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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 (APRIL 30, 1999)
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PLD TELEKOM INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PLD Telekom Inc.
Consolidated Condensed Balance Sheets as of March 31,
1999 (Unaudited) and December 31, 1998.............. 3
Consolidated Condensed Statements of Operations
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 4
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 5
Notes to Consolidated Condensed Financial Statements
(Unaudited) for the three months ended March 31,
1999................................................ 6
Baltic Communications Limited
Condensed Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998................... 13
Condensed Statements of Operations (Unaudited) for
the three months ended March 31, 1999 and 1998...... 14
Condensed Statements of Cash Flows (Unaudited) for
the three months ended March 31, 1999 and 1998...... 15
Notes to Condensed Financial Statements (Unaudited)
for the three months ended March 31, 1999........... 16
NWE Capital (Cyprus) Ltd.
Consolidated Condensed Balance Sheets as of March 31,
1999 (Unaudited) and December 31, 1998.............. 19
Consolidated Condensed Statements of Operations
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 20
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 21
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three months ended
March 31, 1999...................................... 22
PLD Capital Asset (U.S.) Inc.
Condensed Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998................... 25
Condensed Statements of Operations (Unaudited) for
the three months ended March 31, 1999 and 1998...... 26
Condensed Statements of Cash Flows (Unaudited) for
the three months ended March 31, 1999 and 1998...... 27
Notes to Condensed Financial Statements (Unaudited)
for the three months ended March 31, 1999........... 28
Technocom Limited and Subsidiaries
Consolidated Condensed Balance Sheets as of March 31,
1999 (Unaudited) and December 31, 1998.............. 31
Consolidated Condensed Statements of Operations
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 32
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 33
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three months ended
March 31, 1999...................................... 34
</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 March 31,
1999 (Unaudited) and December 31, 1998.............. 37
Consolidated Condensed Statements of Operations
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 38
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 39
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three months ended
March 31, 1999...................................... 40
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 42
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......... 52
Item 6. Exhibits and Reports on Form 8-K.................. 52
</TABLE>
PLD TELEKOM INC. HEREBY AMENDS ITS QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1999 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON MAY 17, 1999, BY CORRECTING CERTAIN ERRORS CONTAINED IN ITS CONSOLIDATED
CONDENSED BALANCE SHEET AS OF MARCH 31, 1999 AND THE RELATED DISCUSSION IN
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND IN NOTE 1(b) TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS.
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLD TELEKOM INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,683 $ 4,579
Trade receivables, net of allowances...................... 12,867 14,905
Other receivables and prepaids............................ 5,159 4,609
Inventory................................................. 4,113 4,152
Due from related parties.................................. 8,684 9,152
----------- ---------
Total current assets.............................. 36,506 37,397
Escrow funds................................................ 16,419 14,908
Property and equipment, net................................. 169,647 168,937
Telecommunications licenses, net............................ 74,606 77,359
Due from related parties.................................... 2,011 2,011
Other investments........................................... 5,350 5,183
Goodwill, net............................................... 35,866 36,368
Other assets................................................ 9,509 9,945
----------- ---------
Total assets...................................... $ 349,914 $ 352,108
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... 20,624 18,124
Accounts payable.......................................... 10,681 10,278
Accrued liabilities....................................... 5,078 3,281
Taxes payable............................................. 5,148 3,664
Due to related parties.................................... 4,172 4,639
Deferred revenues......................................... 2,422 2,869
Customer deposits......................................... 4,162 4,271
Other current liabilities................................. 13,443 6,270
----------- ---------
Total current liabilities......................... 65,730 53,396
Long-term debt.............................................. 149,384 151,814
Minority interest........................................... 22,600 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................................ 244,537 244,419
Accumulated deficit....................................... (132,719) (119,924)
----------- ---------
Total shareholders' equity........................ 112,200 124,877
----------- ---------
Total liabilities and shareholders' equity........ $ 349,914 $ 352,108
=========== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 5
PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Telecommunications........................................ $ 28,716 $ 34,719
Finance lease income...................................... 638 447
----------- -----------
29,354 35,166
Direct costs................................................ 8,403 10,796
----------- -----------
Gross profit........................................... 20,951 24,370
Operating expenses:
General and administrative................................ 13,154 9,700
Depreciation.............................................. 4,829 3,099
Amortization.............................................. 3,319 2,692
Taxes other than income taxes............................. 1,525 1,680
----------- -----------
22,827 17,171
----------- -----------
Operating (loss)/income................................ (1,876) 7,199
Other income/(expense):
Share of loss from equity investments..................... (341) (210)
Interest and other income................................. 259 871
Interest expense.......................................... (6,229) (5,190)
Amortization of deferred financing costs.................. (299) (401)
Foreign exchange loss..................................... (454) (116)
Loss on disposal of investments and property and
equipment.............................................. (33) --
----------- -----------
(Loss)/earnings before income taxes and minority
interest.............................................. (8,973) 2,153
Income taxes.............................................. 2,643 2,997
----------- -----------
Loss before minority interest.......................... (11,616) (844)
Minority interest........................................... 1,179 3,665
----------- -----------
Net loss............................................... $ (12,795) $ (4,509)
=========== ===========
Net loss per common share:
Basic..................................................... $ (0.34) $ (0.14)
=========== ===========
Diluted................................................... $ (0.34) $ (0.14)
=========== ===========
Weighted average common shares outstanding.................. 37,846,789 33,324,290
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 6
PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(12,795) $(4,509)
Adjustments to reconcile net loss to net cash provided
by/(used in) operating activities:
Depreciation and amortization.......................... 8,447 6,192
Share of loss of equity investments.................... 341 210
Accrued interest on senior discount notes.............. 4,813 3,964
Deferred revenue....................................... (447) (811)
Minority interest...................................... 1,179 3,665
Other.................................................. 118 --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Decrease/(increase) in trade receivables, net of
allowances.......................................... 2,038 (96)
Increase in other receivables and prepaids........... (550) (1,556)
Decrease/(increase) in inventory..................... 39 (176)
Change in due from or to related parties............. 1 (720)
Increase/(decrease) in accounts payable, accrued
liabilities, customer deposits, taxes payable and
other current liabilities........................... 5,022 (668)
-------- -------
Net cash provided by operating activities......... 8,206 5,495
Cash flows from investing activities:
Capital expenditures...................................... (5,539) (5,894)
Escrow funds.............................................. (1,511) (449)
Investments and other assets.............................. (435) 1,164
-------- -------
Net cash used in investing activities............. (7,485) (5,179)
Cash flows from financing activities:
Loans from shareholders................................... 2,500 --
Long-term debt repayments................................. (1,517) (427)
Cash dividends paid to minority shareholders.............. (600) --
-------- -------
Net cash provided by/(used in) financing
activities...................................... 383 (427)
-------- -------
Decrease in cash and cash equivalents....................... 1,104 (111)
Cash and cash equivalents, beginning of period.............. 4,579 17,256
-------- -------
Cash and cash equivalents, end of period.................... $ 5,683 $17,145
======== =======
Supplemental disclosures:
Non-cash investing and financing activities:
Supplier financing................................... $ -- $ 1,363
======== =======
Interest paid............................................. $ 703 $ 532
======== =======
Income taxes paid......................................... $ 1,925 $ 2,885
======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 7
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 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
financial statements include all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation. Certain information and footnote
disclosures generally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Results for the interim
period are not necessarily indicative of the results for a full year. These
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
Going Concern
The Company has suffered recurring losses and has a working capital
deficiency. Additionally, the Company has approximately $13.4 million of Series
A and Series B revolving credit notes due to two related holders (hereinafter
defined as the "Travelers Parties") outstanding. $1.1 million of these notes
were due to be repaid by September 30, 1998 and the remaining approximately
$12.3 million of the notes 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 these notes, the last of which was given on
May 10, 1999 and defers payment of the notes to May 31, 1999. The Company does
not presently have sufficient funds on hand to make such payments and management
is actively engaged in pursuing ways to settle the Company's obligations to the
Travelers Parties. In this context, the Company is currently exploring a range
of financing alternatives. Historically, sources of financing have included
private placements of common and preferred shares and debt, asset and investment
sales, shareholder loans and bank lines of credit supported by shareholder
guarantees. While management believes that, as long as progress towards
settlement of such obligations is being made, the Travelers Parties will be
willing to agree to additional payment deferrals, there can be no assurance that
they will not demand payment in full of the Series A and Series B notes. The
Company's failure to make payment in full could result in a cross-default under
and acceleration of the Company's Senior Discount Notes and Convertible
Subordinated Notes, which have an aggregate principal amount of $149.5 million.
This in turn could require the Company to resort to extraordinary measures,
including making sales of assets under distressed conditions or ultimately
seeking the protection of the bankruptcy courts.
In addition, should the minority shareholders in Technocom, who have the
right to put their Technocom shares to the Company from mid-1999 onwards, elect
to exercise these rights, then the Company's inability to meet its obligations
would be exacerbated. The Company is engaged in efforts to address this issue,
including through reaching some accommodation with the minority shareholders
regarding their put options. In the event that no solution can be found, then
this in turn could require the Company to resort to extraordinary measures as
outlined above.
These factors 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 19,701,527 and
6
<PAGE> 8
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
12,484,380 at March 31, 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 months ended March 31, 1999
comprehensive loss was equal to consolidated net loss reported on the
consolidated 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 financial statements.
(e) Reclassifications. Certain reclassifications have been made to the
prior year's consolidated financial statements to conform to the current year's
presentation.
(2) FUTURE ACTIVITIES
The Company's telecommunications businesses are developing rapidly in an
emerging economy which, by its nature, has an uncertain economic, political and
regulatory environment. The general risks of operating businesses in the former
Soviet Union include the possibility for rapid change in government policies,
economic conditions, the tax regime and foreign currency regulations. In
addition, Teleport-TP's satellite-based long distance network is at an early
stage of its 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.
(3) RESTRICTED CASH
Pursuant to the terms of the Company's $149.5 million private placement
completed on June 12, 1996, $16.4 million remained in escrow on March 31, 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 Discount Notes.
(4) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Under the terms of the Company's $123.0 million Senior Discount 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 result,
the interest rate on the Senior Notes increased from 14% to 14.5% as of June 1,
1998, and will remain at 14.5% until the end of the semi-annual interest period
in which such an offering is completed. The first semi-annual cash payment of
interest on the Company's 14% Senior Discount Notes, amounting to
7
<PAGE> 9
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
$8.9 million, will come due on June 1, 1999. The Company currently expects to
pay most, if not all, of this out of funds in the escrow account established in
respect of these notes.
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 Insurance Company and
The Travelers Indemnity Company (collectively, 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 million on each of July 31 and August 31, and a
final payment of $1.1 million on September 30. In relation to the Series A
Notes, the Company was obliged to make a required amortization payment of $1
million on October 31, a further payment of $1 million on November 30 and a
final payment of $10.32 million on December 31, 1998.
The Company made the required payments due with respect to the Series B
Notes on July 31 and August 31 and by agreement with the holders of the Series B
Notes, the final payment of $1.1 million due on September 30 was deferred to
December 31, 1998. Payment of this amount was guaranteed by News, 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
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.
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, 1998, $0.5
million on August 31, 1998, $1.0 million on September 30, 1998, $1.5 million on
October 31, 1998 and $1.5 million on November 30, which resulted in the issuance
of a total of 182,000 warrants to Travelers 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 matured and the balance due became
payable in full. Taking into account the amounts deferred, the total due under
the Series A and Series B Notes as of that date was $13,420,000, of which
$3,100,000 has been guaranteed by News as described above.
Under the terms of the Revolving Credit Agreement, if the Series A and
Series B Notes are not repaid in full when due, the exercise price of all
warrants issued to the holders of the Series A and Series B Notes are reset at
$0.01 per share. In addition, on December 31, 1998 and on the last day of each
succeeding month until the Revolving Credit Notes have been repaid in full, the
holders of the Series A Notes are entitled to receive 70,000 additional warrants
to purchase shares of the Company's Common Stock and the holders of the Series B
Notes are 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", are to have an expiration date ten
years after their respective dates of issue.
The Travelers Parties have given the Company a series of payment deferrals
since December 31, 1998 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 defers payment
of the notes to May 31, 1999. At the same time, the Travelers Parties have
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 has been reset at $0.01 per share.
8
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PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(5) CONTINGENCIES
(a) Under applicable Russian currency control regulations, the Company's
Russian subsidiaries are required to have certain licenses from the Central Bank
of Russia to enable them to make payments of and accept receipts of hard
currency. While PeterStar, 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 March 31, 1999, PeterStar has commitments of approximately $1.5
million related to the acquisition of telecommunications equipment. The
PeterStar supply contracts provide for financing of the amount 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 $1.3 million for the remainder of their terms.
(6) 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
MARCH 31,
-------------------------
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
PeterStar................................................. $ 13,905 $17,469
Technocom................................................. 4,384 5,824
ALTEL..................................................... 7,921 9,549
BCL....................................................... 2,421 2,324
Other..................................................... 723 --
-------- -------
Total revenues.................................... $ 29,354 $35,166
======== =======
</TABLE>
9
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PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Earnings/(loss) before income taxes and minority interest:
PeterStar................................................. $ 3,599 $ 7,358
Technocom................................................. (4,273) 25
ALTEL..................................................... 1,526 3,346
BCL....................................................... 173 244
Corporate................................................. (10,343) (9,008)
Other..................................................... 345 188
-------- -------
Total earnings/(loss) before income taxes and
minority interest............................... $ (8,973) $ 2,153
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Total assets:
PeterStar................................................. $132,587 $132,814
Technocom................................................. 104,280 106,055
ALTEL..................................................... 58,769 59,008
BCL....................................................... 7,162 6,883
Corporate................................................. 35,297 36,491
Other..................................................... 11,819 10,857
-------- --------
Total assets...................................... $349,914 $352,108
======== ========
</TABLE>
A summary of the Company's operations by geographic region is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Russia.................................................... $20,794 $25,617
Kazakhstan................................................ 7,921 9,549
Other..................................................... 639 --
------- -------
Total revenues.................................... $29,354 $35,166
======= =======
Earnings/(loss) before income taxes and minority interest:
Russia.................................................... $ (597) $ 7,627
Kazakhstan................................................ 1,526 3,346
North America............................................. (9,602) (8,820)
Other..................................................... (300) --
------- -------
Total earnings/(loss) before income taxes and
minority interest............................... $(8,973) $ 2,153
======= =======
</TABLE>
10
<PAGE> 12
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Total assets:
Russia.................................................... $246,526 $249,658
Kazakhstan................................................ 58,769 59,008
North America............................................. 40,213 38,793
Other..................................................... 4,406 4,649
-------- --------
Total assets...................................... $349,914 $352,108
======== ========
</TABLE>
11
<PAGE> 13
BALTIC COMMUNICATIONS LIMITED
CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
12
<PAGE> 14
BALTIC COMMUNICATIONS LIMITED
BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 210,412 $ 266,076
Trade receivables, net.................................... 1,195,590 995,919
Due from related parties.................................. 726,715 531,998
Prepayments............................................... 82,088 80,800
Prepaid taxes............................................. 99,375 171,759
Inventory................................................. 93,351 76,025
---------- ----------
Total current assets.............................. 2,407,531 2,122,577
Property and equipment, net................................. 4,659,983 4,668,005
Investments................................................. 8,000 8,000
Intangible assets, net...................................... 86,849 84,052
---------- ----------
Total assets...................................... $7,162,363 $6,882,634
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... 1,710,345 1,510,134
Accrued liabilities....................................... 131,549 87,177
Deferred revenues......................................... 3,841 4,019
Taxes payable............................................. 78,115 100,211
Deferred income tax liability............................. -- 30,706
Due to related parties.................................... 940,826 932,646
Customer deposits......................................... 26,234 26,234
---------- ----------
Total current liabilities......................... 2,890,910 2,691,127
---------- ----------
Shareholder's equity:
Common stock.............................................. 2,183,000 2,183,000
Retained earnings......................................... 2,088,453 2,008,507
---------- ----------
Total shareholder's equity........................ 4,271,453 4,191,507
---------- ----------
Total liabilities and shareholder's equity........ $7,162,363 $6,882,634
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
13
<PAGE> 15
BALTIC COMMUNICATIONS LIMITED
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Telecommunications revenues............................... $2,375,629 $2,317,186
Other non-telecommunications revenues..................... 45,531 7,237
---------- ----------
Total revenues............................................ 2,421,160 2,324,423
Direct costs................................................ 1,353,933 1,144,386
---------- ----------
Gross profit...................................... 1,067,227 1,180,037
---------- ----------
Operating expenses:
General and administrative................................ 603,988 721,468
Depreciation.............................................. 149,840 143,927
Amortisation.............................................. 7,895 3,275
Taxes other than income taxes............................. 51,382 118,071
---------- ----------
Total operating expenses.......................... 813,105 986,741
---------- ----------
Operating income.................................. 254,122 193,296
Other income/(expense):
Interest income........................................... 586 528
Foreign exchange loss..................................... (82,044) 50,072
Loss on disposal of property and equipment................ -- --
---------- ----------
Income before income taxes........................ 172,664 243,896
Income taxes................................................ 92,718 62,561
---------- ----------
Net income........................................ $ 79,946 $ 181,335
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
14
<PAGE> 16
BALTIC COMMUNICATIONS LIMITED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 79,946 $ 181,335
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 149,840 143,927
Amortisation.............................................. 7,895 3,275
Loss on disposal of property and equipment................ 56 18
Changes in operating assets and liabilities:
Increase in trade receivables............................. (199,671) (242,603)
(Increase)/decrease in prepayments........................ (1,288) 8,133
Increase in inventory..................................... (17,326) (45,692)
Decrease/(increase) in prepaid taxes...................... 72,384 (88,264)
Increase in due from/to related parties................... (186,537) (254,288)
Decrease in deferred revenues............................. (178) (119)
Decrease in customer deposits............................. -- (500)
Decrease in taxes payable................................. (22,096) (20,558)
Increase in accrued liabilities........................... 44,372 19,794
Increase in deferred income tax liability................. (30,706) --
Increase in accounts payable.............................. 200,211 412,268
--------- ---------
Net cash provided by operating activities.............. 96,902 116,726
--------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (152,566) (97,528)
Proceeds on disposal of fixed assets...................... -- --
--------- ---------
Net cash used in investing activities.................. (152,566) (97,528)
--------- ---------
Increase/(decrease) in cash............................ (55,664) 19,198
Cash at beginning of period................................. 266,076 241,949
--------- ---------
Cash at end of period....................................... $ 210,412 $ 261,147
========= =========
Supplementary disclosures:
Income tax paid............................................. $ 13,740 $ 177,575
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
15
<PAGE> 17
BALTIC COMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 financial statements include all adjustments
necessary for a fair presentation. Certain information and footnote disclosures
generally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules and regulations. Results for the interim period are not necessarily
indicative of the results for a full year. These condensed financial statements
should be read in conjunction with the financial statements and notes thereto
for the fiscal year ended December 31, 1998.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
The Company's parent is PLD Telekom Inc. ("PLD"). The parent's investment
in the Company has been pushed down into the Company's financial statements and
allocated to fixed assets. The Company's balance sheet at December 31, 1998 and
at March 31, 1999 reflects the effect of this push down accounting treatment.
(2) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
Baltic Communications Limited (the "Company") 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. These licenses are generally
renewed on application. Grounds for termination of licenses are broad and
subjective and there is little precedent upon which to determine the practical
likelihood of termination.
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 a stabilization of the economies of the former Soviet Union, 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 Contingencies
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
16
<PAGE> 18
BALTIC COMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
conflicting. Accordingly few precedents with regard to issues have been
established. Often, differing opinions 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 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 and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of the debt under the terms of the related indentures. 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 the indebtedness to the Travelers Parties which
is currently due on May 31, 1999. While management of PLD believe that, as long
as progress towards settlement of such obligations is being made, the holders of
such debt will agree to payment deferrals beyond the present due date of May 31,
1999, there can be no assurance that the Travelers Parties will grant such
deferrals or that they will not demand payment in full of the obligations. PLD's
failure to make payment in full could result in a claim being made against the
Company under its guaranty and a cross-default under and acceleration of the
senior discount notes and convertible subordinated notes for which the Company
also serves as a guarantor. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
(4) COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive income
was equal to net income reported on the 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 financial statements.
17
<PAGE> 19
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
18
<PAGE> 20
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, 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................................. $ 3,913 $ 2,816
Trade receivables, net of allowances...................... 9,354 11,260
Other receivables and prepaids............................ 1,540 2,024
Inventory................................................. 4,019 4,076
-------- --------
Total current assets.............................. 18,826 20,176
Property and equipment, net................................. 108,075 106,542
Telecommunications licenses, net............................ 36,390 37,663
Other receivables........................................... 2,012 2,012
Goodwill, net............................................... 1,311 1,365
Other assets................................................ 1,427 410
-------- --------
Total assets...................................... $168,041 $168,168
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... 1,819 1,980
Accrued liabilities....................................... 4,834 2,640
Advances from other group companies....................... 33,058 33,988
Due to related parties.................................... 386 462
Customer deposits and advances............................ 6,550 7,109
Current portion of long term debt......................... 2,556 3,479
-------- --------
Total current liabilities......................... 49,203 49,658
-------- --------
Long-term debt.............................................. 6,831 7,165
Due to related parties...................................... 3,910 4,669
Minority interest........................................... 28,959 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....................................... 8,333 7,758
-------- --------
Total shareholder's equity........................ 79,138 78,563
-------- --------
Total liabilities and shareholder's equity........ $168,041 $168,168
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
19
<PAGE> 21
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Telecommunications revenue.................................. $21,909 $27,100
Direct costs................................................ 4,165 7,445
------- -------
Gross profit...................................... 17,744 19,655
Operating expenses:
General and administrative................................ 7,034 5,246
Management fees........................................... 344 400
Depreciation.............................................. 3,334 2,075
Amortization.............................................. 1,326 1,234
Taxes other than income taxes............................. 730 925
------- -------
Total operating expenses.......................... 12,768 9,880
------- -------
Operating income.................................. 4,976 9,775
Other income/(expense):
Interest and other income................................. 54 536
Interest on long-term debt................................ (220) (229)
Foreign exchange loss..................................... (395) (110)
------- -------
Income before income taxes and minority
interest......................................... 4,415 9,972
Income taxes................................................ 2,394 2,510
------- -------
Income before minority interest................... 2,021 7,462
Minority interest........................................... 1,446 3,735
------- -------
Net income........................................ $ 575 $ 3,727
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
20
<PAGE> 22
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 575 $ 3,727
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 4,660 3,309
Minority interest...................................... 1,446 3,735
Changes in operating assets and liabilities:
Increase in accounts receivable...................... 1,906 709
Decrease/(increase) in other receivables and
prepaids............................................ 484 (2,437)
Decrease/(increase) in inventory..................... 57 (105)
Change in amounts due from and to related parties.... (76) 203
Decrease in customer deposits and advances........... (559) (632)
Increase in accounts payable and accrued
liabilities......................................... 2,033 2,272
Decrease in intercompany advances.................... (78) --
------- -------
Net cash provided by operating activities......... 10,448 10,781
Cash flows from investing activities:
Capital expenditures...................................... (4,867) (4,459)
Other investments and assets.............................. (1,016) (109)
------- -------
Net cash used in investing activities............. (5,883) (4,568)
Cash flows from financing activities:
Long-term debt............................................ (1,257) (2,111)
Dividends................................................. (600) --
Advances from group companies............................. (1,611) (1,461)
------- -------
Net cash provided by/(used in) financing
activities....................................... (3,468) (3,572)
------- -------
Increase in cash and cash equivalents............. 1,097 2,641
Cash and cash equivalents at beginning of year.............. 2,816 7,849
------- -------
Cash and cash equivalents at end of year.................... $ 3,913 $10,490
======= =======
Supplemental Disclosures:
Non-cash investing and financing activities:
Purchase of equipment with advances from PLD Telekom
Inc. and under long-term contracts.................... $ -- $ 1,363
======= =======
Interest paid............................................. $ 421 $ 19
======= =======
Income taxes paid......................................... $ 1,911 $ 2,784
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
21
<PAGE> 23
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 financial statements include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation.
Certain information and footnote disclosures generally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. Results for the interim periods are not necessarily indicative of
the results for a full year. These consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the fiscal year ended December 31, 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 sheet at December 31, 1998 and at
March 31, 1999 reflects the effect of this push down accounting treatment. The
costs of the telecommunications licenses are amortized on a straight line basis
over the terms of the related licenses. Goodwill is amortized on a straight line
basis over 20 years.
(2) FUTURE ACTIVITIES
The Company's telecommunications businesses are developing rapidly in an
emerging economy which, by its nature, has an uncertain economic, political and
regulatory environment. The general risks of operating businesses in the former
Soviet Union include the possibility for rapid change in government policies,
economic conditions, the tax regime and foreign currency regulations.
Ultimate recoverability of the Company's investments in its subsidiaries,
PeterStar Company Limited ("PeterStar"), Wireless Technology Corporations
Limited ("WTC") and C.P.Y. Yellow Pages Limited ("Yellow Pages"), is dependent
upon each of these subsidiaries achieving and maintaining profitability, which
is dependent to a certain extent on the stabilization of the economies of the
former Soviet Union, the ability to maintain the necessary telecommunications
licenses and the ability to obtain adequate financing to meet capital
commitments.
(3) RECENT DEVELOPMENTS
On August 14, 1998, PLD acquired an additional 11% of PeterStar through its
acquisition of 100% of the outstanding stock of PLD Holdings Ltd., a Bermudan
company, from Cable 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.
22
<PAGE> 24
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(b) Purchase Commitments
At March 31, 1999, PeterStar has commitments of approximately $1,500,000
related to the acquisition of telecommunications equipment. The PeterStar supply
contract provides for financing of the entire amount over approximately five
years.
(c) Management Services
On January 1, 1998, PLD entered into 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 March
31, 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) Guarantee
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of the debt under the terms of the related indentures.
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. While management
of PLD believe that, as long as progress towards settlement of such obligations
is being made, the holders of such debt will agree to payment deferrals beyond
the present due date of May 31, 1999, there can be no assurance that the holders
will grant such deferrals or that they will not demand payment in full of the
obligations. PLD's failure to make payment in full could result in a
cross-default under and acceleration of the senior discount notes and
convertible subordinated notes for which the Company serves as a guarantor.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
(5) COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive income
was equal to consolidated net income reported on the consolidated 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 financial statements.
23
<PAGE> 25
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
</TABLE>
24
<PAGE> 26
PLD CAPITAL ASSET (U.S.) INC.
BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Assets:
Current:
Cash and cash equivalents.............................. $ 10 $ 10
Other receivables and prepaids......................... 228 228
Assets held for resale................................. 3,949 3,949
Due from related parties -- installment sales
contracts............................................. 4,875 6,408
------- -------
9,062 10,595
Escrow funds.............................................. 1,872 528
Due from related parties -- installment sales contracts... 3,948 3,806
------- -------
14,882 $14,929
======= =======
Liabilities and Shareholder's Equity:
Current liabilities:
Accounts payable and accrued liabilities............... 1,831 1,977
Due to related parties................................. 4,989 5,035
------- -------
6,820 7,012
Commitments and contingencies
Shareholder's equity:
Capital stock:
Additional paid-in capital............................. 6,641 6,641
Retained earnings......................................... 1,421 1,276
------- -------
Total shareholder's equity................................ 8,062 7,917
------- -------
$14,882 $14,929
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
25
<PAGE> 27
PLD CAPITAL ASSET (U.S.) INC.
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenue:
Interest income........................................... $223 $210
Operating Expenses:
General and administrative................................ -- --
---- ----
Income before taxes......................................... 223 210
Income taxes................................................ 78 9
---- ----
Net income.................................................. $145 $201
==== ====
</TABLE>
See accompanying notes to condensed financial statements.
26
<PAGE> 28
PLD CAPITAL ASSET (U.S.) INC.
STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------- -----
<S> <C> <C>
Cash provided by/(used in):
Operations:
Net income............................................. $ 145 $ 201
Non-cash items:
Change in due from or due to related parties, net.... 1,345 (209)
(Decrease)/increase in accounts payable and accrued
liabilities......................................... (146) 8
------- -----
1,344 --
Investing:
Escrow................................................. (1,344) --
------- -----
(1,344) --
------- -----
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
======= =====
</TABLE>
See accompanying notes to condensed financial statements.
27
<PAGE> 29
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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 financial statements include all adjustments
necessary for a fair presentation. Certain information and footnote disclosures
generally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules and regulations. Results for the interim period are not necessarily
indicative of the results for a full year. These 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 Commonwealth of
Independent States ("C.I.S."). 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 months ended March
31, 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 dissolve PLDAL.
Ultimate recoverability of the Company's investments is dependent upon each
of PLD's subsidiaries and affiliates, with which it enters 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) In June 1996, PLD issued senior discount notes and convertible
subordinated notes with an aggregate principal amount of $149.5 million. The
Company is a guarantor of the debt under the terms of the related indentures.
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. While management
of PLD believe that, as long as progress towards settlement of such obligations
is being made, the holders of such debt will agree to payment deferrals beyond
the present due date of May 31, 1999, there can be no assurance that the holders
will grant such deferrals or that they will not demand payment in full of the
obligations. PLD's failure to make payment in full could result in a
cross-default under and acceleration of the senior discount notes and
convertible subordinated notes for which the Company serves as a guarantor.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
(b) As of March 31, 1999, the Company had entered into purchase commitments
with unaffiliated companies relating to telecommunications equipment amounting
to $2,051,000.
28
<PAGE> 30
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(4) COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive income
was equal to net income reported on the 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 financial statements.
29
<PAGE> 31
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
30
<PAGE> 32
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, 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................................. $ 409 $ 390
Trade receivables, net of allowances...................... 2,317 2,394
Other receivables......................................... 2,028 1,880
Due from related parties.................................. 8,256 8,162
-------- --------
TOTAL CURRENT ASSETS.............................. 13,010 12,826
Property and equipment, net................................. 47,553 48,408
Telecommunications licenses, net............................ 30,558 31,904
Due from related parties.................................... 2,135 1,752
Goodwill, net............................................... 10,433 10,572
Other investments and assets, net........................... 591 593
-------- --------
TOTAL ASSETS...................................... $104,280 $106,055
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... 2,977 2,915
Accrued liabilities....................................... 1,177 757
Taxes payable............................................. 4,551 3,571
Due to related parties.................................... 22,897 21,621
Other current liabilities................................. 777 759
-------- --------
TOTAL CURRENT LIABILITIES......................... 32,379 29,623
Other liabilities........................................... -- --
Due to related parties...................................... 8,000 8,000
Supplier financing.......................................... 1,819 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(pound)1 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....................................... (24,748) (20,466)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 62,082 66,364
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $104,280 $106,055
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements
31
<PAGE> 33
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1999 1998
------- ------
<S> <C> <C>
REVENUES:
Telecommunications........................................ $ 3,958 $5,377
Finance lease income...................................... 426 447
------- ------
TOTAL REVENUES.................................... 4,384 5,824
DIRECT COSTS................................................ 2,520 2,178
------- ------
GROSS PROFIT................................................ 1,864 3,646
OPERATING EXPENSES:
General and administrative................................ 2,441 1,996
Depreciation.............................................. 1,114 854
Amortization.............................................. 1,486 65
Taxes other than income taxes............................. 663 434
------- ------
TOTAL OPERATING EXPENSES.......................... 5,704 3,349
OPERATING LOSS.............................................. (3,840) 297
OTHER INCOME/(EXPENSE):
Share of loss from equity investments..................... (137) (210)
Interest income........................................... -- 81
Interest expense.......................................... (362) (143)
Foreign exchange gain..................................... 66 --
------- ------
LOSS BEFORE TAXATION AND MINORITY INTEREST.................. (4,273) 25
Income taxes................................................ (9) (377)
------- ------
LOSS BEFORE MINORITY INTEREST..................... (4,282) (352)
Minority interest........................................... -- --
------- ------
NET LOSS.................................................... $(4,282) $ (352)
======= ======
</TABLE>
See accompanying notes to consolidated condensed financial statements
32
<PAGE> 34
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(4,282) $ (352)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 2,600 919
Share of loss of equity investments....................... 137 210
Changes in operating assets and liabilities:
Decrease/(increase) in trade receivables.................. 77 (735)
(Increase)/decrease in other receivables.................. (148) 772
Changes in due from/to related parties.................... (58) 1,813
Increase/(decrease) in accounts payable and deferred
taxes.................................................. 62 (797)
Increase/(decrease) in accrued liabilities................ 420 (711)
Increase/(decrease) in other liabilities.................. 749 (48)
------- ------
CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES............. (443) 1,071
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (251) (782)
Other investments and assets................................ (7) (148)
------- ------
CASH USED IN INVESTING ACTIVITIES........................... (258) (930)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on long-term indebtedness........................... 720 (427)
------- ------
CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES............. 720 (427)
Decrease in cash and cash equivalents....................... 19 (286)
Cash and cash equivalents at beginning of period............ 390 4,671
------- ------
CASH AT END OF PERIOD....................................... $ 409 $4,385
======= ======
Supplemental disclosures:
Interest paid............................................... $ -- $ 50
======= ======
Income taxes paid........................................... $ -- $ --
======= ======
</TABLE>
See accompanying notes to consolidated condensed financial statements
33
<PAGE> 35
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 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 financial statements include all
adjustments necessary for a fair presentation. Certain information and footnote
disclosures generally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. Results for the interim period are
not necessarily indicative of the results for a full year. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
December 31, 1998.
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
The Company's parent is PLD Telekom Inc. ("PLD" 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
sheet at December 31, 1998 and at March 31, 1999 reflects the effect of this
push down accounting treatment.
The costs of the telecommunications licenses are amortised on a straight
line basis over the terms of the related licenses. Goodwill is amortised on a
straight line basis over 20 years.
(2) BUSINESS OPERATIONS AND FUTURE ACTIVITIES
The Company was incorporated under the laws of the Republic of Ireland in
January 1992. The Company's principal activity is the provision of
telecommunications services in Russia. The Company conducts its business
activities directly and through a number of subsidiaries and other affiliates,
most of which are incorporated in Russia. The Company established a registered
foreign representative office in Russia in October 1995.
The Company operates in an emerging economy which, by its nature, has an
uncertain economic, political, and regulatory environment. The general risks of
operating businesses in the former Soviet Union include the possibilities of
rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations. In addition, its satellite-based long distance
network is at an early stage of its development and operation.
Ultimate recoverability of the Company's investments is dependent upon each
of the subsidiaries and affiliates achieving and maintaining profitability,
which is dependent to a certain extent on a stabilization of the economies of
the former Soviet Union, the ability to maintain the necessary
telecommunications licenses and the ability to obtain adequate financing to meet
capital commitments.
(3) COMMITMENTS AND CONTINGENCIES
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
collateralee of the 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. While management
of PLD believe that, as long as progress towards settlement of such obligations
is being made, the holders of such debt will agree to payment deferrals beyond
the present due date of May 31, 1999, there can be no assurance that the holders
will grant such deferrals or
34
<PAGE> 36
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
that they will not demand payment in full of the obligations. PLD's failure to
make payment in full could result in a cross-default under and acceleration of
the senior discount notes and convertible subordinated notes. These factors
raise substantial doubt about the Parent's ability to continue as a going
concern. The Company is dependent on the continued financial support of its
Parent to finance its ongoing operations. Both the Parent and the Company have
suffered recurring losses and working capital deficiencies. Should the Parent
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 seek the protection of the bankruptcy courts. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company's Russian subsidiary, Teleport-TP, currently utilizes capacity
on three Intelsat satellites for the provision of its international and domestic
long distance services, pursuant to rolling fifteen year contracts with
Intelsat. These agreements require quarterly payments of $1.3 million for the
remainder of their terms.
As of March 31, 1999, the Company has a commitment to pay PLD $8,000,000 on
April 20, 2001 in accordance with the terms of an agreement dated April 21, 1998
between the Company and PLD. In addition, according to the terms of the
agreement interest accrues at the rate of 14% p.a. and will be payable annually
in arrears on the anniversary of the agreement date.
The Company and certain of its Russian subsidiaries have accrued profits
and other taxes based on interpretations of the law which may ultimately be
disputed by the Russian taxation authorities. The exposure to additional profits
and other taxes, fines and penalties, in the opinion of the Company's directors,
will not have a material adverse effect on the financial position or results of
operations of the Company.
There are no material pending legal proceedings to which the Company or any
of its property is subject.
(4) COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive loss was
equal to consolidated net loss reported on the consolidated 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 financial statements.
35
<PAGE> 37
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
36
<PAGE> 38
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, 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................................. $ 1,965 $ 1,642
Trade receivables, net of allowance....................... 3,017 3,811
Inventory................................................. 1,641 1,495
Prepaid expenses and other current assets................. 1,567 733
------- -------
Total current assets.............................. 8,190 7,681
Property and equipment, net................................. 29,617 29,746
Telecommunications license, net............................. 20,962 21,581
------- -------
Total assets...................................... $58,769 $59,008
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. 1,686 939
Due to related parties.................................... 487 602
Customer deposits and advances............................ 4,136 4,244
------- -------
Total current liabilities......................... 6,309 5,785
------- -------
Commitments and contingencies
Minority interest........................................... 5,977 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....................................... (4,420) (3,782)
------- -------
Total shareholder's equity........................ 46,483 47,121
------- -------
Total liabilities and shareholder's equity........ $58,769 $59,008
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
37
<PAGE> 39
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Telecommunications revenues................................. $7,921 $9,549
Direct costs................................................ 1,667 1,948
------ ------
Gross profit................................................ 6,254 7,601
Operating expenses:
General and administrative................................ 2,313 2,313
Management fees........................................... 344 400
Depreciation and amortization............................. 1,870 1,388
Taxes other than income tax............................... 84 135
------ ------
Total operating expenses.......................... 4,611 4,236
------ ------
Operating income............................................ 1,643 3,365
Other income/(expense):
Interest and other income................................. 37 91
Foreign exchange loss..................................... (154) (110)
------ ------
Net income before income tax and minority interest..... 1,526 3,346
Income tax.................................................. 1,089 1,346
------ ------
Net income before minority interest............... 437 2,000
Minority interest........................................... 475 1,257
------ ------
Net (loss)/income........................................... $ (38) $ 743
====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
38
<PAGE> 40
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows provided by operating activities:
Net (loss)/income......................................... $ (38) $ 743
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,870 1,388
Gain on disposal....................................... -- (15)
Bad debt expense....................................... 137 180
Minority interest...................................... 475 1,257
Changes in operating assets and liabilities:
Decrease/(increase) in trade receivables............. 657 (472)
(Increase)/decrease in inventory..................... (146) 167
(Increase)/decrease in prepaid expenses and other
current assets...................................... (803) 311
Increase in accounts payable and accrued
liabilities......................................... 748 155
Decrease in due to related parties................... (95) (385)
(Decrease)/increase in customer deposits and
advances............................................ (108) 253
Decrease in income tax payable....................... (51) (24)
------- -------
Net cash provided by operating activities......... 2,646 3,558
------- -------
Cash flows used in investing activities -- purchase of
property and equipment.................................... (1,123) (960)
------- -------
Cash flows used in financing activities -- dividend
payments.................................................. (1,200) --
------- -------
Increase in cash and cash equivalents............. 323 2,598
Cash and cash equivalents at beginning of period............ 1,642 5,294
------- -------
Cash and cash equivalents at end of period.................. $ 1,965 $ 7,892
======= =======
Supplemental disclosures:
Interest paid............................................. $ -- $ --
======= =======
Income taxes paid......................................... $ 1,126 $ 1,361
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
39
<PAGE> 41
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 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
financial statements include all adjustments necessary for a fair presentation.
Certain information and footnote disclosures generally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such SEC rules and regulations.
Results for interim periods are not necessarily indicative of the results for a
full year. These consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the fiscal year
ended December 31, 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 sheet at December 31, 1998 and at
March 31, 1999 reflects the effect of this push down accounting treatment. The
cost of the telecommunications license is amortized on a straight line basis
over the term of the license.
(2) FUTURE ACTIVITIES
The Company's results are dependent upon the ability of its subsidiary,
ALTEL, formerly known as BECET International ("ALTEL"), to retain existing
subscribers, to attract new subscribers, and to control operating expenses.
ALTEL's cellular telecommunications system is developing in an emerging economy
which, by its nature, has an uncertain economic, political, and regulatory
environment. The general risks of operating businesses in Kazakhstan include the
possibility for rapid changes in government policies, economic conditions, the
tax regime, and foreign currency regulations.
Ultimate recoverability of the Company's investment in ALTEL is dependent
upon ALTEL maintaining profitability, which is dependent on the stability of the
economy of Kazakhstan, the ability to maintain the necessary telecommunications
licenses, and the ability to obtain adequate financing to meet capital
requirements.
(3) COMMITMENTS AND CONTINGENCIES
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of the debt under the terms of the related indentures. The Company is
also 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 the indebtedness to the Travelers Parties which
is currently due on May 31, 1999. While management of PLD believe that, as long
as progress towards settlement of such obligations is being made, the holders of
such debt will agree to payment deferrals beyond the present due date of May 31,
1999, there can be no assurance that the Travelers Parties will grant such
deferrals or that they will not demand payment in full of the obligations. PLD's
failure to make payment in full could result in a claim being made against the
Company under its guaranty and a cross-default under and acceleration of the
senior discount notes and convertible subordinated notes for which the Company
also serves as a guarantor. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
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
40
<PAGE> 42
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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 March
31, 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.
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 months ended March 31, 1999 and 1998, comprehensive
(loss)/income was equal to consolidated net (loss)/income reported on the
consolidated 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 financial statements.
(6) DIVIDEND PAYMENTS
Total dividends declared and paid were $1.2 million and $0 for the three
months ended March 31, 1999 and 1998, respectively.
41
<PAGE> 43
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 March 31, 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 Months Ended March 31, 1999 Versus Three Months Ended March 31, 1998
Overview. The Company reported a net loss of $12.8 million ($0.34 per
share) and an operating loss of $1.9 million on revenues of $29.4 million for
the three months ended March 31, 1999, compared to a net loss of $4.5 million
($0.14 per share) and operating income of $7.2 million on operating revenues of
$35.2 million reported in the first quarter of 1998. EBITDA of $5.4 million
reported in the first quarter of 1999 compared with $12.7 million in the first
quarter of 1998.
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<PAGE> 44
The following table shows the Company's consolidated revenues by principal
operating subsidiary for the three months ended March 31, 1999 and 1998 and the
percentage change in revenues between the periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998 %
-------------------- -------------------- CHANGE OVER
($ MILLION) % ($ MILLION) % PRIOR PERIOD
----------- ----- ----------- ----- ------------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C>
PeterStar............................... 13.9 47.2% 17.5 49.7% (20.6)%
Altel................................... 7.9 26.9% 9.6 27.3% (17.7)%
Technocom............................... 4.4 15.0% 5.8 16.5% (24.1)%
BCL..................................... 2.4 8.2% 2.3 6.5% 4.3%
Other................................... 0.8 2.7% 0.0 0.0% n/a
---- ----- ---- ----- -----
29.4 100.0% 35.2 100.0% (16.5)%
</TABLE>
Revenues. Revenues decreased 16.5% from $35.2 million in the first quarter
of 1998 to $29.4 million in the first quarter of 1999, as the Company's
businesses continued to feel the effects of the Russian economic crisis which
commenced in the third quarter of 1998 and the onset of economic problems 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 74.1% 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.
The Company's new long distance carrier services business, PLDncompass,
contributed revenues of $610,000 in the first quarter of 1999, up from $255,000
in the fourth quarter of 1998 when it commenced operations. PLDncompass is
expected to be an increasingly important contributor to PLD'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, 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 in 1999. It is not possible to rule out further deterioration in the
Russian economic situation which would be likely to impact the Company's
businesses adversely. See "Recent Developments -- Russian Economic and Political
Turmoil." While management believes that it is taking all available measures to
protect the Company and its businesses from the negative effects of any further
problems in Russia and Kazakhstan, there can be no assurance that those measures
will be successful.
Gross profit. A portion of the loss in revenues discussed above was offset
by an improvement in the Company's overall gross margin. While in absolute
terms, gross profit decreased 13.9% to $21.0 million in 1999 from $24.4 million
in 1998, as a percentage of revenues, gross profit improved from 69.3 to 71.4%.
Given the continuing effects of the Russian economic crisis however, it is
difficult to determine whether the Company will be able to maintain this level
of gross margin 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, increased 36.1%
to $13.2 million for the three months ended March 31, 1999 from $9.7 million
recorded in the first quarter of 1998. As a percentage of revenues, general and
administrative expenses for the three months ended March 31, 1999 increased to
44.9% from 27.6% in 1998 reflecting additional costs relating to a number of new
projects aimed at developing alternative revenue streams for the Company
including its
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<PAGE> 45
new international carrier services business (the "Carrier Services Business")
and Cardlink, which is in the process of implementing wireless card validation
systems using proprietary technology.
Depreciation. Depreciation increased 54.8% to $4.8 million in the first
quarter of 1999 compared to $3.1 million incurred in the first quarter of 1998
reflecting the investment of over $44.8 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 16.3% of revenues for the three months ended March 31,
1999 compared to 8.8% a year earlier, largely as a result of the Company's
comparatively lower revenues in the first quarter of 1999 compared to 1998.
Amortization expense. For the three months ended March 31, 1999, the
Company incurred total amortization charges of $3.6 million compared to $3.1
million a year earlier. Of the 1999 year to date charges, $3.3 million related
primarily to the amortization of telecommunications licenses held by PeterStar,
ALTEL and Teleport-TP and $0.3 million related to the amortization of deferred
financing costs. Deferred financing costs relating to the June 1996 high yield
offering are amortized over eight years, the term of the Senior Notes.
The increase in amortization expense in the three months ended March 31,
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 its remaining term which expires in 2004.
This acquisition has resulted in additional quarterly amortization charges of
$0.5 million which commenced in the fourth quarter of 1998.
ALTEL's telecommunications license, which expires in 2009, is also
amortized over its remaining term and resulted in an amortization charge of $0.5
million for the three months ended March 31, 1999, unchanged from a year ago.
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, Rosh Telecom and MTR-Sviaz,
increased from $0.2 million in the first quarter of 1998 to $0.3 million in the
first quarter of 1999. The 1999 first quarter loss consisted of a 50% share of
BELCEL's three month loss of $0.4 million and a 50% share of MTR-Sviaz's three
month loss of $0.3 million.
Interest and other income. Interest and other income of $0.3 million in
the first quarter of 1999 compared with $0.9 million earned in the first quarter
of 1998 and reflects 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 $0.2 million in the first quarter of 1999
compared with $0.4 million earned in the first quarter of 1998. The Company's
escrow account totaled $16.4 million as of March 31, 1999 compared to $34.3
million a year earlier.
Interest expense. Interest expense of $6.2 million in the first quarter of
1999 compared with $5.2 million incurred in the first quarter of 1998 and
consisted of interest on bank indebtedness and short-term borrowings of $0.8
million, interest accreted on the Senior Notes of $4.8 million and interest
expense related to the Convertible Notes of $0.6 million. Interest on the Senior
Notes becomes payable in cash semi-annually commencing June 1999 while interest
on the Convertible Notes is currently paid in cash semi-annually. The increase
in interest expense between the comparative three month periods reflects
increased accretion on the Senior Notes ($0.8 million), and interest on cash
advances from News Corp. ($0.2 million). See "Liquidity and Capital Resources."
Foreign exchange loss. For the three months ended March 31, 1999, the
Company incurred foreign exchange losses of $0.5 million as compared to $0.1
million a year ago. The comparatively higher 1999 first quarter loss relates to
the continuing problems associated with the substantial devaluation of the
rouble which commenced in late 1998. The Company has sought, and will continue
to seek, to limit the effects of such
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<PAGE> 46
conditions by minimizing the amount of rouble balances held by its subsidiaries
and by taking measures to accelerate collection and currency conversion
procedures in so far as this is possible in the current banking and legislative
environment.
Income taxes. The income tax charge for the three months ended March 31,
1999 was $2.6 million compared with $3.0 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 principally to the minority
shareholdings held in three of the Company's subsidiaries -- PeterStar (29%),
ALTEL (50%) and Technocom (19.6%). Minority interest of $1.2 million for the
three months ended March 31, 1999 compared with $3.7 million recorded in 1997
and reflects the weaker results experienced in the first quarter 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 quarter of 1999 was reduced to 29% from 40% a
year ago.
The following table compares the results of operations of the Company's
principal operating subsidiaries for the three months ended March 31, 1999 with
the three months ended March 31, 1998:
<TABLE>
<CAPTION>
PETERSTAR ALTEL TECHNOCOM BCL
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
------------ ------------ ------------- --------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ----- ---- ----- -----
(UNAUDITED, THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................. 13.9 17.5 7.9 9.6 4.4 5.8 2.4 2.3
Gross profit -- $........................ 11.4 12.0 6.3 7.6 1.9 3.7 1.1 1.2
Gross profit -- %........................ 82.0% 68.6% 79.7% 79.2% 43.2% 63.8% 45.8% 52.2%
Operating income/(loss) -- $............. 4.0 7.1 2.2 3.9 (3.8) 0.3 0.3 0.2
Operating income/(loss) -- %............. 28.8% 40.6% 27.8% 40.6% (86.4)% 5.2% 12.5% 8.7%
Net income/(loss) -- $................... 2.4 6.2 1.0 2.5 (4.3) (0.4) 0.1 0.2
Net income/(loss) -- %................... 17.3% 35.4% 12.7% 26.0% (97.7)% (6.9)% 4.2% 8.7%
EBITDA -- $.............................. 5.9 8.8 3.4 4.6 (1.3) 1.0 0.3 0.4
EBITDA -- %.............................. 42.4% 50.3% 43.0% 47.9% (29.5)% 17.2% 12.5% 17.4%
% PLD ownership.......................... 71.0% 60.0% 50.0% 50.0% 80.4% 80.4% 100.0% 100.0%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999, a total of $8.2 million in cash
was generated from operations (1998 -- $5.5 million), $7.5 million was used in
net investing activities (1998 -- $5.2 million) and $0.4 million was provided by
financing activities (1998 -- $0.4 million used in financing activities).
Investments during the first three months of 1999 on telecommunications
equipment and infrastructure within PeterStar, ALTEL and Teleport-TP totaled
$5.5 million. Funds held in escrow at March 31, 1999 increased to $16.4 million
from $14.9 million at the end of 1998 reflecting $0.2 million in interest earned
for the quarter and $1.3 million in installment sales receipts from
subsidiaries.
Cash provided by financing activities of $0.4 million related primarily to
$2.5 million in short-term funding provided to the Company from News Corp.
offset by $0.6 million in dividends paid to a minority shareholder and $1.5
million in long-term debt repayments.
As of March 31, 1999, the Company reported a working capital deficit of
$29.2 million compared to a working capital deficit of $16.0 million at the end
of 1998. At March 31, 1999, the Company had consolidated total assets of $349.9
million ($352.1 million as of December 31, 1998) which consisted of $36.5
million in current assets (including $5.7 million in cash and cash equivalents),
$169.6 million in property and equipment, $74.6 million in unamortized
telecommunications licenses relating to PeterStar, ALTEL and Teleport-TP, escrow
funds of $16.4 million and other assets and investments of $52.7 million,
including $35.9
45
<PAGE> 47
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 $149.4 million, consisting primarily of the
Company's Senior and Convertible Notes, as a percentage of total assets, was
42.7% as of March 31, 1999, compared to $151.8 million or 43.1% of total assets
as of December 31, 1998.
Shareholders' equity of $112.2 million, as of March 31, 1999, compared with
$124.9 million as of December 31, 1998, and consisted of $244.9 million in
common stock and additional paid-in capital offset by the Company's deficit of
$132.7 million. The Company's ratio of long-term indebtedness to equity at March
31, 1999 was 133.1% compared to 121.5% at December 31, 1998.
Under the terms of the Company's $123.0 million Senior Note offering placed
in June 1996, the Company was required to raise $20.0 million in an equity
financing by May 31, 1998. The Company did not do so, and as a result, the
interest rate on the Senior Notes increased from 14% to 14.5% as of June 1,
1998, and will remain at 14.5% until the end of the semi-annual interest period
in which such an offering is completed. The first semi-annual cash payment of
interest on the Company's 14% Senior Notes, amounting to $8.9 million, will come
due on June 1, 1999. The Company currently expects to pay most, if not all, of
this out of funds in the escrow account established in respect of these Notes.
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 Insurance Company and
The Travelers Indemnity Company (collectively, 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 million on each of July 31 and August 31, and a
final payment of $1.1 million on September 30. In relation to the Series A
Notes, the Company was obliged to make a required amortization payment of $1
million on October 31, a further payment of $1 million on November 30 and a
final payment of $10.32 million on December 31, 1998.
The Company made the required payments due with respect to the Series B
Notes on July 31 and August 31 and by agreement with the holders of the Series B
Notes, the final payment of $1.1 million due on September 30 was deferred to
December 31, 1998. Payment of this amount was guaranteed by News, 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
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.
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, 1998, $0.5
million on August 31, 1998, $1.0 million on September 30, 1998, $1.5 million on
October 31, 1998 and $1.5 million on November 30, which resulted in the issuance
of a total of 182,000 warrants to Travelers 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 matured and the balance due became
payable in full. Taking into account the amounts deferred, the total due under
the Series A and Series B Notes as of that date was $13,420,000, of which
$3,100,000 has been guaranteed by News as described above.
Under the terms of the Revolving Credit Agreement, if the Series A and
Series B Notes are not repaid in full when due, the exercise price of all
warrants issued to the holders of the Series A and Series B Notes are reset at
$0.01 per share. In addition, on December 31, 1998 and on the last day of each
succeeding month until the Revolving Credit Notes have been repaid in full, the
holders of the Series A Notes are entitled to receive 70,000 additional warrants
to purchase shares of the Company's Common Stock and the holders of the
46
<PAGE> 48
Series B Notes are 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", are to have an
expiration date ten years after their respective dates of issue.
The Travelers Parties have given the Company a series of payment deferrals
since December 31, 1998 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 defers payment
of the Notes to May 31, 1999. At the same time, the Travelers Parties have
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 has been reset at $0.01 per share.
Management of the Company is actively engaged in pursuing ways in which to
settle the Company's obligations to the Travelers Parties. While management
believes that, as long as progress towards settlement of such obligations is
being made, the Travelers Parties will be willing to agree to additional payment
deferrals, there can be no assurance that they will do so, or that they will not
demand payment in full of the Series A and Series B Notes. The Company's failure
to make payment in full could result in a cross-default under and acceleration
of the Senior Notes and the Convertible Notes. This in turn could require the
Company to resort to extraordinary measures, including making sales of assets
under distressed conditions or ultimately seeking the protection of the
bankruptcy courts.
In addition, the Company may become obligated to make payments in July 1999
of up to $28.2 million to Plicom Limited ("Plicom") and Elite International
Limited ("Elite"), the two minority shareholders of Technocom, as a result of
the following. 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. Under the put and call option
agreement with Plicom, Plicom has the right, commencing June 30, 1999 and
continuing until June 30, 2019, to require the Company to acquire its remaining
holding in Technocom, and the Company has the right to require Plicom to sell
such holding, for a purchase price of $17.5 million. Under its put and call
option agreement with Elite, Elite has: (i) the right, commencing June 30, 1998
and continuing until June 30, 2019, to require the Company to acquire 2 of its
remaining shares in Technocom, and the Company has the right to require Elite to
sell such shares, for a purchase price of $1 million or, at Elite's option, that
number of shares of Common Stock which results from dividing $1 million by the
lower of $5.85 and the average closing price of such shares over the preceding
ten trading days; and (ii) the further right, commencing June 30, 1999 and
continuing until June 30, 2019, to require the Company to acquire its 8
remaining shares in Technocom, and the Company has the right to require Elite to
sell such shares, for a purchase price based on the Company's valuation of
Technocom, provided that such purchase price shall not be less than $6,689,655
nor more than $9,620,689.
The Company currently does not anticipate having sufficient funds on hand
to meet its repurchase obligations in the event that either Plicom or Elite was
to exercise its rights to put its shares to the Company. The Company is engaged
in efforts to address this, including arranging for alternate financing or, in
lieu of such financing, reaching some accommodation with the minority
shareholders regarding their put options. In the event that no additional
financing can be arranged nor any alternate accommodation reached and either
party exercises its rights to put its shares to the Company for cash, the
Company would have to resort to extraordinary measures, including making sales
of assets under distressed conditions or ultimately seeking the protection of
the bankruptcy courts.
These factors 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.
The Company's ongoing operations (including advances to and investments in
its existing subsidiaries and affiliates for capital expenditures and
operational expenses) have to date been financed using the Company's cash
balances, the escrow funds, internally generated cash flow from operations and
supplier financing. The Company's operating businesses are now, for the large
part, self-sustaining. However, to the extent that the operating businesses
experience lower than expected revenues, higher operating costs or higher
47
<PAGE> 49
development costs in connection with the build-out of their networks, or as a
result of continuing economic difficulties in Russia, the Company may need to
seek other sources of financing to fund such operations.
Implementation of the Company's Cardlink wireless card verification
business and the Carrier Services Business, both of which are already underway,
is expected to accelerate during 1999. The Company will be required to support
both businesses until they become self-financing. While Cardlink is not expected
to require significant immediate cash, development of the first phase of the
Carrier Services Business is expected to require capital expenditures which are
anticipated to come from the Senior Note escrow account, and a further part from
vendor financing. However, some additional funding will likely be required to
develop the Carrier Services Business until it is able to generate sufficient
cash to be self-sustaining (in terms of generating sufficient cash to fund its
operating and capital needs), which is not expected to occur until 2000.
In addition, the Company continues to assess acquisition opportunities
throughout the C.I.S. which may complement and add value to the Company's
existing businesses. To the extent that the Company enters into any agreements
to acquire or invest in additional companies operating in the C.I.S., additional
debt and/or equity financing may be required.
The Company intends to address its financing needs as follows. As noted
above, the Company's most immediate issues are its obligations in respect of the
Travelers financing and its potential obligations related to the Technocom
minority shareholders' put options. While there can be no assurance that these
two issues will both be successfully resolved, management of the Company is
pursuing a number of possible solutions and believes that ultimately a solution
or solutions will be found. Assuming a successful resolution, such resolution
may also provide a means whereby the Company can fund some or all of the other
matters described above. Alternatively, the Company expects to be in a position
to fund such other matters out of a combination of internally generated cash,
vendor financing, escrow funds, proceeds of sales of assets and external
financing, all of which the Company believes will be sufficient, assuming a
resolution of the two main issues described above, to permit it to meet its
obligations through the end of 1999, as well as continuing the development of
its businesses.
RECENT DEVELOPMENTS
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. In the latter part of 1998 and the first months
of 1999, the Rouble has further declined in value and this process is expected
to continue.
Also in August 1998 the Russian government announced a 90-day moratorium on
debt repayments. This moratorium caused considerable difficulties for Russian
banks and businesses with hard currency obligations, as well as significantly
impairing the ability of such banks and businesses, as well as the Russian
government itself, to access the Western capital markets. The difficulties
experienced by the Russian banks in turn caused difficulties for their
customers, as bank transfers and deposits were frozen in many cases. The Russian
government itself has effectively defaulted on substantial amounts of its debt,
and is engaged in negotiations with Western banks and institutions (which reach
back several months) to restructure this indebtedness. Continuation of these
conditions for any significant period of time could have serious long-term
effects on the Russian economy. At the present time, it is impossible to predict
whether or when any resolution of these problems is likely.
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<PAGE> 50
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 has been to cause the International Monetary Fund to delay
further assistance to the Russian government. In May 1999, another political
upheaval occurred, when President Boris Yeltsin dismissed the Primakov
government and selected Sergei Stepashin as the new Prime Minister. The Russian
parliament has yet to approve the selection of Mr. Stepashin as Prime Minister,
and it could be some time before it does so. It is too soon to predict what
policies will be adopted by the new Stepashin government. This most recent
governmental reshuffling creates 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 three 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 incurred a significant foreign
exchange loss in 1998 and an increased exchange loss in the first three months
of 1999 as compared to the same period in 1998, together with a reduction in
revenues on a year-on-year basis, and the Company expects that revenues and
margins will remain under pressure, and that the average age of its receivables
is likely to continue to grow. 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.
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, 1999. SFAS 133 cannot be applied
retroactively to financial statements of prior periods. At the current time the
Company has not evaluated the impact SFAS 133 will have, if any.
YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications,
particularly older systems and applications, use a two-digit, rather than a
four-digit, date field to designate a particular year. As a result 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.
49
<PAGE> 51
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 $0.4 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 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
50
<PAGE> 52
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.
51
<PAGE> 53
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
52
<PAGE> 54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLD TELEKOM INC.
Date: May 21, 1999 By: /s/ SIMON EDWARDS
--------------------------------------
Simon Edwards
Senior Vice President, Chief Financial
Officer and Treasurer
53
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLD TELEKOM
INC.'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q AND THE CONSOLIDATED FINANCIAL
STATEMENTS FOR PLD TELEKOM INC. AT AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
CONTAINED THEREIN.
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