property and equipment, net................................. 4,637,224 4,668,005
Investments................................................. 8,000 8,000
Intangible assets, net...................................... 93,651 84,052
---------- ----------
Total assets...................................... $6,952,508 $6,882,634
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... 1,498,092 1,510,134
Accrued liabilities....................................... 159,017 87,177
Deferred revenues......................................... 3,631 4,019
Taxes payable............................................. 151,959 100,211
Deferred income tax liability............................. -- 30,706
Due to related parties.................................... 939,554 932,646
Customer deposits......................................... 26,234 26,234
---------- ----------
Total current liabilities......................... 2,778,487 2,691,127
---------- ----------
Shareholder's equity:
Common stock.............................................. 2,183,000 2,183,000
Retained earnings......................................... 1,991,021 2,008,507
---------- ----------
Total shareholder's equity........................ 4,174,021 4,191,507
---------- ----------
Total liabilities and shareholder's equity........ $6,952,508 $6,882,634
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
18
<PAGE> 20
BALTIC COMMUNICATIONS LIMITED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Telecommunications revenues............. $2,251,706 $2,751,594 $4,627,335 $5,068,780
Other non-telecommunications revenues... 37,508 28,398 83,039 35,635
---------- ---------- ---------- ----------
Total revenues.......................... 2,289,214 2,779,992 4,710,374 5,104,415
Operating expenses:
Direct costs (excludes depreciation).... 1,294,509 1,356,561 2,648,442 2,500,947
General and administrative.............. 656,309 722,901 1,260,297 1,444,369
Depreciation............................ 150,279 140,988 300,119 284,915
Amortization............................ 11,032 2,529 18,927 5,804
Taxes other than income taxes........... 78,989 124,928 130,371 242,999
---------- ---------- ---------- ----------
Total operating expenses........ 2,191,118 2,347,907 4,358,156 4,479,034
---------- ---------- ---------- ----------
Operating income................ 98,096 432,085 352,218 625,381
Other income/(expense):
Interest income......................... 830 398 1,416 926
Foreign exchange loss................... (68,333) (131,727) (150,377) (81,655)
Loss on disposals....................... (1,445) (43,979) (1,445) (43,979)
---------- ---------- ---------- ----------
Income before income taxes...... 29,148 256,777 201,812 500,673
Income taxes.............................. (126,580) (84,900) (219,298) (147,461)
---------- ---------- ---------- ----------
Net income...................... $ (97,432) $ 171,877 $ (17,486) $ 353,212
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
19
<PAGE> 21
BALTIC COMMUNICATIONS LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)/income........................................... $ (17,486) $ 353,212
Adjustments to reconcile net (loss)/income to net cash
provided by operating activities:
Depreciation.............................................. 300,119 284,915
Amortization.............................................. 18,927 5,804
Loss and provisions on disposal of property and
equipment.............................................. 45,574 43,979
Changes in operating assets and liabilities:
Increase in trade receivables............................. (27,301) (657,338)
Decrease/(increase) in prepayments........................ 25,747 (25,996)
(Increase)/decrease in inventory.......................... (5,662) 108,634
Decrease/(increase) in prepaid taxes...................... 38,728 (115,578)
Change in due from/to related parties..................... (217,785) (122,677)
Decrease in deferred revenues............................. (388) (141)
Decrease in customer deposits............................. -- (983)
Increase/(decrease) in taxes payable...................... 51,748 (106,746)
Increase in accrued liabilities........................... 71,840 50,650
Decrease in deferred income tax liability................. (30,706) --
(Decrease)/increase in accounts payable................... (12,042) 206,814
--------- ---------
Net cash provided by operating activities.............. 241,313 24,549
--------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (344,295) (103,071)
Proceeds on disposal of fixed assets...................... 857 5,267
--------- ---------
Net cash used in investing activities.................. (343,438) (97,804)
--------- ---------
Decrease in cash....................................... (102,125) (73,255)
Cash at beginning of period................................. 266,076 241,949
--------- ---------
Cash at end of period....................................... $ 163,951 $ 168,694
========= =========
Supplementary disclosures:
Income taxes paid........................................... $ 64,563 $ 274,454
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
20
<PAGE> 22
BALTIC COMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed financial statements are unaudited and have been
prepared by Baltic Communications Limited ("BCL" or the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of management, the condensed financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation. Certain information and footnote disclosures generally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. Results for interim periods are not necessarily indicative of the
results for a full year. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 20-F for the fiscal year ended December 31,
1998.
Certain reclassifications have been made to the prior year's condensed
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 financial statements and
allocated to fixed assets. The Company's balance sheets at December 31, 1998 and
at June 30, 1999 reflect the effect of this push down accounting treatment.
(2) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
BCL was formed to provide international direct dial, international payphone
and leased line services to business customers in St. Petersburg and the
Leningrad Oblast. The Company was incorporated on September 3, 1991 under the
laws of the Russian Federation as a closed joint stock company.
The Company's principal telecommunications license allows it to operate an
international, national and local telecommunications system in St. Petersburg;
this expires in 2003. Other licenses, all of which expire in 2001, are for
telematic services, rent of circuits, data services and the operation of a
dedicated national/international overlay network.
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.
Ultimate recoverability of the Company's investments is dependent upon it
achieving and maintaining profitability, which is dependent to a certain extent
on the stabilization of the economy of the Russian Federation, the Company's
ability to maintain the necessary telecommunications licenses and its ability to
obtain adequate financing to meet capital commitments.
(3) COMMITMENTS AND CONTINGENCIES
(a) Taxation
Russia currently has a number of laws related to various taxes imposed by
both federal and regional governmental authorities. Applicable taxes include
value added tax, corporation tax ("profit tax"), a number of turnover based
taxes, and payroll (social) taxes, together with others.
Laws related to these taxes have not been in force for significant periods,
in contrast to more developed market economies. Therefore, regulations are often
unclear, open to wide interpretation, and in some instances conflicting.
Accordingly few precedents with regard to issues have been established. Often,
differing opinions
21
<PAGE> 23
BALTIC COMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
regarding legal interpretation exist both among and within government ministries
and organisations (like the State Tax Service and its various inspectorates),
thus creating uncertainties and areas of conflict.
Tax declarations, together with other legal compliance areas (such as
customs and currency control matters) are subject to review and investigation by
a number of authorities, which are enabled by law to impose extremely severe
fines, penalties and interest charges. These facts create tax risks in Russia
substantially more significant than typically found in countries with more
developed tax systems.
The Company has had extensive tax inspections in the past, which have
resulted in minimal penalties. These inspections have covered most of the taxes
applicable to the Company.
Management believes that it has adequately provided for tax liabilities in
the accompanying condensed financial statements. However, the risk remains that
the relevant authorities could take differing positions with regard to
interpretative issues and the effect could be significant.
(b) Guarantees
In June 1996, PLD issued senior discount notes (the "Senior Notes") and
convertible subordinated notes (the "Convertible Notes") with an aggregate
principal amount of $149.5 million (together, the "Notes"). The Company is a
guarantor of this debt under the terms of the related indentures. The Company is
also a guarantor of other indebtedness of PLD to The Travelers Insurance Company
and The Travelers Indemnity Company (the "Travelers Parties").
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to pay its indebtedness to the Travelers Parties. PLD's
failure to make payment in full to the Travelers Parties could result in a claim
being made against the Company under its guarantee, as well as resulting in a
cross-default under and acceleration of the Senior Notes and Convertible Notes.
In addition, any failure by PLD to make interest payments on the Senior Notes
and Convertible Notes could result in a default under and acceleration of those
Notes, which could also lead to a claim against the Company under its guarantee
of those Notes. Any such events would have a material adverse effect on the
Company and raise substantial doubt about the Company's ability to continue as a
going concern.
On May 17, 1999, PLD entered into a Merger Agreement with Metromedia
International Group, Inc. ("MMG") pursuant to which PLD will become a wholly
owned subsidiary of MMG, upon the terms and conditions set forth therein (the
"Merger"). In connection with the Merger Agreement and the transactions
contemplated thereunder, substantially all of the holders of the Senior Notes
and Convertible Notes have agreed, subject to completion of the Merger and the
other transactions contemplated by the Merger Agreement, to defer to the date
the Merger is consummated all of the interest payable on the Notes during the
period from the execution of the Merger Agreement to the date of consummation of
the Merger and to exchange their outstanding Notes for new notes issued by MMG
which will not be guaranteed by the Company. In addition, the Travelers Parties
have agreed, again subject to completion of the Merger and the other
transactions contemplated by the Merger Agreement, to defer payment of $8.5
million of the amounts due to them until the completion of the Merger, and to
further defer payment of the remaining $4.92 million owed to them by PLD until
August 2000. The Company's guarantee to the Travelers Parties will remain in
place until PLD has repaid all of its indebtedness to such parties, which is
expected to occur in August 2000.
While agreements have been reached with substantially all of the holders of
the Senior Notes and Convertible Notes and with the Travelers Parties on a
restructuring of PLD's indebtedness to such parties, those agreements are
conditioned upon the closing of PLD's merger with MMG. If the merger did not
close, PLD would remain obligated to pay interest on the Senior Notes and
Convertible Notes and there can be no assurance that the Travelers Parties would
not demand payment in full of PLD's obligations to them.
22
<PAGE> 24
BALTIC COMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(4) COMPREHENSIVE INCOME
For the three and six months ended June 30, 1999 and 1998, comprehensive
income/loss was equal to net income/loss reported on the condensed statement of
operations.
(5) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's condensed financial statements for
the six months ended June 30, 1999.
23
<PAGE> 25
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
24
<PAGE> 26
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- -------------
(THOUSANDS OF U.S. DOLLARS
EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,330 $ 2,816
Trade receivables, net of allowances...................... 10,345 11,260
Other receivables and prepaids............................ 1,448 2,024
Inventory................................................. 3,475 4,076
-------- --------
Total current assets.............................. 20,598 20,176
Property and equipment, net................................. 110,413 106,542
Telecommunications licenses, net............................ 35,072 37,663
Other receivables........................................... -- 2,012
Goodwill, net............................................... 1,257 1,365
Other assets and investments................................ 2,501 410
-------- --------
Total assets...................................... $169,841 $168,168
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... 4,524 1,980
Accrued liabilities....................................... 2,564 2,640
Advances from other group companies....................... 32,509 33,988
Due to related parties.................................... -- 462
Customer deposits and advances............................ 6,169 7,109
Current portion of long-term debt......................... 3,554 3,479
-------- --------
Total current liabilities......................... 49,320 49,658
-------- --------
Long-term debt.............................................. 7,071 7,165
Advances from other group companies......................... 3,439 4,669
Minority interest........................................... 29,915 28,113
Commitments and contingencies
Shareholder's equity:
Common stock, par value CYL1 per share. Authorized
3,246,174 shares in 1999 and 1998; issued and
outstanding 3,246,174 shares in 1999 and 1998.......... 7,082 7,082
Contributed surplus....................................... 63,723 63,723
Accumulated surplus....................................... 9,291 7,758
-------- --------
Total shareholder's equity........................ 80,096 78,563
-------- --------
Total liabilities and shareholder's equity........ $169,841 $168,168
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
25
<PAGE> 27
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Telecommunications revenues......................... $19,952 $30,838 $41,861 $57,938
Operating expenses:
Direct costs (excludes depreciation).............. 4,646 8,096 8,811 15,541
General and administrative........................ 5,784 6,065 12,818 11,311
Management fees................................... 274 419 618 819
Depreciation...................................... 3,582 2,621 6,916 4,696
Amortization...................................... 1,326 1,221 2,652 2,455
Taxes other than income taxes..................... 323 1,266 1,053 2,191
------- ------- ------- -------
Total operating expenses.................. 15,935 19,688 32,868 37,013
------- ------- ------- -------
Operating income.......................... 4,017 11,150 8,993 20,925
Other income/(expense):
Interest and other income......................... 3 115 57 651
Interest on long-term debt........................ (176) (151) (396) (380)
Foreign exchange gain/(loss)...................... 196 (110) (199) (220)
------- ------- ------- -------
Income before income taxes and minority
interest................................ 4,040 11,004 8,455 20,976
Income taxes........................................ 1,726 2,460 4,120 4,970
------- ------- ------- -------
Income before minority interest........... 2,314 8,544 4,335 16,006
Minority interest................................... 1,356 4,128 2,802 7,863
------- ------- ------- -------
Net income................................ $ 958 $ 4,416 $ 1,533 $ 8,143
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
26
<PAGE> 28
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 1,533 $ 8,143
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 9,568 7,151
Minority interest...................................... 2,802 7,863
Changes in operating assets and liabilities:
Decrease/(increase) in accounts receivable........... 915 (686)
Decrease/(increase) in other receivables and
prepaids............................................ 576 (2,886)
Decrease/(increase) in inventory..................... 601 (316)
Change in amounts due from and to related parties.... (462) 1,037
Decrease in customer deposits and advances........... (940) (287)
Increase/(decrease) in accounts payable and accrued
liabilities......................................... 2,468 (4,041)
Decrease in intercompany advances.................... (1,479) --
------- -------
Net cash provided by operating activities......... 15,582 15,978
Cash flows from investing activities:
Capital expenditures...................................... (10,787) (8,364)
Other investments and assets.............................. (32) (1,962)
------- -------
Net cash used in investing activities............. (10,819) (10,326)
Cash flows from financing activities:
Long-term debt............................................ (1,249) (3,233)
Dividends................................................. (1,000) (1,250)
Advances from group companies............................. -- (2,887)
Other receivables......................................... -- 3,012
------- -------
Net cash used in financing activities............. (2,249) (4,358)
------- -------
Increase in cash and cash equivalents............. 2,514 1,294
Cash and cash equivalents at beginning of period............ 2,816 7,849
------- -------
Cash and cash equivalents at end of period.................. $ 5,330 $ 9,143
======= =======
Supplemental Disclosures:
Non-cash investing and financing activities:
Purchase of equipment with advances from PLD Telekom
Inc. and under long-term contracts.................... $ -- $ 7,547
======= =======
Interest paid............................................. $ 1,014 $ 723
======= =======
Income taxes paid......................................... $ 2,867 $ 5,075
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
27
<PAGE> 29
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(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 consolidated condensed 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 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 included in the Company's
Annual Report on Form 20-F for the fiscal year ended December 31, 1998.
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 sheets at December 31, 1998 and at
June 30, 1999 reflect the effect of this push down accounting treatment. The
costs of the telecommunications licenses are amortized on a straight line basis
over the terms of the related licenses. Goodwill is amortized on a straight line
basis over 20 years.
(2) FUTURE ACTIVITIES
The Company's telecommunications businesses are developing in an emerging
economy which, by its nature, has an uncertain economic, political and
regulatory environment. The general risks of operating businesses in the former
Soviet Union include the possibility for rapid change in government policies,
economic conditions, the tax regime and foreign currency regulations.
Ultimate recoverability of the Company's investments in its subsidiaries,
PeterStar Company Limited ("PeterStar"), Wireless Technology Corporations
Limited ("WTC") and C.P.Y. Yellow Pages Limited ("Yellow Pages"), is dependent
upon each of these subsidiaries achieving and maintaining profitability, which
is dependent to a certain extent on the stabilization of the economies of the
former Soviet Union, the ability to maintain the necessary telecommunications
licenses and the ability to obtain adequate financing to meet capital
commitments.
(3) RECENT DEVELOPMENTS
On August 14, 1998, PLD acquired an additional 11% of PeterStar through its
acquisition of 100% of the outstanding stock of PLD Holdings Ltd., a Bermudan
company, from Cable and Wireless plc.
(4) COMMITMENTS AND CONTINGENCIES
(a) Taxation
PeterStar and ALTEL (an operating subsidiary of WTC formerly known as BECET
International) have accrued profit and other taxes based on interpretations of
the law which may ultimately be disputed by the local taxation authorities.
Management believes that the exposure to additional profit and other taxes,
fines and penalties will not have a material adverse effect on the financial
position or results of operations of the Company.
28
<PAGE> 30
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(b) Purchase Commitments
At June 30, 1999, PeterStar had commitments of approximately $1,400,000
related to the acquisition of telecommunications equipment. The PeterStar supply
contracts provide for financing of these amounts over approximately five years.
(c) Management Services
On January 1, 1998, PLD entered into an 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 and was for a one year term,
automatically renewable for successive one year periods unless terminated by
either party.
ALTEL has negotiated an agreement with its other shareholder effective
January 1, 1998, under which the shareholder will provide certain consulting
services, management support services and personnel expertise. Payments under
this agreement are 300,000 tenge per month (U.S. dollar equivalent as of June
30, 1999 approximates $3,429) plus 1.0% of monthly gross revenues. The agreement
was for a one year term, automatically renewable for successive one year periods
unless terminated by either party.
(d) Guarantees
In June 1996, PLD issued senior discount notes (the "Senior Notes") and
convertible subordinated notes (the "Convertible Notes") with an aggregate
principal amount of $149.5 million (together, the "Notes"). The Company is a
guarantor of this debt under the terms of the related indentures. A wholly owned
subsidiary of the Company is also a guarantor of this debt, as well as of other
indebtedness of PLD to The Travelers Insurance Company and The Travelers
Indemnity Company (the "Travelers Parties").
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to pay its indebtedness to the Travelers Parties. PLD's
failure to make payment in full to the Travelers Parties could result in a claim
being made against the Company's subsidiary under its guarantee, as well as
resulting in a cross-default under and acceleration of the Senior Notes and
Convertible Notes. In addition, any failure by PLD to make interest payments on
the Senior Notes and Convertible Notes could result in a default under and
acceleration of those Notes. Any such default under the Notes could result in a
claim being made against the Company under its guarantee, which would have a
material adverse effect on the Company and raise substantial doubt about the
Company's ability to continue as a going concern.
On May 17, 1999, PLD entered into a Merger Agreement with Metromedia
International Group, Inc. ("MMG") pursuant to which PLD will become a wholly
owned subsidiary of MMG, upon the terms and conditions set forth therein (the
"Merger"). In connection with the Merger Agreement and the transactions
contemplated thereunder, substantially all of the holders of the Senior Notes
and Convertible Notes have agreed, subject to completion of the Merger and the
other transactions contemplated by the Merger Agreement, to defer to the date
the Merger is consummated all of the interest payable on the Notes during the
period from the execution of the Merger Agreement to the date of consummation of
the Merger and to exchange their outstanding Notes for new notes issued by MMG
which will not be guaranteed by the Company or the Company's subsidiary. In
addition, the Travelers Parties have agreed, again subject to completion of the
Merger and the other transactions contemplated by the Merger Agreement, to defer
payment of $8.5 million of the amounts due to them until the completion of the
Merger, and to further defer payment of the remaining $4.92 million owed to them
by PLD until August 2000. The guarantee of the Company's subsidiary to the
Travelers Parties will remain in place until PLD has repaid all of its
indebtedness to such parties, which is expected to occur in August 2000.
While agreements have been reached with substantially all of the holders of
PLD's Senior Notes and Convertible Notes and with the Travelers Parties on a
restructuring of PLD's indebtedness to such parties,
29
<PAGE> 31
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
those agreements are conditioned upon the closing of the Merger. If the Merger
did not close, PLD would remain obligated to pay interest on the Senior Notes
and Convertible Notes and there can be no assurance that the Travelers Parties
would not demand payment in full of PLD's obligations to them.
(5) COMPREHENSIVE INCOME
For the three and six months ended June 30, 1999 and 1998, comprehensive
income was equal to consolidated net income reported on the consolidated
condensed statement of operations.
(6) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's consolidated condensed financial
statements for the six months ended June 30, 1999.
30
<PAGE> 32
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
31
<PAGE> 33
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Assets:
Current:
Cash and cash equivalents.............................. $ 10 $ 10
Other receivables and prepaids......................... 390 228
Assets held for resale................................. 4,994 3,949
Due from related parties -- installment sales
contracts............................................. 5,111 6,408
------- -------
10,505 10,595
Escrow funds.............................................. 2,218 528
Due from related parties -- installment sales contracts... 3,513 3,806
------- -------
$16,236 $14,929
======= =======
Liabilities and Shareholder's Equity:
Current liabilities:
Accounts payable and accrued liabilities............... 917 1,977
Due to related parties................................. 6,015 5,035
Current portion of long-term debt...................... 355 --
------- -------
7,287 7,012
Long-term debt............................................ 741 --
Shareholder's equity:
Capital stock:
Additional paid-in capital............................. 6,641 6,641
Retained earnings......................................... 1,567 1,276
------- -------
Total shareholder's equity................................ 8,208 7,917
------- -------
$16,236 $14,929
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
32
<PAGE> 34
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues:
Interest income........................................... $193 $132 $416 $342
Operating expenses:
General and administrative................................ -- -- -- --
---- ---- ---- ----
Operating income............................................ 193 132 416 342
Interest expense............................................ (41) -- (41) --
Foreign exchange gain....................................... 73 -- 73 --
---- ---- ---- ----
Income before taxes......................................... 225 132 448 342
Income taxes................................................ 79 5 157 14
---- ---- ---- ----
Net income.................................................. $146 $127 $291 $328
==== ==== ==== ====
</TABLE>
See accompanying notes to condensed financial statements.
33
<PAGE> 35
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------- -----
<S> <C> <C>
Cash provided by/(used in):
Operations:
Net income............................................. $ 291 $ 328
Non-cash items:
Increase in supplier prepayments..................... (89) --
Increase in assets held for resale................... (149) --
Change in due from or due to related parties, net.... 1,736 (328)
Increase in accounts payable and accrued
liabilities......................................... (99) --
------- -----
1,690 --
Investing:
Escrow................................................. (1,690) --
------- -----
(1,690) --
------- -----
Increase /(decrease) in cash and cash equivalents......... -- --
Cash and cash equivalents, beginning of period.............. 10 10
------- -----
Cash and cash equivalents, end of period.................... $ 10 $ 10
Non-cash investing and financing activities:
Purchase of equipment with advances from PLD Telekom Inc.
and suppliers.......................................... $ 895 --
======= =====
</TABLE>
See accompanying notes to condensed financial statements.
34
<PAGE> 36
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed financial statements are unaudited and have been
prepared by PLD Capital Asset (U.S.) Inc. ("PLDCA" or the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of management, the condensed financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation. Certain information and footnote disclosures generally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. Results for interim periods are not necessarily indicative of the
results for a full year. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto for the fiscal year
ended December 31, 1998.
(2) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
PLDCA was incorporated on April 17, 1998 under the laws of the State of
Delaware and is a wholly-owned subsidiary of PLD Telekom Inc. ("PLD" or the
"Parent"). The Company was formed as a special purpose subsidiary to enter into
installment sales agreements in respect of certain telecommunications equipment
required by PLD's operating subsidiaries located in the former Soviet Union. On
June 30, 1998, PLDCA assumed the assets, liabilities and business of PLD Asset
Leasing Limited ("PLDAL"). PLDCA recorded such assets and liabilities at the
historical cost of PLDAL, since the entities were under common control. Amounts
presented for the three and six months ended June 30, 1998 reflect the results
of operations and cash flows of PLDAL. PLDAL is a Cypriot company wholly owned
by the Parent, which existed to enter into lease agreements with related
companies. PLDAL is presently inactive and it is the intention of the Parent to
liquidate PLDAL.
Ultimate recoverability of the Company's investments is dependent upon each
of PLD's subsidiaries and affiliates with which it has entered into installment
sales contracts, achieving and maintaining profitability, which is dependent to
a certain extent on a stabilization of the economies of the former Soviet Union,
the ability of these companies to maintain their telecommunications licenses and
their ability to obtain adequate financing to meet capital commitments.
(3) COMMITMENTS AND CONTINGENCIES
(a) Guarantees
In June 1996, PLD issued senior discount notes (the "Senior Notes") and
convertible subordinated notes (the "Convertible Notes") with an aggregate
principal amount of $149.5 million (together, the "Notes"). The Company is a
guarantor of this debt under the terms of the related indentures.
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to meet its current debt obligations. PLD's failure to
make payment in full of its current debt obligations could result in a
cross-default under and acceleration of the Senior Notes and Convertible Notes.
In addition, any failure by PLD to make interest payments on the Senior Notes
and Convertible Notes could result in a default under and acceleration of those
Notes. Any such events could result in a claim being made against the Company
under its guarantee, which would have a material adverse effect on the Company
and raise substantial doubt about the Company's ability to continue as a going
concern.
On May 17, 1999, PLD entered into a Merger Agreement with Metromedia
International Group, Inc. ("MMG") pursuant to which PLD will become a wholly
owned subsidiary of MMG, upon the terms and conditions set forth therein (the
"Merger"). In connection with the Merger Agreement and the transactions
contemplated thereunder, substantially all of the holders of the Senior Notes
and Convertible Notes have agreed, subject to completion of the Merger and the
other transactions contemplated by the Merger
35
<PAGE> 37
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Agreement, to defer to the date the Merger is consummated all of the interest
payable on the Notes during the period from the execution of the Merger
Agreement to the date of consummation of the Merger and to exchange their
outstanding Notes for new notes issued by MMG which will not be guaranteed by
the Company.
While agreements have been reached with substantially all of the holders of
the Senior Notes and Convertible Notes and with other parties involving PLD's
obligations to such parties, those agreements are conditioned upon the closing
of the Merger. If the Merger did not close, PLD would remain obligated to pay
interest on the Senior Notes and Convertible Notes and there can be no assurance
that the other parties would not demand payment in full of PLD's current debt
obligations to them.
(b) Purchase Commitments
As of June 30, 1999, the Company had entered into purchase commitments with
unaffiliated companies relating to telecommunications equipment amounting to
$704,000.
(c) Deferral of Payments to Supplier
Pursuant to an amendment to a supply contract with Siemens, which was
originally entered into in August 1997, the Company has restructured the amount
outstanding as of June 30, 1999 of $1.1 million, whereby $0.7 million has been
deferred for payment during the period June 30, 2000 to December 31, 2003.
(4) RESTRICTED CASH
Pursuant to the terms of PLD's $149.5 million private placement completed
on June 12, 1996, $2.2 million was in the Company's escrow account on June 30,
1999. These funds may only be used for certain specified purposes, principally
for the purchase of telecommunications equipment and the payment of interest on
PLD's Senior Notes.
(5) COMPREHENSIVE INCOME
For the three and six months ended June 30, 1999 and 1998, comprehensive
income was equal to net income reported on the condensed statement of
operations.
(6) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's condensed financial statements for
the six months ended June 30, 1999.
36
<PAGE> 38
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
37
<PAGE> 39
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- --------------
(THOUSANDS OF U.S. DOLLARS,
EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 884 $ 390
Trade receivables, net of allowances...................... 2,378 2,394
Other receivables......................................... 2,117 1,880
Due from related parties.................................. 8,655 8,162
-------- --------
TOTAL CURRENT ASSETS.............................. 14,034 12,826
Property and equipment, net................................. 46,811 48,408
Telecommunications licenses, net............................ 29,211 31,904
Due from related parties.................................... 2,355 1,752
Goodwill, net............................................... 10,294 10,572
Other investments and assets, net........................... 583 593
-------- --------
TOTAL ASSETS...................................... $103,288 $106,055
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... 3,109 2,915
Accrued liabilities....................................... 894 757
Taxes payable............................................. 5,533 3,571
Due to related parties.................................... 23,785 21,621
Supplier finance -- current portion....................... 963 759
-------- --------
TOTAL CURRENT LIABILITIES......................... 34,284 29,623
Due to related parties...................................... 8,000 8,000
Supplier finance -- long-term portion....................... 1,525 2,068
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 L1 per share,
authorized -- 1,000 shares, issued and fully
paid -- 199 shares
Share premium............................................. 40,390 40,390
Additional capital........................................ 46,439 46,439
Accumulated deficit....................................... (27,351) (20,466)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 59,479 66,364
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $103,288 $106,055
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
38
<PAGE> 40
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Telecommunications.................................. $ 4,264 $ 5,085 $ 8,222 $10,462
Finance lease income................................ 386 427 812 874
------- ------- ------- -------
TOTAL REVENUES.............................. 4,650 5,512 9,034 11,336
OPERATING EXPENSES:
Direct costs (excludes depreciation)................ 2,550 2,662 5,070 4,840
General and administrative.......................... 1,569 2,503 4,010 4,499
Depreciation........................................ 1,111 904 2,225 1,758
Amortization........................................ 1,486 2,957 2,972 3,022
Taxes other than income taxes....................... 260 556 923 990
------- ------- ------- -------
TOTAL OPERATING EXPENSES.................... 6,976 9,582 15,200 15,109
OPERATING LOSS........................................ (2,326) (4,070) (6,166) (3,773)
OTHER INCOME/(EXPENSE):
Share of loss from equity investments............... (121) (48) (258) (258)
Gain on disposal of fixed assets.................... 238 -- 238 --
Interest income..................................... 4 36 4 117
Interest expense.................................... (362) (420) (724) (563)
Foreign exchange gain............................... 182 -- 248 --
------- ------- ------- -------
LOSS BEFORE TAXATION AND MINORITY INTEREST............ (2,385) (4,502) (6,658) (4,477)
Income taxes.......................................... 218 377 227 --
------- ------- ------- -------
LOSS BEFORE MINORITY INTEREST............... (2,603) (4,125) (6,885) (4,477)
Minority interest..................................... -- -- -- --
------- ------- ------- -------
NET LOSS.............................................. $(2,603) $(4,125) $(6,885) $(4,477)
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
39
<PAGE> 41
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(6,885) $(4,477)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 5,197 4,780
Share of loss of equity investments....................... 258 258
Changes in operating assets and liabilities:
Decrease/(increase) in trade receivables.................. 16 (765)
(Increase)/decrease in other receivables.................. (237) 1,031
Changes in due from/to related parties.................... (415) 4,314
Increase/(decrease) in accounts payable and deferred
taxes.................................................. 193 (1,808)
Decrease in accrued liabilities........................... (11) (931)
Increase/(decrease) in other liabilities.................. 1,771 (92)
------- -------
CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES............. (113) 2,310
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (628) (3,575)
Other investments and assets................................ 9 (246)
------- -------
CASH USED IN INVESTING ACTIVITIES........................... (619) (3,821)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Related party financing..................................... 1,226 --
Payment on long-term indebtedness........................... -- (1,373)
------- -------
CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES............. 1,226 (1,373)
Increase/(decrease) in cash and cash equivalents............ 494 (2,884)
Cash and cash equivalents at beginning of period............ 390 4,671
------- -------
CASH AT END OF PERIOD....................................... $ 884 $ 1,787
======= =======
Supplemental disclosures:
Interest paid............................................... $ -- $ 129
======= =======
Income taxes paid........................................... $ 192 $ --
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
40
<PAGE> 42
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(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 condensed financial statements
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation. Certain information and footnote disclosures generally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules
and regulations. Results for interim periods are not necessarily indicative of
the results for a full year. These consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the fiscal year ended December 31, 1998.
Certain reclassifications have been made to the prior year's consolidated
condensed financial statements to conform to the current year's presentation.
The Company's parent is PLD Telekom Inc. ("PLD" or the "Parent"). 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
sheets at December 31, 1998 and at June 30, 1999 reflect the effect of this push
down accounting treatment. The costs of the telecommunications licenses are
amortised on a straight line basis over the terms of the related licenses.
Goodwill is amortised on a straight line basis over 20 years.
(2) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
The Company was incorporated under the laws of the Republic of Ireland in
January 1992. The Company's principal activity is the provision of
telecommunications services in Russia. The Company conducts its business
activities directly and through a number of subsidiaries and other affiliates,
most of which are incorporated in Russia. The Company established a registered
foreign representative office in Russia in October 1995.
The Company operates in an emerging economy which, by its nature, has an
uncertain economic, political, and regulatory environment. The general risks of
operating businesses in the former Soviet Union include the possibilities of
rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations. In addition, its satellite-based long distance
network is at an early stage of its operations.
Ultimate recoverability of the Company's investments is dependent upon each
of the subsidiaries and affiliates achieving and maintaining profitability,
which is dependent to a certain extent on a stabilization of the economies of
the former Soviet Union, the ability to maintain the necessary
telecommunications licenses and the ability to obtain adequate financing to meet
capital commitments.
(3) COMMITMENTS AND CONTINGENCIES
(a) Pledge Arrangements
In June 1996, PLD issued senior discount notes (the "Senior Notes") and
convertible discount notes (the "Convertible Notes") with an aggregate principal
amount of $149.5 million (together, the "Notes"). PLD is the owner of all of the
preferred shares in the Company and these shares, together with 17 ordinary
shares of the Company owned by PLD (representing approximately 8.5% of all such
ordinary shares outstanding), have been pledged by PLD as collateral under the
terms of the related indentures. In
41
<PAGE> 43
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
November 1997, an additional 28 ordinary shares in the Company owned by PLD
(representing approximately 14% of all such ordinary shares outstanding) were
pledged as collateral to The Travelers Insurance Company and The Travelers
Indemnity Company (the "Travelers Parties") in relation to certain other
indebtedness of PLD to such parties.
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to pay its indebtedness to the Travelers Parties. PLD's
failure to make payment in full to the Travelers Parties could result in a
cross-default under and acceleration of the Senior Notes and Convertible Notes.
In addition, any failure by PLD to make interest payments on the Senior Notes
and Convertible Notes could result in a default under and acceleration of those
Notes. Because the Company is dependent upon the continued financial support of
PLD to finance its ongoing operations, any such events would have a material
adverse effect on the Company and raise substantial doubt about the Company's
ability to continue as a going concern. Should PLD cease to trade as a going
concern, the Company may have to resort to extraordinary measures, including
making sales of assets under distressed conditions or ultimately seeking the
protection of the bankruptcy courts. The consolidated condensed financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
On May 17, 1999, PLD entered into a Merger Agreement with Metromedia
International Group, Inc. ("MMG") pursuant to which PLD will become a wholly
owned subsidiary of MMG, upon the terms and conditions set forth therein (the
"Merger"). In connection with the Merger Agreement and the transactions
contemplated thereunder, substantially all of the holders of the Senior Notes
and Convertible Notes have agreed, subject to completion of the Merger and the
other transactions contemplated by the Merger Agreement, to defer to the date
the Merger is consummated all of the interest payable on the Notes during the
period from the execution of the Merger Agreement to the date of consummation of
the Merger and to exchange their outstanding Notes for new notes issued by MMG
for which shares in the Company will not be pledged. In addition, the Travelers
Parties have agreed, again subject to completion of the Merger and the other
transactions contemplated by the Merger Agreement, to defer payment of $8.5
million of the amounts due to them until the completion of the Merger, and to
further defer payment of the remaining $4.92 million owed to them by PLD until
August 2000. PLD's pledge of a portion of the ordinary shares of the Company to
the Travelers Parties will remain in place until PLD has repaid all of its
indebtedness to such parties, which is expected to occur in August 2000.
Additionally, under the terms of the Merger Agreement, MMG and PLD have
entered into a $7.0 million bridge loan agreement to fund PLD's operations from
the date of the Merger Agreement until consummation of the Merger or until the
Merger Agreement is terminated. 115 of the Company's ordinary shares owned by
PLD (representing approximately 58% of all such ordinary shares outstanding)
have been pledged as collateral for such bridge loan. As a result of this and
the other pledges referred to above, all of the preferred and ordinary shares of
the Company owned by PLD have been pledged.
While agreements have been reached with substantially all of the holders of
PLD's Senior Notes and Convertible Notes and with the Travelers Parties on a
restructuring of PLD's indebtedness to such parties, those agreements are
conditioned upon the closing of the Merger. If the Merger did not close, PLD
would remain obligated to pay interest on the Senior Notes and Convertible Notes
and there can be no assurance that the Travelers Parties would not demand
payment in full of PLD's obligations to them.
(b) Commitments
Teleport-TP, a subsidiary of the Company in Russia, currently utilizes
capacity on three Intelsat satellites for the provision of its international and
domestic long distance services, pursuant to rolling fifteen year contracts with
Intelsat. These agreements require quarterly payments of $1.1 million for the
remainder of their terms.
42
<PAGE> 44
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 1999, the Company has a commitment to pay PLD $8.0 million
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.
(c) Taxation
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 will not, in the opinion of the Company's
directors, have a material adverse effect on the financial position or results
of operations of the Company.
(d) Legal Proceedings
There are no material pending legal proceedings to which the Company or any
of its property is subject.
(4) COMPREHENSIVE INCOME
For the three and six months ended June 30, 1999 and 1998, comprehensive
loss was equal to consolidated net loss reported on the consolidated condensed
statement of operations.
(5) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's consolidated condensed financial
statements for the six months ended June 30, 1999.
43
<PAGE> 45
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
44
<PAGE> 46
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- --------------
(THOUSANDS OF U.S. DOLLARS,
EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,175 $ 1,642
Trade receivables, net of allowance....................... 2,872 3,811
Due from related parties.................................. -- 20
Inventory................................................. 1,436 1,495
Prepaid expenses and other current assets................. 555 713
------- -------
Total current assets.............................. 7,038 7,681
Property and equipment, net................................. 28,963 29,746
Telecommunications license, net............................. 20,298 21,581
------- -------
Total assets...................................... $56,299 $59,008
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. 1,740 939
Due to related parties.................................... 85 602
Customer deposits and advances............................ 3,880 4,244
------- -------
Total current liabilities......................... 5,705 5,785
------- -------
Commitments and contingencies
Minority interest........................................... 5,300 6,102
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
Reserve capital........................................... 100 100
Accumulated deficit....................................... (5,609) (3,782)
------- -------
Total shareholder's equity........................ 45,294 47,121
------- -------
Total liabilities and shareholder's equity........ $56,299 $59,008
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
45
<PAGE> 47
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Telecommunications revenues......................... $ 5,839 $10,128 $13,760 $19,677
Operating expenses:
Direct costs (excludes depreciation).............. 1,274 1,954 2,941 3,902
General and administrative........................ 2,050 2,444 4,363 4,757
Management fees................................... 274 419 618 819
Depreciation and amortization..................... 2,048 1,634 3,918 3,022
Taxes other than income tax....................... 42 149 126 284
------- ------- ------- -------
Total operating expenses.................. 5,688 6,600 11,966 12,784
------- ------- ------- -------
Operating income.................................... 151 3,528 1,794 6,893
Other income/(expense):
Interest and other income......................... (4) 94 33 185
Foreign exchange loss............................. (489) (81) (643) (191)
------- ------- ------- -------
Net (loss)/income before income tax and
minority interest............................ (342) 3,541 1,184 6,887
Income tax.......................................... 724 1,344 1,813 2,690
------- ------- ------- -------
Net (loss)/income before minority
interest................................ (1,066) 2,197 (629) 4,197
Minority interest................................... (277) 1,355 198 2,612
------- ------- ------- -------
Net (loss)/income................................... $ (789) $ 842 $ (827) $ 1,585
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
46
<PAGE> 48
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows provided by operating activities:
Net (loss)/income......................................... $ (827) $ 1,585
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 3,918 3,022
Gain on disposal....................................... -- 89
Bad debt expense....................................... 33 180
Minority interest...................................... 198 2,612
Changes in operating assets and liabilities:
Decrease/(increase) in trade receivables............. 906 (520)
Decrease in inventory................................ 59 269
Increase in prepaid expenses and other current
assets.............................................. (116) (429)
Increase in accounts payable and accrued
liabilities......................................... 594 7
Decrease in due to related parties................... (497) (1,287)
(Decrease)/increase in customer deposits and
advances............................................ (364) 520
Increase/(decrease) in income tax payable............ 482 (58)
------- -------
Net cash provided by operating activities......... 4,386 5,990
------- -------
Cash flows used in investing activities -- purchase of
property and equipment.................................... (1,853) (2,825)
------- -------
Cash flows used in financing activities -- dividend
payments.................................................. (2,000) (2,500)
------- -------
Increase in cash and cash equivalents............. 533 665
Cash and cash equivalents at beginning of period............ 1,642 5,294
------- -------
Cash and cash equivalents at end of period.................. 2,175 5,959
======= =======
Supplemental disclosures:
Interest paid............................................. $ -- $ --
======= =======
Income taxes paid......................................... $ 1,361 $ 3,083
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
47
<PAGE> 49
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999
(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
condensed financial statements include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation. Certain information and
footnote disclosures generally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Results for interim periods
are not necessarily indicative of the results for a full year. These
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 20-F for the fiscal year ended December 31,
1998.
The Company's ultimate parent is PLD Telekom Inc. ("PLD"). The parent's
investment in the Company has been pushed down into the Company's consolidated
financial statements and allocated to the cost of the telecommunications
license. The Company's consolidated balance sheets at December 31, 1998 and at
June 30, 1999 reflect the effect of this push down accounting treatment. The
cost of the telecommunications license is amortized on a straight line basis
over the term of the license.
(2) FUTURE ACTIVITIES
The Company's results are dependent upon the ability of its subsidiary,
ALTEL, formerly known as BECET International ("ALTEL"), to retain existing
subscribers, to attract new subscribers, and to control operating expenses.
ALTEL's cellular telecommunications system in Kazakhstan is operating 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
(a) Guarantees
In June 1996, PLD issued senior discount notes (the "Senior Notes") and
convertible subordinated notes (the "Convertible Notes") with an aggregate
principal amount of $149.5 million (together, the "Notes"). The Company is a
guarantor of this debt under the terms of the related indentures. The Company is
also a guarantor of other indebtedness of PLD to The Travelers Insurance Company
and The Travelers Indemnity Company (the "Travelers Parties").
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to pay its indebtedness to the Travelers Parties. PLD's
failure to make payment in full to the Travelers Parties could result in a claim
being made against the Company under its guarantee, as well as resulting in a
cross-default under and acceleration of the Senior Notes and Convertible Notes.
In addition, any failure by PLD to make interest payments on the Senior Notes
and Convertible Notes could result in a default under and acceleration of those
Notes, which would also lead to a claim against the Company under its guarantee
of those Notes. Any such events would have a material adverse effect on the
Company and raise substantial doubt about the Company's ability to continue as a
going concern.
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<PAGE> 50
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
On May 17, 1999, PLD entered into a Merger Agreement with Metromedia
International Group, Inc. ("MMG") pursuant to which PLD will become a wholly
owned subsidiary of MMG, upon the terms and conditions set forth therein (the
"Merger"). In connection with the Merger Agreement and the transactions
contemplated thereunder, substantially all of the holders of the Senior Notes
and Convertible Notes have agreed, subject to completion of the Merger and the
other transactions contemplated by the Merger Agreement, to defer to the date
the Merger is consummated all of the interest payable on the Notes during the
period from the execution of the Merger Agreement to the date of consummation of
the Merger and to exchange their outstanding Notes for new notes issued by MMG
which will not be guaranteed by the Company. In addition, the Travelers Parties
have agreed, again subject to completion of the Merger and the other
transactions contemplated by the Merger Agreement, to defer payment of $8.5
million of the amounts due to them until the completion of the Merger, and to
further defer payment of the remaining $4.92 million owed to them by PLD until
August 2000. The Company's guarantee to the Travelers Parties will remain in
place until PLD has repaid all of its indebtedness to such parties, which is
expected to occur in August 2000.
While agreements have been reached with substantially all of the holders of
the Senior Notes and Convertible Notes and with the Travelers Parties on a
restructuring of PLD's indebtedness to such parties, those agreements are
conditioned upon the closing of the Merger. If the Merger did not close, PLD
would remain obligated to pay interest on the Senior Notes and Convertible Notes
and there can be no assurance that the Travelers Parties would not demand
payment in full of PLD's obligations to them.
(b) Management Services
On January 1, 1998, PLD entered into an 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 and was for a one year term,
automatically renewable for successive one year periods unless terminated by
either party.
ALTEL has negotiated an agreement with its other shareholder effective
January 1, 1998, under which the shareholder will provide certain consulting
services, management support services and personnel expertise. Payments under
this agreement are 300,000 tenge per month (U.S. dollar equivalent as of June
30, 1999 approximates $3,429) plus 1.0% of monthly gross revenues. The agreement
was for a one year term, automatically renewable for successive one year periods
unless terminated by either party.
(c) Taxation
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.
(4) COMPREHENSIVE INCOME
For the three and six months ended June 30, 1999 and 1998, comprehensive
income/loss was equal to consolidated net income/loss reported on the
consolidated condensed statement of operations.
(5) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up
49
<PAGE> 51
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
activities and organization costs to be expensed as incurred. The Company was
required to adopt both new statements in the first quarter of 1999. The adoption
of these statements did not have a material effect on the Company's consolidated
condensed financial statements for the six months ended June 30, 1999.
(6) DIVIDEND PAYMENTS
Total dividends declared and paid were $2.0 million and $2.5 million for
the six months ended June 30, 1999 and 1998, respectively.
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<PAGE> 52
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information relating to political, social and economic conditions in the
countries of the former Soviet Union and the Commonwealth of Independent States,
the commencement of certain programs and the proposed offering of certain
services by the Company's operating subsidiaries, proposed changes in the
Company's corporate structure and centers of operations, the impact of Year 2000
issues on the Company's operations and interpretations and actions of certain
regulatory authorities, including in the United States, Canada, Russia,
Kazakhstan and Belarus, as well as information contained elsewhere in this
report where statements are preceded by, followed by, or include the words
"believes," "expects," "anticipates," and similar expressions. For such
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including without
limitation, those discussed elsewhere in the Report. Furthermore, this document
constitutes a Year 2000 Readiness Statement, and the statements herein are
subject to the Year 2000 Information and Readiness Disclosure Act, and the
Company hereby claims the protection of such Act for this document and all
information contained herein.
BASIS OF PRESENTATION
The Company's key interests at June 30, 1999 include a 71% equity interest
in PeterStar, which provides telecommunications services in St. Petersburg,
Russia; a 50% equity interest in ALTEL, which provides cellular services in
Kazakhstan; a 50% interest in BELCEL, which provides cellular services in
Belarus; and an 80.4% equity interest in Technocom which, through its 49.3%
equity interest in Teleport-TP, operates an international teleport in Moscow,
fiber optic networks in Moscow and its environs and a satellite-based long
distance network across Russia.
EBITDA is used as a measure of operating performance and is defined as
earnings (or loss) from continuing operations before income taxes and minority
interest plus net interest (interest expense less interest and other income)
plus depreciation and amortization. It is presented as supplemental disclosure
because it assists in understanding the Company's operating results. EBITDA,
however, may not be comparable to similarly titled measures of other companies
and should not be considered in isolation or as a substitute for net income,
cash flow provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
Certain of the Company's subsidiaries pay management fees to their
shareholders, including the Company. The figures presented for the subsidiaries
reflect all payments of such fees (i.e. management fees are included in
operating expenses in the same way as other expenses of the subsidiary).
Profitability measures -- EBITDA, operating profit and net income -- are
therefore quoted after accounting for such payments.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1999 Versus Three and Six Months Ended
June 30, 1998
Overview. The definition of EBITDA is given in the previous section. It is
commonly used as an indicator of the ability of a business to generate cash
flows from its operating activities. Management therefore considers it to be a
relevant and useful measure for investors. The Company reported a net loss of
$10.6 million ($0.28 per share) and an operating loss of $1.2 million on
revenues of $28.0 million for the three months ended June 30, 1999, compared to
a net loss of $5.4 million ($0.16 per share) and operating income of $5.9
million on operating revenues of $39.2 million reported in the second quarter of
1998. EBITDA of $7.6 million reported in the second quarter of 1999 compares
with $11.9 million in the second quarter of 1998. For the six months ended June
30, 1999, the Company reported a net loss of $23.4 million ($0.62 per share) and
an operating loss of $3.1 million on revenues of $57.3 million compared to a net
loss of $9.9 million ($0.30 per share) and operating income of $13.1 million on
operating revenues of $74.4 million reported in the six
51
<PAGE> 53
months ended June 30, 1998. EBITDA of $13.1 million reported in six months ended
June 30, 1999 compared with $24.6 million in the six months ended June 30, 1998.
For the six months ended June 30, 1999, net cash provided by operating and
financing activities amounted to $13.6 million and $4.2 million, respectively,
with net cash used in investing activities amounting to $14.5 million. This
compares to the six months ended June 30, 1998 when net cash provided by
operating activities amounted to $8.0 million, and net cash used in investing
activities and financing activities amounted to $0.4 million and $8.8 million,
respectively. Cash flows generated by operating subsidiaries are generally
retained by those businesses to finance capital expenditures, service long-term
debt and provide working capital. Funds in excess of subsidiaries' requirements
are distributed to shareholders.
The following table shows the Company's consolidated revenues by principal
operating subsidiary for the three and six months ended June 30, 1999 and 1998
and the percentage change in revenues between the periods:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 % JUNE 30, 1999 JUNE 30, 1998
------------------- ------------------- CHANGE OVER ------------------- -------------------
($ MILLION) % ($ MILLION) % PRIOR PERIOD ($ MILLION) % ($ MILLION) %
----------- ----- ----------- ----- ------------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PeterStar............ 13.8 49.3% 20.3 51.8% (32.0)% 27.7 48.3% 37.8 50.8%
ALTEL................ 5.8 20.7% 10.1 25.8% (42.6)% 13.8 24.1% 19.7 26.5%
Technocom............ 4.7 16.8% 5.5 14.0% (14.5)% 9.0 15.7% 11.3 15.2%
BCL.................. 2.3 8.2% 2.8 7.1% (17.9)% 4.7 8.2% 5.1 6.8%
Other................ 1.4 5.0% 0.5 1.3% 180.0% 2.1 3.7% 0.5 0.7%
---- ----- ---- ----- ----- ---- ----- ---- -----
28.0 100.0% 39.2 100.0% (28.6)% 57.3 100.0% 74.4 100.0%
<CAPTION>
%
CHANGE OVER
PRIOR PERIOD
------------
<S> <C>
PeterStar............ (26.7)%
ALTEL................ (29.9)%
Technocom............ (20.4)%
BCL.................. (7.8)%
Other................ 320.0%
-----
(23.0)%
</TABLE>
Revenues. Revenues decreased 28.6% from $39.2 million in the second
quarter of 1998 to $28.0 million in the second quarter of 1999. For the six
months ended June 30, 1999, revenues decreased 23.0% from $74.4 million reported
a year ago to $57.3 million. PeterStar, Technocom and BCL continued to feel the
effects of the Russian economic crisis which commenced in the third quarter of
1998, while ALTEL's performance during 1999 has been adversely affected by the
worsening economic conditions in Kazakhstan. These economic problems have
resulted in the loss of some customers as well as reduced calling activity among
those who have remained customers.
PeterStar and ALTEL continue to account for the majority (70.0%) of the
Company's consolidated revenues. Although subscriber numbers have increased for
both these entities over the comparable periods, revenues per subscriber or line
have fallen.
In the case of Teleport-TP, where tariffs to certain customers are quoted
in roubles, revenues have been adversely affected by the rouble devaluation. In
addition, collections have slowed and the Company's businesses are having to
devote more resources to the process of collecting receivables.
While increased competition has not been an issue for either PeterStar or
Teleport-TP, ALTEL has been experiencing downward pressure on tariffs as a
result of other cellular licensees commencing operations in Kazakhstan.
The Company's new international carrier services business (the "Carrier
Services Business"), which commenced operations in the fourth quarter of 1998,
contributed revenues of $1.3 million in the first half of 1999. This business is
expected to be an increasingly important contributor to the Company's
consolidated revenues in 1999 and subsequent years as this business is
developed.
Overall, management believes that based upon the current economic
circumstances in Russia and Kazakhstan, revenues in the short-term are unlikely
to grow at the same rate as they have in recent years. Given the many
uncertainties in the Russian political and economic situations at the present
time, exacerbated by the absence of strong leadership or effective economic
planning, it is extremely difficult to make any accurate assessment of the
prospects for the Company's businesses for the balance of 1999. It is not
possible to rule out further deterioration in the Russian and Kazakh economic
situation which would be likely to impact
52
<PAGE> 54
the Company's businesses adversely. See "Recent Developments." While management
believes that it is taking all available measures to protect the Company and its
businesses from the negative effects of any further problems in Russia and
Kazakhstan, there can be no assurance that those measures will be successful.
Direct costs (excludes depreciation). Direct costs decreased 25.4% to $9.1
million in the second quarter of 1999 from $12.2 million reported in the second
quarter of 1998. For the six months ended June 30, 1999, direct costs decreased
23.9% from $23.0 million reported a year ago to $17.5 million. As a percentage
of revenues, direct costs decreased marginally from 30.9% to 30.5% over the
comparable six month periods. Given the continuing effects of the Russian
economic crisis however, it is difficult to determine whether the Company will
be able to maintain these margin levels for the balance of 1999.
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, decreased 12.8%
to $10.9 million for the three months ended June 30, 1999 from $12.5 million
recorded in the second quarter of 1998. For the six months ended June 30, 1999,
general and administrative expenses increased 8.6% to $24.1 million from $22.2
million recorded in the six months ended June 30, 1998. As a percentage of
revenues, general and administrative expenses for the six months ended June 30,
1999 increased to 42.1% from 29.8% in 1998.
In light of the reduction in revenues stemming from the inherent
uncertainty in the current Russian and Kazakh economies, the Company has
initiated cost cutting efforts within its subsidiaries and corporate offices. As
a result, consolidated general and administrative costs were reduced by $2.3
million between the first and second quarters of 1999.
Depreciation. Depreciation increased 45.7% to $5.1 million in the second
quarter of 1999 compared to $3.5 million incurred in the second quarter of 1998.
For the six months ended June 30, 1999, depreciation increased 50.0% to $9.9
million from $6.6 million recorded in the six months ended June 30, 1998
reflecting the investment of over $40.4 million in property and equipment over
the past 12 months. Depreciation will likely continue to grow as capital
expenditures are expected to continue, albeit at a slower pace, in 1999.
Depreciation represented 17.3% of revenues for the six months ended June 30,
1999 compared to 8.9% a year earlier.
Amortization expense. For the three months ended June 30, 1999, the
Company incurred total amortization charges of $3.6 million compared to $3.3
million in the second quarter of 1998. For the six months ended June 30, 1999,
the Company incurred total amortization charges of $7.2 million compared to $6.4
million a year earlier. Of the 1999 year to date charges, $6.6 million related
primarily to the amortization of telecommunications licenses held by PeterStar,
ALTEL and Teleport-TP and $0.6 million related to the amortization of deferred
financing costs. Deferred financing costs relate to the June 1996 high yield
offering and are amortized over eight years, the term of the Senior Notes.
The increase in amortization expense in the three and six months ended June
30, 1999 was primarily due to the acquisition by the Company, effective
September 30, 1998, of an additional 11% interest in PeterStar for consideration
of $33.9 million. The excess of the purchase price over identifiable, tangible
assets of $28.1 million arising on the acquisition was allocated to goodwill and
telecommunications licenses. The value allocated to goodwill ($24.7 million) is
being amortized over 20 years and the value allocated to PeterStar's licenses
($3.4 million) is being amortized over their remaining terms which expire in
2004. This has resulted in additional quarterly amortization charges of $0.5
million commencing in the fourth quarter of 1998. ALTEL's and Teleport-TP's
telecommunications licenses are also amortized over their remaining terms, which
expire in 2009 and 2004, respectively.
The Company does not anticipate any problems renewing the
telecommunications licenses currently held by any of its subsidiaries upon their
expiry.
Share of income/(loss) from equity investments. The Company's share in
losses from equity investments, primarily BELCEL and MTR-Sviaz, increased from
$48,000 in the second quarter of 1998 to $89,000 in the second quarter of 1999.
For the six months ended June 30, 1999, the Company's share in losses from
equity investments increased to $0.4 million compared to $0.3 million reported
last year. The 1999 first half
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<PAGE> 55
loss consisted of a 50% share of BELCEL's six month loss of $0.3 million and a
50% share of MTR-Sviaz's six month loss of $0.5 million.
Interest and other income. Interest and other income of $0.2 million in
the second quarter of 1999 compared with $0.9 million earned in the second
quarter of 1998. For the six months ended June 30, 1999, interest and other
income of $0.5 million compared to $1.8 million reported last year and reflects,
in part, the draw down of escrow cash and other cash resources of the Company
and its subsidiaries over the past 12 months. Interest earned on the Company's
escrow account totaled $0.3 million in the first half of 1999 compared with $0.4
million earned in the first half of 1998. The Company's escrow account totaled
$15.2 million as of June 30, 1999 compared to $21.7 million a year earlier. In
addition, in the three and six months ended June 30, 1998, interest and other
income included a $0.5 million payment from Cable & Wireless relating to taxes
paid by Baltic Communications Limited ("BCL") subsequent to the Company's
acquisition of BCL from Cable & Wireless in early 1996. Pursuant to the terms of
the acquisition, the Company was indemnified for these taxes which related to
prior periods.
Interest expense. Interest expense of $6.8 million in the second quarter
of 1999 compared with $5.4 million incurred in the second quarter of 1998. For
the six month period, interest expense of $13.0 million in 1999 compared with
$10.5 million incurred in 1998 and consisted of interest on bank indebtedness
and short-term borrowings of $1.8 million, interest accrued on the Senior Notes
of $10.0 million and interest expense related to the Convertible Notes of $1.2
million. Interest on short-term borrowings of $1.6 million for the six month
period included $1.0 related to the outstanding Series A and B Notes ($13.4
million) and $0.5 million related to News America advances ($6.4 million). In
addition, during June 1999, MMG advanced the Company a total of $3.0 million
which incurred $13,750 in interest. See "Liquidity and Capital Resources."
Foreign exchange loss. For the three months ended June 30, 1999, the
Company recorded a foreign exchange gain of $0.3 million as compared to a $0.4
million foreign exchange loss a year ago. For the six months ended June 30,
1999, the Company incurred a net foreign exchange loss of $0.1 million as
compared to $0.5 million in 1998. The Company has sought, and will continue to
seek, to limit its foreign exchange losses by minimizing the amount of rouble
balances held by its subsidiaries and by taking measures to accelerate
collection and currency conversion procedures in so far as this is possible in
the current banking and legislative environment. The Company does not hedge or
otherwise insure against its exchange risks as it has determined that this is
neither practical or economical to do so.
Income taxes. The total income tax charge for the three months ended June
30, 1999 was $2.1 million compared with $2.2 million in 1998. For the six month
period, income taxes in 1999 of $4.7 million compared with $5.2 million in 1998.
The provision for income taxes relates substantially to current income taxes in
the Company's Russian and Kazakh businesses and its decrease reflects the
overall decreased profitability of these subsidiaries over the prior year.
Minority interest. Minority interest relates to the minority shareholdings
held in three of the Company's subsidiaries -- PeterStar (29%), ALTEL (50%) and
Technocom (19.6%). Minority interest of $0.9 million for the three months ended
June 30, 1999 compared with $3.9 million recorded in the second quarter of 1998.
For the six months ended June 30, 1999, minority interest totaled $2.1 million
compared to $7.5 million a year ago, reflecting the weaker results experienced
in the first half of 1999 compared to 1998. In addition, effective September 30,
1998, the Company acquired an additional 11% of PeterStar. Accordingly,
PeterStar's minority interest percentage in the first half of 1999 was reduced
to 29% from 40% a year ago.
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<PAGE> 56
The following table compares the results of operations of the Company's
principal operating subsidiaries for the three and six months ended June 30,
1999 with the three and six months ended June 30, 1998:
<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
------------ ------------- -------------- --------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ----- ---- ----- ----- ----- -----
(UNAUDITED, THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ 13.8 20.3 5.8 10.1 4.7 5.5 2.3 2.8
Operating income/(loss) -- $............ 4.5 8.7 0.7 4.0 (2.3) (4.1) 0.1 0.4
Operating income/(loss) -- %............ 32.6% 42.9% 12.1% 39.6% (48.9)% (74.5)% 4.3% 14.3%
Net income/(loss) -- $.................. 4.1 6.9 (0.6) 2.7 (2.6) (4.1) (0.1) 0.2
Net income/(loss) -- %.................. 29.7% 34.0% (10.3)% 26.7% (55.3)% (74.5)% (4.3)% 7.1%
EBITDA -- $............................. 7.3 9.6 1.7 5.1 0.6 (0.3) 0.2 0.4
EBITDA -- %............................. 52.9% 47.3% 29.3% 50.5% 12.8% (5.5)% 8.7% 14.3%
% PLD ownership......................... 71.0% 60.0% 50.0% 50.0% 80.4% 80.4% 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
------------ ------------- -------------- --------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ----- ---- ----- ----- ----- -----
(UNAUDITED, THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ 27.7 37.8 13.8 19.7 9.0 11.3 4.7 5.1
Operating income/(loss) -- $............ 8.6 15.8 2.8 7.9 (6.2) (3.8) 0.4 0.6
Operating income/(loss) -- %............ 31.0% 41.8% 20.3% 40.1% (68.9)% (33.6)% 8.5% 11.8%
Net income/(loss) -- $.................. 6.5 13.1 0.4 5.2 (6.9) (4.5) 0.0 0.4
Net income/(loss) -- %.................. 23.5% 34.7% 2.9% 26.4% (76.7)% (39.8)% 0.0% 7.8%
EBITDA -- $............................. 13.2 18.4 5.1 9.7 (0.7) 0.7 0.5 0.8
EBITDA -- %............................. 47.7% 48.7% 37.0% 49.2% (7.8)% 6.2% 10.6% 15.7%
% PLD ownership......................... 71.0% 60.0% 50.0% 50.0% 80.4% 80.4% 100.0% 100.0%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
On May 17, 1999, the Company entered into the Merger Agreement with MMG
pursuant to which the Company will become a wholly owned direct subsidiary of
MMG on the terms and conditions set forth therein. See "Recent
Developments -- Merger with Metromedia International Group, Inc." for more
detailed information on the Merger Agreement, the Merger and other contemplated
transactions.
If the Merger did not close, the factors discussed below in the section
encaptioned "Commitments and Sources of Funds for 1999" would raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated condensed financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
General
For the six months ended June 30, 1999, a total of $13.6 million in cash
was generated from operations (1998 -- $8.0 million), $14.5 million was used in
net investing activities (1998 -- $0.4 million) and $4.2 million was provided by
financing activities (1998 -- $8.8 million used in financing activities).
Investments during the first half of 1999 on telecommunications equipment
and infrastructure within PeterStar, ALTEL and Teleport-TP totaled $13.2
million. Funds held in escrow at June 30, 1999 increased to $15.2 million from
$14.9 million at the end of 1998 reflecting $0.3 million in interest earned
year-to-date, and $1.7 million in installment sales receipts received from
subsidiaries, offset by a $1.7 million escrow draw to finance further capital
equipment purchases for the subsidiaries.
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<PAGE> 57
Cash provided by financing activities of $4.2 million related primarily to
$6.0 million in short-term funding provided to the Company from News America
($3.0 million) and MMG ($3.0 million), offset by $1.0 million in dividends paid
to a minority shareholder and $0.8 million in long-term debt repayments.
As of June 30, 1999, the Company reported a working capital deficit of
$36.8 million compared to a working capital deficit of $16.0 million at the end
of 1998. At June 30, 1999, the Company had consolidated total assets of $351.2
million ($352.1 million as of December 31, 1998) which consisted of $39.5
million in current assets (including $7.9 million in cash and cash equivalents),
$172.2 million in property and equipment, $71.9 million in unamortized
telecommunications licenses relating to PeterStar, ALTEL and Teleport-TP, escrow
funds of $15.2 million and other assets and investments of $52.4 million,
including $35.4 million in goodwill, net of amortization, relating to the
Company's November 1997 acquisition of an additional 29.65% interest in
Technocom and August 1998 acquisition of an additional 11% interest in
PeterStar.
Long-term indebtedness of $150.1 million, consisting primarily of the
Company's Senior and Convertible Notes, as a percentage of total assets, was
42.7% as of June 30, 1999, compared to $151.8 million or 43.1% of total assets
as of December 31, 1998.
Shareholders' equity of $101.7 million, as of June 30, 1999, compared with
$124.9 million as of December 31, 1998, and consisted of $245.0 million in
common stock and additional paid-in capital offset by the Company's deficit of
$143.3 million. The Company's ratio of long-term indebtedness to equity at June
30, 1999 was 147.6% compared to 121.5% at December 31, 1998.
Commitments and Sources of Funds for 1999
Operating Businesses. The Company has historically funded the needs of its
operating businesses for capital expenditures and operating expenses out of the
proceeds of its financing activities, including supplier financing, proceeds
from sales of assets and, to the extent these existed, distributions from its
operating businesses (in the form of dividends and management fees). Except for
its Cardlink business (which is in the process of implementing wireless card
validation systems using proprietary technology) and the Carrier Services
Business, the Company's operating businesses have largely become
self-sustaining, in that they have been able to pay for capital expenditures and
operational expenses out of internally generated cash flows from operations
and/or have been able to arrange their own financing, including supplier
financing. Some supplier financing is back-to-back financing arranged by the
Company, where PLDCA, a wholly owned subsidiary of the Company, acquires
equipment, pays the supplier and resells the equipment to the operating
business. The principal source of funds for the latter activity has been the
escrow funds, discussed in greater detail below.
The Company plans to endeavor to accelerate the implementation of its
Cardlink business and Carrier Services Business, to the extent possible, in
1999. While Cardlink is not anticipated to require significant immediate cash,
development of the first phase of the Carrier Services Business is expected to
require approximately $17.0 million. The Company is currently negotiating with
an Ericsson company for a vendor financing arrangement for the Carrier Services
Business. Both the Cardlink business and the Carrier Services Business are
expected to be self-sustaining (in terms of generating sufficient cash to
fund -- or support financing for -- their operating and capital needs) in 2000.
To the extent that the operating businesses (other than Cardlink and the
Carrier Services Business) experience lower than expected revenues, higher
operating costs or higher development costs, so that they are no longer able to
fund their activities internally, the Company has the choice to provide
financing support itself, or cause the businesses to scale back or slow down the
build-out of their networks and/or to cut costs. The Company has already
initiated a number of these actions in response to the economic difficulties in
Russia and Kazakhstan, and anticipates continuing to take such actions in the
event that its businesses appear to need additional support.
In the event that the Company is unable to fully support the planned
implementation of the Carrier Services Business in 1999, it has the option to
defer capital expenditures scheduled for 1999 to 2000 or later, and to scale
back the development of its network. This will result in reduced traffic being
handled by, and
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<PAGE> 58
reduced revenues from this business during 1999. The Company is currently unable
to quantify the effect on revenues of any such deferrals or scaling back of
development.
The Company. The Company has to date funded its own operations from the
same sources as it has funded its operating businesses, namely, proceeds of its
financing activities, including supplier financing, proceeds from sales of
assets and, to the extent, these existed, distributions from its operating
businesses. As the operating businesses have become self-sustaining, so too has
the level of distributions (including management fees) from its operating
businesses increased. The Company anticipates receiving approximately $8.0
million in distributions (including management fees) from its operating
businesses in 1999.
Expatriate employees working for the Company's operating businesses in
Russia, Kazakhstan and Belarus are employed through NWE Cyprus, which also acts
as an intermediate holding company for three of the Company's operating
businesses -- PeterStar, ALTEL and Yellow Pages. On an overall basis, the funds
received by NWE Cyprus through management fees and dividends are currently
sufficient to enable it to make the monthly salary and other payments due to
such expatriates. However, due to timing differences between receipt of
management fees/dividends and requirements to pay salaries etc. on a regular
basis, the Company periodically has to provide "top-up" funding to NWE Cyprus,
but the amounts involved are insignificant. Should the levels of management fees
and dividends reduce in future, the Company could, if necessary, reduce the
number of its expatriate employees, although this would have a detrimental
effect upon its ability to monitor and support its operating businesses.
The Company has the following commitments upcoming during the remainder of
1999 and intends to deal with them as set forth below. However, the manner in
which the Company will deal with its commitments depends upon the consummation
of the Merger. If the Merger is not consummated, then the Company could be
required to resort to extraordinary measures, including making sales of assets
under distressed conditions or ultimately seeking the protection of the
bankruptcy courts. The Company believes that certain of its assets, notably its
interests in PeterStar and ALTEL, are readily saleable, but that, given that
they would be sold under distressed conditions, the Company would be unlikely to
receive full value for either of them. The Company would also be receptive to
entering into a transaction with another company with greater financial
resources as an alternative to having to enter into sales of assets under
distressed conditions or to take other extraordinary measures, but there can be
no assurance that such a transaction can be accomplished.
Travelers Financing. In November 1997, in connection with its acquisition
of additional interests in Technocom, the Company issued $12.32 million in 12%
Series A secured revolving credit notes (the "Series A Notes") and $3.1 million
in 12% Series B revolving credit notes (the "Series B Notes" and, together with
the Series A Notes, the "Revolving Credit Notes"), to The Travelers Insurance
Company and The Travelers Indemnity Company (collectively, the "Travelers
Parties") pursuant to a Revolving Credit Note and Warrant Agreement dated
November 26, 1997 between the Company and the Travelers Parties (the "Revolving
Credit Agreement"). Both the Series A Notes and the Series B Notes are secured
by the Company's inventory and accounts receivable. In addition, the Series A
Notes are secured by 28 of the Technocom shares acquired. In addition to issuing
the Series A and Series B Notes, the Company also issued to the Travelers
Parties a total of 423,000 warrants to purchase Common Stock at $8.625 at any
time up to December 31, 2008 (the "Travelers Warrants").
Pursuant to the terms of the Series A Notes and the Series B Notes, the
Company had the option of making certain "targeted reductions in commitment"
with respect to such Notes commencing in July 1998, or of issuing additional
warrants to purchase shares of the Company's Common Stock (the "Additional
Warrants") at an exercise price of $8.625 each, expiring on December 31, 2008.
The Company elected not to make any such "targeted reductions in commitment"
and, as a result, issued a total of 182,000 Additional Warrants to the Travelers
Parties.
The Company made required amortization payments of $1,000,000 on each of
July 31, 1998 and August 31, 1998, which were applied in reduction of the Series
B Notes. The $1,100,000 balance due under the Series B Notes was payable in full
on September 30, 1998 but, as a result of News America issuing a
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<PAGE> 59
guarantee in respect of the amount due, the maturity date was deferred by the
Travelers Parties to December 31, 1998. Required amortization payments of
$1,000,000 due on each of October 31, 1998 and November 30, 1998 were also
deferred by the Travelers Parties to December 31, 1998, also as a result of News
America issuing guarantees in respect of the amounts due.
On December 31, 1998 the Series A Notes and the amounts deferred under the
Series B Notes would have matured and the balance due would have become payable
in full. Taking into account the amounts deferred, the total that would have
been due under the Series A and Series B Notes as of that date was $13,420,000,
of which $3,100,000 was guaranteed by News America as described above. Prior to
December 31, 1998, the Travelers Parties issued a deferral of the payment of the
amounts due to January 15, 1999. The Travelers Parties then gave the Company a
further series of payment deferrals with respect to the amounts due under the
Series A and Series B Notes, the last of which was given on May 10, 1999 and
deferred payment of the Notes to May 31, 1999. In connection with the Merger,
the Travelers Parties agreed to a restructuring of the Company's obligations to
them, as described below, which included a further deferral to the date of
closing of the Merger or termination of the Merger Agreement. The Company has
continued to make monthly interest payments due on the Notes on a current basis.
Under the terms of the Revolving Credit Agreement, if the Series A and
Series B Notes were not repaid in full when due, the exercise price of all
warrants issued to the holders of the Series A and Series B Notes would have
been reset at $0.01 per share. In addition, in the event of such non-payment, on
December 31, 1998 and on the last day of each succeeding month until the
Revolving Credit Notes were repaid in full, the holders of the Series A Notes
would have been entitled to receive 70,000 additional warrants to purchase
shares of the Company's Common Stock and the holders of the Series B Notes would
have been entitled to receive 32,000 additional warrants to purchase shares of
the Company's Common Stock, in each case at a price of $0.01 per share. All such
warrants, referred to as "Default Warrants", would have had an expiration date
ten years after their respective dates of issue.
The Travelers Parties had expressly reserved their rights to claim all of
the Default Warrants to which they would be entitled under the formula described
above, and also to claim that the exercise price of the Travelers Warrants and
the Additional Warrants had been reset at $0.01 per share. Management of the
Company believes that the Travelers Parties had no basis for such claims and, if
asserted, they would not have been successful.
In connection with the Merger, the Travelers Parties have reached agreement
with MMG on the partial repayment of the Revolving Credit Notes upon the closing
of the Merger and the amendment and restatement of the Revolving Credit
Agreement and the Revolving Credit Notes (as so amended, the "Amended and
Restated Notes") issued thereunder. Under the terms of the agreement between the
Travelers Parties and MMG, the Travelers Parties will be paid an aggregate of
$8,500,000 upon the closing of the Merger, and the balance of $4,920,000 will be
evidenced by the Amended and Restated Notes. In addition, the guarantees of News
America described above will be released. Finally, the Travelers Parties agreed
to exchange all warrants held by them to purchase Common Stock of the Company
for a combination of shares of Common Stock of the Company and warrants to
purchase shares of common stock of MMG. These agreements with the Travelers
Parties are conditioned upon the completion of the Merger.
Obligations under Senior and Convertible Notes. In June 1996 the Company
issued to a limited number of U.S. institutional investors $123,000,000
aggregate principal amount at maturity of Senior Notes and $26,500,000 aggregate
principal amount of Convertible Notes. In March 1998 the Indentures pursuant to
which such Notes were issued were amended pursuant to a Consent Solicitation. In
October 1998 the Senior Notes were exchanged for Exchange Notes of substantially
similar tenor pursuant to an Exchange Offer.
Under the terms of the Senior Note Indenture, approximately $37.0 million
of the proceeds of the sale of the Senior Notes was required to be placed in
escrow and released solely to acquire assets for use in a telecommunications
business. The Company has used approximately $29.1 million to date to fund
purchases of equipment for its operating businesses, by having PLDCA purchase
equipment using the funds in escrow and then reselling the equipment to the
operating businesses, and the balance of such funds remain available for such
purposes (or for the payment of interest on the Senior and Convertible Notes).
However, the
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<PAGE> 60
limitation on the use of proceeds to acquire assets has meant that the Company
has not been able to use the funds in escrow for working capital needs of its
operating businesses, nor to pay for other expenses associated with setting up a
telecommunications network. Furthermore, the Company has found compliance with
the conditions for the release of funds from escrow to be burdensome, in that it
is time consuming and expensive. Finally, the covenants of the Indentures impose
substantial restrictions upon the Company's activities.
Interest in the amount of $1,192,500 is payable semi-annually in cash on
the Convertible Notes. The Company has made all such interest payments to date.
The Senior Notes accreted at the rate of 14% per annum since issue through May
31, 1998 and at the rate of 14.5% since such date through November 30, 1998.
In connection with the Merger, the Company and MMG have entered into
Agreements to Exchange and Consent with substantially all of the holders of the
Company's outstanding Senior Notes and Convertible Notes with respect to the
exchange of such notes for the New MMG Notes upon the closing of the Merger. In
connection with such agreements, the holders of the Senior Notes and the
Convertible Notes have agreed to defer until the date of closing of the Merger
payment of interest on such Notes coming due during the period between the
signing of the Agreements to Exchange and Consent and the date of closing of the
Merger. The implementation of these agreements is conditioned upon the closing
of the Merger.
News Revolving Credit Agreement. On November 30, 1998, News America
entered into a revolving credit agreement with the Company pursuant to which
News America agreed to advance $8.1 million (subsequently increased to $9.55
million) to the Company.
As part of the transactions contemplated by the Merger, News America and
MMG entered into an agreement whereby News America has agreed not to exercise
any rights under its Revolving Credit Agreement dated as of September 30, 1998
with the Company, as amended (the "News Revolving Credit Agreement") until the
Merger is consummated (or the Merger Agreement is terminated), and MMG has
agreed that, on the date that the Merger is consummated, it will cause: (i) the
amount advanced by News America under the News Revolving Credit Agreement,
namely, $6.45 million, to be repaid in full, together with interest at an annual
rate of 10% (in lieu of the 20% rate specified in the News Revolving Credit
Agreement); and (ii) the guarantees given by News America to the Travelers
Parties to be cancelled. This agreement with News America is conditioned upon
the closing of the Merger.
Technocom Put/Call. Under the current terms of put and call agreements
with the minority shareholders of Technocom, the Company may become obligated to
make payments of up to $28.1 million to Plicom Limited ("Plicom") and Elite
International Limited ("Elite"), the two minority shareholders of Technocom. The
Company has put and call agreements with Plicom and Elite which, following the
November 1997 acquisition by the Company of a portion of each of their interests
in Technocom, beneficially own 14.57% and 5.03%, respectively, of the ordinary
shares of Technocom.
As part of the transactions contemplated by the Merger, agreement has been
reached with Plicom and Elite with respect to the put and call arrangements with
Plicom and Elite for their Technocom ordinary shares. Pursuant to such
agreements, upon the closing of the Merger, Plicom shall receive $8,750,000 in
full payment for its remaining 14.57% interest in Technocom and Elite shall
receive $3,844,500 in full payment for its remaining 5.03% interest in
Technocom. These amended agreements with Plicom and Elite are conditioned upon
the closing of the Merger.
Scientific Atlanta. The Company has issued a note to Scientific Atlanta in
respect of amounts due under its supply contract with Scientific Atlanta for the
Satelink network being developed by Teleport-TP, in the amount of $1,204,000,
which comes due on November 20, 1999. The Company anticipates having sufficient
cash on hand at the time in order to be able to make such payment.
Operating Leases, etc. The Company currently leases space at 43 Dover
Street in London, 505 Park Avenue in New York and 67 Broad Street in New York.
No rental is due with respect to 67 Broad Street, New York until July 1999. The
aggregate rental payable for these premises in 1999 is approximately $660,000.
The Company also has acquired an "indefeasible right of use" in a transatlantic
cable for $4.5 million, payable in twelve equal quarterly installments of
$375,000 each, the first of which was paid in June 1999. The Company anticipates
meeting these obligations out of cash on hand.
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<PAGE> 61
The Company's operating businesses all lease space for their operations,
some of which is provided free of charge by their local shareholders. All such
businesses anticipate paying such rentals, where applicable, on a current basis
during 1999.
Other Capital Commitments. As noted above, the Company's operating
businesses have ongoing capital requirements associated with the development of
their businesses. In no case is the Company specifically obligated to provide
capital to its operating businesses; it was so obligated in the past, but all
such obligations have been met. Furthermore, the Company is in a position to
control the level of commitments undertaken by its operating businesses, so as
to minimize the number of times when the Company may be required to step in to
support commitments made by an operating business. At the end of the day, the
Company's ultimate protection lies in being able to slow or, if necessary, stop
for a period of time, the development of the networks of one or more of its
operating businesses. In this respect the Company is closely monitoring the
situation of the one business which is likely to require significant capital
infusion, namely, its Carrier Services Business, to determine the rate at which
that business can be developed, consistent with the need of the Company to meet
its other obligations.
Guarantees and Other Commitments. While the Company has guaranteed
obligations of its subsidiaries in the past, the only guarantee that is
currently outstanding is to Siemens in the amount of $1.4 million relating to
equipment purchased by Technocom.
Subsidiaries of the Company have guaranteed the Senior and Convertible
Notes, and two subsidiaries, BCL and WTC, have guaranteed the Revolving Credit
Notes.
Bridge Loan Agreement. In connection with the Merger Agreement, MMG has
entered into a bridge loan agreement with the Company pursuant to which MMG has
agreed to lend the Company up to $7.0 million, secured by an approximately 58%
interest in Technocom, at an annual interest rate of 10% to fund its ongoing
operations during the period from the execution of the Merger Agreement to the
date that the Merger is consummated or terminated. As of July 31, 1999, the
Company had borrowed $4.0 million under such bridge loan agreement. The Company
expects that such financing, when combined with internally generated cash,
vendor financing and escrow funds, will be sufficient to support the Company's
ongoing operations until the closing of the Merger.
While agreements have been reached with substantially all of the holders of
the Senior Notes and the Convertible Notes, the Travelers Parties, News America
and the minority shareholders of Technocom on a restructuring of the Company's
obligations to such parties, those agreements are conditioned upon the closing
of the Company's merger with MMG. If the merger did not close, PLD would remain
obligated to pay interest on the Senior Notes and the Convertible Notes and
there can be no assurance that the Travelers Parties, News America or the
minority shareholders of Technocom would not demand payment in full of the
Company's obligations to them. The Company would not have sufficient funds on
hand to meet such obligations, and any such events would have a material adverse
effect on the Company and would raise substantial doubt about the Company's
ability to continue as a going concern, and the consolidated condensed financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
EFFECTS OF NEWLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS 133 cannot be applied
retroactively to financial statements of prior periods. At the current time the
Company has not evaluated the impact SFAS 133 will have, if any.
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YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications,
particularly older systems and applications, use a two-digit, rather than a
four-digit, date field to designate a particular year. As a result of the
century change, date-sensitive systems may recognize dates in the twenty-first
century (i.e., after 2000) as dates in the twentieth century (i.e., the
corresponding year commencing with the prefix 19 ). Equally, such systems may
not recognize dates in the twenty-first century at all. All of this could lead
to system failures or miscalculations which could lead to disruption of
operations such as data being lost, an inability to process transactions,
incorrect data being generated and critical deadlines being overlooked. The
impact of these disruptions could be significant.
The Company has conducted, and has caused each of its operating
subsidiaries to conduct a survey of the equipment and software used by them.
The Company's business involves the supply of services. To the very limited
extent that it maintains actual inventory for sale (e.g., cellular telephone
equipment sold to subscribers for its cellular telephony services), it does not
manufacture such inventory itself but resells goods supplied by recognized
manufacturers of such goods.
Its survey has involved testing of equipment as well as contacting the
manufacturers of equipment and producers of software (or review of materials
published by such parties, including websites) to assess such parties' Year 2000
readiness. Such survey has indicated that, except in a few instances, the
equipment and software which it uses are Year 2000 compliant. The Company is
taking steps to upgrade or replace those items which are not compliant. In many
cases the items required to be upgraded or replaced were due to be upgraded or
replaced in any event, so that the Company's exposure has been the acceleration
of already planned expenditures, rather than new or unanticipated expenditures.
The Company expects that essentially all of its upgrading and replacement work,
and any remaining testing required, will be complete by the end of the third
quarter of 1999.
To date, the Company has expended approximately $1.9 million for
remediation efforts and expects that its total remediation costs, including
scheduled upgrades and replacements of approximately $3.1 million, will be
approximately $4.0 million.
Starting in January 1998, all operating businesses were required to use
their best efforts to obtain specific warranties of Year 2000 compliance from
parties with which they contract for products or services thereafter. While
almost all new contracts for products or services entered into since that date
have contained some form of warranty, these have generally been limited to
recovering of direct losses, and not indirect or consequential losses, such as
loss of revenues or profits. In consequence, the actual efficacy of such
warranties may be somewhat limited.
Additionally, all operating businesses have been required to review the
terms under which they have heretofore supplied products and/or services to
third parties. No case has been identified in which any operating business has
specifically guaranteed Year 2000 compliance, and 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.
While there can be no assurances that equipment failures will not occur,
the effect of such failures may be ameliorated by the fact that such equipment
is usually part of a network of facilities and equipment maintained by the
Company. This means that a failure in an individual component will not
necessarily cause a substantial disruption to the network as a whole, because no
individual item is critical to the operation of the network as a whole, and the
network also provides opportunities to by-pass the failure.
The foregoing indicates that, to the extent that its business depends upon
equipment, software, facilities and networks under its control, the Company
believes that, by the year 2000, it will have taken all steps
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reasonably required to ensure that those items are Year 2000 compliant, and that
it has reasonable contingency arrangements to deal with failures.
The Company's principal Year 2000 risks arise from the fact that it is
dependent for the completion of its calls upon a variety of other traffic
carriers who provide interconnection and termination services. Since in many
cases there are a variety of routes over which traffic can be carried, it is
simply not possible for the Company to verify that each entity which could be
involved in providing telecommunications services to its operating subsidiaries
will be Year 2000 compliant. To a large extent, the Company is reliant in these
circumstances on the actions of the other telecommunications operators and
service providers to ensure that their counterparts are Year 2000 compliant.
While the Company believes that the parties providing these services which are
based in the United States and other Western countries are expected to be
substantially Year 2000 compliant, the Year 2000 compliance and readiness of the
Russian and other C.I.S. parties with which the Company's operating businesses
interact appears to be substantially behind that of Western parties. The Company
has been unable to determine with any degree of certainty the extent to which
its interconnect partners in the C.I.S. are non-compliant because those parties
have generally been reluctant to share this information. The recent decision by
the Russian government not to cooperate in Year 2000 compliance exercises,
prompted by the Kosovo crisis, is likely to make it more difficult for the
Company to obtain this information. Nevertheless the Company believes, based on
such reluctance and anecdotal and other evidence, that many of those partners,
particularly in those in the less developed regions of the Russian Federation or
the C.I.S., are substantially non-compliant.
Furthermore, the likelihood that those parties will be able to become Year
2000 compliant seems problematical, given the limited amount of time left for
this, the severe funding constraints faced by those parties, principally as a
result of poor economic conditions in their home countries, and the possible
lack of governmental pressure on those parties.
Accordingly, there is a significant risk that the Company's operating
businesses may experience disruptions in their operations as a result of their
C.I.S. interconnect partners not being able to complete calls or pass traffic to
those businesses. While the Company is unable to predict the extent or duration
of such disruptions, the possibility exists that they could be extensive, and
also take considerable time, perhaps even months, to correct.
An additional risk is the likelihood that the billing systems of those
interconnect partners may also be disrupted, resulting in those partners being
unable to collect from their customers or to make timely settlements with the
Company's operating businesses.
Accordingly, the Company believes that there is a considerable risk that it
will experience disruptions in providing telecommunications services to and from
the countries of the C.I.S. which it serves, and that those disruptions may be
substantial. Given its inability to obtain an accurate assessment of the extent
to which its C.I.S. partners may be non-compliant, it is impossible for the
Company to predict either the extent or the magnitude of those disruptions.
Nevertheless, they have the potential to adversely impact the operations of its
operating subsidiaries, and such adverse impact may be material.
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.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
A Form 8-K, dated May 20, 1999, was filed by the Company in respect of
the signing of the Merger Agreement with MMG.
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<PAGE> 65
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 16, 1999 By: /s/ SIMON EDWARDS
--------------------------------------
Simon Edwards
Senior Vice President, Chief Financial
Officer, Principal Accounting
Officer and Treasurer
64
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLD TELEKOM
INC.'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q AND THE CONSOLIDATED FINANCIAL
STATEMENTS FOR PLD TELEKOM INC. AT AND FOR THE THREE MONTHS AND SIX MONTHS
ENDED JUNE 30, 1999 CONTAINED THEREIN.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,882
<SECURITIES> 0
<RECEIVABLES> 17,517
<ALLOWANCES> 3,423
<INVENTORY> 3,557
<CURRENT-ASSETS> 39,517
<PP&E> 223,074
<DEPRECIATION> 50,903
<TOTAL-ASSETS> 351,160
<CURRENT-LIABILITIES> 76,300
<BONDS> 138,251
0
4
<COMMON> 378
<OTHER-SE> 101,275
<TOTAL-LIABILITY-AND-EQUITY> 351,160
<SALES> 0
<TOTAL-REVENUES> 57,328
<CGS> 0
<TOTAL-COSTS> 17,483
<OTHER-EXPENSES> 42,970
<LOSS-PROVISION> 1,415
<INTEREST-EXPENSE> 13,027
<INCOME-PRETAX> (16,581)
<INCOME-TAX> 4,723
<INCOME-CONTINUING> (23,391)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,391)
<EPS-BASIC> (0.62)
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</TABLE>
