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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM
TO
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20444
PLD TELEKOM INC.
(FORMERLY PETERSBURG LONG DISTANCE INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 13-3950002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
505 PARK AVENUE, 21ST FLOOR 10022
NEW YORK, NY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(212) 527-3800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
14% SENIOR DISCOUNT NOTES DUE 2004
9% CONVERTIBLE SUBORDINATED NOTES DUE 2006
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this annual report on Form 10-K or any amendment to
this annual report on Form 10-K. [ ]
As of March 29, 1999, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was $69,858,027.00. Such aggregate market
value was computed by reference to the closing sale price of the Common Stock as
reported on the National Market segment of The Nasdaq Stock Market on such date.
For purposes of making this calculation only, the registrant has defined
affiliates as including all executive officers, directors and beneficial owners
of more than ten percent of the Common Stock of the Company.
As of March 29, 1999, there were 37,846,789 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
As stated in Part III of this Annual Report on Form 10-K, portions of the
definitive proxy statement to be filed within 120 days after the end of the
fiscal year covered by this Annual Report on Form 10-K are incorporated herein
by reference.
Unless the context indicates otherwise, the terms "PLD" and "Company" refer
to PLD Telekom Inc.
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PLD TELEKOM INC.
FORM 10-K ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 66
Item 3. Legal proceedings........................................... 67
Item 4. Submission of Matters to a Vote of Security Holders......... 67
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 67
Item 6. Selected Financial Data..................................... 71
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 71
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 86
Item 8. Financial Statements and Supplementary Data................. 86
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 87
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 87
Item 11. Executive Compensation...................................... 87
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 87
Item 13. Certain Relationships and Related Transactions.............. 87
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Forms
8-K......................................................... 88
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PART I
ITEM 1. BUSINESS
OVERVIEW
PLD Telekom Inc. ("PLD" or the "Company"), through its operating
subsidiaries, is a major provider of local, long distance and international
telecommunications services in the Russian Federation, Kazakhstan and Belarus.
The Company's five principal operating businesses are: (i) PeterStar Company
Limited ("PeterStar"), which provides integrated local, long distance and
international telecommunications services in St. Petersburg through a fully
digital fiber optic network; (ii) Technocom Limited ("Technocom"), which,
through Teleport-TP, provides dedicated international telecommunications
services to Russian and foreign businesses in Moscow and operates a
satellite-based pan-Russian long distance network; (iii) Baltic Communications
Limited ("BCL"), which provides dedicated international telecommunications
services in St. Petersburg; (iv) ALTEL (known until May 1998 as BECET
International), which provides national cellular service in Kazakhstan and (v)
Belarus-Netherlands Belcel Joint Venture ("BELCEL"), which provides the only
national cellular service in Belarus. In addition, the Company is developing a
portfolio of international long distance products and services, under the name
"PLDncompass", targeted at carriers and corporate customers in the United
States, the United Kingdom and Europe which require telecommunications services
to and from the countries of the former Soviet Union.
In August 1998, News America Incorporated, through an affiliate ("News"),
acquired a 38% stake in the Company in a series of transactions with the Company
and Cable and Wireless plc ("Cable & Wireless"). Prior to the completion of
these transactions, Cable & Wireless had been, since 1994, the Company's
principal shareholder. As part of these transactions, the Company acquired an
additional 11% interest in PeterStar and its 50% interest in BELCEL. See
"-- Recent Developments -- Transactions with Cable & Wireless and News."
The Company's objective is to be a leading participant in the targeted
development of telecommunications infrastructure, products and services in the
emerging markets of the Russian Federation and other countries of the former
Soviet Union. The Company expects to achieve this goal through: (i) expanding
and further integrating its existing business and network infrastructure into
the public telecommunications networks; (ii) providing high quality national and
international long distance services in the Russian Federation; (iii) providing
additional value-added services such as wireless communications, fax, data and
Internet services as a means of developing new traffic streams; (iv) further
developing relationships with local and national strategic partners in the
Russian Federation and other countries of the former Soviet Union; and (v)
developing its "PLDncompass" international long distance business.
The Company has several potential sources of cash flows, including fees
from management services, dividends, repayment of intercompany advances, lease
payments, payments under equipment sales contracts and payments from customers
of its "PLDncompass" business. The Company currently generates fees from
management services provided to certain of its operating subsidiaries. One of
its operating subsidiaries, ALTEL, paid two dividends in 1997 and three in
respect of 1998. Although its ability to generate dividend income from its other
operating businesses in the near future may be limited due to the cash flow
requirements of those businesses, the Company ultimately expects to receive
dividends from them in the future. The Company received payments in respect of
intercompany advances during the course of 1997 and 1998, and expects this to
continue in 1999. In relation to leases and equipment sales contracts entered
into with its operating subsidiaries, the Company started to receive payments in
1998. The Company received its first payment from "PLDncompass" customers at the
end of 1998 and expects to see revenues from this business grow in 1999.
The Company's receivables (described above) are all denominated in U.S.
Dollars, as are its Senior Notes, its Convertible Notes and its Revolving Credit
Notes (all as hereinafter defined), which represent almost all of its
outstanding indebtedness. Certain of its operating subsidiaries have incurred
bank indebtedness, and are expected to continue to do so from time to time. All
such indebtedness has been, and is expected to continue to be denominated in
U.S. Dollars.
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In general, PeterStar, ALTEL and, to a lesser extent, Teleport-TP post
their tariffs in U.S. Dollars, and receive payment in local currency at the U.S.
dollar exchange rate prevailing on the date of payment. These operating
businesses face an exchange risk to the extent that they experience any
difficulty in converting the local currency payment received into U.S. Dollars.
In addition, they face a risk that the local currency weakens against the U.S.
Dollar during the period between the customer instructing its bank to pay the
operating business and the day the payment is actually received by the operating
business. Historically, this time period has been short and the exchange risks
arising from this particular issue have therefore been minimal. However, the
Company's operating businesses experienced significant foreign exchange losses
in the third and, to a lesser extent, fourth quarters of 1998, due principally
to delays in clearing payments within the Russian banking system. In addition,
virtually all of Teleport-TP's tariffs for its domestic long distance service
are denominated in Russian Roubles, so that the Company is fully exposed to
exchange losses with respect to the revenues from this business. The revenues
from this business currently represent over 20% of Teleport-TP's total revenues,
and, as this business grows, so too will the amount and percentage of
Teleport-TP's revenues exposed to foreign exchange losses. See "Risk
Factors -- Country Risks -- Restrictions on Currency Conversion; Historical
Volatility in Currency Prices."
The fostering of existing, and the creation of new, partnerships with local
and regional partners is crucial to the long-term success of the Company in this
environment. In its operating businesses, the Company's partners include:
Petersburg Telephone Network ("PTN"), the local telephone system operator in St.
Petersburg, and St. Petersburg Intercity & International Telephone ("SPMMTS"),
the gateway for national and international long distance calls to and from St.
Petersburg, which together hold an indirect 14% interest in PeterStar;
Kazakhtelekom, the state-owned national telecommunications operator in
Kazakhstan which is the holder of a 50% interest in ALTEL; and AO Rostelecom,
the primary long distance and international carrier in the Russian Federation,
which is a 44% shareholder in Teleport-TP. The Company will seek to continue
developing ventures with local partners who can provide: (i) assistance in
obtaining telecommunications operating licenses; (ii) access to network
facilities; and (iii) political support.
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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Also 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 the current Prime Minister Yevgeny Primakov.
The current government has yet to propose a plan to address Russia's economic
and financial difficulties, one result of which has been to cause the
International Monetary Fund to delay further assistance to the Russian
government. At the same time, the fact that President Boris Yeltsin appears to
be playing a less active role in the day-to-day governing of the country, and
the possibility that he may decide (as he is constitutionally permitted) to once
more reshuffle his government, have created increased uncertainty about the
future political situation in Russia, which in turn has created additional
concern about the ability of the government to deal with the many problems
currently afflicting the Russian economic system. See "Risk Factors -- Country
Risks -- Russian Economic and Political Turmoil."
TRANSACTIONS WITH CABLE & WIRELESS AND NEWS
On August 14, 1998, following approval by the Company's shareholders, the
Company concluded a series of transactions with News and Cable & Wireless which
resulted, among other things, in the acquisition by the Company of: (i) an
additional 11% interest in its subsidiary PeterStar from News (immediately
following News' acquisition of such interest from Cable & Wireless); and (ii) a
50% interest in BELCEL and certain intercompany indebtedness from Cable &
Wireless. In connection with these acquisitions, the Company issued an aggregate
of 4.3 million shares of its Common Stock to News and Cable & Wireless. In
addition, Cable & Wireless sold to News its complete stake in the Company
(including the Common Stock issued by the Company to Cable & Wireless in
exchange for the interest in BELCEL and a warrant to purchase 250,000 shares of
Common Stock). As a result of these transactions, News now holds a 38% interest
in the Company and has become the Company's largest shareholder.
The Company acquired its additional 11% interest in PeterStar by acquiring
100% of the shares of PLD Holdings Limited, a Bermuda company ("PLD Holdings"),
the owner of that 11% interest. The Company acquired its 50% interest in BELCEL
by acquiring all of the shares of CommStruct International Byelorussia BV, a
corporation organized under the laws of the Netherlands ("CIBBV"), which owns
such 50% interest.
NEWS REVOLVING CREDIT AGREEMENT
On November 30, 1998 (but effective September 30, 1998), the Company
entered into a revolving credit agreement with News (the "News Revolving Credit
Agreement") under which News agreed to advance up to $8.1 million to the
Company. On March 22, 1999, News increased the amount it would advance to $9.1
million. Each advance under the News Revolving Credit Agreement bears interest
at an annual rate of 20% and is repayable on June 30, 1999. Advances are
evidenced by notes which, together with interest thereon, are convertible at
News' option into shares of Common Stock of the Company at conversion rates
determined as of the date of issue of the applicable note. In addition, in the
event that News guarantees obligations of the Company, a note is issued
reflecting the Company's reimbursement obligation should such guarantee be
called. Amounts so guaranteed are treated as advances under the News Revolving
Credit Agreement, meaning that they count with respect to the $9.1 million
ceiling on total advances. In addition, in the event a guarantee is called, the
Company will owe interest on its reimbursement obligation at the annual rate of
20% calculated from the date payment by News is made under its guarantee. Notes
issued in respect of reimbursement obligations, together with interest thereon,
are also convertible into shares of Common Stock at conversion rates determined
as of their date of issue. News can cease making advances at any time and for
any reason. Currently, however, the full amount available under the News
Revolving Credit Agreement has been advanced or applied in respect of News'
guarantees. Of the total $9.1 million of notes issued, notes aggregating $3.1
million have been issued in respect of guarantees of the Revolving Credit Notes
described below. See "Recent Sales of Unregistered Securities."
TRAVELERS FINANCING
In November 1997, in connection with its acquisition of additional
interests in Technocom, the Company issued $12.32 million in 12% Series A
secured revolving credit notes (the "Series A Notes") and $3.1 million in 12%
Series B revolving credit notes (the "Series B Notes" and, together with the
Series A Notes, the
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"Revolving Credit Notes"), to The Travelers Insurance Company and The Travelers
Indemnity Company (collectively, the "Travelers Parties") pursuant to a
Revolving Credit Note and Warrant Agreement dated November 26, 1997 between the
Company and the Travelers Parties (the "Revolving Credit Agreement"). Both the
Series A Notes and the Series B Notes are secured by the Company's inventory and
accounts receivable. In addition, the Series A Notes are secured by 28 of the
Technocom shares acquired. In addition to issuing the Series A and Series B
Notes, the Company also issued to the Travelers Parties a total of 423,000
warrants to purchase Common Stock at $8.625 at any time up to December 31, 2008
(the "Travelers Warrants").
Pursuant to the terms of the Series A Notes and the Series B Notes, the
Company had the option of making certain "targeted reductions in commitment"
with respect to such Notes commencing in July 1998, or of issuing additional
warrants to purchase shares of the Company's Common Stock (the "Additional
Warrants") at an exercise price of $8.625 each, expiring on December 31, 2008.
The Company elected not to make any such "targeted reductions in commitment"
and, as a result, issued a total of 182,000 Additional Warrants to the Travelers
Parties.
The Company made required amortization payments of $1,000,000 on each of
July 31, 1998 and August 31, 1998, which were applied in reduction of the Series
B Notes. The $1,100,000 balance due under the Series B Notes was payable in full
on September 30, 1998 but, as a result of News issuing a guarantee in respect of
the amount due, the maturity date was deferred by the Travelers Parties to
December 31, 1998. Required amortization payments of $1,000,000 due on each of
October 31, 1998 and November 30, 1998 were also deferred by the Travelers
Parties to December 31, 1998, also as a result of News issuing guarantees in
respect of the amounts due.
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 February 28, 1999 and defers
payment of the Notes to April 30, 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 Travelers Warrants 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. See "Risk Factors -- Risks Involving the Company -- Repayment
of Travelers Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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THE CONSENT SOLICITATION
In March 1998, the Company commenced a consent solicitation (the "Consent
Solicitation") directed at the holders of its outstanding 14% Senior Discount
Notes due 2004 (the "Senior Notes") and 9% Convertible Subordinated Notes due
2006 (the "Convertible Notes" and, together with the Senior Notes, the "Notes")
requesting their consent to certain amendments to the Indentures governing such
Notes, intended to give the Company more flexibility in conducting its business
and also to clarify certain provisions of those Indentures.
The amendments were approved by the requisite number of holders of the
Notes and, following this, The Bank of New York, as trustee under the
Indentures, the Company and certain other parties executed a supplemental
indenture, dated March 20, 1998 (the "Supplemental Indenture"), bringing the
amendments to the Indentures and certain related documents into effect. In
addition, the Company issued a total of 123,000 five-year warrants to purchase
1.8 shares of Common Stock at $6.90 per share to the holders of the Senior
Notes, and a total of 22,700 five-year warrants to purchase 2 shares of Common
Stock at a price of $6.90 per share to the holders of the Convertible Notes. If
all of these warrants are exercised, the Company will issue a total of 266,800
shares of Common Stock. These warrants are referred to herein collectively as
the "Consent Warrants."
Unless the context clearly requires otherwise, references to the "Notes",
the "Senior Notes" and the "Convertible Notes" shall refer to such securities as
so amended pursuant to the Consent Solicitation, and references to the "Senior
Note Indenture", the "Convertible Note Indenture" and the "Indentures" shall
refer to such indentures, as so amended pursuant to the Consent Solicitation.
REGISTRATION OF OUTSTANDING SECURITIES; COMPLETION OF EXCHANGE OFFER
In June 1996, the Company issued the following securities to a limited
number of U.S. institutional investors (the "June 1996 Placement"): (i)
$123,000,000 aggregate principal amount at maturity of Senior Notes; (ii)
123,000 warrants (the "Placement Warrants") to purchase an aggregate of
4,182,000 shares of Common Stock (the "Placement Warrant Shares"); and (iii)
$26,500,000 aggregate principal amount of Convertible Notes. The Senior Notes
and the Placement Warrants were initially issued as units (the "Units") and the
Placement Warrants became separable from the Senior Notes on December 10, 1996.
On July 30, 1998, the Securities and Exchange Commission declared effective
the registration statements relating to (i) the exchange offer (the "Exchange
Offer") pursuant to which the outstanding Senior Notes (the "Outstanding Senior
Notes") would be exchanged for identical Senior Notes which had been registered
under the Securities Act of 1933 (the "Exchange Notes"); (ii) the resale by the
holders thereof of the Convertible Notes and the shares of Common Stock issuable
upon the conversion thereof and (iii) the resale by the holders thereof of the
Placement Warrants and the Placement Warrant Shares. As a result of the
effectiveness of the registration statement relating to the Convertible Notes
and the Common Stock issuable upon conversion thereof, Special Interest (as
defined in the Indentures) ceased to be payable with respect to the Convertible
Notes on July 30, 1998.
The Exchange Offer with respect to the Senior Notes commenced on August 28,
1998 and was completed at the close of business on October 9, 1998, with the
holders of 100% of the Outstanding Senior Notes tendering such Notes for
Exchange Notes. Upon completion of the Exchange Offer, the Exchange Notes were
issued in exchange for such Outstanding Senior Notes, in the form of a global
Exchange Note held through the facilities of the Depository Trust Company. As a
result of the completion of the Exchange Offer, Special Interest ceased to be
payable with respect to the Senior Notes on October 9, 1998.
INCREASED INTEREST RATE ON INDEBTEDNESS
Under the terms of the Senior Notes and the Revolving Credit Notes, the
interest rate payable increases if the Company has not raised $20,000,000 in
additional equity by May 31, 1998. The Company did not complete such an equity
offering by such date and accordingly the interest rate on the Senior Notes
increased from 14% to 14.5% per annum, and the interest rate on the Revolving
Credit Notes increased from 12% to 15% per annum, in each case effective June 1,
1998. Such rates revert to their former levels once the equity offering
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has been completed. Interest due on the Senior Notes (at 14.5% per annum)
accreted until December 1, 1998, and thereafter is payable in cash,
semi-annually, on each June 1 and December 1 thereafter.
CORPORATE STRUCTURE
The following chart shows the corporate structure of the Company and its
material interests (but also including intermediate holding companies and
special purpose financing subsidiaries such as NWE Capital (Cyprus) Ltd. ("NWE
Cyprus"), PLD Holdings, PLD Capital Asset (U.S.) Inc. ("PLDCA") and PLD Asset
Leasing Limited ("PLD Leasing")), together with the percentage of equity
ownership of the Company and Technocom in each operating subsidiary and other
significant investments.
[CORPORATE STRUCTURE CHART]
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(1) The Company holds its interests in a number of its subsidiaries through NWE
Cyprus to take advantage of the double taxation treaty between Cyprus and
the Russian Federation.
(2) Of its total 71% interest in PeterStar, the Company holds 60% through NWE
Cyprus and 11% through PLD Holdings, a former subsidiary of Cable & Wireless
which the Company acquired from News in August 1998. The other shareholder
of PeterStar is Telecominvest (29%), which is in turn owned 51% by
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an affiliate of Commerzbank AG, a major German bank, 25% by PTN and 24% by
SPMMTS, and which was formed by PTN and SPMMTS to act as a holding company
for their respective interests in a number of telecommunications ventures in
Northwest Russia.
(3) In November 1997, the Company acquired an additional 29.65% of the ordinary
shares in Technocom, bringing its total interest to the current 80.40% As a
result, the remaining interests in Technocom are beneficially owned by: (i)
Plicom Limited (14.57%), an Irish company beneficially owned by the family
interests of Mr. Mark Klabin ("Plicom"); and (ii) Elite International
Limited (5.03%), an Irish company beneficially owned by a trust advised by
Dr. Boris Antoniuk ("Elite"). The Company understands that Dr. Antoniuk has
the power to exercise the voting rights of the shares in Technocom owned by
Elite. The remainder of the interests held by Plicom and Elite are subject
to put and call arrangements with the Company. See "-- Risk Factors -- Risks
Involving the Company -- Technocom Minority Shareholders' Put Options."
Technocom also holds an effective 100% interest in Space Communication
Services (SCS) Limited, a company organized under the laws of Guernsey,
Channel Islands ("SCS"), which acts as Teleport-TP's marketing arm for the
selling and administration of TV broadcasting services, and a 50% interest
in Rosh Telecom Limited, a telecommunications equipment distributor, which
it is currently negotiating to sell to Plicom.
(4) The Company holds its 50% interest in ALTEL through its wholly owned
subsidiary, Wireless Technology Corporations Limited ("WTC"), a corporation
organized under the laws of the British Virgin Islands, which in turn is
wholly owned by NWE Cyprus. The other 50% interest in ALTEL is currently
held by Kazakhtelekom, a Kazakh joint stock company, formerly wholly owned
by the government of Kazakhstan, which operates the public telephone network
in that country. In May 1997, the Kazakh government announced the sale of a
40% stake in Kazakhtelekom to Daewoo. However, in March 1998, it was
reported that Daewoo had sold a portion of its stake (reported to be
approximately 10%) to an unnamed third party. It was later confirmed that
Daewoo had sold its entire stake in Kazakhtelekom to Kazcommertzbank, a
commercial bank based in Kazakhstan. It is understood that the Kazakh
government is seeking to sell a 15% stake in Kazakhtelekom to private
investors.
(5) In 1996, Technocom's interest in Teleport-TP was increased to its current
49.33% (56% voting interest) through: (i) its acquisition of a 55.51%
interest in JV Technopark Limited ("Technopark"), which owns a 7.5% interest
in Teleport-TP; and (ii) the acquisition by Roscomm Limited, a Guernsey
company ("Roscomm"), which is 66.67% beneficially owned by Technocom and
which already owned a 5% interest in Teleport-TP, of an additional 5%
interest previously held in trust for the VVC, the All-Russian Exhibition
Center, a business park in Moscow. Technocom holds 38.5% of its beneficial
interest directly, 6.67% through its 66.67% beneficial interest in Roscomm
(which owns a 10% interest in Teleport-TP), and 4.16% through its 55.51%
interest in Technopark (which owns a 7.5% interest in Teleport-TP). The
remaining 44% voting interest in Teleport-TP is held by Rostelecom.
Teleport-TP holds a 25% interest in Gorizont-RT, a cellular
telecommunications operator in the Republic of Sakha. The remaining
interests in Gorizont-RT are held by Sakhatelekom (51%) and local business
partners (24%).
(6) Technocom holds a 49% interest in MTR-Sviaz, a wireline telecommunications
operator in Moscow. The remaining 51% interest is held by Mosenergo, the
Moscow city power utility.
(7) The Company holds its 50% interest in BELCEL through its wholly owned
subsidiary CIBBV, a corporation organized under the laws of the Netherlands.
The remaining interests in BELCEL are currently held by the Minsk City
Telephone Network (45%) and the Minsk Regional Telephone Company (5%).
------------------------
The Company's executive offices are located at 505 Park Avenue, 21st Floor,
New York, New York, 10022 (telephone number (212) 527-3800).
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "PLDI" and the Toronto Stock Exchange under the symbol "PLD". It is
also traded on the Berlin and Frankfurt Stock
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<PAGE> 10
Exchanges. Prior to March 6, 1997, the Company's trading symbol on the Nasdaq
National Market was "PLDIF."
As of December 31, 1998, the Company had 15 employees, all of whom were
full-time.
TELECOMMUNICATIONS IN THE FORMER SOVIET UNION
In the Soviet era, telecommunications in the Russian Federation and other
republics of the former Soviet Union were government owned and designed
principally to serve the defense and security needs of the state. The telephone
network itself was highly centralized, reflecting the centralized nature of the
Soviet economy. Telephonic links were directed towards the center of the network
while neglecting inter-regional links. As a result, the ability to direct calls
between regions without going through the center remains limited, which in turn
has been a major constraint on economic growth in regional markets. Being
committed to a "hub and spoke" network, the former Soviet Union never developed
a trunk "backbone" capable of providing network expansion on a nationwide basis.
Consistent with a political philosophy which limited access to the world
outside the former Soviet Union, all international calls originating in the
former Soviet Union until 1992 were routed through a single international
exchange in Moscow which had a capacity of only 3,200 circuits. Due to the
inadequacies of the public network, as well as to ensure secrecy, many
individual ministries and security organizations, including the Communist Party
itself, established their own private nationwide networks. These private
networks absorbed a substantial amount of the relatively limited resources
available for investment in telecommunications. At the same time, these networks
currently present an opportunity for the development of a national network apart
from the existing public network.
With the break-up of the Soviet Union and the liberalization of the
economies of its former republics, the demand for telecommunications services
increased significantly. However, the governments of the countries of the former
Soviet Union did not have the significant capital necessary for the development
of the telecommunications infrastructure. As a result, they have actively
encouraged market liberalization, privatization and foreign investment in the
telecommunications sector. This has resulted in significant development in the
areas of fixed wire overlay systems, private networks and cellular and data
services. They have also made their own efforts to develop a basic
telecommunications infrastructure, but lack of capital, exacerbated by recent
difficult economic conditions, has made progress towards this goal slow.
TELECOMMUNICATIONS IN THE RUSSIAN FEDERATION
The Russian telecommunications sector has experienced substantial
difficulty in meeting the rapidly growing demand for telecommunications services
in the Russian Federation. At the local level, there has been a significant
growth in joint ventures providing discrete telecommunications services, such as
international access and cellular service. While the bulk of this activity has
been in Moscow and St. Petersburg, it has occurred in other regions as well.
This trend has been encouraged by the Russian government which has issued over
10,000 licenses through the Ministry of Communications of the Russian Federation
(the "Former MOC") (which as of March 17, 1997 has been replaced by the Russian
Federal Committee on Telecommunications and Informatics (the "RFCTI")) to these
new service providers. Most joint ventures involve a Russian and a foreign
partner. Many of these joint ventures have remained moribund; however, where
they have commenced operations, there has been an immediate improvement in
telecommunications services in the targeted areas. Since much of the marketing
activity has been aimed at the business community, the benefits of these
improvements have not been (and for the foreseeable future are not likely to be)
widely felt by residential customers, particularly those outside major
metropolitan areas.
When the Former MOC was reorganized in 1991, the Russian government decided
to convert each regional telephone center into a separate, privatized company
with the government maintaining the controlling interest in the company. There
are 89 of these regional telephone companies. The government's interests in most
of these companies are now held through Sviazinvest.
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The national and international long distance market in the Russian
Federation is dominated by Rostelecom, a formerly state-owned enterprise which
has been privatized, but in which the Russian government continues to hold a 38%
equity and 51% voting interest through Sviazinvest. Until 1991, Rostelecom was
the monopoly provider of national and international long distance service. Since
then, the Former MOC has issued licenses to approximately twenty other providers
of international services. Rostelecom itself has entered into a number of joint
ventures to develop its network and services, including through its
participation in Teleport-TP.
Sviazinvest, which was originally 100% owned by the Russian State Property
Committee (now the Ministry of State Property), is a holding company for the
Russian government's interests in the local and regional telephone companies
across the Russian Federation. In general, Sviazinvest has a portfolio that
comprises holdings of 35% of the equity interest and 51% of the voting
interests, with a number of notable exceptions, in these telephone companies.
Sviazinvest is represented on the board of directors of each of these companies,
but does not participate in the day-to-day management of the operations.
In 1997, it was reported that, notwithstanding previously announced plans
to have Sviazinvest compete with Rostelecom, the Russian government had
consolidated its telecommunications holdings in Sviazinvest and Rostelecom by
transferring its shareholding in Rostelecom (38% of the common stock, and 51% of
the voting stock) to Sviazinvest. The balance of the shares in Rostelecom remain
in the hands of private investors. In April 1997, the government announced that
it was seeking to sell 49% of Sviazinvest in two auctions, one as to a 25% stake
open to Russian and foreign investors and the other as to a 24% stake open only
to Russian investors. In July 1997, the government announced that the 25% stake
had been sold to a consortium which included Oneximbank and Renaissance Capital,
for a purchase price of $1.875 billion. Following this auction, the Russian
government announced its intention to increase the size of the other stake being
sold to 25% minus two shares. The schedule for the sale of the second stake has
been delayed following the August 1998 financial crisis, and the structure of
any such sale (including whether foreign participation will be permitted) has
not been announced. While it is not yet clear how the proceeds of this sale will
be employed, it is understood that the government wishes to have a substantial
part, if not all, of the proceeds allocated to its current budget deficit. Prior
to the August 1998 crisis, Sviazinvest had announced plans to raise $400 million
through a Eurobond offering in 1998, but that offering was also delayed as a
result of the Russian financial crisis. In light of all of the foregoing, it is
unclear what impact the consolidation of the government's telecommunications
holdings and the auction of significant stakes in Sviazinvest will have on the
Russian telecommunications market in general and the Company in particular.
The provision of telecommunications services is currently regulated by the
Law on Telecommunications which came into effect on February 22, 1995 (the
"Telecommunications Law"). While the Former MOC had significant regulatory
powers prior to the passage of the Telecommunications Law, principally through
the issuance of new licenses, telecommunications had traditionally been viewed
as the province of the military and security services. The Telecommunications
Law placed control of the Russian telecommunications network (except for the
networks of the government, military and security forces) in the hands of a
civilian regulatory authority. Under the Telecommunications Law, the Former MOC
was, and now the RFCTI is, charged with the responsibility of coordinating the
development of telecommunications in the Russian Federation and regulating the
provision of services. Specifically, the Former MOC was and now the RFCTI is,
given authority to issue telecommunications licenses, allocate frequencies and
certify equipment for use in Russia. The Telecommunications Law also establishes
a number of important principles in the telecommunications area, including the
guarantee of equal access for all providers of telecommunications services and
safeguards for private business activity in the telecommunications sector. The
Telecommunications Law extends these principles to foreign companies and
individuals, thereby recognizing the need to encourage foreign participation in
the development of the Russian telecommunications sector.
The Federal Committee for Regulating Natural Monopolies in
Telecommunications (now under the government of the Russian Federation) has been
empowered to regulate international and, since mid-1997, domestic long distance
tariffs, together with interconnect fees for public operators in the Russian
Federation. In addition, this Committee has the authority to establish the
framework for local fees and tariffs which, in the future, will be regulated by
newly-established Regional Committees for Regulating Natural Monopolies. At
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<PAGE> 12
the current time, regional governments set and regulate local tariffs, and it is
currently uncertain as to how, and when, local tariff regulation will be
transferred to the Regional Committees. While the Company's businesses are not
public operators and will therefore not be directly affected by any tariff
regulation imposed by the Federal or Regional Committees, their own pricing
policies are inevitably influenced by the tariffs charged by public operators.
While the RFCTI appears to have succeeded to all of the powers and
authorities of the Former MOC (with the exception of tariff regulation), it is
not yet clear whether it will in fact continue to operate in the same manner,
and wield the same influence as the Former MOC. In particular, it is not clear
whether the RFCTI will be able to control the actions of local governmental and
other regulatory authorities who may endeavor to impose their own informal
licensing and other regulatory requirements or conditions on operators. In
addition, in the area of tariff regulation, it is not yet clear how the various
Committees will interact with the regional governments, and the regional
governments may continue to seek to regulate tariffs in their regions. See "Risk
Factors -- Risks Involving the Company -- Regulatory Uncertainties."
Moscow. Local public fixed-line telephone service in Moscow is provided by
MGTS, a recently privatized company which operates the telephone network in
Moscow. MGTS currently serves approximately 4,900,000 subscribers, of which 79%
are residential. Approximately 10% of the switches on the MGTS network are
digital and digital service generally is available to only 10% of its
subscribers. Since local calls are free, the bulk of MGTS' revenue comes from
line rental. However, MGTS has announced plans to introduce call metering as
part of a major redevelopment of its network, although the timing of the
introduction of such metering remains unclear.
MGTS has also announced a number of initiatives designed to develop the
Moscow public network, including projects to be carried out jointly with AT&T,
Rostelecom and Siemens.
In addition to MGTS, there are a number of digital overlay networks in
Moscow which involve a Western investor (e.g., GPT, Belgacom, Lucent
Technologies (formerly, AT&T Network Systems ("Lucent")) and Global TeleSystems
("GTS")) and a local Russian partner (usually MGTS, the Central Telegraph Office
or Rostelecom). Finally, there are a number of private network facilities owned
by the local and regional utilities that provide services to a limited market
segment.
MGTS routes long distance traffic through a gateway exchange called MMTS.
This traffic is directed to the Rostelecom long distance network for delivery to
the regional telephone operators. International traffic is also passed to
Rostelecom via MMTS. The international network of Rostelecom is supported by a
combination of Russian and Western satellite capacity, including that provided
by Teleport-TP, and international fiber optic cable capacity. However, there
continues to be considerable congestion at the MMTS and Rostelecom switching
centers due to their inability to keep up with demand. Certain calls to other
countries of the former Soviet Union can still be routed through the Rostelecom
network although this network primarily consists of analog switching and is
characterized by significant call failure rates. For callers on private
networks, international access is generally provided by direct satellite
facilities, such as Teleport-TP. The telecommunications market in Moscow also
supports four cellular operators (two analog and two digital) and nine paging
networks.
A majority of the voting stock of MGTS is held by Sistema, a holding
company with ties to the Moscow city government which has significant interests
in the Moscow telecommunications, tourist and other industries.
St. Petersburg. The telephone network serving St. Petersburg is operated
by PTN, the local telephone company which was privatized in May 1993. PTN has
1,800,000 lines in operation, amounting to a nominal penetration rate of 36%.
PTN's intra-city traffic is carried through a network of thirty-four transit
exchanges distributed throughout St. Petersburg and all connected to each other
in a "cobweb" fashion. The existing PTN network is outdated and overloaded,
producing congestion, interference, "crossed lines" and poor transmission
quality. Only 23% of PTN's exchanges are digital/electronic, and some of its
equipment is over 40 years old. PTN has recently installed a modern fiber optic
loop which, once fully operational, will
10
<PAGE> 13
significantly enhance its ability to deliver traffic throughout its service
area. PTN has also entered into a number of other, primarily wireless,
telecommunications joint ventures.
PTN routes long distance traffic through a gateway exchange operated by
SPMMTS. This traffic is then passed to the Rostelecom long distance network for
delivery throughout the rest of the Russian Federation and the other countries
of the former Soviet Union. The Company acquired a 10.4% equity interest in
SPMMTS in 1994, which it sold in June 1997.
SPMMTS is the gateway for international calls to and from St. Petersburg.
SPMMTS has a number of options for the forwarding of international calls. Such
calls can be directed to an international gateway owned by St. Petersburg
International ("SPI"), a joint venture between British Telecommunications plc
("BT") and SPMMTS which has satellite connections to the UK. In addition, SPMMTS
has access, via Rostelecom, to the undersea cable between Russia and Denmark for
international traffic. Finally, SPMMTS has the option to route international
traffic through the international gateway in Moscow. In addition to SPMMTS,
there are several independent dedicated networks which provide international
telecommunications access in St. Petersburg, including BCL. Under the terms of
its license, PeterStar is required to route its long distance and international
traffic via the public network gateway.
The telecommunications market in St. Petersburg also supports three
cellular operators (two analog and one digital) and a number of paging networks.
In 1994, PTN and SPMMTS formed Telecominvest, originally as a joint venture
to act as a holding company for their respective interests in a number of
telecommunications ventures in Northwest Russia. Subsequently, in 1996, a
Commerzbank affiliate acquired a 51% interest in Telecominvest. Currently
Telecominvest owns 29% of PeterStar, 31% of North West GSM ("NW GSM"), the
digital 900 MHZ operator for St. Petersburg, 49% of Neva Cable and 5% of Neda
Paging. It is understood that PTN intends to transfer all or part of its
interests in Delta Telecom and Neda Paging to Telecominvest, subject to final
agreement with their joint venture partners. Although as a result of this
activity Telecominvest will hold interests in regional cellular operators which
are customers of PeterStar, as well as other ventures which may be possible
customers for PeterStar, it is unclear what the exact nature of Telecominvest's
plans are with respect to these holdings or how such plans will affect
PeterStar.
TELECOMMUNICATIONS IN KAZAKHSTAN
At the time of Kazakhstan's independence in 1991, the Kazakh telephone
system consisted of the same outdated network equipment as the other telephone
systems in the former Soviet republics. Currently, only 11% of Kazakhstan's
population of approximately 17,000,000 has telephone lines. The existing
national telephone network consists of approximately 1,900,000 lines, of which
330,000 are in Almaty. Due to the poor condition of much of the
telecommunications infrastructure in Kazakhstan, basic telephone service is
characterized by poor transmission quality. However, some modernization has
taken place during the last few years and quality is improving. While the
installed exchange switching capacity has not increased significantly, the
introduction of digital exchanges will make for easier future expansion.
The national network is served by trunk switches in what were the 19
original regional centers throughout the country. New transit switches supplied
by Alcatel, Lucent and others have been installed in 15 of the 19 regional
centers, and three more will be installed by the summer of 1999. Some digital
local exchanges have been installed in 16 of the regional centers, although many
electromechanical exchanges are expected to remain in use throughout the country
for some time.
While the majority of inter-regional transmission capacity is still analog,
a limited amount of digital transmission has been added over some routes. Low
capacity digital microwave has been introduced on several routes, and a high
capacity microwave has been installed between Astana and Petropavlovsk. The
existing fiber optic cable between Astana and Karaganda will be extended to
Almaty by the summer of 1999, and there is a fiber optic spur from Petropavlovsk
to Omsk connecting to the Vladivostok-Moscow-Europe cable.
Until 1992, the sole means of international access to and from Kazakhstan
was through a central switch located in Moscow. Kazakhstan acquired its own
international gateway in August 1992 when a new AT&T
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<PAGE> 14
5ESS switch was installed in Almaty. It now has approximately 800 direct
international circuits via satellite with 22 countries, including the United
States, Japan, Australia, Germany, France, Israel and Turkey and via analog
cables to Moscow. Kazakhstan is also participating in the fiber optic link
between China and the countries of Central Asia and Europe, and this system is
already being used to provide inter-regional capacity between Almaty, Taraz and
Chimkent.
The Kazakh Law on Enterprises dated February 13, 1991 authorizes the
Cabinet of Ministers to issue licenses for certain types of activities in
Kazakhstan, including the provision of telecommunications services. The Cabinet
of Ministers delegated the authority to license telecommunication providers,
allocate frequencies and certify telecommunications equipment to the Kazakh
Ministry of Transport and Communications (the "KMOC"). Pursuant to this
delegation of authority, the KMOC adopted temporary procedures for the
consideration of applications for and the issuance of such licenses. In April
1995, President Nazarbayev issued a decree setting forth the licensing
procedures in greater detail. The decree also confirmed the authority of the
Cabinet of Ministers to grant licenses and the right of non-Kazakh companies and
individuals to equal treatment in the granting of licenses. However, apart from
these licensing procedures, there is virtually no other regulation in the
telecommunications sector, and no comprehensive regulatory framework.
Administration of the telecommunications sector is essentially left to the
discretion of the KMOC.
Actual operation of the public telephone network is carried out by
Kazakhtelekom, which was created for this purpose in June 1994, as well as
regional operators. A variety of functions previously carried out by other
governmental entities, including representation of the Kazakh government in
international telecommunications matters and the planning and development of the
network in Kazakhstan, have been transferred to Kazakhtelekom. Kazakhtelekom has
been granted a revised license giving it specific authority to act as the
exclusive operator of the Kazakh national network and to represent the Kazakh
government in international telecommunications matters, along with a broad
series of powers to enable it to fulfil this function. Kazakhtelekom carries out
its functions under the oversight and direction of the KMOC. In May 1997, the
Kazakh government announced that it had sold a 40% stake in Kazakhtelekom to
Daewoo. However, in March 1998, it was reported that Daewoo had sold a portion
of its stake (reported to be approximately 10%) to an unnamed third party. It
was later confirmed that Daewoo had sold its entire stake in Kazakhtelekom to
Kazcommertzbank, a commercial bank based in Kazakhstan. It is understood that
the Kazakh government is seeking to sell a 15% stake in Kazakhtelekom to private
investors.
TELECOMMUNICATIONS IN BELARUS
Belarus, a former member of the Soviet Union, became an independent state
in 1991. Like Kazakhstan, Belarus' telephone system at the time of its
independence consisted of outdated network equipment. As of 1991, only 14% of
Belarus' population had telephone lines and, although improvements have been
made to the telephone system since then, as of 1995 that penetration rate had
risen only to 18%.
All aspects of the telecommunications sector in Belarus are regulated by
the Ministry of Posts, Telecommunications and Informatics. In October 1994, the
Supreme Soviet of Belarus adopted its Communications Law, effective January
1995. Also in 1995, Beltelekom, the current monopoly national telephone operator
in Belarus, was formed through the combination of the Minsk local telephone
network, the long distance operator and other telecommunications entities
throughout the country.
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PETERSTAR COMPANY LIMITED
OVERVIEW
PeterStar, in which the Company owns a 71% interest, operates a fully
digital, city-wide fiber optic telecommunications network in St. Petersburg that
is interconnected with the network of PTN, the local telephone company, as well
as the Russian national and international long distance systems. PeterStar
provides integrated, high quality, digital telecommunications services with
modern transmission equipment, including local, national and international long
distance and value-added services, to businesses in St. Petersburg. The
PeterStar network provides an alternative to the PTN network, which to date has
been characterized by significant capacity constraints. PeterStar is able to
provide integrated telecommunications services to business customers, including
users of high bandwidth voice, data and video communications services.
PeterStar's network is designed to support a wide range of telecommunications
products and services with a high degree of reliability. Additionally, PeterStar
provides the three cellular operators in St. Petersburg with access to digital
switching and transmission capacity which significantly improves their ability
to consistently receive and deliver their customers' traffic. As of December 31,
1998, PeterStar had a total of 168,166 active lines, of which 108,278 were
provided to cellular operators.
PeterStar, which started limited service in 1993, generated net income for
the year ended December 31, 1998 of $17.8 million on operating revenues of $72.4
million, as compared to net income of $16.5 million on operating revenues of
$54.5 million for the year ended December 31, 1997. Subscriber lines installed
increased from 114,774 at the end of 1997 to 168,166 at December 31, 1998,
reflecting increased penetration of the business community, residential and
cellular operators. PeterStar accounted for 49.8% of the Company's operating
revenues for the year ended December 31, 1998, as compared to 47.6% for the year
ended December 31, 1997.
PeterStar, a Russian closed joint stock company, was incorporated in 1992.
STRATEGY
PeterStar's strategy is to continue to meet the growing demands of business
customers and other network operators in St. Petersburg. PeterStar has recently
added incremental transmission capacity and upgraded its transmission network
from STM-4 to STM-16, as well as introducing new service features such as ISDN
capability, which allows simultaneous transmission of voice, data, video and
still images. In addition, as part of its strategic relationship with PTN,
PeterStar intends to continue to provide targeted support to PTN in its efforts
to upgrade and modernize its network. While the August 1998 financial crisis and
its aftermath have caused some slowdown in business activity, the business
environment in St. Petersburg remains stable, and the prospects for continued
growth of small to mid-sized Russian and foreign businesses remain reasonably
positive. PeterStar has placed increased emphasis on this market segment in
order to capitalize on what it considers to be a significant market opportunity.
PeterStar is involved in several projects designed to expand its direct
dial services in St. Petersburg and Northwest Russia. PeterStar has undertaken
with PTN a major infrastructure project involving the replacement of analog
exchanges with digital exchanges for certain parts of the network on
Vassilievski Island, a city district in St. Petersburg. This project requires
the conversion of approximately 30,000 business and residential lines that have
previously been operated by PTN, after which such lines become a part of the
PeterStar network. In addition, PeterStar plans to further enhance its transit
network capabilities in order to provide continued support to the cellular and
other network providers in terminating traffic in St. Petersburg and to the
national and international gateway.
PRODUCTS AND SERVICES
PeterStar currently provides: (i) voice and data services to business and
residential customers; (ii) switched transit services for cellular and other
network operators; and (iii) value-added voice and data services. PeterStar
markets its products and services through its own direct sales force and agents
which target mainly corporate accounts.
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<PAGE> 16
PeterStar also provides a number of value-added voice and data services to
complement the basic fixed network services it currently provides. PeterStar
believes that the ability to provide such services on the PeterStar digital
network is a key competitive advantage in the St. Petersburg marketplace.
Current services include the following:
Data Services. PeterStar provides high speed data links across the city of
St. Petersburg. These connections provide links between the computer networks of
banks and large companies, allowing for data interchange between a variety of
back office systems. The target customer for such services is the financial
sector, with the Russian Stock Market, Sberbank, Promstroibank, and Bank St.
Petersburg all currently using PeterStar's services. Other applications for
these high speed links, such as Reuters, utilize PeterStar to deliver
value-added services to their own customers.
Frame Relay. PeterStar operates a frame relay data network service as an
enhanced feature of its current service offering. Customers include Citibank,
the Russian Central Bank and the Russian Stock Market.
ATM. PeterStar has installed an ATM service, including eight switches, for
selected customers to complement its existing service offering. Customers
include Coca-Cola and financial institutions such as Promstroibank and Bank St.
Petersburg, and it is anticipated that an expansion of this service will take
place once market demand has been confirmed.
Operator services. PeterStar has provided operator assistance service
since the third quarter of 1995 pursuant to a 1995 agreement with SPMMTS. The
agreement with SPMMTS provides PeterStar with primary access to the "07" (long
distance) operators connecting customers on a non-automatic dial destination
throughout the Russian Federation and the other countries of the former Soviet
Union. Other operator services offered include conference calling and
person-to-person calling. PeterStar also plans to provide access to wider
databases including those provided by C.P.Y. Yellow Pages Limited, the Company's
wholly owned subsidiary which publishes a business-to-business directory for St.
Petersburg ("Yellow Pages").
Calling Card Services. In November 1995, PeterStar launched a direct dial
calling card service, enabling customers to dial directly through to the
PeterStar network when using a tone dial telephone. The service, which provides
both debit and credit card service, is also available via the PeterStar operator
service for pulse and rotary dial telephones. PeterStar has expanded this
service offering through co-operation with Comstar, a network operator in
Moscow, providing PeterStar customers access in Moscow. PeterStar is currently
considering a further expansion of its calling card platform in conjunction with
the development of the Teleport-TP national network facilities.
Equipment Sales. PeterStar offers customers a wide range of
telecommunications equipment as a means of enhancing its service. It offers
PBXs, key systems, handsets, and the full range of customer terminals including
Partner, Partner Plus, Eurogenesis and Definity. PeterStar also offers a
maintenance service for the equipment.
ISDN. PeterStar has installed an ISDN platform to service the demand in
the local marketplace. PeterStar also offers international ISDN services,
following agreement on the standard for C-7 signaling and the upgrading of the
international gateway.
Internet. Since August 1996, PeterStar has provided its subscribers access
to the Internet via WEBplus, a local Internet service provider. PeterStar
provides dial-up and dedicated network access to customers wishing to use the
WEBplus service.
CUSTOMERS AND MARKETING
PeterStar's customer base currently consists of three general categories:
(i) business customers; (ii) cellular and other network operators; and (iii)
residential customers. PeterStar's primary focus is the provision of voice and
data services to business customers, focusing on those which generate large
amounts of outgoing long distance and international traffic.
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<PAGE> 17
PeterStar continues to experience a shift in its customer base, from
foreign companies (which tend to use the higher priced international services)
to predominantly Russian businesses and, to a lesser extent, residential
customers (for whom local calling is the principal usage).
The following table illustrates, as of December 31, 1995, 1996, 1997 and
1998, the number of lines on the PeterStar network, set forth by customer
segment:
<TABLE>
<CAPTION>
NO. OF NO. OF NO. OF NO. OF
LINES LINES LINES LINES
AS OF % OF AS OF % OF AS OF % OF AS OF % OF
DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995
TYPE OF CUSTOMER 1998 TOTAL 1997 TOTAL 1996 TOTAL 1995 TOTAL
- - ---------------- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Direct dial -- business........ 42,495 25% 24,344 21% 12,482 24% 4,840 23%
Direct dial -- consumer........ 17,500 11% 4,482 4% 2,310 4% 2,029 9%
Cellular....................... 108,278 64% 85,948 75% 37,213 72% 14,659 68%
------- --- ------- --- ------ --- ------ ---
Total................ 168,166 100% 114,774 100% 52,005 100% 21,528 100%
======= === ======= === ====== === ====== ===
</TABLE>
COMMERCIAL VOICE AND DATA SERVICES
PeterStar's digital overlay network provides its customers with improved
connectivity, as well as a package of exchange services such as call waiting,
call forwarding and three-way conferencing. PeterStar offers its customers a
choice between new digital installations or the upgrading of existing PTN analog
connections to digital capability. New lines are provided via either traditional
copper connections or fiber optic cables.
For domestic long distance connections, PeterStar offers dedicated digital
circuits to Moscow. Moscow is the destination of approximately 40% of the long
distance traffic from St. Petersburg, all other national traffic being directed
to the national switching center of Rostelecom in Moscow for delivery throughout
the Russian Federation.
SPMMTS is the gateway for international calls to and from St. Petersburg
and SPMMTS has a number of options for the forwarding of international calls.
Such calls can be directed to an international gateway owned by SPI, a joint
venture between BT and SPMMTS which has satellite connections to the UK. In
addition, SPMMTS has access, via Rostelecom, to the undersea cable between
Russia and Denmark for international traffic. Finally, SPMMTS has the option to
route international traffic through the international gateway in Moscow. In
addition to SPMMTS, there are several independent dedicated networks which
provide international telecommunications access in St. Petersburg, including
BCL.
Call revenues and total minutes in the commercial voice and data services
segment (i.e, non-cellular) amounted to $30.9 million, $22.5 million, $12.8
million and $6.2 million, and 220,022,000, 126,220,000, 71,128,000 and
19,995,000, in 1998, 1997, 1996 and 1995, respectively.
Business Customers. PeterStar's primary focus has been the provision of
telecommunications products and services to business customers, focusing on
those which generate large amounts of outgoing long distance and international
traffic. PeterStar targets both foreign and, increasingly, Russian businesses
which have requirements for high quality local, long distance and international
telecommunications services. As of December 31, 1998, Russian businesses, such
as Baltika Brewery and LenEnergo, represented approximately 70% of PeterStar's
42,495 business subscriber lines and foreign businesses, such as ABB, Rothmans
Inc., Pepsi, Alcatel, Nokia, McDonalds, Volvo, PricewaterhouseCoopers and Philip
Morris, represented the balance. Total call revenues from PeterStar's directly
connected business customers were $30.5 million in 1998.
Residential Customers. As of December 31, 1998, PeterStar had connected
17,500 residential customers to its network. Revenues from direct dial
residential customers (principally connection charges and line rentals) totaled
$0.7 million in 1998 (of which $0.4 million was call revenue). At present,
PeterStar does not directly receive any local call revenues from its residential
customers, but does bill and collect revenues for national and international
calls at the SPMMTS tariff. In 1999, PeterStar will complete a project with PTN
to
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upgrade telecommunications services on Vassilievski Island, a project which is
increasing the number of residential customers on the PeterStar network.
EXPANSION OF VOICE AND DATA SERVICES
PeterStar has undertaken with PTN an infrastructure project centering on
the replacement of analog step-by-step and cross-bar exchanges with digital
telecommunications equipment for Vassilievski Island, a city district in St.
Petersburg. The project requires the conversion of a total of approximately
30,000 business and residential lines that were previously operated by PTN,
after which such lines become part of the PeterStar network and the users become
PeterStar customers. As of December 31, 1998, approximately 13,000 lines had
been converted, with the balance expected to completed in the first half of
1999. While the business customers are charged either PeterStar or PTN tariffs
(based on their traffic patterns), the residential customers pay PeterStar the
equivalent PTN rate for the line rental. PeterStar collects the revenues on
national and international calling from these customers, although the level of
such calling for residential customers, who are the bulk of the new customers,
is not substantial. The total cost of the project is estimated at approximately
$25 million, of which $13 million is for network infrastructure and the balance
for civil works and local network upgrades. This amount also includes
approximately $3 million for an upgrade to the core PeterStar overlay network.
As of December 31, 1998, a total of $23.7 million had been spent, representing
approximately 95% of the project's total cost.
PeterStar also expects to increase its operating presence in Northwest
Russia through the targeted development of digital infrastructure to connect
business customers and to develop operational relationships with the regional
telephone companies. PeterStar is exploring the possibilities for closer
cooperation with both Teleport-TP and BCL in connection with the expansion of
its core business in St. Petersburg and the implementation of its strategy in
Northwest Russia.
The implementation of this expansion in direct dial services involves a
variety of risks, including those set forth in "-- Risk Factors -- Risks
Involving PeterStar Company Limited and Baltic Communications Limited."
CELLULAR SERVICES
The three cellular operators in St. Petersburg currently utilize the
PeterStar network to deliver high quality services to their customers and
provide reliable access to the local, long distance and international networks.
PeterStar's digital infrastructure enhances the ability of the cellular
operators to consistently receive and deliver their customer's traffic, a
benefit that is not achievable by using the outdated PTN transmission network.
In addition, the lack of capacity on the PTN network provides a significant
constraint on the ability of the cellular operators to expand their capacity to
meet market demand. Access to the PeterStar network provides these cellular
operators with the additional capacity necessary to accommodate their planned
growth.
The number of cellular customers in St. Petersburg has increased from
approximately 6,400 at December 31, 1994 to over 110,000 at December 31, 1998,
as St. Petersburg has become one of the fastest growing cellular markets in
Russia. The cellular operators in St. Petersburg experienced a drop-off in the
number of subscribers following the August 1998 crisis, although there are signs
that the subscriber numbers are beginning to recover. Subscribers are primarily
business customers who use cellular service as a mobile telecommunications tool
rather than as an alternative to the wireline network.
The three cellular operators in St. Petersburg are:
Delta Telecom. Delta, the NMT 450 operator which is a joint venture
between PTN and an affiliate of MediaOne (formerly U.S. West Media Group, Inc.),
was connected to the PeterStar network in September 1995. As of December 31,
1998, the majority of Delta's subscribers (of which 20,789 were active) were
connected to the PeterStar network.
North West GSM. NW GSM, the digital 900 MHZ operator for the city which is
a joint venture between Sonera, Telia, Telenor, Lensvyaz and Telecominvest, has
been connected to the PeterStar system
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since September 1994. As of December 31, 1998, all of NW GSM's subscribers (of
which 73,673 were active) were connected to the PeterStar network.
Fora Communications. Fora, a joint venture between Millicom International
Cellular ("Millicom") and the City of St. Petersburg, is an AMPS 800 cellular
system that has been connected to the PeterStar network since July 1994. As of
December 31, 1998, all of Fora's subscribers (of which 13,816 were active) were
connected to the PeterStar network.
The following table sets forth, for each cellular operator, the number of
active lines connected to PeterStar at December 31, 1995, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
OPERATOR 1998 1997 1996 1995
- - -------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Fora Communications................... 13,816 16,671 8,603 3,410
NorthWest GSM......................... 73,673 52,681 22,210 7,049
Delta Telecom......................... 20,789 16,596 6,400 4,200
</TABLE>
Call revenues and total minutes in the cellular segment amounted to $12.2
million, $9.0 million, $5.2 million and $2.2 million, and 178,370,000,
119,096,000, 57,729,000 and 17,830,000 minutes, in 1998, 1997, 1996 and 1995,
respectively.
NETWORK AND FACILITIES
PeterStar's network and facilities give it the ability to provide advanced
digital services to the telecommunications market in St. Petersburg, services
that the Company believes PTN, with its primarily analog network, will be unable
to provide in the near term due to internal funding constraints. The PeterStar
network consists of digital exchanges which are connected by fiber optic cables,
advanced transmission systems and remote switching units and concentrators. The
fiber optic network forms twelve rings, permitting traffic to be re-routed in
the event that a cable is cut or damaged. The network is fully interconnected
with the PTN network, with direct and indirect connections via approximately 680
kilometers of fiber optic cable to all thirty-four PTN transit exchanges
distributed throughout St. Petersburg. These direct connections to all of the
primary PTN exchanges enable callers to by-pass congestion on the PTN network.
The fiber optic cables also provide direct links to the national and
international switch, providing PeterStar customers with high quality long
distance and international access. PeterStar expects that it will continue to
incrementally add switching, transmission capacity and local loop infrastructure
to its core network in order to address its target market in St. Petersburg and
regional points of presence.
In addition to core network development, PeterStar, as part of its goal to
be the full service telecommunications provider to the business community in St.
Petersburg, has undertaken a number of specialized customer connections to its
network, tailoring the solution to the specific customers' needs. This involved
investment in, among other things, new cable, trunked radio, and customer
premises equipment. Customer contracts concluded in 1998 include those with the
Customs Authority, the Russian Mint, Lenexpo and Siemens.
PeterStar has signed a contract with Tadiran, an Israeli wireless equipment
manufacturer, to supply 1,500 lines of wireless local loop infrastructure.
PeterStar has deployed such equipment where: (i) local loop infrastructure is
non-existent or of poor quality; and (ii) the cost of installing cable would be
prohibitive. As of December 31, 1998, PeterStar had in operation 809 wireless
local loop lines and plans on expanding the wireless local loop service offering
during 1999 based on customer demand.
The PeterStar network currently consists of three AT&T 5ESS exchanges and
several remote concentrators. PeterStar's Vassilievski Island exchange now
serves as its main transit exchange, and is linked to the other PeterStar
exchange located in Ligovskaia, in the central business district of St.
Petersburg, as well as with PTN and SPMMTS. The Ligovskaia switch is being
upgraded in order to provide redundancy to the main Vassilievski Island transit
exchange. The Vassilievski Island exchange has the capacity to serve a large
number of customers, both in the immediate vicinity of Vassilievski Island and
at remote locations via the
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fiber optic network. This capacity enables PeterStar to carry substantial
volumes of traffic to and from the PTN network to other network operators, such
as cellular, Internet and paging operators, and to provide high quality links
for long distance and international calls. PeterStar has added incremental
transmission capacity and upgraded its transmission network from STM-4 to
STM-16, as well as working on the provision of new service features. In
addition, as part of its strategic relationship with PTN, PeterStar intends to
continue to provide targeted support to PTN in its effort to upgrade and
modernize its network. See "-- Expansion of Voice and Data Services" and
"-- Risk Factors -- Risks Involving PeterStar Company Limited and Baltic
Communications Limited -- Dependence on PTN Facilities."
BILLING, TARIFFS AND INTERCONNECTION CHARGES
Billing
Except for the residential and business customers on Vassilievski Island
(which are billed in Roubles at the PTN rate), PeterStar denominates its tariffs
in U.S. Dollars, with its customers paying the monthly invoice in Roubles at the
U.S. Dollar/Rouble exchange rate on the date when the customer instructs its
bank to make payment. By denominating its tariffs in U.S. Dollars (and
exchanging Roubles at the then current U.S. Dollar/Rouble exchange rate),
PeterStar reduces the exchange rate risk otherwise associated with transacting
business in a foreign currency. However, during the third and, to a lesser
extent, fourth quarters of 1998, significant delays occurred in the processing
of payments within the Russian banking system and led to exchange losses in
those periods. See "-- Risk Factors -- Country Risks -- Restrictions on Currency
Conversion; Historical Volatility in Currency Prices."
Tariffs
There are no specific regulations regarding tariffs charged by PeterStar
(except for customers on Vassilievski Island which are charged the PTN tariff).
PeterStar sets its tariffs taking into account those charged by PeterStar's
interconnect parties, namely PTN, SPMMTS and SPI, as well as competitive
pressures in the marketplace. PeterStar charges its customers for the
installation of equipment and initiation of service, line rental, local, long
distance and international calls and special services.
In the period during which PeterStar has operated, there has been
significant price convergence between PeterStar and public network national and
international call tariffs. As PeterStar has widened its customer base, it has
reduced its national and international call tariffs. At the same time, public
network tariffs have increased for long distance access. Until PTN introduces
local call metering to its customers, PeterStar will not receive any local
calling revenues from its residential customers, and the timing of the
introduction of such metering remains unclear.
PeterStar's published tariff for local calls differs according to whether
the call is made during peak times (8 AM to 8 PM) or at other times. For
domestic and international long distance calls, tariffs are based on the call's
destination and the time of the call. PeterStar offers discounts, based on call
volumes, for customers who make a large number of calls per month.
PeterStar charges a flat per line installation charge for telephone lines
and for 2Mb/s digital circuits, regardless of the number of lines or circuits
installed. In addition, customers are charged a monthly rental charge for the
telephone lines and digital circuits.
Business Customers. PeterStar business customers are charged the full
PeterStar published tariffs for installation and initiation charges, line rental
and local, long distance and international calls. Certain discounts are given
for installations based on the number of lines installed at a single customer
location and for call volumes.
Cellular Operators. The cellular companies pay PeterStar for the
installation and lease of 2 Mb/s links, a connection charge for each number
connected and a monthly rental fee for each number, plus volume related call
charges.
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Residential Customers. PeterStar currently receives line rental and
connection charges from residential customers at the PTN rate. PeterStar will
not receive local call charges from residential customers until PTN imposes such
charges and then will only receive charges at the PTN rate. Long distance and
international calls are billed directly by PeterStar. For residential customers
connected as part of the Vassilievski Island project, PeterStar collects all
revenues for long distance and international calling, with charges at the PTN
tariff level.
Interconnection Charges
PeterStar has been able to negotiate favorable tariffs for interconnection
fees and carrier charges with both PTN and SPMMTS. PeterStar's current
interconnect agreements with PTN and SPMMTS are open-ended agreements, while the
interconnection fees and carrier charges payable under the interconnect
agreements are subject to renegotiation between the parties from time to time.
Commencing in 1998, PeterStar has been required to pay a local line rental
charge to PTN, although roughly half of the fee otherwise payable during 1998
was offset against amounts owed to PeterStar by PTN in respect of the
Vassilievski Island project. The aggregate amount paid to PTN in 1998 for line
rental charges was $1.3 million. The amount of the 1999 line rental charged has
not yet been determined, but PeterStar expects once again to be able to offset
amounts owing from PTN against such charges during 1999. See "-- Risk Factors --
Risks Involving PeterStar Company Limited and Baltic Communications
Limited -- Dependence on Interconnect Parties."
TELECOMMUNICATIONS LICENSES
In June 1996, PeterStar was granted a license, which superseded a license
granted in November 1994, for an eight year term expiring November 2004 to
provide local, national and international telecommunications services within St.
Petersburg and the surrounding region. One of the conditions of this license is
that access to long distance and international communications be through the
public network. Other licenses that have been issued to PeterStar include a
dedicated network license (expiring September 2001), a data communications
license (expiring May 2001), a telematics license (expiring May 2001) and a
videoconferencing license (expiring June 2001). Based on its experience in
renewing existing, and obtaining new, licenses and its general knowledge of the
licensing environment in Russia, management of PeterStar believes that, so long
as they are being actively utilized, all such licenses will be renewed at the
end of their respective terms.
The main PeterStar license, governing the provision of public
telecommunications services, sets the number of lines which PeterStar may have
in St. Petersburg and the surrounding region at 106,000, and requires that
capacity equal to 74,200 lines be introduced by June 1999. Based on its
experience in renewing existing, and obtaining new, licenses and its general
knowledge of the licensing environment in Russia, management of PeterStar
believes that the maximum and minimum number of lines are not strict
requirements but are instead designed to provide general guidance as to the
number of lines intended to be included on the system. As of December 31, 1998,
PeterStar had 168,166 lines, of which 108,278 were provided to cellular
operators. PeterStar does not believe that its license would be terminated or
re-negotiated, that it would be forced to reduce the number of its subscribers,
or that other penalties would be imposed, by reason of its exceeding its 106,000
line ceiling, but there can be no assurance that the RFCTI would not take a
different position which in turn could result in the revocation of the license
or its renegotiation on terms unfavorable to PeterStar or the imposition of
penalties. It is not possible to calculate the amount of any penalties which
might be imposed, which are in the discretion of the RFCTI.
The dedicated network license permits PeterStar to provide long distance
and international telephone transmission services to dedicated network operators
(such as BCL) in St. Petersburg and the surrounding region for a term expiring
in September 2001. The dedicated network license sets the number of lines which
PeterStar may have at 30,000 and requires that capacity equal to 21,000 lines be
introduced by September 1999. Once again, based on its experience in renewing
existing, and obtaining new, licenses and its general knowledge of the licensing
environment in Russia, management of PeterStar believes that the maximum and
minimum number of lines are not strict requirements but are instead designed to
provide general guidance as to the number of lines intended to be included on
the system. However, there can be no assurance that the RFCTI would not take a
different position which in turn could result in the revocation of the licenses
or their
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renegotiation on terms unfavorable to PeterStar or the imposition of penalties.
It is not possible to calculate the amount of any penalties which might be
imposed, which are in the discretion of the RFCTI. See "-- Risk Factors -- Risks
Involving PeterStar Company Limited and Baltic Communications
Limited -- Reliance on Telecommunications Licenses; Risks of Revocation or
Renegotiation of Licenses."
EQUIPMENT AND OTHER OPERATING AGREEMENTS
Equipment. Lucent is PeterStar's primary network equipment supplier. In
recent years, equipment supply agreements have been entered into with Lucent for
the purchase of telecommunications equipment, including transmission systems,
switching equipment and related software, for the PeterStar network, including
for the Vassilievski Island project. In some cases, Lucent has provided vendor
financing, using Dutch export credit guarantees. In all other cases, the
equipment has been purchased by the Company and resold on an installment payment
basis to PeterStar.
Cellular and Other Operators. Pursuant to interconnect agreements with
Delta, NW GSM and Fora, PeterStar provides interconnect service from the
cellular networks to the local network and a gateway for long distance and
international networks. Traffic interconnections are linked and made through
PeterStar's switch system. The interconnect agreements provide for the following
payments to be made by each cellular operator to PeterStar based on 2 Mb/s trunk
connections: monthly lease fees for each trunk; per-subscriber number fees and
per-minute tariffs. The Delta agreement is for a one year term, renewable for
additional one year periods by mutual agreement. The NW GSM agreement is for a
minimum period of two years, after which either party may terminate upon not
less than three months prior written notice. The agreement with Fora is for two
years and may be extended by mutual agreement for successive five year periods.
EMPLOYEES
As of December 31, 1998, PeterStar had 412 employees, all of whom were
full-time. Of these employees, 411 were Russian nationals and one was an
expatriate manager. None of its employees is subject to a collective bargaining
agreement. PeterStar believes that its relations with its employees are good.
BALTIC COMMUNICATIONS LIMITED
BUSINESS
BCL, in which the Company acquired a 100% equity interest in April 1996,
provides international direct dial, international payphone and leased line
services for Russian and foreign businesses in St. Petersburg and the Leningrad
Oblast. BCL also offers a number of advanced broadband services, as well as
"carrier's carrier" services to other telecommunications operators. BCL has its
own switching and international transmission facilities in St. Petersburg, which
act as a gateway for corporate customers in both Moscow and St. Petersburg. The
BCL network consists of an international and local switch and capacity on the
international fiber optic cable via Finland to Sweden and the United Kingdom.
BCL's primary international carrier relationships are with Telia of Sweden,
Cable & Wireless Communications of the United Kingdom and Lattelekom of Latvia.
BCL rents local access from PeterStar and PTN to connect its customers in St.
Petersburg.
BCL had a total of approximately 1,200 lines connected as of December 31,
1998 and generated approximately 10,408,000 million minutes of traffic for the
year ended December 31, 1998. BCL is currently investigating means to increase
the capacity on its network and to provide additional capacity for "carrier's
carrier" services.
The Company endeavors to cross-sell the distinct service offerings provided
by PeterStar and BCL to their respective customer bases. For example,
PeterStar's marketing representatives are now also able to market BCL's
international private line services to PeterStar's and other corporate
customers. In addition, control of both PeterStar and BCL provides the Company
with the opportunity to: (i) potentially realize economies of scale at the
operational level (i.e. a single sales and customer services channel and
coordinated technical resources); and (ii) introduce new services to targeted
markets in a more efficient manner. In addition, PeterStar and BCL are exploring
the possibilities of closer cooperation in connection with the
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expansion of their respective core businesses in St. Petersburg and the
implementation of their strategies in Northwest Russia.
BCL generated net income for the year ended December 31, 1998 of $0.4
million on operating revenues of $9.9 million, as compared to net income of $0.8
million on operating revenues of $7.6 million for the year ended December 31,
1997. BCL accounted for 6.8% of the Company's operating revenues for the year
ended December 31, 1998, compared to 6.6% for the year ended December 31, 1997.
BCL, a Russian closed joint stock company, was incorporated in 1991.
TELECOMMUNICATIONS LICENSE
BCL's primary license permits it to provide long distance and international
telephone, facsimile and data transmission services within St. Petersburg and
the surrounding region for a term expiring on December 31, 2003. Management
believes that, so long as it is being actively utilized, BCL's license will be
renewed at the end of its current term. BCL is not required to route its long
distance traffic through the facilities of SPMMTS, and has its own international
facilities providing cable access. However, BCL's license does not permit it to
interconnect with PTN's public network. BCL is therefore working with PeterStar
to explore providing integrated long distance and international solutions for
customers. The license sets the upper limit of subscribers to the BCL network at
100,000 and requires that 70,000 of these be in place by January 2001. BCL had a
total of approximately 1,200 lines as of December 31, 1998. Based on its
experience in renewing existing, and obtaining new, licenses and its general
knowledge of the licensing environment in Russia, management of BCL believes
that the maximum and minimum line numbers are not strict requirements but are
instead designed to provide general guidance as to the number of lines intended
to be included on the system. However, there can be no assurance that the RFCTI
would not take a different position which in turn could result in the revocation
of the license or its renegotiation on terms unfavorable to BCL or the
imposition of penalties. It is not possible to calculate the amount of any
penalties which might be imposed, which are in the discretion of the RFCTI. See
"-- Risk Factors -- Risks Involving PeterStar Company Limited and Baltic
Communications Limited -- Reliance on Telecommunications Licenses; Risks of
Revocation or Renegotiation of Licenses."
EMPLOYEES
As of December 31, 1998, BCL had 94 employees, all of whom were full-time.
Of these employees, 93 were Russian nationals and one was an expatriate manager.
None of its employees is subject to a collective bargaining agreement, although
there is a union representative at BCL. BCL believes that its relations with its
employees are good.
TECHNOCOM LIMITED
OVERVIEW
Technocom, in which the Company owns an 80.4% interest, is the Company's
holding company for its interests in various telecommunications ventures in the
Russian Federation outside of St. Petersburg and the surrounding region.
Technocom's principal asset is its 49.33% equity interest (56% voting interest)
in Teleport-TP, a Moscow-based long distance and international operator
targeting the commercial sector and other telecommunications operators with its
satellite-based telecommunications services. Technocom also holds a 49% interest
in MTR-Sviaz, a venture formed by Technocom and Mosenergo, the Moscow city power
utility, to modernize and commercialize a portion of Mosenergo's internal
telecommunications network. See "-- Ownership and Management of Operating
Subsidiaries -- Technocom Limited."
In addition, Teleport-TP is a 25% shareholder in Gorizont-RT, a GSM
cellular operator in the Republic of Sakha, an autonomous region within the
Russian Federation. Under the joint venture arrangements, Teleport-TP was
required to procure two GSM switches for Gorizont-RT; these have been supplied
by Technocom through a lease arrangement. In addition, Teleport-TP is the
primary carrier for long distance
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traffic for both the cellular network and the local telephone company,
Sakhatelekom, which is the majority shareholder in Gorizont-RT.
Technocom recorded a net loss for the year ended December 31, 1998 of $15.6
million on operating revenues of $22.2 million, as compared with a net loss of
$4.8 million on operating revenues of $21.0 million for the year ended December
31, 1997. Technocom accounted for 15.3% of the Company's operating revenues for
the year ended December 31,1998 as compared to 18.5% for the year ended December
31, 1997.
Teleport-TP recorded a net loss for the year ended December 31, 1998 of
$4.7 million on operating revenues of $18.2 million, as compared with a net loss
of $2.8 million on revenues of $16.9 million for the year ended December 31,
1997.
Technocom, an Irish company, and Teleport-TP, a Russian closed joint stock
company, were both organized in 1992.
STRATEGY
Teleport-TP has developed from being a provider of international
telecommunications services from a single point of presence in Moscow to a
company able to provide high-quality domestic and international long distance
services in multiple locations across the Russian Federation and certain other
countries of the former Soviet Union. Teleport-TP utilizes Western satellite
capacity and technology and the Company believes that there is a largely
untapped market for satellite-based services between various regions of the
Russian Federation due to the current poor quality, or total absence, of
terrestrial digital long distance lines in many areas. Installation of the first
phase of the long distance network commenced in the second half of 1996, with 36
sites installed as of December 31, 1998. Technocom has contracted with the
telecommunications equipment supplier Scientific-Atlanta, Inc. to supply
equipment for a total of 45 sites which, based on current plans, will be
installed by mid-1999.
Technocom expects to further develop its group's presence in Moscow through
the targeted development of infrastructure via Teleport-TP and MTR-Sviaz, and
through co-operation agreements with other network providers to deliver value
added voice and data services to the corporate market. Teleport-TP and MTR-Sviaz
are presently working together to address the corporate market, with MTR-Sviaz
providing or arranging to provide the local infrastructure in Moscow, and
connecting customers to Teleport-TP for national and international access.
TELEPORT-TP
Overview
Since 1994, Teleport-TP has operated an international telecommunications
network providing dedicated voice, data and video services, as well as
bandwidth, to Russian and foreign businesses and private telecommunications
networks. During 1998, Teleport-TP continued the installation of a long distance
network (installation of which commenced in 1996) which is being targeted to
high volume customers requiring high quality, reliable long distance service
across the Russian Federation. Targeted customers include: (i) regional public
telephone companies (Electrosviaz); (ii) local public telephone companies; (iii)
private cellular, wireline, data and other network operators; and (iv) corporate
users.
Dedicated International Network Services
Products and Services
Voice and Data Services. Teleport-TP provides international voice and data
services, as well as bandwidth, to a number of private networks in the Russian
Federation and to Russian and foreign businesses, including Rostelecom, the
primary national and international long distance carrier in the Russian
Federation and a 44% shareholder in Teleport-TP, Sprint and MTR-Sviaz. As of
December 31, 1998, Teleport-TP provided access to over 1,000 international
digital circuits to 25 operators in 22 countries, making it one of the largest
international carriers in the Russian Federation. Teleport-TP has opened up
direct routes to Georgia, Kazakhstan and Kyrgyzstan in the C.I.S.
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Teleport-TP provides these international telecommunications services
through access to two Intelsat satellites and one Eutelsat satellite.
Teleport-TP's arrangements with Intelsat and Eutelsat provide it with flexible
and reliable satellite capacity, allowing Teleport-TP to provide consistent,
high quality dedicated international telecommunications services to Russian and
foreign businesses. The Company believes these arrangements represent a
competitive advantage over carriers using less reliable Russian-made satellite
systems.
In order to reach those countries to which it has not yet opened direct
routes, Teleport-TP has entered into carrier relationships with Deutsche Telekom
("DT") in Germany, AT&T in the United States and Kokusai Denshin Denwa Co., Ltd.
("KDD") in Japan. Teleport-TP receives at least the same accounting rates and
equal division of revenues from DT, AT&T and KDD as has been negotiated between
the predecessor to the RFCTI and the German, United States and Japanese
governments.
Television Transmission. An additional source of revenue for Teleport-TP
has been the provision of international circuits for the transmission of
television signals to broadcasters which require international transmission
capacity on an as-needed, rather than a scheduled, basis. Customers for this
service include Capital Cities -- ABC, NHK and Fuji TV of Japan and TV India.
Customers and Marketing
Rostelecom. Rostelecom, the primary national and international carrier in
the Russian Federation and the holder of a 44% ownership interest in
Teleport-TP, is Teleport-TP's principal customer for dedicated international
network services. As of December 31, 1998, Teleport-TP leased approximately 800
active circuits via Intelsat and Eutelsat to Rostelecom, pursuant, as to the
Intelsat circuits, to a contract which was originally signed in December 1992
and is now automatically renewed for one year terms unless otherwise terminated
by either party and, as to the Eutelsat circuits, to a ten-year contract which
commenced in September 1995. Revenue from Rostelecom in 1998 totaled $5.4
million. Rostelecom utilizes Teleport-TP on traffic routes where it does not yet
have a direct terrestrial connection and where the cost of a terrestrial
connection would be prohibitive. On such routes, Teleport-TP provides Rostelecom
with a means of accessing high quality digital international circuits that are
not available via other Russian satellite or terrestrial means. See "-- Risk
Factors -- Risks Involving Technocom Limited and Teleport-TP -- Dependence on
Rostelecom as Customer; Necessity to Further Develop Customer Base."
Carrier Relationships. Teleport-TP, through its direct carrier
relationships, the most important of which is with KDD of Japan, delivers
incoming international traffic to its private network.
Private Networks. Teleport-TP also has relationships with a number of
business centers and private network operators. Teleport-TP's most important
private network customer to date has been Sprint Sviaz, a Russian subsidiary of
Global One, which leases 30 international circuits. Other customers include MTR-
Sviaz, Technopark, the Intourist Computer Center and the Oil House Business
Center.
Network and Facilities
Teleport-TP Network. Teleport-TP's dedicated international
telecommunications network consists of an earth station (with three antennae),
an international gateway switch and fiber optic cable. These network facilities
are owned by Technocom and leased to Teleport-TP. The earth station consists of
two Standard-A 18.3 meter antennas linked to two Intelsat satellites, one of
which (at 342(LOGO)) serves Western Europe and the United States and the other
of which (at 62(LOGO)) serves the Far East, and a 13 meter antenna linked to a
Eutelsat satellite (at 36(LOGO)) which provides additional connectivity to
European countries.
Fiber optic cable links Teleport-TP's switch with its principal customers,
including the national network of Rostelecom, the national television switching
center in Ostankino, and a number of business parks, overlay network operators
such as MTR-Sviaz and Comstar, and state-owned utilities located in Moscow and
the Moscow region.
Teleport-TP is connected to the facilities of MTR-Sviaz to terminate
certain traffic to users on the MTR-Sviaz network. MTR-Sviaz uses leased
circuits from a number of network providers, access to the Teleport-TP fiber
optic facilities, and the Mosenergo internal communications network to terminate
its calls. Teleport-
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TP also uses the MTR-Sviaz facilities to house its Internet gateway, from which
links to Internet Service Providers (ISPs) are provided via leased and dial-up
lines on the public network. Teleport-TP also acts as the long distance gateway
for subscribers on the MTR-Sviaz network.
The fiber optic cable utilizes the underground duct facilities of MGTS, the
operator of the local telephone network in Moscow, under one year agreements
which are subject to automatic one year renewals unless either party provides
timely notice of cancellation. The current agreements expire on December 31,
1999. See "-- Risk Factors -- Risks Involving Technocom Limited and
Teleport-TP -- Dependence on MGTS Facilities."
Intelsat Arrangements. Teleport-TP currently routes international traffic
through two Intelsat satellites at 342(LOGO) and 62(LOGO). The annual cost of
such circuits is currently $1.2 million. In addition, Teleport-TP has leased
transponder capacity on a third Intelsat satellite (at 66(LOGO)) in connection
with the development of its long distance network program in Russia and the
C.I.S. at an annual cost of $4.1 million. The circuit capacity is leased on a
"rolling" 15-year basis, under which each lease automatically renews each year
for a 15-year term, unless the election is made not to roll over the commitment,
in which event the lease terminates on a date 15 years later. The transponder
leases are for fixed 15-year terms, terminating in 2012 and 2013, respectively.
See "-- Long Distance Network Services--Network and Facilities."
The Intelsat system, with 22 operational satellites of 4 different
configurations, is of significantly greater size, and provides greater coverage,
than any of its competitors. Intelsat's global capacity makes it the leading
international telecommunications satellite operator. The Intelsat organization
is able to offer flexible and reliable satellite capacity, supported by a
variety of contingency plans. Additionally, because of the strength of the
Intelsat organization, manufacturers and operators have designed their ground
stations to be compatible with Intelsat's specifications, creating a system that
is global and transparent to users and their customers.
Since January 1993, Teleport-TP has been one of only three direct Intelsat
customers in the Russian Federation. Teleport-TP's relationship with Intelsat
provides a number of advantages to Teleport-TP and its customers, including: (i)
high quality and reliable service resulting from the reliability of the
satellite system; (ii) a wide range of service options; (iii) a wide range of
consulting and training services; and (iv) operational planning and management
services reflecting Intelsat's experience with in excess of 60
telecommunications satellites over a period of 30 years.
Eutelsat Arrangements. Pursuant to a ten-year agreement with Eutelsat,
which commenced in September 1995, Teleport-TP has access to a total switched
capacity of 1,800 international circuits. Teleport-TP currently provides access
to seven countries in Europe via a Eutelsat satellite at 36(LOGO).
Teleport-TP is one of three private registered Eutelsat operators in the
Russian Federation and, in 1997, became an equity participant in Eutelsat as
well. Eutelsat is the intergovernmental organization responsible for providing
satellite communications space segment facilities for almost all European
nations. Although originally designed to provide principally television and
radio capacity, Eutelsat satellites now carry large quantities of
telecommunications traffic. Unlike Teleport-TP, most of the signatories to
Eutelsat are national telephone companies, often with a right to exclusive use
or monopoly control of operations of users within their home territory.
Teleport-TP has already benefited from its relationships with Eutelsat by
obtaining relatively inexpensive access to the Eutelsat system. Pursuant to the
initial agreement between Teleport-TP and Eutelsat, 50% of the cost of the earth
station is being financed on favorable terms by Eutelsat and 300 satellite
circuits are being provided free to Teleport-TP for the first three years.
The Eutelsat system is designed to have high transponder capacity, with
built-in redundancy, both within its satellites and by the provision of in-orbit
spare capacity. Additionally, the transponder, antenna and cross-connect
facilities make for very flexible space segment capacity. The Company believes
that Teleport-TP's position as a participant in Eutelsat and a provider of
Eutelsat services in the Russian Federation will provide it with a considerable
strategic advantage with respect to intra-European telecommunications.
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Long Distance Network Services
Products and Services
The Company believes that there is a largely untapped market for satellite
links between various regions of the Russian Federation due to the current poor
quality, or total absence, of terrestrial digital long distance lines in many
areas. In order to expand its customer base beyond Moscow and to meet growing
demand for reliable telecommunications links, Teleport-TP has developed
satellite links using both PAMA/SCPC (Pre-Assigned Multiple Access/Single
Channel Per Carrier) and DAMA (Demand Assigned Multiple Access) technologies
between cities and regions in the Russian Federation. These links are provided
by Teleport-TP, under the registered trade name "Satelink", directly between
cities and regions, without going through Teleport-TP's Moscow hub. In
particular, Teleport-TP is seeking to address the market for inter-regional
communications where call completion rates are understood to be low, primarily
due to the underdeveloped nature of the Rostelecom infrastructure. In addition,
Teleport-TP is seeking to address the market for intra-regional communications
where call completion is the responsibility of the regional network provider. In
such instances Teleport-TP becomes an integral part of regional network
developments. Currently, Teleport-TP has reached agreements with Uraltelecom and
the regional operators in Sakha and Chita for such regional networks. While, due
to various startup problems including logistical difficulties and administrative
difficulties with local and regional governmental authorities, there have been
significant delays in the installation of, and the clearance to operate the
equipment for this network, it is expected that a total of 45 sites will be
installed by mid-1999. See "-- Risk Factors -- Risks Involving Technocom Limited
and Teleport-TP -- Capital and Management Resources Required for Network
Expansion; Management of Growth."
Internet Services. Teleport-TP opened an Internet gateway during the first
quarter of 1997, using the registered trade name "Portal." The gateway is
configured to provide high speed data access to regional Internet service
providers as well as leased line and dial-up access in Moscow for corporate
clients.
Television Services. Teleport-TP has formulated a strategy to address the
growing demand for the resale of transponder capacity to domestic television
companies for: (i) the distribution of programming to regional sites for onward
terrestrial re-broadcasting; and (ii) direct distribution of digital TV
broadcasting.
Private Line Services. Teleport-TP also provides national and
international private leased circuit access to corporate entities, either as
part of an integrated private network package or on a case-by-case basis as
defined by the customer.
Value-Added Services. The Company anticipates that Teleport-TP will
develop a portfolio of corporate network services to address this specific
market sector as Teleport-TP's operations mature. Cooperation with PeterStar in
addressing this corporate market is also envisaged.
Customers and Marketing
These long distance services are being targeted to high volume customers
requiring high quality, reliable long distance service across the Russian
Federation. Targeted customers include: (i) regional and local public telephone
companies (Electrosviaz); (ii) private cellular, wireline, data and other
network operators; and (iii) corporate users. As of December 31, 1998, 42
contracts had been signed. Of these, 15 are with regional and local public
telephone companies, 16 are with cellular operators and alternative local access
providers and the balance are with corporate and individual users.
Implementation of these contracts in a timely manner is subject to the
ability of Teleport-TP to comply with any new operating conditions that may be
set by the local and regional governmental authorities in the areas in which it
operates. See "-- Risk Factors -- Risks Involving Technocom Limited and
Teleport-TP -- Capital and Management Resources Required for Network Expansion;
Management of Growth."
Teleport-TP acts as a "carrier's carrier" to public telephone companies and
cellular, wireline and other operators. Teleport-TP provides these operators
with long distance and, in many cases, international access via its dedicated
network so that these operators can provide high quality access to their own
subscribers.
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In developing a package of voice and data services for the corporate user,
Teleport-TP has enhanced its marketing and sales functions through recruitment
of experienced sales personnel and is addressing three distinct corporate market
segments: (i) the corporate market where the main focus of the customer is
located in Moscow and St. Petersburg (where co-operation can take place with
PeterStar and BCL), but where the customer also requires regional network
services; (ii) international ventures with requirements for both national and
international connectivity; and (iii) the corporate market in which the customer
has made the decision to expand to the regional cities or in which the
decision-making will take place in the regional centers.
Network and Facilities
The Teleport-TP network uses Scientific-Atlanta Skylinx.DDSTM Digital PAMA,
DAMA and IDR satellite telephony systems, technologies that are used by public
telephone companies either as a market entry mechanism or as an enhancement of
the existing terrestrial infrastructure. The network utilizes an 18.3-meter
Standard-A Intelsat satellite master antenna at the hub site in Moscow.
Agreements are in place with Intelsat for access to 77 MHZ of transponder
capacity on the Intelsat 704 satellite at 66(LOGO). Teleport-TP believes that
using this digital capacity from Intelsat represents a competitive advantage
over telecommunications operators using less reliable Russian domestic satellite
systems. Customers on Teleport-TP's long distance network -- public and private
telecommunications companies -- have the choice of taking permanent leased
circuits or switched circuits, depending on their requirements. In addition,
corporate customers now have the ability to create their own private networks
throughout the Russian Federation using this combination of permanent and
switched circuits.
As of December 31, 1998, 36 medium (7 meter) and small (4.5 meter) antenna
terminals had been installed in major cities throughout the Russian Federation;
including Ekaterinburg, Kazan, Orenburg, Astrakhan, Volgodonsk, Kaliningrad and
Stavropol, and in Kazakhstan and Georgia, providing digital voice and data
services. It is anticipated that a total of 45 antennas will be installed by
mid-1999.
The system is designed to be flexible, allowing for timely installation of
antennas in regional sites without changing the existing network configuration.
Additional channel units can be quickly installed at existing sites should
demand increase. The network has full mesh topology allowing customers in remote
sites to connect with other remote sites without going through a central hub
station, thus avoiding a "double-hop" on the satellite. This offers considerable
improvement over traditional "star" configuration satellite-based systems.
The Teleport-TP long distance network interconnects with Rostelecom for the
delivery of calls to locations where Teleport-TP does not have its own
facilities.
MTR-SVIAZ
MTR-Sviaz, which commenced operations in November 1996 and had
approximately 850 lines connected as of December 31, 1998, provides local,
national and international services to both corporate customers and the Internet
market. MTR-Sviaz uses leased circuits from a number of providers, access to the
Teleport-TP fiber cable facilities and the Mosenergo internal communications
network to terminate its calls. Teleport-TP uses the MTR-Sviaz facilities to
house its Internet gateway, from which links to ISPs are provided via leased and
dial-up lines on the public network.
MTR-Sviaz is a venture between Mosenergo (51%) and Technocom (49%) to
modernize and commercialize a portion of Mosenergo's internal telecommunications
network. MTR-Sviaz commenced operations in the third quarter of 1996 with the
initial network program encompassing the installation of a 10,000 line Siemens
exchange as a central switching node on the existing Mosenergo
telecommunications network. The switch is connected to Teleport-TP via fiber
optic cable, giving customers on the Mosenergo network direct access to the
digital long distance facilities of Teleport-TP's network. In addition to the
Mosenergo organization itself, other entities connected to the Mosenergo network
include commercial enterprises located at business centers on Mosenergo
premises.
Technocom's contribution to MTR-Sviaz included provision of the switch to
service 8,000 Moscow city lines and 2,000 lines on the internal Mosenergo
network and the acquisition of 4,000 Moscow city lines. The
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switch and lines were purchased by Technocom and are leased to MTR-Sviaz.
Further capital investment may be required if subscriber demand is greater than
anticipated. Customers on the MTR-Sviaz network include Mosenergo (1,000 lines)
and nine Internet service providers.
MTR-Sviaz, a Russian closed joint stock company, was incorporated in 1994.
OTHER ACTIVITIES
Cellular Services. Teleport-TP holds a 25% interest in Gorizont-RT, a
joint venture which has a license to provide GSM cellular service in the
Republic of Sakha, a semi-autonomous region of the Russian Federation. The other
parties to the joint venture are Sviazservice (24%) and Sakhatelekom, the local
Electrosviaz (51%). The network is currently operational in the cities of
Yakutsk, Mirny and Neriungry. In addition to taking an equity interest in the
project, Teleport-TP is providing the long distance access for the venture
through the installation of Satelink antennae at the above three sites. In
addition, Teleport-TP has an agreement with Sakhatelekom for the provision of
long distance access. The GSM switching equipment for Mirny and Neriungry has
been purchased by Technocom from Italtel and is being leased to Gorizont-RT. As
of December 31, 1998, Gorizont-RT had approximately 500 active subscribers
generating approximately $85,000 in revenues per month. Based on the level of
customer demand to date, Teleport-TP does not anticipate being required to
provide further funding to Gorizont-RT.
Teleport-TP paid an initial fee for its participation, and was required to
provide three antennae and two GSM switches capable of serving 1,500
subscribers. Teleport-TP receives 27% of the income derived from new
installations, line rentals and local calling, and 80% of the income derived
from long distance and international calling. Sakhatelekom has committed to
provide a minimum of 90,000 minutes of traffic per month, at a minimum tariff of
$1.50 per minute. Gorizont-RT's license has a term of eight years and requires
that 20% coverage of the territory of the Republic of Sakha (and an installed
network capacity of 3,000 numbers) be achieved by the end of 1997 and 50%
coverage of the territory of the Republic of Sakha (and an installed network
capacity of 20,000 numbers) be achieved by the end of 2004. Gorizont-RT did not
meet the initial coverage requirement by the end of 1997, but management does
not believe that this will have any material impact on its future licensing
position.
Other Joint Ventures. Technocom anticipates that it may, either directly
or through Teleport-TP, enter into joint ventures with local partners in
connection with the development of local network infrastructure either wireline
or wireless, to complement the development of its long distance network.
BILLING AND TARIFFS
Billing
International Network Services. Teleport-TP bills the operators of the
networks it serves, who in turn are responsible for billing the individual
subscribers to those networks. For its foreign carrier relationships,
Teleport-TP has agreed with KDD, DT and AT&T the inter-administration settlement
process for international traffic settlements.
Long Distance Network Services. Teleport-TP invoices the operators of
public telephone, and private cellular, wireline and other networks, which in
turn invoice their own subscribers. Teleport-TP invoices all corporate users
directly.
Currency of Billing. The tariffs for the Satelink long distance services
are generally posted and invoiced in Russian Roubles. Teleport-TP therefore
faces an exchange risk if the value of the Russian Rouble declines between the
time the bill is sent to the customer and the date that payment is received in
Russian Roubles, and a more significant exchange risk if, as in 1998, the Rouble
is devalued. Currently, revenues from Satelink represent 20% of Teleport-TP's
total revenues, and this percentage (and hence Teleport-TP's currency exposure)
is likely to grow as the Satelink program itself grows. Teleport-TP's other
tariffs are predominantly denominated in U.S. Dollars. Invoices are then paid
either in U.S. dollars or in Roubles at the U.S. Dollar/ Rouble exchange rate on
the date when the customer instructs its bank to make payment. While there is
still
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some exchange risk where tariffs are denominated in U.S. Dollars, it is more
limited. See "-- Risk Factors -- Country Risks -- Restrictions on Currency
Conversion; Historical Volatility in Currency Prices."
Tariffs
International Network Services. Teleport-TP is not subject to federal or
local regulation on tariffs. Teleport-TP sets its tariffs taking into account
those charged by its interconnect parties, as well as competitive pressures in
the marketplace. Teleport-TP maintains tariffs for international calls, private
line services for corporate clients and television transmissions. Teleport-TP
also has fixed line charges, for connection and rental fees, although these
currently do not contribute significantly to its revenues. However, as
Teleport-TP expands its activities and more private customers are connected to
its network, revenues from fixed line charges may become more significant.
The tariffs that Teleport-TP offers to its dedicated network customers for
international calls depend on the call's destination and the volume of calls
placed by each customer regardless of the time or day. Teleport-TP offers a
range of discounts for customers that exceed a certain targeted level of call
minutes. Discount packages are being developed for individual customers on a
case-by-case basis as the business matures. Teleport-TP provides international
private leased circuits to corporate customers at a monthly tariff, with prices
determined by the amount of bandwidth and the destination required by the
customer.
Domestic Long Distance Network Services. Per minute tariffs for the
satellite-based domestic long distance network services depend on the call's
destination and the volume of traffic. The tariffs for DAMA and IDR circuits are
also generally on a per minute basis. Tariff packages are being developed for
individual customers on a case-by-case basis as the business matures and will
incorporate, where necessary, the sale or lease of the antenna as part of the
package. Tariffs for private leased circuits to corporate customers range are on
a per circuit basis and vary based on the amount of bandwidth required by the
customer. In recent months, Teleport-TP's tariffs in U.S. dollar terms for its
long distance services have come under significant downward pressure due to the
Rouble devaluation in August 1998 and the fact that Rostelecom has not been
permitted to raise its Rouble tariffs to compensate for such devaluation, but it
is not yet possible to predict the long-term trends for these tariffs.
TELECOMMUNICATIONS LICENSES
Teleport-TP
Teleport-TP's business is dependent on four telecommunications licenses,
although it holds a total of 12 such licenses.
Teleport-TP has been issued two licenses for long distance and
international leased circuits for dedicated network services and for television,
and a data license providing for interconnection to the public network. In
addition, Teleport-TP has been issued an overlay license to offer local, long
distance and international voice and data services which are interconnected to
the public telephone network in the 40 regions (plus Moscow and St. Petersburg)
in which Teleport-TP's long distance network will initially be operational.
Based on its experience in renewing existing, and obtaining new, licenses and
its general knowledge of the licensing environment in Russia, management of
Teleport-TP believes that, so long as they are being actively utilized, all of
the licenses will be renewed at the expiration of their respective terms.
License N4207, issued in October 1996 (replacing earlier licenses N100 and
N1661 obtained by Teleport-TP) authorizes Teleport-TP to provide long distance
and international telecommunications services to private networks within
Moscow's city limits and, to a limited extent, elsewhere in the Russian
Federation. No interconnection of the Teleport-TP network with public switched
telephone networks is permitted under this license. License N4207 expires in
November 2004.
A second license, license N4437, issued in October 1996 (replacing an
earlier license N386), authorizes Teleport-TP to provide international leased
lines and circuits for the transmission of television signals within Moscow's
city limits. International lines may only be leased to customers holding an
appropriate license granted by the RFCTI. The license also provides that
Teleport-TP may lease up to 1,000 international circuits
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for the transmission of television and telecommunications services. Teleport-TP
believes that this number of lines and circuits is sufficient to cover its
requirements through the remainder of the current term of the license. License
N4437 expires October 28, 2004.
The data license, license N3654, authorizes Teleport-TP to provide data
transmission services in Moscow, St. Petersburg and other cities of the Russian
Federation and permits interconnection with public networks. The data license
expires in January 2002.
The overlay license, license N4199, permits Teleport-TP to offer local,
long distance and international voice and data services which are interconnected
to the public telephone network in the 40 regions (plus Moscow and St.
Petersburg) in which Teleport-TP's long distance network will initially be
operational. This permits Teleport-TP to deliver calls to all subscribers on the
public network in such regions. License N4199 expires in May 2001.
License N4207 limits the number of subscribers under such license to 15,000
and requires that 10,500 be in place by October 1999. License N4437, unlike its
predecessor N386, makes no reference to minimum subscriber targets. (License
N386 limited the number of subscribers to 1,700 and required that 1,190 be in
place by October 28, 1997.) Teleport-TP did not meet these minimum subscriber
numbers. License N3654 provides that the installed subscriber capacity of
Teleport-TP's data network should permit the connection of at least 70,000
subscribers by December 2000 and at least 100,000 subscribers by the end of the
license, but it does not impose any limit on the number of subscribers. License
N4199 provides that the total installed capacity of the long distance network
should be at least 100,000 numbers with at least 70,000 numbers operational by
May 2000. Based on its experience in renewing existing, and obtaining new,
licenses and its general knowledge of the licensing environment in Russia,
management of Teleport-TP believes that these subscriber provisions are not
strict requirements, but are instead designed to provide general guidance as to
the number of subscribers intended to be included on the system. Based on that
experience, management of Teleport-TP further believes that, so long as a
license is being actively utilized, such license will not be terminated nor
other sanctions imposed if Teleport-TP failed to have the minimum number of
subscribers in place by any date specified or if it was to exceed the maximum
number of subscribers permitted by the license, but there can be no assurance
that the RFCTI would not take a different position, which in turn could result
in the revocation of the license or its renegotiation on unfavorable terms or
the imposition of penalties. It is not possible to calculate the amount of any
penalties which might be imposed, which are in the discretion of the RFCTI. See
"-- Risk Factors -- Risks Involving Technocom Limited and
Teleport-TP -- Reliance on Telecommunications Licenses; Risks of Revocation or
Renegotiation of Licenses."
MTR-Sviaz
MTR-Sviaz has been issued license N3644 which authorizes MTR-Sviaz to
provide local telephone service through interconnection with the public switched
telephone network within the city and region of Moscow. The license permits
connection only through the Mosenergo network. License N3644 is limited to a
maximum of 9,500 lines in the city of Moscow and a further 500 lines in the
Moscow oblast. License N3644 expires in December 2006. Under the terms of the
license, MTR-Sviaz is obligated to have at least 70% of the total number of
subscribers permitted under the terms of the license in place within six years.
MTR-Sviaz has also been issued license N2463 which authorizes MTR-Sviaz to
provide local and long distance leased line services within the city and region
of Moscow. Local and long distance lines may only be leased to customers holding
an appropriate license issued by the RFCTI. License N2463 is limited to a
maximum of 3,500 lines and expires in October 2001. MTR-Sviaz is obligated by
the terms of the license to have at least 70% of the total number of subscribers
permitted under the license in place by October 1999.
EQUIPMENT AND OTHER OPERATING AGREEMENTS
Equipment Leases. Equipment purchased by Technocom for the various
projects undertaken by Teleport-TP and MTR-Sviaz is leased to them pursuant to
lease agreements between Technocom and those ventures.
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Teleport-TP -- International Network Facilities -- Intelsat. The original
two Intelsat antennas and the AT&T type 5ESS switch for Teleport-TP's operations
were supplied on a turnkey basis by AT&T under a supplier financing arrangement.
In July 1995, Technocom agreed to pay off the outstanding balance on the AT&T
debt of $8.0 million in Teleport-TP in return for ownership of the assets.
Technocom then leased the equipment to Teleport-TP over a ten year lease period.
In addition, the Company has purchased an Ericsson switch and other network
telecommunications equipment, which have been provided to Teleport-TP on lease
and installment sales bases.
Teleport-TP -- International Network Facilities -- Eutelsat. The Eutelsat
antenna was supplied on a turnkey basis pursuant to an agreement with Hughes.
Fifty percent of the purchase price was financed by a three-year supplier credit
agreement, supported by a guarantee drawn on the Bank of Austria. Technocom's
commitments under this agreement were satisfied in full during 1998. The
remaining fifty percent was financed by a five-year loan from Eutelsat, which
provides for no principal payments during the first 18 months and for the loan
to be guaranteed by the RFCTI. The funds were provided by Eutelsat on the
condition that Teleport-TP will use the TDMA earth station exclusively for the
Eutelsat space segment for a minimum continuous period of ten years from the
start of the earth station's operation. The equipment is being leased to
Teleport-TP by Technocom for a period of eight years. Teleport-TP has the right
to purchase the equipment from Technocom at the end of the lease period.
Teleport-TP -- Long Distance Network Facilities. All of the equipment for
the satellite-based network, consisting principally of a master 18-meter antenna
in Moscow, and 7-meter and 4.5-meter remote antennas, was supplied by
Scientific-Atlanta, pursuant to an agreement originally signed in 1995 and
amended several times to increase the amount of equipment being supplied.
All of the telecommunications equipment purchased under the
Scientific-Atlanta agreement is being leased to Teleport-TP by Technocom
pursuant to telecommunications asset leases.
The Company has also contracted with Siemens for converters and other
telecommunications equipment required for the long distance network, and leased
such equipment to Teleport-TP.
ECI Telecom of Israel has supplied the Digital Channel Multiplication
Equipment (DCME) and modems for the Teleport-TP international and domestic long
distance service facilities, as well as a SDH-4 system for the 622 Mb/s fiber
optic ring in Moscow.
MTR-Sviaz. Technocom's contribution to MTR-Sviaz included provision of,
among other things, a switch to service 8,000 Moscow city lines and 2,000 lines
on the internal Mosenergo network. Technocom also purchased 4,000 Moscow city
lines, for which it will be paid by MTR-Sviaz as part of the equipment lease
described below. Mosenergo's contribution to MTR-Sviaz includes the provision of
Moscow city lines at a discounted price, the premises for the switch and the
construction of the fiber optic connections between the Mosenergo network and
the Moscow city network. Mosenergo is also responsible for network design,
securing the numbering plan for the 4,000 city lines and supplying the technical
data for connecting the Mosenergo network to the city network. The switch for
MTR-Sviaz was purchased from Siemens which financed 70% of the purchase price.
The Company has guaranteed this vendor financing. The switch is being leased by
Technocom to MTR-Sviaz under an eight-year lease agreement signed in 1995.
MTR-Sviaz will have the right to purchase the equipment from Technocom at the
end of the lease period.
Gorizont-RT. Supply arrangements were concluded with Italtel for the
provision of GSM cellular switches and related equipment for the Gorizont-RT
venture; this equipment has been installed in the cities of Mirny and Neriungry.
EMPLOYEES
As of December 31, 1998, Technocom and Teleport-TP had 74 and 106
employees, respectively, all of whom were full-time. All but two of these
employees were Russian nationals. None of Technocom's or Teleport-TP's employees
is subject to a collective bargaining agreement. Technocom believes that its
relations with its employees are good.
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ALTEL
OVERVIEW
ALTEL, in which the Company owns a 50% interest, currently operates the
only nationwide cellular network in Kazakhstan. ALTEL was formerly known as
BECET International, although marketing its services under the name "ALTEL". In
May 1998 ALTEL changed its corporate name to the name under which it was doing
business. Also in 1998, ALTEL introduced a prepaid cellular service (marketed
under the name "TUMAR") in Almaty which, as of December 31, 1998, had 6,964
active subscribers.
The other 50% of ALTEL is held by Kazakhtelekom, the operator of the
national telephone network in Kazakhstan. In May 1997, the Kazakh government
announced the sale of a 40% stake in Kazakhtelekom, the state-owned
telecommunications company, to Daewoo. However, in March 1998, it was reported
that Daewoo had sold a portion of its stake (reported to be approximately 10% of
Kazakhtelekom) to an unnamed third party. It was later confirmed that Daewoo had
sold its entire stake in Kazakhtelekom to Kazcommertzbank, a commercial bank
based in Kazakhstan. It is understood that the Kazakh government is seeking to
sell a 15% stake in Kazakhtelekom to private investors. Kazakhtelekom recently
received a revised license specifically naming it as the exclusive national
network operator in Kazakhstan, and giving it a wide range of powers to carry
out this function. During 1998, the KMOC issued two GSM licenses for the
development of national GSM networks in Kazakhstan. The two license recipients
(one of which is a joint venture including Kazakhtelekom) commenced active
marketing of their services in February 1999.
The Company's primary objectives for ALTEL are to increase revenues and
cash flows through increased penetration, usage and network coverage. Cellular
service provides a rapid and relatively inexpensive way to overcome the
deficiencies of the wireline telecommunications infrastructure in Kazakhstan.
ALTEL's cellular telecommunications network in Kazakhstan currently consists of
separate systems in Almaty, South Kazakhstan (Chimkent), Karaganda, Pavlodar,
Astana (formerly known as Akmola), Aktyubinsk, Kustanai, East Kazakhstan
(Ust-Kamenogorsk), Atyrau, Taraz, Petropavlovsk and Kyzl Orda. As of December
31, 1998, ALTEL's cellular telecommunications network covered a geographic area
of approximately 4,200,000 people, representing 24% of the total population, in
12 cities. ALTEL commenced cellular service in September 1994 and has since
experienced significant subscriber and revenue growth. As of December 31, 1998,
ALTEL had 20,768 active subscribers, of which 6,964 were customers of ALTEL's
prepaid service. This compares with 11,102 subscribers as of December 31, 1997.
ALTEL, which began operations in September 1994, generated net income for
the year ended December 31, 1998 of $9.2 million on operating revenues of $39.5
million, as compared to net income of $7.2 million on operating revenues of
$30.0 million for the year ended December 31, 1997. The subscriber base grew
from 2,882 at the end of 1995 to 20,768 at December 31, 1998 (of which 6,964
were customers of ALTEL's prepaid service). ALTEL accounted for 27.2% of the
Company's operating revenues for the year ended December 31, 1998, as compared
to 26.2% for the year ended December 31, 1997.
ALTEL, a Kazakh closed joint stock company, was incorporated in 1994.
STRATEGY
The Company believes the development of a market economy in Kazakhstan is
likely to increase demand for modern telecommunications services, including
wireless communications, as demonstrated by the subscriber growth experienced to
date by ALTEL. While the Kazakh telephone network is slowly being modernized,
the Company believes this is likely to be an expensive and lengthy process. The
Company believes that this environment provides ALTEL with the opportunity to
provide customers in Kazakhstan with a viable, high quality alternative to
wireline telephone service during the period it will take to modernize the basic
public network. Management of ALTEL currently believes that, by virtue of its
cost structure and its market penetration to date, together with its recently
introduced prepaid service, it is in a good position to compete with the new GSM
operations. However, ALTEL is currently assessing the impact of the GSM licenses
on its business, and there can be no assurance that ALTEL will in fact be able
to compete successfully with the new licensees.
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NETWORK AND FACILITIES
As of December 31, 1998, ALTEL's cellular telecommunications network in
Kazakhstan consisted of separate systems in Almaty, South Kazakhstan (Chimkent),
Karaganda, Pavlodar, Astana, Aktyubinsk, Kustanai, East Kazakhstan
(Ust-Kamenogorsk), Atyrau, Taraz, Petropavlovsk and Kyzl Orda. Further
installations remain dependent upon many factors including the successful
location of additional cell sites and the results of marketing and other
studies. As of December 31, 1998, investment in ALTEL's cellular network
infrastructure and support facilities totaled approximately $43.4 million. ALTEL
anticipates that its capital expenditure program in 1999 will total
approximately $8.6 million and will be used to develop new installations, expand
network capacity in the existing cities and to upgrade equipment. The Company
currently believes that this funding will be provided by internally generated
cashflows.
All ALTEL systems are connected to the local telephone network and the
regional trunk switch in the cities where they are located. The system in Almaty
is also linked to an international trunk exchange and the Astana system will be
linked to a new international switch in that city when it becomes operational.
Long distance and international calls are completed using the national and
international network of Kazakhtelekom. International calls are switched through
a digital exchange in Almaty.
Space for most ALTEL switches, cell sites and associated equipment is
provided by Kazakhtelekom. ALTEL also uses space in a Kazakhtelekom exchange
building in Almaty for office and administrative purposes and leases other
premises in Almaty which combines its central warehouse and a larger customer
service center and retail outlet. ALTEL has also established, and will continue
to establish, customer service centers in each city in which service is offered.
Virtually all space for customer service centers and equipment not provided by
Kazakhtelekom is leased, although ALTEL has purchased its facilities in Taraz,
one base station site and building in Chimkent and a base station building in
Karaganda.
In November 1997, the official political capital of Kazakhstan was moved
from Almaty to Astana. Although ALTEL does have a presence in Astana, the
long-term effect of this move on ALTEL's business remains uncertain. For
example, ALTEL could need to incur the cost of moving its administrative
functions to Astana. Currently, both the number of customers in Astana and the
traffic between Almaty and Astana are increasing, but there is a risk that the
move could result in reduced cellular activity in Almaty in the future.
PRODUCTS AND SERVICES
ALTEL customers may choose from three types of cellular service: service
within a single city, service within Kazakhstan as a whole, and full service
including international access. Optional services include call waiting, three
party conferencing, call forwarding, voice mail and busy transfer. ALTEL markets
cellular telephones and related equipment manufactured by Motorola and Philips.
ALTEL offers a roaming facility between the home city of the subscriber and
other cities served by the ALTEL network. In addition, as of December 31, 1998,
ALTEL had established roaming agreements with a total of 18 other cellular
operators, including: (i) BEELINE (Vimpelcom) in Moscow and Samara; (ii) Fora in
St. Petersburg; (iii) Digital Sotovaya Svyaz in the Ukraine; (iv) Katel in
Kyrgyzstan; and (v) Uzdunrobita in Uzbekistan.
ALTEL introduced a prepaid cellular service in Almaty in August 1998 (under
the name "TUMAR"), thereby adding to its existing service offerings. ALTEL
expects to introduce the prepaid service in additional regions, include Astana,
during 1999. In addition to further reducing the potential for bad debts, this
system also permits ALTEL to market a portable unit having fewer features and
more economical pricing, thus enabling ALTEL to expand into a new and
potentially much larger market segment than that to which it has addressed its
marketing efforts to date. As of December 31, 1998, TUMAR had 6,964 active
subscribers.
ALTEL markets its cellular services through its own outside direct sales
force, which targets corporate and government accounts and high volume
consumers, together with customer service centers. Although ALTEL's standard
service includes individuals, it has most appeal to businesses which constitute
around 90% of the customer base. In contrast, the TUMAR prepaid services are
targeted almost exclusively to middle
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income domestic individuals (including students). With this differentiation,
ALTEL believes that it has broad appeal across the community.
ALTEL does business under the registered trade names "ALTEL" and "TUMAR"
and features these names in all of its marketing and promotional activity. ALTEL
uses a variety of marketing channels to promote its services, including
television, radio, newspapers, billboards and sponsorship of concerts and other
popular events. ALTEL believes that both the identification of the "ALTEL" and
"TUMAR" trade names with its services, and its marketing activities, have been
effective in stimulating demand for its products and services.
OPERATIONS
Billing and Tariffs
Tariffs for ALTEL customers are posted in U.S. Dollars. Government
regulations determine the currency in which invoices may be paid, which depends
upon the residency status of the customer. Domestic subscribers may pay only in
Tenge, while foreign subscribers are permitted to pay in Tenge or U.S. Dollars.
Commencing March 1998, ALTEL is now required to issue a tax invoice with each
bill stating the amount in Tenge as of the billing date. However, to date, ALTEL
has still been able to receive payment in Tenge at the U.S. dollar exchange rate
on the date payment is made.
Under the terms of its license, ALTEL is free to establish the rates for
all cellular services provided on its network, without prior approval from the
KMOC. ALTEL's pricing is subject to review by the Kazakh Anti-Monopoly
Commission. ALTEL currently employs one pricing structure for all of its
customers, but Kazakh government agencies are offered a 25% discount on
activation and a 35-40% discount on monthly access fees and airtime charges.
Currently, ALTEL has 123 subscribers in this category and management does not
expect this number to increase significantly over time.
A new ALTEL subscriber currently pays a one-time activation fee and makes a
security advance to cover monthly fees and usage charges which depends on
whether the subscriber has international, inter-city or local access,
respectively. Non-residents of Kazakhstan pay higher security advances. Monthly
access fees vary depending on whether the customer chooses local service alone,
inter-city service or full international service. Basic usage charges vary
between peak and off-peak calls, plus the applicable tariffs for international
and inter-city calls. In addition, there is a monthly fee for each optional
service, including call waiting, three party conferencing, call forwarding,
itemized billing and busy transfer. ALTEL also charges its subscribers a fee for
the ability to roam to other regional cities. ALTEL periodically offers special
tariff-related promotions which include discounts on certain elements of the
tariff schedule when packaged together. In addition, certain customers are
offered volume discounts on the tariff schedule. ALTEL has also introduced
air-time tariff plans, providing discounts to users, based on the periods that
they intend to use the phone and whether their calls are predominantly incoming
or outgoing. All tariffs include VAT at the rate of 20%.
The basic connection fee for the TUMAR prepaid service is a one time fee,
depending on whether the customer provides the handset or if the customer
purchases the handset from ALTEL. No monthly access fees are charged to TUMAR
customers, and the usage charges are higher for outgoing calls than they are for
incoming calls, but do not vary depending on the time the call is made or
received. TUMAR introduced a new tariff plan in February 1999, with a connection
fee, a per day usage charge and a charge for outgoing calls, but no charge for
incoming calls. TUMAR expects to introduce discounts to its air-time tariffs
during March 1999. TUMAR customers can currently only make local calls within
Almaty.
ALTEL's tariffs have been recently revised in light of competition from the
GSM licenseholders, which have offered low introductory tariffs to attract
customers. ALTEL expects that competition from the GSM operators will continue
to exert downward pressure on the tariffs for both ALTEL and TUMAR.
Interconnection
ALTEL is dependent on its interconnection to networks operated by
Kazakhtelekom for the completion of its local, long distance and international
calls. ALTEL pays an annual license fee to the KMOC in lieu of
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all frequency or interconnection charges, equal to up to 6% of its after-tax
profits as calculated by the Kazakh statutory audit. ALTEL pays Kazakhtelekom a
tariff in respect of local calls, and enjoys a preferential tariff in respect of
long distance and international calls which provides ALTEL with an average
margin of 25% on such calls. Kazakhtelekom has recently been authorized, in
connection with its appointment as the exclusive operator of the Kazakh national
network, to levy interconnection charges, and to do this on a basis which yields
it a profit. There can be no assurance that Kazakhtelekom will not use this
authority to start assessing interconnection charges against ALTEL,
notwithstanding that ALTEL is already paying a license fee expressly stated to
be in lieu of interconnection charges.
TELECOMMUNICATIONS LICENSE
ALTEL holds a 15-year renewable license issued in February 1994 for the
creation and operation of cellular communications networks in Kazakhstan for
local, long distance and international calling, using the 800 MHZ frequency band
and "AMPS" technology. Under the terms of the license ALTEL was required to
provide cellular services to Almaty and ten to twelve additional regional
centers by the end of 1996, a condition which has been met. See "-- Network and
Facilities."
The license specifies that ALTEL is to be the exclusive provider of
cellular service in Kazakhstan for the first five years of the license term, a
period which expired in February 1999. The license is transferable upon approval
by 75% of ALTEL's shareholders.
In 1998, before the expiration of the exclusivity period, ALTEL commenced
discussions with the KMOC on substituting a new license with revised terms for
its existing license. One aspect of such new license would have been the
elimination of the exclusivity provisions in return for other concessions,
including an extension of the basic term of the license. Although the
exclusivity period has since expired according to the terms of the license,
ALTEL and the KMOC are continuing to discuss the terms of a new license for
ALTEL.
EQUIPMENT AND OTHER OPERATING AGREEMENTS
ALTEL purchased from Motorola the infrastructure equipment required for the
cellular systems to be installed in Almaty and eighteen other regional centers
throughout Kazakhstan. Pursuant to a separate agreement, Motorola agreed to
furnish services with respect to the equipment, which included system design,
installation, optimization, system engineering, program management, software
maintenance and on-site switch maintenance.
Both agreements expire in May 1999. Motorola and ALTEL are currently in
discussions regarding a new agreement.
EMPLOYEES
As of December 31, 1998, ALTEL had 340 employees, all of whom were
full-time. Of these employees, 337 were Kazakh nationals and three were
expatriate managers. The number of employees involved in branch operations was
140. None of its employees is subject to a collective bargaining agreement.
ALTEL believes that its relations with its employees are good.
BELCEL
OVERVIEW
BELCEL, in which the Company acquired an indirect 50% interest in August
1998, currently operates the only national cellular network in Belarus. The
other 50% of BELCEL is held by the Minsk City Telephone Network (45%) and the
Minsk Regional Telephone Network (5%).
The Company's primary objectives for BELCEL are to increase revenues and
cash flows through increased subscriber penetration, usage, network coverage and
roaming with neighboring countries.
BELCEL, a Belarussian joint venture, was formed in 1991.
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NETWORK AND FACILITIES
BELCEL's cellular telecommunications network in Belarus currently consists
of one switch in Minsk and 40 base stations providing service in Minsk, Brest,
Grodno, Vitebsk, Gomel, Mogilev, Borisov, Baranovichi, Lida, Molodechno, Naroch,
Bobruisk, Mozyr, Orsha, Polotsk, and Novopolotsk. As of December 31, 1998,
BELCEL's cellular telecommunications network covered a geographic area of
approximately 4.9 million people, representing 47% of the total population, in
16 centers of population. BELCEL commenced cellular service in May 1993. As of
December 31, 1998, BELCEL had 12,200 active subscribers, compared to 8,500
subscribers as of December 31, 1997. During the month of December 1998, BELCEL's
subscribers generated monthly recurring revenues of $26 per subscriber.
The BELCEL network enjoys full interconnect for local, long distance and
international services. Calls to fixed line phones and international calls are
completed using the national and international network of Beltelecom.
International calls are switched through a digital exchange in Minsk.
OPERATIONS
Billing and Tariffs
Subscribers are billed monthly in Belarussian Rubles for access charges,
call charges, and toll charges and optional services. Recent legislative changes
permit non-resident organizations to be billed and pay for airtime in U.S.
dollars.
Throughout 1998 BELCEL had to comply with legislation designed to reduce
overall inflation in Belarus to 24% per annum. Ruble tariffs were only allowed
to increase by 2% per month. This did not match the falling value of the
Belarussian Ruble against the dollar, and consequently the services offered by
BELCEL became, in hard currency terms, very cheap. This resulted in rapid
customer growth in the second half of the year. BELCEL's customers pay a monthly
access fee of the equivalent of $10 for all services, the outgoing call tariff
for calls within Belarus is 7 cents per minute and incoming calls cost 5 cents
per minute. Charges for international calls are banded into regions.
Interconnection
BELCEL is dependent on its interconnection to networks operated by
Beltelecom for the completion of its local, long distance and international
calls. BELCEL pays no annual license fee to the Government but pays $350,000 per
year for frequency usage and for circuits rented from Beltelecom at a price
calculated according to the legislation of Belarus. BELCEL pays Beltelecom a
tariff in respect of local calls, and enjoys a preferential tariff in respect of
long distance and international calls which provides BELCEL with an average
margin of 40% on such calls. All payments to Beltelecom are made in Belarussian
Rubles.
BELCEL has entered into a series of agreements with CMG, SoftPro and
Ericsson AB ("Ericsson") for the purchase of the equipment required for its
cellular network. BELCEL's total capital expenditure budget for 1999 is
approximately $3 million, which it expects to be funded from cash generated by
the business.
TELECOMMUNICATIONS LICENSE
BELCEL holds a 15-year renewable license issued in July 1992 for the
creation and operation of cellular communications networks in Belarus for local,
long distance and international calling, using the 450 MHz frequency band and
"NMT" technology. Under the terms of the license BELCEL was required to install
30 base stations by the end of the fifth year, a condition which has been met.
CARRIER SERVICES BUSINESS
The Company is currently developing a long distance carrier services and
private line business (the "Carrier Services Business") under the name
"PLDncompass", which is targeted at telecommunications carriers and corporate
customers in the United States and Europe which require telecommunications
services to and from Russia, the other C.I.S. countries and the Baltic States.
The Company has contracted with Cable
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& Wireless Communications ("CWC") of the United Kingdom and Sonera of Finland
for the delivery of 21 2Mbps circuits for this purpose.
The first phase of the business commenced during the fourth quarter of 1998
with the launch of private line services between Russia and the United States
and to date, customer contracts have been signed and are operational for 10 Mbps
of circuit capacity generating approximately $170,000 per month in gross
revenues.
The second phase of development, the launch of wholesale carrier services
in Europe, is anticipated to commence during the second quarter of 1999. The
Company will aggregate, through Company-owned facilities in London, long
distance traffic from European telecommunications carriers bound for those
targeted countries and then deliver the traffic over leased and owned circuit
capacity. Where necessary, the Company will utilize digital circuit
multiplication equipment (DCME) on such circuits to create enhanced network
efficiencies. The Company will, where possible, use the facilities of its local
operating companies to either terminate the traffic at its ultimate destination,
in the case of Russian traffic, or as hubs to the country of final destination,
in the case of calls to other countries of the C.I.S. and the Baltic States.
The Company has contracted to co-locate its first operating facilities in
the UK at the CWC telecommunications facilities management center in London. The
Company is presently negotiating a long-term lease for a dedicated operational
U.K. facility which it anticipates will be available for service during the
third quarter of 1999. Additional sites in Europe will be determined in the
light of customer demand and market de-regulation.
The Company expects to expand this operation to offer carrier services to
other telecommunications operators in the United States. To this end, the
Company has contracted for a U.S. operations' facility site in New York City and
has acquired capacity in a trans-Atlantic cable between New York and London from
where traffic will be delivered (via the CWC and Sonera capacity described
above) to Russia. The Company anticipates developing the U.S.-based business
during 1999.
The Company has obtained licenses in the United States and the United
Kingdom for the provision of these long distance services.
The development of this business is expected to be financed from a
combination of internally generated cash, vendor financing, funds from the
Senior Note escrow account and new financing.
The Company is presently negotiating a Global Purchase Agreement with
Ericsson for the supply of switching, transmission, and billing systems for this
new operation. This supply agreement will also include the purchase of equipment
to upgrade the capacity of the switching and transmission networks at the
Company's operating companies in Russia, as well as vendor financing for the
equipment purchases. The Company anticipates completing the arrangements with
Ericsson during the second quarter of 1999.
The Company believes that the Carrier Services Business is an important way
to reduce its reliance on, and exposure to, Russia and the other countries of
the C.I.S., with the generation of new revenues and cashflow in the U.S. and
Europe, while creating a competitive advantage through leveraging the
infrastructure already in place in its local operating businesses.
OTHER OPERATIONS
CPY YELLOW PAGES LIMITED
Yellow Pages, a Cyprus company in which the Company holds a 100% interest,
is the owner of one of the most comprehensive databases of Russian and foreign
businesses in St. Petersburg and publisher of what is primarily a business to
business directory. As of December 31, 1998, Yellow Pages had 68 employees in
St. Petersburg who handle all of the graphic design and database management.
Yellow Pages hires part-time workers for the periodic update of the directory.
The Company utilizes the database of Yellow Pages to the benefit of PeterStar
and BCL, particularly in achieving more effective target marketing and in
operator services.
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PLD MANAGEMENT SERVICES LIMITED
PLD Management Services Limited ("PLDMS") is a wholly owned subsidiary of
the Company based in the United Kingdom that to date has performed certain
management, commercial and technical consulting, investor relations, new
business development, corporate finance and accounting services for and on
behalf of the Company. The Company has transferred most of these functions to
New York City. PLDMS has charged, and will continue to charge, the costs it
incurs in providing its services, principally salaries, travel and office costs,
to both the Company and its subsidiaries. As of December 31, 1998, PLDMS had
eight employees, all of whom were full-time.
COMPETITION
PETERSTAR COMPANY LIMITED
PeterStar is building and operating its business in a highly competitive
environment. PeterStar does not have an exclusive license to provide
telecommunications services in St. Petersburg, and a number of other entities,
including Russian companies and international joint ventures, are competing with
PeterStar for a share of the St. Petersburg telecommunications market. A number
of such companies (or their joint venture partners) are larger than PeterStar
and have greater access to capital or resources.
Although PTN has historically supported the development of PeterStar, PTN
and PeterStar must be regarded as competitors in the telephony segment. PTN can
offer its customers the same core services as PeterStar, notwithstanding the
lower transmission quality and call completion rates of the PTN network.
Furthermore, PTN has recently completed the installation of a modern fiber optic
loop in St. Petersburg which, when fully operational, will significantly enhance
its ability to carry traffic and could therefore compete with PeterStar.
Although PeterStar believes that PTN will require substantial additional capital
to completely modernize its network, PTN, either alone or through Telecominvest,
is free at any time to enter into joint venture arrangements with other foreign
partners to modernize its network independently of PeterStar. While PeterStar
believes that there is a constructive working relationship between PeterStar and
PTN, there can be no assurance that PTN will not in the future start to compete
more aggressively with PeterStar and/or that future disputes between the
partners will not occur and/or that PTN will not seek another partner. See
"-- Risk Factors -- Risks Involving PeterStar Company Limited and Baltic
Communications Limited -- Dependence on Interconnect Parties" and "-- Ownership
and Management of Operating Subsidiaries -- PeterStar Company Limited."
The other major competitors to PeterStar are: (i) Global One, the
international joint venture between Sprint, DT, France Telecom and its Russian
partner, the telegraph office, which provides national and international voice
and data services to certain destinations; and (ii) Sovintel, a joint venture
between Rostelecom and GTS, which is currently based in Moscow, both of which
have been expanding their operations in St. Petersburg. Since they are generally
unable to compete effectively with PeterStar based on quality, these competitors
principally compete on the basis of price, thereby exerting some price pressure
on PeterStar.
Other competitors include: (i) Combellga, a joint venture of CominCom,
BelgaCom, Alcatel Bell and MMTS which operates an international overlay network
in Moscow and has been attempting to penetrate the St. Petersburg market,
offering international access similar to BCL, as well as long distance access to
Moscow; (ii) JS Leivo, a joint venture of LenEnergo and Imatran Voima of Finland
which provides outgoing international access; (iii) St. Petersburg Teleport,
which offers only outgoing international services and offers lower priced
services; and (iv) Metrocom, which provides local data access in St. Petersburg.
In addition, the three cellular operators in St. Petersburg are competitors of
PeterStar because they offer local, long distance and international access. At
the same time, each cellular operator uses PeterStar to deliver its traffic.
TELEPORT-TP
Teleport-TP is building and operating its business in a highly competitive
environment. Both in the market for international telecommunications services
and the pan-Russian long distance market, Teleport-TP
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faces competition from a number of entities, including Russian companies and
international joint ventures. A number of such companies (or their joint venture
partners) are larger than Teleport-TP and have greater access to capital or
resources.
International Network Services
In providing international circuits and direct dial services in Moscow,
Teleport-TP faces competition from a number of operators offering similar
services. Such operators, including Comstar, Combellga, Telmos and Sovintel, are
primarily targeting Russian and foreign businesses in the city, replicating the
services that PeterStar is providing in St. Petersburg. In terms of providing
international circuits, Teleport-TP faces direct competition from the Russian
Space Communications Corporation, the state owned operator which uses both
Intelsat and Russian satellites, and indirectly from Rostelecom, which owns
capacity in and operates the international cable facilities connecting the
Russian Federation to the telecommunications networks of the major global
carriers.
Long Distance Network Services
In providing long distance services, Teleport-TP faces competition from a
number of sources, both on a national and regional basis. Teleport-TP faces
competition from Rostelecom in the provision of long distance access to the
local telephone companies. Rostelecom currently appears to support the continued
development of Teleport-TP and Rostelecom stands to gain from its relationship
with Teleport-TP, not only as a Teleport-TP shareholder but also to the extent
that expansion of the Teleport-TP network facilitates the modernization of the
Rostelecom network on a targeted basis. There are no other commercial national
networks of the same scale as the Rostelecom network, although there are a
number of private networks, including those of the Ministries of Defense and
Railways, that could, if funding were made available, provide further
competition to Teleport-TP.
At this time, it is unclear what impact the consolidation of the
government's telecommunications holdings and the auction of significant stakes
in Sviazinvest will have on the Russian telecommunications market in general and
Teleport-TP in particular. See "-- Telecommunications in the Former Soviet
Union -- Telecommunications in the Russian Federation."
Teleport-TP also faces competition from other Western-financed entities
seeking to provide various forms of higher bandwidth voice and data
communications services throughout Russia, including: (i) TeleRoss, a subsidiary
of GTS, which is offering service in 12-15 cities using the Russian domestic
satellite systems; (ii) Rosnet, principally a provider of data network services;
(iii) Aerocom, a satellite and fiber optic-based carrier's carrier based in
Moscow, which provides international circuits via the Russian Express satellite
network; (iv) Belcom, a private carrier providing international point-to-point
leased circuits to the oil and gas companies in remote locations, and secondly
closed user group services to communities of interest; and (v) Moscow Teleport,
a satellite based provider of services targeted at the corporate user.
ALTEL
Until 1998, ALTEL was the only licensed national cellular operator in
Kazakhstan. In 1998, the KMOC awarded two licenses for the development of a
national GSM network in Kazakhstan. One license was issued to Kcell, a joint
venture of TurkCell and Kazakhtelekom, and the other license was issued to
Kmobile, a joint venture of Telsim, a Turkish company, and local Kazakh
interests. Active marketing was begun by Kcell in early February 1999 and by
Kmobile in mid-February 1999. Management of ALTEL currently believes that, by
virtue of its cost structure and its market penetration to date, together with
its recently introduced prepaid service, it is in a good position to compete
with the new GSM operations. However, ALTEL is currently assessing the impact of
the GSM licenses on its business, and there can be no assurance that ALTEL will
in fact be able to compete successfully with the new licensees.
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BELCEL
BELCEL is the only licensed national cellular operator in Belarus. While
the government of Belarus has announced that it is considering licensing a GSM
operator in Belarus, no action towards the award of such a license has been
taken, and it is not possible to predict whether, if ever, such a license may be
issued.
OWNERSHIP AND MANAGEMENT OF OPERATING SUBSIDIARIES
PETERSTAR COMPANY LIMITED
Ownership Structure
The Company holds its 71% interest in PeterStar through NWE Cyprus (60%)
and PLD Holdings (11%). It acquired its 60% interest held through NWE Cyprus at
various times over the period 1992-96. The Company acquired PLD Holdings in
August 1998 as part of the transactions with News and Cable & Wireless.
The remaining 29% of PeterStar is held by Telecominvest, which is in turn
owned 51% by an affiliate of Commerzbank AG, a major German bank, 25% by PTN and
24% by SPMMTS. Telecominvest was originally a joint venture between PTN and
SPMMTS formed to act as a holding company for their respective interests in a
number of telecommunications ventures in Northwest Russia.
Relationship with Other Equity Holders
Under the PeterStar foundation documents, a general meeting of shareholders
may take action through a simple majority of those present. Accordingly, since
the Company has a 71% interest in PeterStar, it should be assured of being able
to take whatever action it requires once a meeting is constituted. However,
representatives of 75% of the ordinary shares must first be present to
constitute a quorum. Thus, it is possible for Telecominvest (and Commerzbank,
through its control position in Telecominvest) to prevent action from being
taken by ensuring that there is no quorum at a shareholders meeting.
Also, pursuant to the PeterStar foundation documents, the shareholders have
rights of first refusal to purchase any shares which any shareholder wishes to
transfer, and to purchase any shares held by any shareholder who is bankrupt or
goes into liquidation.
PeterStar is dependent on PTN for the completion of most of its calls, and
the PeterStar network is linked to the PTN network, giving PeterStar access to
PTN's large local subscriber base. In addition, PeterStar is dependent on PTN's
buildings, ducts and tunnels in order to house its exchanges and to reach its
customers. Until 1998, PTN permitted PeterStar to house its exchanges in PTN
buildings and use its other facilities without paying rent or call charges.
Commencing in 1998, PeterStar has been required to pay a local line rental
charge to PTN, although roughly half of the fee otherwise payable during 1998
was offset against amounts owed to PeterStar by PTN in respect of the
Vassilievski Island project. The aggregate amount paid to PTN in 1998 for line
rental charges was $1.3 million. The amount of the 1999 line rental charged has
not yet been determined, but PeterStar expects once again to offset amounts due
from PTN against such charges during 1999. However, any change in the terms on
which PeterStar has access to PTN's facilities, or any restrictions imposed by
PTN on the completion of calls from the PeterStar network, could have a material
adverse effect on PeterStar and, in turn, the Company. Given the extent of the
reliance of PeterStar upon PTN, PTN is clearly in a position to exercise a high
degree of influence over PeterStar's affairs as a practical matter, even as an
indirect minority shareholder.
Notwithstanding its ability to influence PeterStar's affairs, the Company
believes that PTN will continue to support the development of PeterStar's
business as presently planned, and that PTN's business objectives are basically
consistent with PeterStar's own plans.
Management
The board of directors of PeterStar consists of eight individuals, with
three each being appointed by NWE Cyprus and Telecominvest, and one being
appointed by PLD Holdings. The eighth director is the
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General Director, who is nominated by NWE Cyprus subject to final approval by
the shareholders. As the owner of NWE Cyprus and PLD Holdings, the Company has
the indirect right to appoint four of the eight directors of PeterStar, and to
nominate the General Director who also sits on the Board.
Inasmuch as six of the eight directors must be present to constitute a
quorum, the possibility exists that the Telecominvest directors (or any three
other directors) may be able from time to time to prevent the creation of a
quorum. Once a quorum is present, however, the Company is currently reasonably
assured of a majority of the votes on the board, on the basis that the General
Director, who is a Company appointee, will vote with the four Company-appointed
directors. Even if the General Director votes with the Telecominvest directors,
the Company can still achieve a majority of votes because the PeterStar
foundation documents specify that the person designated as Chairman of the Board
(whom the Company is entitled to appoint) also has a casting vote in the event
of a tie vote among the board of directors.
The day-to-day management of PeterStar is the responsibility of the General
Director and a management board which is composed of the PeterStar divisional
directors. The PeterStar operational divisions are: Sales and Marketing,
Finance, Technical and Operations and Administration.
The officers of PeterStar are as follows:
<TABLE>
<S> <C>
Sergei Kuznetsov.................................... General Director
Rick Macy........................................... Commercial Director
Alexander Belyakov.................................. Technical and Operations Director
</TABLE>
Sergei Kuznetsov became General Director of PeterStar in September 1998.
Prior to joining PeterStar, he had been, since July 1995, the General Director
of Telecominvest, the company formed by PTN and SPMMTS to hold their interests
in St. Petersburg and Northwest Russia. Before that, Mr. Kuznetsov was the
initial General Director of Delta Telecom, Russia's first mobile
telecommunications company. Prior to that time Mr. Kuznetsov's career had been
in PTN where he rose to become the chief engineer of the Necrasovski regional
node. He received his degree from the North West Scientific Institute in St.
Petersburg. He received an MBA degree from Columbia University and attended the
management program at the Fuqua School of Management of Duke University. He is a
director of a number of companies including PTN, Telecominvest and PeterStar.
Rick Macy joined PeterStar as Commercial Director in April 1998, replacing
Stephen Gardner who then became Vice President -- Commercial, Russia for PLD.
Prior to joining PeterStar, Mr. Macy was the Commercial Director, Moscow for
Millicom, where he was responsible for the sales and marketing of all of
Millicom's Russian cellular joint ventures. Previously, he was Area Sales
Manager for Harris Corporation, responsible for their European markets. He also
spent four years as an electronics technician in the U.S. Navy.
Alexander Belyakov became Technical and Operations Director in May 1996.
His previous positions were Acting Technical and Operations Director (beginning
in March 1995) and Chief Engineer of the Technical Department. Mr. Belyakov
graduated from the St. Petersburg Institute of Communications in 1978. From 1978
until 1982, he worked in "Mezhgorsvjazstroy", where his responsibilities were
the installation of optical fiber links and switching equipment. From 1982
through 1992, he worked in PTN as a leading engineer in digital
telecommunication systems. In January 1993, Mr. Belyakov joined PeterStar and
became Transmission Systems Manager.
Service Agreement
PeterStar entered into a service agreement, dated as of January 1, 1999,
with NWE Cyprus, pursuant to which, for a one-year term, NWE Cyprus will provide
management services to PeterStar, including advice and assistance with respect
to the design, implementation, operations, marketing and expansion of
PeterStar's network for a one-year term. NWE Cyprus invoices PeterStar quarterly
for these services in U.S. Dollars. PeterStar has had similar agreements with
NWE Cyprus for all years dating back to 1992.
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<PAGE> 43
PLD Telekom Inc. Representative Office
In 1997, the Company established a representative office of the Company in
St. Petersburg. The office is co-located at the premises of BCL. The Company
employs as its Representative Director Peter Owen Edmunds, formerly with
PeterStar, and two administrative staff members. Mr. Owen Edmunds, who was
previously the Deputy General Director and Sales and Marketing Director of
PeterStar, formed part of the initial team from the Company that helped
formulate the development of PeterStar commencing in April 1992. Prior to
joining the Company, Mr. Owen Edmunds served for 14 years as an officer in the
British Army. He served in the United Kingdom and Germany, ending his military
career in Berlin on the Five Nation Liaison team. Mr. Owen Edmunds underwent
Russian language training in the service and is a qualified Russian interpreter.
TECHNOCOM LIMITED
Ownership Structure
The Company holds a 80.4% voting interest in Technocom, with the balance
being held by Plicom (14.57%) and Elite (5.03%). In November 1997, the Company
acquired: (i) 30 Technocom ordinary shares (or approximately 15.1% of the total
such shares issued) held by Plicom, an Irish company beneficially owned by the
family interests of Mr. Mark Klabin, for $18.5 million in cash; and (ii) 29
Technocom ordinary shares (or approximately 14.6% of the total such shares
issued) held by Elite, an Irish company beneficially owned by a trust advised by
Dr. Boris Antoniuk, for $6.25 million in cash and 1,316,240 shares of the
Company's Common Stock.
Technocom's principal asset is its equity interest in Teleport-TP. The
shareholders of Teleport-TP are Technocom (38.5%), Rostelecom (44%), Roscomm
(10%) and Technopark (7.5%). During 1996, Technocom's direct and indirect
interests in Teleport-TP were increased to 49.33% through: (i) the acquisition
of a 55.51% interest in Technopark, a 7.5% shareholder in Teleport-TP; and (ii)
the acquisition by Roscomm (in which Technocom holds a 66.67% interest) of a 5%
interest previously held in trust for the VVC. The completion of these
transactions by Technocom has given Technocom the ability to control 56% of the
voting shares in Teleport-TP and nominate three of the five seats on the
Teleport-TP board, thereby permitting the consolidation of Teleport-TP's
financial results into the Company's consolidated financial statements under
U.S. GAAP effective December 31, 1996.
Technocom also owns a 49% beneficial interest in MTR-Sviaz. The remaining
51% is owned by Mosenergo, the Moscow city power utility. MTR-Sviaz is a joint
venture formed to modernize and commercialize a portion of Mosenergo's internal
telecommunications network.
Technocom also holds a 50% interest in Rosh Telecom, a venture with ECI, an
Israeli equipment supplier. Rosh Telecom is the exclusive agent for ECI in the
Russian Federation. Technocom is currently negotiating to sell its interest in
Rosh Telecom to Plicom.
Technocom also has an effective 100% of SCS. SCS acts as Teleport-TP's
marketing arm for satellite circuit capacity made available by Teleport-TP to
international television agencies with occasional broadcasting requirements.
Relationship with Other Equity Holders
In connection with the November 1997 acquisitions of portions of the
Technocom interests held by Plicom and Elite, the Company entered into a revised
put and call option agreement with Plicom and Elite.
Under these arrangements as originally structured, the remaining ordinary
shares of Technocom held by these shareholders (29 shares, or approximately
14.6% of the total ordinary shares outstanding, in the case of Plicom, and 10
shares, or approximately 5% of the total ordinary shares outstanding, in the
case of Elite) were to have been independently valued in 1999 and the Company
had the right to call, and Plicom and Elite had the right to put, their
respective interests at the per share value established by the valuation.
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These arrangements were restructured as follows. In the case of the
interest held by Plicom, while the date on which the put or call could be
exercised did not change, the valuation procedure was eliminated and the "put
and call" price for its interest was set at a fixed $17,500,000. In the case of
Elite, two of its remaining ten ordinary shares were made subject to a new put
and call arrangement which would come into effect in 1998, with the "put and
call" price to be $1 million or, at Elite's option, that number of shares of the
Common Stock which resulted from dividing $1 million by the lower of $5.85 and
the average closing price of such shares over the preceding ten trading days.
The remaining eight ordinary shares continued to be subject to the existing put
and call arrangements in 1999, except that the valuation would be made by the
Company and the amount paid pursuant to the exercise of either the put or the
call could not exceed $9,620,689 or be less than $6,689,655. See "-- Risk
Factors -- Risks Involving the Company -- Technocom Minority Shareholders' Put
Options."
The success of Teleport-TP's business is very dependent upon the continuing
support of Rostelecom. Rostelecom holds a 44% interest in Teleport-TP, and Mr.
Oleg Belov, the general director of Rostelecom, is Rostelecom's representative
on the Teleport-TP board of directors.
Currently, Rostelecom is Teleport-TP's largest customer for its
international network services, accounting for approximately 30% of total
Teleport-TP revenues in 1998, as compared to 27% in 1997. As of December 31,
1998, Teleport-TP leased approximately 800 active circuits via Intelsat and
Eutelsat to Rostelecom, pursuant, as to the Intelsat circuits, to a contract
which was originally signed in December 1992 and is now automatically renewed
for additional one year terms unless otherwise terminated by either party and,
as to the Eutelsat circuits, to a ten-year contract which commenced in September
1995.
Additionally, to date Rostelecom has supported all of Teleport-TP's plans
(and related license applications) for the expansion of its "Satelink" network
in Russia, even though Rostelecom is the principal provider of national and
international long distance service in Russia, and thus in direct competition
with Teleport-TP. Rostelecom's motivation appears to be its equity interest in
Teleport-TP as well as the fact that Teleport-TP's network provides improved
telecommunications links with areas of the Russian Federation which Rostelecom
is unable to serve fully, or at all, and thus increases traffic utilizing
Rostelecom's own network.
In view of the importance of the relationship of Rostelecom to Teleport-TP
and the central position which Rostelecom plays in the Russian
telecommunications industry, Rostelecom is clearly in a position to exercise
considerable influence over Teleport-TP's affairs, notwithstanding the fact that
it holds a minority position in the company and its representative on the board
of directors is also in a minority. While there is no guarantee that Rostelecom
will continue to support the expansion of Teleport-TP, the Company knows of no
reason to believe, based on the nature of its support to date and the benefits
it receives from the relationship, that Rostelecom will not continue to support
Teleport-TP in the future.
Management
Technocom is managed by a board of directors consisting of five members,
three of whom are designated by the Company, with Plicom and Elite, Technocom's
other shareholders, each nominating one member. The day-to-day management of
Technocom is currently the responsibility of John Armley, who is the Chief
Operating Officer of Technocom. Mr. Mark Klabin and Dr. Boris Antoniuk provide
significant operational and oversight services to Technocom pursuant to
consulting agreements. The Company has provided, and will continue to provide,
logistical, engineering and project management support to the development of
Teleport-TP's satellite-based long distance network, the costs associated with
which are borne by Technocom.
In connection with the Company's acquisition of the additional interests in
Technocom in November 1997, Technocom entered into an amendment to its
consulting agreement with Plicom (under which Plicom makes available the
services of Mr. Klabin), amending and increasing the duties to be performed
thereunder, increasing the annual fee payable thereunder from $100,000 to
$200,000, providing for the payment of expenses reasonably incurred, and
specifying that the agreement will terminate once the Company has acquired the
remainder of Plicom's interest in Technocom. Technocom also entered into an
amendment to its existing consulting agreement with Elite (under which Dr.
Antoniuk's services are provided), increasing the annual fee from $108,333 to
$158,333. Separately, both Mr. Klabin and Dr. Antoniuk have agreed not to
42
<PAGE> 45
compete with the Company in the field of telecommunications in the former Soviet
Union both while they are directors of Technocom and for two years after they
cease to be directors of Technocom.
Michael Maltby became Chief Financial Officer of Technocom in February
1998. Prior to joining Technocom, he was the Finance Director of BELCEL. From
1995 to 1996, Mr. Maltby was a Financial Systems Accountant for Comstar in
Moscow. Previously, he was a chartered accountant with Ernst & Young where he
worked in the London, St. Petersburg and Moscow offices.
ALTEL
Ownership Structure
The Company's 50% interest in ALTEL is held by WTC, a British Virgin
Islands corporation and a wholly owned indirect subsidiary of the Company. The
shares of WTC are held by the Company through NWE Cyprus. The other 50% interest
in ALTEL is currently held by Kazakhtelekom, a joint stock company which is
owned by the government of Kazakhstan and which operates the public telephone
network in that country (the authority to operate such network having been
recently confirmed by the grant to Kazakhtelekom of specific authority to act as
the exclusive operator of the public network in Kazakhstan and as representative
of the Kazakh government in international telecommunications matters). In May
1997, the Kazakh government announced that it had sold a 40% stake in
Kazakhtelekom to Daewoo. However, in March 1998, it was reported that Daewoo had
sold a portion of its stake (reported to be approximately 10% of Kazakhtelekom)
to an unnamed third party. It was later confirmed that Daewoo had sold its
entire stake in Kazakhtelekom to Kazcommertzbank, a commercial bank based in
Kazakhstan. It is understood that the Kazakh government is seeking to sell a 15%
stake in Kazakhtelekom to private investors.
Relationship with Other Equity Holders
The relationship between WTC and Kazakhtelekom is governed principally by
the terms of a joint venture agreement entered into in December 1993. The
agreement sets forth the respective capital contributions of the parties. In the
case of the Kazakh partner, these consisted of the cellular license and
frequencies, as well as all physical facilities required for the operation of
the cellular network. As required, WTC contributed cash, equipment, property and
services with an aggregate value of $20.0 million by February 1995. WTC has no
obligation to make any additional contributions. Should the board of directors
of ALTEL determine that ALTEL requires an additional capital contribution, then
each shareholder will be required to contribute its proportionate share of the
capital contribution or face dilution.
Each ALTEL shareholder has the same voting, distribution and liquidation
rights, except that upon a liquidation, WTC is entitled to receive out of any
distributions the first $20.0 million for its capital contribution plus any
subsequent capital contributions not matched by Kazakhtelekom.
Under current Kazakh legislation, neither party is permitted to sell,
assign, pledge or otherwise transfer its equity interest in ALTEL without first
offering such interest to the other party
ALTEL and Kazakhtelekom entered into an interconnection agreement pursuant
to which Kazakhtelekom agreed to provide ALTEL with access to the public
switched telephone network in Kazakhstan for the fifteen year term of ALTEL's
current license free of charge (but subject to payment of certain charges to
local operators for carriage and termination of calls from ALTEL's network).
While there is no reason to suppose that Kazakhtelekom will not honor this
commitment, the loss of, or any significant limitation on its access to the
network could have a material adverse effect on the operations of ALTEL.
While WTC may have the power, pursuant to the management structure
described below, to direct the operations or determine the strategies of ALTEL,
management believes that it is unlikely, in view of the pivotal importance of
Kazakhtelekom to the business of ALTEL, that any significant initiatives would
be undertaken by WTC without the consent of Kazakhtelekom. To date,
Kazakhtelekom has not used its position to undermine initiatives proposed by
WTC, nor to cause ALTEL to take any action to WTC's detriment; however, there
can be no assurance that it will not do so in the future.
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<PAGE> 46
It is not known what effect on ALTEL, or its license or business, the
recent designation of Kazakhtelekom as the exclusive operator of the public
network will have. In addition, Kazakhtelekom is a participant in one of the
joint ventures which was recently granted a national GSM license in Kazakhstan
and it remains unclear what impact this participation will have on ALTEL's
business. All of these developments will present new uncertainties and
challenges for ALTEL. See "-- Risk Factors -- Risks Involving ALTEL."
In connection with the grant of its telecommunications license in 1994, WTC
agreed to lend the KMOC up to $3 million on commercial terms for use for various
KMOC projects. During 1995, the Company advanced $3 million to Monogram Finance
Group Limited ("MFGL") in exchange for a convertible promissory note due on
February 20, 2000. The note is convertible at any time prior to February 29,
2000 into common stock of MFGL representing 50% of its total issued and
outstanding common stock. Its sole asset is an agreement to acquire a 50%
interest in Monogram Telecommunications Limited, a Bermuda company ("MTL"). MTL
has an agreement to acquire 100% of an Irish company known as Kazakhstan
Telecommunications Development Corporation Limited ("KTDC"). KTDC has agreed in
principle with the government of Kazakhstan to assist the government in
connection with the privatization of Kazakhtelekom. While the Company believes
that this arrangement satisfies the commitment given by WTC to the KMOC, there
can be no assurance that the KMOC will not still call upon WTC to advance, and
that WTC will not be obligated to pay, the $3 million.
Management
ALTEL is currently managed by a board of directors consisting of six
members, three designated by Kazakhtelekom and three by WTC. WTC designates the
Chairman of the Board who has a casting vote in the event of a tie vote. At
least four members of the board are required to approve any of the following
actions: amendment of ALTEL's charter, dissolution, voluntary bankruptcy,
approval of the annual budget, acquisition of assets or businesses in excess of
$5 million or any disposition or transfer of the ALTEL license, other
investments in excess of $1 million or incurring indebtedness in excess of $2
million. These arrangements cannot be changed without WTC's consent.
Accordingly, while there may be some question about the enforceability of these
arrangements, WTC believes that it has the ongoing ability to make all
significant strategic, operating, financing and investing decisions on behalf of
ALTEL through the arrangements described above, although it is not likely that
it would choose to take action without the approval of Kazakhtelekom.
ALTEL has two co-chief executive officers ("Co-CEOs") and a treasurer who
is also the chief financial officer ("CFO"), and may appoint other officers as
the board determines. In addition, ALTEL has a chief Kazakh financial officer
("CKFO") who reports directly to the CFO and who is responsible for accounting
matters under Kazakh law as well as serving as a liaison between ALTEL and the
Kazakh tax authorities. One of the Co-CEOs and the CKFO are appointed by the
directors who are designees of Kazakhtelekom and the other Co-CEO and the CFO
are appointed by the directors who are designees of WTC. The Co-CEO appointed by
the WTC directors has the ultimate responsibility for the management of ALTEL,
subject to the authority of the board of directors.
The current officers are as follows:
<TABLE>
<S> <C>
Rex Power............................... Co-Chief Executive Officer
Maxut Sauranbekov....................... Co-Chief Executive Officer
Michael Leaver.......................... Chief Financial Officer
Natalia V. Sauranbekova................. Chief Kazakh Financial Officer
</TABLE>
Rex Power joined ALTEL in June 1997. He is a registered chartered engineer
and a registered European engineer. Prior to joining ALTEL, he worked for Cable
& Wireless for over 30 years, mostly in overseas assignments, including
management positions in Nigeria, Saudi Arabia and Macau. Additional positions
with Cable & Wireless included Regional Business Manager for the Bermuda,
Caribbean and Atlantic Islands Region and General Manager, Eastern
Russia/Director, Special Projects in the Northeast Asia Region, Hong Kong and
Japan.
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Maxut Sauranbekov became Co-Chief Executive Officer of ALTEL in June 1997.
He joined ALTEL in October 1994 as Vice President for Marketing, Sales and
Customer Service and then served as Vice President for Corporate Affairs. Prior
to joining ALTEL, he worked for eight years in various other commercial and
financial ventures.
Michael Leaver joined ALTEL as Chief Financial Officer in April 1998. From
1995 until joining ALTEL, he was Deputy General Director of Uralwestcom, a
cellular telephony operator in Yekaterinburg. Previously, Mr. Leaver was the
Financial Director for Kiev Tetra Pak, a Ukrainian joint venture, for three
years during its start-up phase.
Natalia V. Sauranbekova has more than seven years experience in finance.
For over three years, she was Financial Director at Kazryastechnika, which
provided research and planning services for the KMOC, and prior to that she was
an economist with a number of Kazakh government agencies. She is married to Mr.
Maxut Sauranbekov, one of the two Co-Chief Executive Officers.
Recent changes in applicable Kazakh legislation will require that the
management arrangements described above will need to be revised. However,
although it seems clear that the existing arrangements cannot be completely
preserved in their present form, because of the imprecision in some of the
drafting and also because of the lack of precedents due to the newness of the
legislation, it is difficult to state to what extent these arrangements will
need to be revised. In addition, ALTEL is actively exploring the option of
converting to a different legal form which may permit the preservation of, if
not all, at least a substantial portion of the management arrangements described
above in their current form. ALTEL does not expect to resolve this issue before
the middle of 1999.
ALTEL entered into Consulting and Information Services Agreements with the
Company and Kazakhtelekom, each dated January 1, 1998, pursuant to which such
parties provide certain consulting, information, management services and
personnel expertise to ALTEL. In consideration for these services, ALTEL pays
consulting fees, in the case of the Company, of $25,000 per month plus 3.4% of
ALTEL's gross revenues, and, in the case of Kazakhtelekom, of 300,000 Tenge per
month plus 1% of ALTEL's gross revenues. These contracts are each for a one year
term automatically renewable for successive one year periods unless terminated
by either party.
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<PAGE> 48
RISK FACTORS
This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information relating to political, social and economic conditions in the
countries of the former Soviet Union and the Commonwealth of Independent States,
the commencement of certain programs and the proposed offering of certain
services by the Company's operating subsidiaries, proposed changes in the
Company's corporate structure and centers of operations and interpretations and
actions of certain regulatory authorities, including in the United States,
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" or similar expressions. For such statements
the Company claims the protection of the safe harbor for forward-looking
statements contained in the private Securities Litigation Reform Act of 1995.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including without
limitation, those discussed elsewhere in this Report and in the documents
incorporated herein by reference. Furthermore, this document constitutes a Year
2000 Readiness Disclosure 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.
COUNTRY RISKS
General. Foreign companies conducting operations through affiliates in the
Russian Federation, Kazakhstan and Belarus face significant political, economic,
currency, legal and social risks. For example, a report released February 20,
1997 by the United States Embassy in Moscow on the commercial environment in the
Russian Federation listed the following general difficulties affecting trade and
investment in the Russian Federation, most of which are also encountered in
Kazakhstan and Belarus, and some or all of which could affect the ability of the
Company or its operating businesses to conduct or realize income from their
businesses:
- ownership disputes
- high taxes, and a frequently changing tax regime
- high operating costs
- lack of systematic and accessible credit information
- corruption and commercial crime
- financial illiquidity of many firms
- changing requirements from regulatory bodies
- lack of market information
- an infant commercial legal framework
- cultural and language differences
- infrastructure problems
- payments, arrears and frozen accounts
- frequent changes in governmental personnel
Political Risks. Since the breakup of the Soviet Union, the political
situation in the Russian Federation, Kazakhstan and Belarus has been
characterized by uncertainty and instability.
Russia. In the Russian Federation, there have been significant tensions
between the executive and legislative branches of the government and efforts by
the regions and autonomous republics of the Russian Federation to gain a greater
degree of independence (the most dramatic example of which was the conflict in
Chechnya). Lack of consensus between local and regional authorities and the
federal government often results in the enactment of conflicting legislation at
various levels and may result in political instability. This lack of consensus
may have negative economic effects on the Company, which could be material to
its operations.
In addition, Communist and nationalist parties wield strong influence in
the lower house of Parliament (the Duma) and have made gains in regional
governorships which could result in a slow down or reversal of the development
of a free market economy.
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During the transformation to a market-oriented economy in the Russian
Federation, legislation has been enacted to protect property against
expropriation and nationalization. However, a resurgence in nationalism could
result in pressures for the reduction or even elimination of non-Russian
ownership of Russian businesses, and there can be no assurance that such
recently enacted protections would be enforced in the event of an attempted
expropriation or nationalization. Legislation to restrict foreign ownership in
the telecommunications industry is introduced from time to time and, while not
expected to become law, is symptomatic of these increasingly nationalistic
attitudes.
There is also significant instability in the executive branch. Boris
Yeltsin, President of the Russian Federation, has been unable because of
ill-health to carry out the many and significant responsibilities of that
office. Instead, he has increasingly delegated his responsibilities to
ministerial appointees, while at the same time endeavoring to retain, and
demonstrate, his continuing constitutional powers by making frequent changes in
his appointments. All of this has served to create significant uncertainty, not
only as to the policies his government will pursue, but also as to whether the
government is likely to take any action to deal with the many significant
problems which the Russian Federation faces.
Additionally, he has announced that he will not run for re-election in
2000, which has set off a race between a number of candidates anxious to succeed
him. The efforts of these other candidates to be elected as President, and the
resulting change in leadership at that time, could result in additional
political instability and also substantial changes in government policies. Any
such matters could have a material adverse effect on the Company.
Kazakhstan. The political situation in Kazakhstan is characterized by
one-man rule by President Nursultan Nazarbayev who demonstrates considerable
political power. While such concentration of power may at times be perceived as
providing a stabilizing influence, it also increases the risk of nepotism,
arbitrary decision-making and significant policy changes in the event of
succession.
Belarus. In Belarus, President Aleksandr Lukashenko essentially controls
the organs of government. In addition, his rule is characterized by outside
observers as autocratic because of a perceived lack of tolerance for opposition.
In addition, President Lukashenko has made recent moves to re-unite Belarus with
the Russian Federation, although it is unclear whether any such reunification
will occur.
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 is expected to continue to decline in value during 1999,
perhaps significantly.
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
Also 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 the current Prime Minister Yevgeny Primakov.
The current government has yet to propose a plan to address Russia's economic
and financial difficulties, one result of which has been to cause the
International Monetary Fund to delay further assistance to the Russian
government. At the same time, the fact that President Boris Yeltsin appears to
be playing a less active role in the day-to-day governing of the country, and
the possibility that he may decide (as he is constitutionally permitted) to once
more reshuffle his government, have created increased uncertainty about the
future political situation in Russia, which in turn has created 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. 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, together with
decreased revenue growth and increased collections problems, and the Company
expects that revenue growth and margins will remain under pressure, and that the
average age of its receivables is likely to continue to grow as collections
problems increase. The Company is not yet able to predict the effects of the
ongoing difficulties on its results for 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.
Economic Risks -- Uncertain Pace of, and Difficulties Experienced in,
Economic Reform; Reliance on Foreign Economic Aid. Until recently, the
economies of the Russia Federation, Kazakhstan and Belarus were administered by
the central authorities of the former Soviet Union. Following the collapse of
those authorities and the command economy they managed, the governments of both
the Russian Federation and Kazakhstan sought to implement policies designed to
introduce free market economies into their respective countries. While these
policies have met with some success, the economies of both the Russian
Federation and Kazakhstan have been characterized by high unemployment, high
rates of business failure, the deterioration of certain sectors of the economy,
high government debt relative to gross domestic product and declining real
wages. In both the Russian Federation and Kazakhstan real economic improvement
has been limited to specific regions (the Moscow and St. Petersburg regions in
Russia, and Almaty in Kazakhstan). The Russian Federation is still experiencing
a lack of political consensus as to the scope, content and pace of free market
reforms. No assurance can be given that policies to introduce or support a free
market economy will continue to be implemented in either the Russian Federation
or Kazakhstan, that these countries will remain receptive to foreign investment
or that the economies of the Russia Federation or Kazakhstan will stabilize. The
failure of any of these to occur could have a material adverse effect on the
Company. In addition, the Russian Federation currently receives substantial
financial assistance from several foreign governments and international
organizations. To the extent any of this financial assistance is reduced or
eliminated, economic development in the Russian Federation may be adversely
affected, and any resulting difficulties in the Russian economy could have a
material adverse effect on the Company.
Conversely, while the Government of Belarus initially sought to introduce
free market reforms, more recently the President has reversed this direction, so
that the economy, while manifesting some free market characteristics, has
essentially returned to a regime of centralized control. This has resulted in a
declining economy, rampant inflation and falling standards of living. It is not
possible to predict how, or when, these conditions may improve.
-- Limited Experience with Free Market Economy. Russian, Kazakh and
Belarus businesses have limited operating history in free market conditions and
have had limited experience compared with Western companies with the entering
into and performance of contractual obligations. Accordingly, as compared to
Western companies, such businesses are often characterized by management that
lacks experience in
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responding to changing market conditions and limited capital resources with
which to develop their operations. In addition, the Russian Federation,
Kazakhstan and Belarus have limited infrastructure to support a market system,
and banks and other financial systems are not well developed or well regulated.
Businesses therefore may experience difficulty in obtaining working capital
facilities. Moreover, these countries' banking system have faced and may
encounter in the future liquidity crises as well as other problems arising as a
result of under-capitalization of the banking sector as a whole. The experiences
gained from the financial and banking crisis in Russia in the last two quarters
of 1998 demonstrate how fragile the Russian banking system is, and at the same
time how dependent Western investors are on such system. Another general Russian
banking crisis in particular could have a material adverse effect on the
Company's operations and financial performance and on the ability of its
customers to pay amounts due. While neither Kazakhstan nor Belarus have
experienced a similar crisis, there is the potential for such a crisis in both
countries and the effects of any such crisis would likely be as severe.
Restrictions on Currency Conversion; Historical Volatility in Currency
Prices. None of the Russian Rouble, the Kazakh Tenge or the Belarussian Ruble
is convertible outside of their home countries.
In Belarus, there are significant (and increasing) controls on currency
conversion, including requirements that exports only be sold for hard currency
which must then be converted into Belarussian Rubles at a low "official" rate of
exchange. While there is some trading at the higher "unofficial" rates of
exchange, the Belarussian Ruble is essentially inconvertible.
In Russia and Kazakhstan, a market exists for the conversion of Roubles and
Tenge into other currencies, but it is limited in size and is subject to rules
limiting the purposes for which conversion may be effected. The history of
trading in the Russian Rouble and Kazakh Tenge against the U.S. Dollar has been
characterized by significant declines in value and considerable volatility,
although the Russian Rouble and the Kazakh Tenge experienced relative stability
against the U.S. dollar during 1996 and 1997. However, during 1998 and the early
part of 1999, the Russian Rouble has been under considerable pressure and
suffered substantial declines against the U.S. Dollar and other currencies.
After remaining relatively stable during 1998, the Kazakh Tenge has started to
weaken, reflecting concerns about the health of the country's economy. See
"-- Russian Economic and Political Turmoil."
In general, PeterStar, ALTEL and, to a lesser extent, Teleport-TP post
their tariffs in U.S. Dollars, and receive payment in local currency at the U.S.
dollar exchange rate prevailing on the date of payment. These operating
businesses face an exchange risk to the extent that they experience any
difficulty in converting the local currency payment received into U.S. Dollars.
In addition, they face a risk that the local currency weakens against the U.S.
Dollar during the period between the customer instructing its bank to pay the
operating business and the day the payment is actually received by the operating
business. Historically, this time period has been short and the exchange risks
arising from this particular issue have therefore been minimal. However, the
Company's operating businesses experienced significant foreign exchange losses
in the third and, to a lesser extent, fourth, quarter of 1998, due principally
to delays in clearing payments within the Russian banking system.
However, virtually all of Teleport-TP's Satelink tariffs are denominated in
Russian Roubles, meaning that it is fully exposed to exchange losses with
respect to revenues from the Satelink business, both in respect of the currency
conversion problems described in the preceding paragraph and in respect of more
dramatic loss of value (in U.S. Dollar terms) resulting from devaluation of the
Russian Rouble. Currently, over 20% of its total revenues are derived from this
business. Both the percentage and amount of revenues which are exposed to such
foreign exchange losses are likely to grow as the Satelink business grows.
All of these factors, and others, may serve to increase the Company's
exposure to foreign exchange losses in the future, the effect of which cannot
currently be predicted. No assurance can be given that the Company's operating
businesses which bill in U.S. dollar equivalents will be able to continue to
post their tariffs in U.S. Dollars and collect payments in local currencies in
amounts determined by reference to the value of the U.S. Dollar, or that they
will continue be able to process such payments without banking delays or to
exchange local currencies for U.S. Dollars without significant difficulties,
delays or costs.
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In addition, no assurance can be given, in respect of Belarus where
government controls have made the currency essentially inconvertible, that the
Company will be able to develop billing and payment strategies to deal with this
situation.
It is not practical or economical for the Company to hedge its exchange
risks. See "Quantitative and Qualitative Disclosure About Market Risk." Any of
these developments, in conjunction with further declines, or volatility, in the
value of the Russian Rouble, the Belarussian Ruble or the Tenge against the U.S.
Dollar, could have a material adverse effect on the Company. See also "-- Risks
Involving the Company -- Currency Controls."
Legal Risks -- Underdeveloped Legal System. The Russia Federation,
Kazakhstan and Belarus lack fully developed legal systems. Russian, Kazakh and
Belarussian law is evolving rapidly and in ways that may not always coincide
with market developments, resulting in ambiguities, inconsistencies and
anomalies, and ultimately in investment risk that would not exist in more
developed legal systems. Furthermore, effective redress in Russian, Kazakh and
Belarussian courts in respect of a breach of law or regulation, or in an
ownership dispute, may be difficult to obtain.
Risks associated with the Russian, Kazakh and Belarussian legal systems
include: (i) the untested nature of the independence of the judiciary and its
immunity from economic, political or nationalistic influences; (ii) the relative
inexperience of judges and courts in commercial dispute resolution, and
generally in interpreting legal norms; (iii) inconsistencies among laws,
presidential decrees and governmental and ministerial orders and resolutions;
(iv) often times conflicting local, regional and national laws, rules and
regulations; (v) the lack of judicial or administrative guidance on interpreting
the applicable rules; (vi) retroactive changes in laws and regulations; and
(vii) a high degree of discretion on the part of government authorities and
arbitrary decision-making which increases, among other things, the risk of
property expropriation. The result has been considerable legal confusion,
particularly in areas such as company law, property, commercial and contract
law, securities law, foreign trade and investment law and tax law. No assurance
can be given that the uncertainties associated with the existing and future laws
and regulations of the Russian Federation, Kazakhstan or Belarus will not have a
material adverse effect on the Company. In addition, there is no guarantee that
a foreign investor would obtain effective redress in any court. No treaty exists
between the United States and the Russian Federation, Kazakhstan or Belarus for
the reciprocal enforcement of foreign court judgments.
Furthermore, the relative infancy of business and legal cultures in the
Russia Federation, Kazakhstan and Belarus are reflected in the inadequate
commitment of local business people, government officials, agencies and the
judicial system to honor legal rights and agreements, and generally to uphold
the rule of law. Accordingly, the Company may, from time to time, confront
threats of, or actual, arbitrary or illegal revision or cancellation of its
licenses and agreements, and face uncertainty or delays in obtaining legal
redress, any of which could have a material adverse effect on the Company.
-- Possible Additional Liability of Shareholders. The Civil Code of the
Russian Federation and the Law of the Russian Federation on Joint Stock
Companies generally provide that shareholders in a Russian joint stock company
are not liable for the obligations of the joint stock company, and only bear the
risk of loss of their investment. However, if a company (an "effective parent")
is capable of determining decisions by another company (an "effective
subsidiary"), and such capability is provided for in the charter of the
effective subsidiary or in a contract between the companies, and if the
effective parent gives obligatory directions to the effective subsidiary, such
effective parent bears joint and several responsibility for transactions
concluded by such effective subsidiary in carrying out such directions. In
addition, an effective parent is secondarily liable for an effective
subsidiary's debts in the event an effective subsidiary becomes insolvent or
bankrupt resulting from the action or inaction of an effective parent which is
capable of determining decisions of the effective subsidiary whether as a result
of the effective parent's ownership interest, pursuant to the terms of a
contract between the companies or in any other way. In such instances, other
shareholders of the effective subsidiary may claim compensation for the
effective subsidiary's losses from the effective parent which caused the
effective subsidiary to take action(s) or fail to take action(s) knowing that
such action(s) or failure to take action(s) would result in losses. Accordingly,
it is possible that the Company may be deemed to be an
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effective parent of certain of its subsidiaries and therefore be liable in
certain cases for the debts of its effective subsidiaries. Such liability could
have a material adverse effect on the Company.
The Company believes that the applicable legislation in Kazakhstan and
Belarus does not contain any similar provisions.
-- Limited Protection of Minority Shareholders. Russian laws regulating
ownership, control and corporate governance of Russian companies may, in some
cases, provide limited protection to shareholders, particularly minority
shareholders. Disclosure and reporting requirements, and anti-fraud and insider
trading legislation have only recently been enacted and most Russian companies
and managers are not accustomed to such restrictions on their activities. The
concept of fiduciary duties on the part of management or directors to their
companies or shareholders is also new and is not well developed. See "-- Risks
Involving the Company -- Potential Conflicts of Interest." Additionally,
procedural protections to which U.S. shareholders are accustomed, such as
contingent fee arrangements or the ability to bring class actions, are as yet
still unknown in Russia.
The concept of minority shareholder rights has not yet been tested in
Kazakhstan or Belarus, and it is therefore difficult to predict how a court
confronted with the issue would rule.
Social Risks. The political and economic changes in the Russian
Federation, Kazakhstan and Belarus since the break up of the former Soviet Union
have resulted in significant social dislocations, as existing governing
structures have collapsed and new ones are only beginning to take shape. The
resulting broad decline in the standard of living has often resulted in
substantial political pressure on the government to slow or even reverse the
economic policies currently being pursued. In addition, such decline in the
standard of living has led in the past, and could lead in the future, to labor
and social unrest. Such labor and social unrest may have political, social and
economic consequences, such as increased support for a renewal of centralized
authority, increased nationalism (with restrictions on foreign investment in the
Russian, Kazakh or Belarussian economy) and increased violence, any of which
could have a material adverse effect on the Company.
In addition, the local and international press have reported significant
organized criminal activity, particularly in large metropolitan centers,
directed at revenue-generating businesses, and an increased integration of
Russian organized crime with major international criminal organizations. A
substantial increase in property crime in large cities has also been reported.
Finally, the local and international press have reported high levels of official
corruption in the locations where the Company's operating businesses operate. No
assurance can be given that organized or other crime or claims that the Company
or any of its operating businesses has been involved in official corruption will
not in the future have a material adverse effect on the Company.
Official Data Reliability. The official data published by Russian federal,
regional and local governments and federal agencies, and by the Kazakh and
Belarussian governments and their respective agencies, are substantially less
complete or reliable than those of Western countries, and there can be no
assurance that the official sources from which certain of the information set
forth herein has been drawn are reliable. Official statistics may also be
produced on different bases than those used in Western countries. Any discussion
of matters relating to the Russian Federation, Kazakhstan or Belarus herein must
therefore be subject to uncertainty due to concerns about the completeness or
reliability of available official and public information.
RISKS INVOLVING THE COMPANY
History of Losses. The Company has reported net losses during each of its
years of operations and there can be no assurance that the Company will be able
to generate profits in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Repayment of Travelers Financing. The Company is currently obligated to
pay the Travelers Parties the sum of $13,420,000 on or before April 30, 1999.
See "Recent Developments -- Travelers Financing." This obligation came due on
December 31, 1998 and the Travelers Parties deferred payment on that date, and
have further deferred the date for payment on a number of dates following, in
order to allow the Company time in order to arrange for its payment. While
management of the Company believes that, as long as progress towards
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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. Failure on the part of the Company to make payment in full
would constitute an Event of Default under the Series A and Series B Notes,
entitling the Travelers Parties to exercise their rights and remedies under the
Revolving Credit Agreement. In addition, the occurrence of such an Event of
Default would trigger the cross-default provisions contained in the Indentures
governing the Senior Notes and the Convertible Notes. In the latter case, the
holders of those Notes would be entitled to accelerate those Notes and demand
their payment in full. If such an event was to occur, and the Company was unable
to reach some accommodation with the holders of the Senior and Convertible Notes
and the Travelers Parties, 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.
Technocom Minority Shareholders' Put Options. The Company has a put and
call agreement with Plicom under which Plicom has the right after June 30, 1999
to require the Company to acquire its remaining 14.57% holding in Technocom, and
the Company has the right to require Plicom to sell such holding, for a purchase
price of $17.5 million. The Company has a further put and call option agreement
with Elite under which Elite has: (i) the right after June 30, 1998 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 after June 30, 1999 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, but
which in all events will 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 after June 30, 1999. 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.
Year 2000. While the Company believes that it should not encounter
material problems as a result of its own equipment not being Year 2000
compliant, its businesses may encounter disruptions in service as a result of
noncompliance on the part of other traffic carriers, particularly those in
Russia and other C.I.S. countries on which they are dependent for the completion
of their calls. The Company believes that the Year 2000 compliance 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, and that it
is unlikely that those parties will be able to become fully Year 2000 compliant,
given the limited amount of time left for this, and the severe funding
constraints faced by those parties. Additionally, the Russian government has
recently announced, in response to the Kosovo crisis, an intention to limit its
cooperation in efforts to deal with potential Year 2000 problems. 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. Additionally, the billing systems of those interconnect partners may
also be disrupted, resulting in those partners being unable to make timely
settlements with the Company's operating businesses. All of these items have the
potential to adversely impact the operations of its operating subsidiaries, and
such adverse impact, on both the businesses of such subsidiaries and the
Company's own financial results, may be material. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Year 2000
Issues."
Capital Requirements. Assuming the Company is able to resolve the issues
related to the Travelers financing and the Technocom minority shareholders' put
options (see "-- Repayment of Travelers Financing" and "-- Technocom Minority
Shareholders' Put Options"), the Company will continue to have capital
requirements in three main areas.
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-- Capital Expenditures and Working Capital for Operating Businesses. The
Company has to provide for the capital expenditures and working capital needs of
its operating businesses until such time as such operating businesses become
self-sustaining. To date, only ALTEL has achieved that position. The Company has
significant cash; however, the bulk of this (representing proceeds of the Senior
Notes) is being held in escrow and can only be released from escrow upon
compliance with certain conditions. Those conditions include a specific
requirement that the funds be used solely to acquire assets for use in a
telecommunications business. This requirement means, among other things, that
these funds cannot be used for the working capital needs of the operating
businesses, or to pay for civil engineering and related works required in
connection with the installation of telecommunications networks. In addition,
the Company has found compliance with the conditions for release of funds
burdensome, in that it is time consuming and expensive.
-- Acquisitions and Other Business Development. The Company needs funds to
acquire and/or develop new businesses. Again, the funds in escrow can only be
used for this to the extent that equipment is being purchased; start up costs
and working capital have to be met out of other Company funds.
-- Payment of Principal and Interest on Outstanding Indebtedness. The
Company has significant debt service requirements. In addition to its need to
repay $13,420,000 due under the Series A and Series B Notes to the Travelers
Parties as described above, the Company is obligated under the Senior Notes and
the Convertible Notes issued in June 1996. These Notes accreted until December
1, 1998, when interest on the full accreted value became payable annually
thereafter in cash. Until May 31, 1998 these Notes accreted at the rate of 14%
per annum. As a result of the Company not raising $20,000,000 in additional
equity by May 31, 1998, as of June 1, 1998 they commenced to accrete at 14.5%
per annum. As of December 1, 1998, the accreted value of the Senior Notes on the
Company's balance sheet was $112.9 million. The first semi-annual payment of
interest in cash, due June 1, 1999, will be at least $8.9 million. The exact
amount of the semi-annual interest payment will depend on the interest rate then
payable. The Senior Notes come due in full on June 1, 2004. The Convertible
Notes (in the principal amount of $26,500,000) come due on June 1, 2006, and
bear interest, payable semi-annually in cash, at the rate of 9% per year.
The Travelers Parties have reserved their rights to claim Default Warrants
with an exercise price of $0.01 per share, and also to claim that the exercise
price of the Travelers Warrants and the Additional Warrants has been reset from
$8.65 to $0.01. See "Business -- Recent Developments -- Travelers Financing."
The issuance of the Default Warrants could result in the issuance of a
substantial number of additional shares of Common Stock upon their exercise. In
addition, any adjustment of the exercise price on the Travelers Warrants and the
Additional Warrants would result in the issuance of the shares of Common Stock
at a significant discount, resulting in substantial dilution to the holders of
the Company's Common Stock.
The Company also faces significant structural challenges in generating the
cash required to meet its obligations with respect to its indebtedness. See
"-- Holding Company Structure; Barriers to Realizing Cash from Subsidiaries."
Possible Effects of Insufficient Capital Resources. In addition to the
special issues raised by the Travelers financing and the Technocom minority
shareholders' put options (see "--Repayment of Travelers Financing" and
"-- Technocom Minority Shareholders' Put Options"), the need to meet its capital
requirements may necessitate the Company raising funds in a public or private
equity or debt offering. If the Company is required to conduct such an offering,
its ability to do so on acceptable terms, if at all, will be affected by several
factors, including financial market conditions and the value and performance of
the Company at the time of such offering or refinancing, which in turn may be
affected by many factors, including economic and industry cycles. There can be
no assurance that such an offering can or will be completed on satisfactory
terms.
Failure to generate sufficient funds for its capital requirements in the
future, whether from operations or additional debt or equity financing, or
difficulties encountered in providing capital to its operating businesses, may
require the Company to delay or abandon some or all of its anticipated
expenditures and expansions, or in an extreme case to sell some or all of its
assets, any of which could have a material adverse effect upon the growth of the
Company's businesses and on the Company.
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Also, failure to generate funds for its capital requirements in a timely
manner could lead to the Company defaulting under equipment purchase contracts,
which could lead to the loss of important equipment, or under the indebtedness
referred to above, which could result in acceleration and actions by the holders
of such indebtedness to realize upon guarantees and other security for such
indebtedness. Any of such events could have a material adverse impact upon the
Company and its shareholders.
Limitations on Activities Imposed by Indentures and Revolving Credit
Agreement. The Indentures pursuant to which the Senior Notes and the
Convertible Notes were issued were issued in the June 1996 Placement, and the
Revolving Credit Agreement pursuant to which the Revolving Credit Notes were
issued in November 1997, contain covenants which impose substantial restrictions
upon activities in which the Company may wish to engage. These covenants also
cover the activities of the Company's "Restricted Subsidiaries", meaning
companies in which the Company has directly or indirectly a greater than 50%
interest (but specifically including ALTEL). These covenants, which in many
cases are extremely complex, include restrictions upon the types, amounts and
terms of indebtedness which may be incurred (including the giving of guarantees)
and of the security which may be given for such indebtedness, restrictions upon
payment of dividends (other than by subsidiaries to the Company), bars on
additional investments other than those falling within relatively narrow
exceptions (such as investments in wholly-owned subsidiaries, or to increase the
size of the Company's interest in a subsidiary), limits on sale-leaseback
transactions or the issuance of preferred stock, restrictions on transactions
with affiliates unless certain conditions are met, and the requirement that
sales of assets be made for 75% cash proceeds and all of the proceeds be
re-invested within one year or used to pay indebtedness. In addition, as a
result of the Company not having raised $20,000,000 in additional equity by May
31, 1998, under the terms of the Revolving Credit Notes, the Company is not
permitted, until such equity is raised, to make any unscheduled debt repayments
or to make any capital expenditures (or fund any subsidiary's capital
expenditures) other than out of the proceeds of the Senior Notes being held in
escrow. These covenants impose substantial restraints upon the ability of the
Company and its subsidiaries to conduct their respective businesses, and upon
their capacity to engage freely in transactions which may be beneficial or to
respond timely to opportunities they may encounter and, to this extent, could
affect the growth and development of these companies. Additionally, their
breadth and complexity raises the possibility that the Company or a subsidiary
may inadvertently breach a covenant, thereby triggering a default and possible
acceleration of the indebtedness. While the Company may endeavor to obtain
waivers of particular covenants or of possible breaches thereof, that procedure
is cumbersome and slow and not conducive to prompt decision making. Finally, the
requirement that the Company only access the funds in escrow may impact its
ability to respond promptly to its subsidiaries' capital expenditure needs. See
"-- Capital Requirements."
Effect of Substantial Leverage. As of December 31, 1998, the Company had
$151.8 million of consolidated long-term debt and shareholders' equity of $124.9
million.
In addition to the special issues raised by the Travelers financing and the
Technocom minority shareholders' put options (see "-- Repayment of Travelers
Financing" and "-- Technocom Minority Shareholders' Put Options"), the
substantial degree to which the Company is leveraged could have important
consequences including, but not limited to, the following: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions, general corporate or other purposes may be
limited; (ii) a substantial portion of the Company's cash flow from operations
will be dedicated to the payment of interest on, and the principal of, its debt;
(iii) the agreements governing the Company's indebtedness contain certain
restrictive financial and operating covenants which could limit the Company's
ability to compete and expand; and (iv) the Company's substantial leverage may
make it more vulnerable to economic downturns, limit its ability to withstand
competitive pressures and reduce its flexibility in responding to changing
business and economic conditions. Certain of the Company's competitors currently
operate on a less leveraged basis and have significantly greater operating and
financial flexibility than the Company.
Holding Company Structure; Barriers to Realizing Cash from
Subsidiaries. As a holding company that conducts virtually all of its business
through subsidiaries, the Company has essentially no source of cash other than
distributions and other payments from its subsidiaries. In order to pay cash
interest on the Senior Notes, the Convertible Notes and the Revolving Credit
Notes or the principal amount of the Notes and the Revolving
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Credit Notes at maturity, or to redeem or repurchase the Notes or the Revolving
Credit Notes, or to fund its working capital requirements, the Company will be
required to obtain the necessary cash from its subsidiaries. As set forth
hereinafter, there may be a number of legal and other hurdles to be overcome in
connection with obtaining such cash from its subsidiaries.
The ability of the Company's subsidiaries to make payments to the Company
may be constrained by: (i) their own ability to generate sufficient cash from
their operations; (ii) the level of taxation, particularly corporate profits and
withholding taxes, in the jurisdictions in which they operate; (iii) exchange
controls and repatriation restrictions in effect in the jurisdictions in which
they operate; and (iv) the ownership interests of other investors in the
Company's subsidiaries.
Taxation. Taxes payable by Russian, Kazakh and Belarussian companies are
substantial and include value-added taxes ("VAT"), excise taxes, export taxes
and income taxes. The tax risks of investing in the Russian Federation,
Kazakhstan and Belarus can be substantial. Obtaining the benefits of any
relevant tax treaties can be extremely difficult due to the documentary and
other requirements imposed by the Russian, Kazakh and Belarussian authorities
and, in the case of Russia and Kazakhstan, the unfamiliarity of those
administering the tax system with the international tax treaty system or their
unwillingness to recognize the treaty system, while in the case of Belarus, its
very status under the tax treaties to which it may be a party remains very
unclear. For example, a recent instruction issued by the Russian State Tax
Service mandates full withholding regardless of tax treaty status and requires
the recipient to seek to obtain a refund for withholding in excess of treaty
amounts. The need to deal with these issues may negate or impair tax planning
initiatives undertaken by the Company to reduce its and its subsidiaries'
overall tax obligations. Furthermore, the taxation systems in the Russian
Federation, Kazakhstan and Belarus are at an early stage of development and are
subject to varying interpretations, frequent changes and inconsistent and
arbitrary enforcement at the federal, regional and local levels. In certain
instances, new taxes and tax regulations have been given retroactive effect.
Currency Controls -- Risks of Changing Regulatory and Administrative
Environment. Belarus currently effectively prevents the making of all payments
in hard currency and the repatriation of capital and profits. While applicable
legislation in both the Russian Federation and Kazakhstan currently permits the
repatriation of profits and capital and the making of other payments in hard
currency, the ability of the Company to repatriate such profits and capital and
to make such other payments is dependent upon the continuation of the existing
legal regimes for currency control and foreign investment, administrative
policies and practices in the enforcement of such legal regimes and the
availability of foreign exchange in sufficient quantities in those countries.
The Company's ability to repatriate distributions and other payments in
hard currency will be dependent upon the continued ability of the Company's
operating subsidiaries, where applicable, to bill their customers in U.S.
Dollars or the equivalent amount of local currency, as well as their ability to
freely exchange local currency receipts into U.S. Dollars. See "-- Country
Risks -- Restrictions on Currency Conversion; Historical Volatility in Currency
Prices." There can be no assurance that, because of future changes in Russian
and Kazakh currency regulations, the Company's ability to fully and/or on a
timely basis realize benefits from its operations in the Russian Federation and
Kazakhstan through the receipt of hard currency payments will continue.
In respect of Belarus, the Company is unlikely to be able to repatriate
other than incidental amounts of funds from BELCEL because of exchange control
restrictions, and the further fact that the Belarussian Ruble is effectively
inconvertible.
-- Currency Licensing Requirements. Under current currency regulations in
the Russian Federation and Kazakhstan, while there do not appear to be
additional administrative requirements for the payment of dividends or interest
on debt, until January 1999, specific licenses from both the Central Bank and
the National Bank of Kazakhstan were required for the making of equipment lease
payments to a foreign lessor and for repayments of principal on debt with a term
of more than 180 days. As of January 1999, the Central Bank required licenses
for any such obligations with a term of more than 90 days. Failure to obtain
such currency licenses where required can result in the imposition of fines and
penalties. While the requirements for
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obtaining such licenses largely involve the production of documentation, not
only are the documentary requirements themselves burdensome, but there can be no
assurance that the entity granting the licenses may not impose additional,
substantive requirements for the grant of a license or deny a request for a
license on an arbitrary basis. See "-- Country Risks -- Legal
Risks -- Underdeveloped Legal System." Furthermore, the time typically taken by
the Central Bank and the National Bank of Kazakhstan to issue such licenses can
be lengthy. In the case of the Central Bank, delays of up to one year or more in
the issuance of licenses have not been uncommon. The failure of the Company to
obtain, or any significant delay in the issuance of, such licenses could
substantially delay the time at which the Company may receive payments under
such leases. To address this problem, and based on the Company's belief that
currency licenses are presently not required in the Russian Federation for
payments under installment sales contracts, the Company has now commenced
providing equipment to its operating businesses on an installment sales basis
rather than through leasing and, as a result of the Consent Solicitation, the
Indentures were amended to permit the Company to do this. However, there is no
assurance that the Central Bank or other relevant Russian entity will not
construe the applicable currency legislation as requiring licenses for
installment sales as well as leases. Failure to obtain currency licenses, where
required, can result in the imposition of fines and penalties, significant
delays in delivering equipment to the Company's operating businesses and
resulting difficulties in generating cash flows from the Company's operating
businesses in the Russian Federation.
Finally, the Company's ability to repatriate distributions and other
payments in hard currency will be dependent upon the continued ability of the
Company's operating subsidiaries in Russia and Kazakhstan to bill their
customers in the U.S. dollars or the equivalent amount of local currency, as
well as their ability to exchange freely local currency receipts into U.S.
dollars. There can be no assurance that, because of changes in Russian and
Kazakh currency regulations, and/or because of a recurrence of the financial,
banking and currency crises which afflicted the Russian Federation in the latter
part of 1998, the Company's ability to fully and/or on a timely basis realize
benefits from its operations in the Russian Federation and Kazakhstan through
the receipt of hard currency payments will continue. The Company does not
anticipate being able to receive distributions from BELCEL due to the fact that
the Belarussian Ruble is effectively inconvertible.
-- Licensing Requirements for Prior Investments. Until 1995, most direct
foreign investment in the Russian Federation appears to have been made without
licenses from the Central Bank, due to the lack of clear guidelines from the
Central Bank governing such investments. However, in 1995 the Central Bank
confirmed that licenses were required for such direct foreign investments and
that upon application it would issue licenses specifically authorizing such
direct foreign investments in Russian companies. In response to private
inquiries, the Central Bank also indicated that it would consider retroactive
licensing of previously made direct foreign hard currency investments upon
appropriate application. The Company is actively reviewing with the managements
of its operating subsidiaries its obligations to comply with these licensing
requirements, particularly on a retroactive basis. If the Central Bank were to
determine that the Company did not hold the required licenses, this could give
rise to substantial fines and penalties.
-- Possible Effects of Currency Controls and Regulations on the Company's
Ability to Meet its Obligations. There can be no assurance that, due to the
risks outlined above, the Company will not experience difficulties or delays in
receiving cash flows from its operating subsidiaries. Any such difficulties or
delays could materially affect the Company's ability to make payments on its
outstanding indebtedness and could result in defaults in the Company's payment
obligations under that indebtedness or an acceleration of the maturity of that
debt. In addition, the Company's ability to meet its working capital
requirements or to declare and pay dividends to its shareholders could be
adversely affected by any cash flow restrictions experienced by the Company.
Anti-Monopoly Committee Approval. Under Russian anti-monopoly legislation,
transactions which potentially influence competition in the Russian Federation
are subject to the disclosure to and/or prior consent of the Russian
Anti-Monopoly Committee. The Anti-Monopoly Committee generally has wide
discretion to approve or disapprove transactions falling within the scope of its
authority, though in practice transactions are rarely challenged. The time
typically required by the Anti-Monopoly Committee to review a proposed
transaction varies between three and four months. Failure to obtain prior
consent may constitute grounds for the Anti-Monopoly Committee to seek a court
decision declaring the relevant transaction null and
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void. In particular, transactions (including rental or lease transactions) which
involve the acquisition of more than 20% of a Russian company's stock or the
transfer of assets amounting to more than 10% of the assets of a transferor to a
transferee, are subject to prior consent of the Anti-Monopoly Committee.
This requirement on its face applies to companies leasing assets to other
companies, such as Technocom, PLDCA and PLD Leasing, which would therefore need
to obtain such consent before leasing equipment to the Company's operating
subsidiaries. While the Company has been advised that such requirement should
not apply to such arrangements, there can be no assurance that the Anti-Monopoly
Committee will concur and accordingly that the Anti-Monopoly Committee will not
require such consent. Although the Company does not believe that equipment
leases could have an anti-competitive effect in the Russian Federation, no
assurance can be given that consent from the Anti-Monopoly Committee will be
granted. The refusal of the Anti-Monopoly Committee to give consent to any
equipment leases could have a material adverse effect upon the Company.
Absence of Complete Control; Dependence on Local Partners. The Company's
principal assets are its interests in its operating subsidiaries. The Company
holds a 71% ordinary share interest in PeterStar and a 50% interest in ALTEL.
The Company also has a 80.4% interest in Technocom, which in turn currently has
a 49.33% direct and indirect beneficial economic interest (56.0% voting
interest) in Teleport-TP and a 49% interest in MTR-Sviaz. Finally, the Company
holds a 50% ordinary share interest in BELCEL. While the Company may have the
ability, in the case of PeterStar, ALTEL, BELCEL and Teleport-TP, to direct the
operations or determine the strategies of such subsidiaries under the terms of
their respective constituent documents, the enforceability of some of the
Company's rights is uncertain. See "-- Country Risks -- Legal Risks." Further,
the other shareholders may, as a practical matter, be able to impede the
Company's ability to exercise effective control. In addition, the Company would
be unlikely to take significant initiatives without the approval, in the case of
PeterStar, of Telecominvest and PTN; in the case of ALTEL, of Kazakhtelekom; in
the case of BELCEL, of the Minsk Regional Telephone Network and the Minsk City
Telephone Network; and, in the case of Teleport-TP, of Rostelecom. See
"-- Ownership and Management of Operating Subsidiaries." Certain of the
Company's operating subsidiaries are dependent on continued access, on favorable
terms, to the facilities of certain of the Company's partners, and this may
adversely affect the Company's ability to rely on its legal rights to influence
the conduct of the business of its operating subsidiaries. In summary, the
absence of complete legal control by the Company over the operations of
PeterStar, ALTEL, Teleport-TP and BELCEL, coupled with the dependence of these
ventures on continued access to the facilities of the Company's partners, could
have a material adverse effect on the Company. Finally, PeterStar, Technocom,
Teleport-TP and ALTEL are all restricted subsidiaries under the Senior Note
Indenture and the Convertible Note Indenture, and the Company is required by the
terms of such indentures not to permit its restricted subsidiaries to violate
the various covenants contained in such Indentures. See "-- Limitations on
Activities Imposed by Indentures and Revolving Credit Agreement." There can be
no assurance that the Company will always be in a position to comply with this
obligation, and its failure to do so could cause a default under the Senior Note
Indenture or the Convertible Note Indenture.
Susceptibility to Political and Other Pressures. Although the governments
of the countries and regions in which the Company operates may be limited in the
extent to which they can legally direct the Company's policies, in practice they
may be able to exercise significant influence. As a consequence, not only may
the Company's activities be restrained if a governmental entity is not
supportive, but the Company may be forced to take action to support policies or
agendas of the government which are not in its commercial or other interests. In
addition, in order to maintain good working relationships with its partners, the
Company may need to take certain actions which may not necessarily be in its
commercial or business interests. See "-- Risks Involving PeterStar Company
Limited and Baltic Communications Limited -- Dependence on PTN Facilities."
Dependence on Key Management. The Company's various operating businesses
are managed by a small number of key management personnel, both expatriate and
local. The Company generally is not in a position unilaterally to appoint local
managers, which must usually be done in conjunction with its local partner, so
that the Company is not able to ensure the continued availability of any given
individual's services. While all expatriates are employed under employment
agreements by a subsidiary of the Company, no assurance can be
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given that their services or the services of these other key individuals will
continue to be available to the Company's operating subsidiaries. In addition,
the Company is dependent on its core management team of James Hatt, Simon
Edwards and Ian Armour, as well as Peter Owen Edmunds, who heads the Company's
representative office in St. Petersburg. Neither the Company nor its operating
subsidiaries carry "key-man" insurance with respect to these individuals. The
Company could be materially and adversely affected if any key management
personnel should cease to be active for any reason in the management at the
corporate and/or operating subsidiary level.
Competition. The Company is developing and operating its businesses in
highly competitive environments. A number of companies compete with the
Company's operating businesses, many of which have access to greater financial
and technical resources than the Company. There can be no assurance that the
Company will be able to overcome successfully the competitive pressures to which
it is subject, both in the markets in which it currently operates and in markets
into which it might expand. Furthermore, in many instances the Company's
partners in its operating businesses are also potential -- and in some cases
actual -- competitors. For example, PTN has recently completed the installation
of a fiber optic network in St. Petersburg which, when fully operational, will
improve call completion rates on the PTN network and could provide a serious
alternative to PeterStar's network and permit PTN to compete more effectively
for business in St. Petersburg. In addition, while Rostelecom appears to be
generally supportive of the development of Teleport-TP's long distance network,
such network is in direct competition with the national long distance network
operated by Rostelecom, and there can be no assurance that Rostelecom will
continue to support the development of Teleport-TP's network. Similarly, ALTEL's
cellular network in Kazakhstan could be seen as being in competition with the
national network operated by Kazakhtelekom. ALTEL also faces substantial
competition from operators which were recently awarded GSM licenses in
Kazakhstan, one of which is a consortium which includes Kazakhtelekom.
Similarly, the Belarussian government has recently announced plans to award
additional cellular licenses. At this time it is unclear what impact the
consolidation of the Russian government's holdings in Sviazinvest and Rostelecom
and the sale of significant stakes in Sviazinvest to Russian and foreign
investors will have on the Russian telecommunications market in general and the
Company in particular.
Potential Conflicts of Interest. Each of the Company's principal partners
in PeterStar, ALTEL and Teleport-TP have interests that may conflict with those
of the Company.
PTN, which holds its interest in PeterStar through Telecominvest and is the
main provider of basic telephony services in St. Petersburg, already competes to
some degree with PeterStar for customers and may increasingly become a
substantial competitor with the eventual upgrading of its telecommunications
network. Kazakhtelekom, the public switched telephone network operator and the
Company's partner in ALTEL, may be a significant competitor for ALTEL's cellular
operations when it improves the telephony services it provides in Kazakhstan by
upgrading its fixed wire telecommunications network. In addition, Kazakhtelekom
is a participant in one of the joint ventures which was recently awarded a
national GSM license in Kazakhstan. Rostelecom, the Russian telecommunications
company that is Technocom's principal partner in the Teleport-TP venture,
competes with Teleport-TP, both directly and indirectly through joint ventures
with other international companies in the provision of telephony and related
services Finally, certain directors of the Company's operating subsidiaries also
act as directors or officers of its partners in the Russian Federation and
Kazakhstan.
In light of these competing interests, and, in particular, the extent of
the legal and practical control that the Company's partners have over the
affairs of the Company and its operating subsidiaries, any or all of the
companies named above may use their influence, through the directors they
appoint to the boards of the Company and its operating subsidiaries or
otherwise, to benefit themselves or other businesses in which they have an
interest at the expense of the Company and its operating subsidiaries, subject
to such limited fiduciary duties as they may have under applicable law.
Moreover, such persons are not obliged (except for such obligations as they may
have under applicable law) to allocate to the Company and its operating
businesses corporate opportunities of which they become aware through the
directors referred to above or otherwise. No assurance can be given that the
fiduciary duty and corporate opportunity doctrines that exist under United
States law will provide adequate protections to the Company's shareholders
against the pursuit of such
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conflicting interests. Kazakh and Belarussian law currently provide no
protection in this regard and, while Russian corporate law has recently
introduced the concept of the fiduciary duties of corporate officers and
directors, the law is too new for any prediction to be made as to how much
protection it will, in fact, provide. The pursuit of conflicting interests by
the persons referred to above could have a material adverse effect on the
Company.
Impact of Auction of Stakes in Sviazinvest on the Company and the
Telecommunications Market in Russia. In 1997, it was reported that,
notwithstanding its previously announced plans to have Sviazinvest compete with
Rostelecom, the Russian government had consolidated its telecommunications
holdings in Sviazinvest and Rostelecom by transferring its shareholding in
Rostelecom (38% of the common stock, and 51% of the voting stock) to
Sviazinvest. The balance of the shares in Rostelecom remain in the hands of
private investors. In April 1997, the government announced that it was seeking
to sell 49% of Sviazinvest in two auctions, one as to a 25% stake open to
Russian and foreign investors and the other as to a 24% stake open only to
Russian investors. In July 1997, the government announced that the 25% stake had
been sold to a consortium which included Oneximbank and Renaissance Capital, for
a purchase price of $1.875 billion. Following this auction, the Russian
government announced its intention to increase the size of the other stake being
sold to 25% minus two shares. The schedule for the sale of the second stake has
been delayed following the August 1998 financial crisis, and the structure of
any such sale (including whether foreign participation will be permitted) has
not been announced. While it is not yet clear how the proceeds of this sale will
be employed, it is understood that the government wishes to have a substantial
part, if not all, of the proceeds allocated to its current budget deficit. Prior
to the August 1998 crisis, Sviazinvest had announced plans to raise $400 million
through a Eurobond offering in 1998, but that offering was also delayed as a
result of the Russian financial crisis. In light of all of the foregoing, it is
unclear what impact the consolidation of the government's telecommunications
holdings and the auction of significant stakes in Sviazinvest will have on the
Russian telecommunications market in general and the Company in particular.
Regulatory Uncertainties. The Company's operating businesses operate in
uncertain regulatory environments. The Russian telecommunications system is
currently regulated by the RFCTI, the Kazakh telecommunications system is
currently regulated by the KMOC and the Belarussian telecommunications system is
currently regulated by the Belarus Ministry of Posts, Telecommunications and
Informatics, largely through the issuance of licenses. Despite the 1995
enactment of the Telecommunications Law in Russia, considerable uncertainty
still exists as to the application and interpretation of many of its terms.
There is currently no comprehensive legal framework with respect to the
provision of telecommunications services in Kazakhstan or Belarus, although a
number of laws, decrees and regulations govern or affect the telecommunications
sector. Further, the recently announced appointment of Kazakhtelekom as the
exclusive operator of the public telephone network in Kazakhstan and/or the
participation of Kazakhtelekom in one of the joint ventures recently granted a
national GSM license in Kazakhstan, may lead to restructuring of the
telecommunications sector in Kazakhstan, the effects of which are difficult to
predict at the present time.
While the RFCTI appears to have succeeded to all of the powers and
authorities of the Former MOC, it is not yet clear whether it will in fact
continue to operate in the same manner and wield the same influence as the
Former MOC. In particular, it is unclear whether the RFCTI will be able to
control the actions of local and regional governmental authorities who may
endeavor to impose new conditions upon operators in their respective
jurisdictions or areas of influence. As an example, significant delays in the
rollout of Teleport-TP's long distance network have been caused by
administrative difficulties experienced with local and regional governmental
authorities. See "-- Risks Involving Technocom Limited and
Teleport-TP -- Capital and Management Resources Required for Network Expansion;
Management of Growth."
The absence of adequate regulation in the telecommunications sector has
meant that decisions, including the granting and renewal of licenses, may at
times be made by governmental officials without reference to precedent or
procedure.
Furthermore, the introduction of regulation of tariffs, or any other type
of regulation, could have far-reaching, and potentially materially adverse,
effects on the Company. In particular, there is considerable uncertainty as to
what impact the transfer of authority to regulate local tariffs to Regional
Committees will
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have on local tariffs in Russian. See "Telecommunications in the Former Soviet
Union -- Telecommunications in the Russian Federation."
Limitations on Ability to Transfer Interests. The terms of the PeterStar,
BELCEL and ALTEL shareholder and joint venture agreements, and the terms of the
shareholder and joint venture agreements relating to Teleport-TP and MTR-Sviaz,
impose restrictions on the Company's ability to transfer its interests in such
companies and give the other shareholders in such companies certain pre-emptive
and other similar rights. It is likely that the Company's ability to transfer
its interests in other future investments will be similarly limited. The
restrictions on, and other provisions relating to the sale of these interests,
and the lack of liquidity in the market for interests the Company now holds or
may acquire, may impede their resale by the Company. While it may be possible to
arrange for negotiated sales with one or more buyers, the Company may not be
able to realize value from these interests, or acceptable terms, in a timely
manner or at all.
Management of Growth. The Company is at a relatively early stage of
development and has experienced, and may continue to experience, rapid growth
resulting from the continued development of PeterStar, ALTEL, Teleport-TP and
its other operating businesses. The Company's future growth will require the
Company to manage its expanding operations and to adapt its operational systems
to respond to changes in the business environment. The expansion of the
Company's operations has placed and will continue to place significant demands
on the Company and its management to improve the Company's operational,
financial and management information systems, to develop further the management
skills of the Company's managers and supervisors and to continue to train,
motivate and effectively manage the Company's employees. The failure of the
Company to manage its growth effectively could have a material adverse effect on
the Company.
RISKS INVOLVING PETERSTAR COMPANY LIMITED AND BALTIC COMMUNICATIONS LIMITED
Limited Operating History. PeterStar was formed in May 1992 and started
operating a modern digital telephone exchange network in St. Petersburg in
February 1993. BCL, which was acquired by the Company in April 1996, was also
formed in 1992 to provide international direct dial and private line services
for foreign companies in St. Petersburg. While both PeterStar and BCL generated
profits in the years ended December 31, 1997 and 1998, in view of their limited
operating history there can be no assurance that PeterStar or BCL will be able
to generate sufficient revenues or control their costs enough to remain
profitable in the future.
Reliance on Telecommunications Licenses; Risks of Revocation or
Renegotiation of Licenses. PeterStar's business is dependent on the maintenance
of its principal telecommunications license which permits it to operate a public
telephone system in the Russian Federation for a term expiring in November 2004.
Other licenses that have been issued to PeterStar include a dedicated network
license (expiring September 2001), a data communications license (expiring May
2001), a telematics license (expiring May 2001) and a videoconferencing license
(expiring June 2001). The main PeterStar license, governing the provision of
public telecommunications services, sets the number of lines which PeterStar may
have in St. Petersburg and the surrounding region at 106,000, and requires that
capacity equal to 74,200 lines be introduced by June 1999. However, management
of PeterStar believes that the maximum and minimum number of lines are not
strict requirements but are instead designed to provide general guidance as to
the number of lines intended to be included on the system. As of December 31,
1998, PeterStar had 168,166 active lines, of which 108,278 were provided to
cellular operators. Based on its experience in renewing existing, and obtaining
new, licenses and its general knowledge of the licensing environment in Russia,
management of PeterStar does not believe that its license would be terminated or
re-negotiated, that it would be forced to reduce the number of its subscribers,
or that other penalties would be imposed, by reason of its exceeding its 106,000
line ceiling, but there can be no assurance that the RFCTI would not take a
different position. The dedicated network license permits PeterStar to provide
long distance and international telephone transmission services to dedicated
network operators (such as BCL) in St. Petersburg and the surrounding region for
a term expiring in September 2001. The dedicated network license sets the number
of lines which PeterStar may have at no less than 30,000 and requires that
capacity equal to 21,000 lines be introduced by September 1999. Once again,
based on its experience in renewing existing, and obtaining new, licenses and
its general knowledge of the licensing environment in Russia, management of
PeterStar believes that these maximum and minimum number of lines
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are not strict requirements but are instead designed to provide general guidance
as to the number of lines intended to be included on the system. There can be no
assurance that the RFCTI would not interpret the provisions of the licenses
differently, which in turn could result in the revocation of the licenses or
their renegotiation on terms unfavorable to PeterStar or the imposition of
penalties. It is not possible to calculate the amount of any penalties which
might be imposed, which are in the discretion of the RFCTI.
BCL's primary license permits it to provide long distance and international
telephone, facsimile and data transmission services to private networks in St.
Petersburg and the surrounding region for a term expiring on December 31, 2003.
Based on its experience in renewing existing, and obtaining new, licenses and
its general knowledge of the licensing environment in Russia, management of BCL
believes that, so long as it is being actively utilized, BCL's license will be
renewed at the end of its current term. The license limits the number of
subscribers to 100,000 and requires that 70,000 of these be in place by January
2001. Based on its experience in renewing existing, and obtaining new, licenses
and its general knowledge of the licensing environment in Russia, management of
BCL believes that the maximum and minimum line numbers are not strict
requirements but are instead designed to provide general guidance as to the
number of lines intended to be included on the system. As of December 31, 1998,
BCL had a total of approximately 1,200 lines. Based on that knowledge and
experience, BCL has no reason to believe that its license would be terminated if
it either exceeded 100,000 lines or failed to have 70,000 lines in place by
January 2001, but there can be no assurance that the RFCTI would not interpret
the license provisions differently, which in turn could result in the revocation
of its license or its renegotiation on terms unfavorable to BCL or the
imposition of penalties. It is not possible to calculate the amount of any
penalties which might be imposed, which are in the discretion of the RFCTI.
No assurance can be given that either PeterStar or BCL will be able to
maintain its licenses, that the terms will not be interpreted, altered or
renegotiated to its disadvantage or that they will be renewed upon expiration.
The loss of, or a substantial limitation upon the terms of, either PeterStar's
or BCL's licenses could have a material adverse effect on the Company.
Dependence on Interconnect Parties. PeterStar is dependent on PTN, SPMMTS
and other operators for the completion of most of its calls. The PeterStar
network is linked to the PTN network, which gives PeterStar access to PTN's
large local subscriber base. PeterStar is required by the terms of its license
to route all long distance and international calls through the public network.
PeterStar has been able to negotiate favorable tariffs for interconnection fees
and carrier charges with both PTN and SPMMTS. PeterStar's current interconnect
agreements with PTN and SPMMTS are open-ended agreements, while the
interconnection fees and carrier charges payable under the interconnect
agreements are subject to renegotiation between the parties from time to time.
The agreements provide for automatic extensions at the end of their term unless
otherwise terminated by either party. The interconnection fees and carrier
charges payable under the interconnect agreements are subject to renegotiation
between the parties from time to time. There can be no assurance, however, that
PeterStar will continue to have access to the PTN network or that PeterStar will
continue to receive such favorable tariffs. The loss of access to such network
or increases in such tariffs could have a material adverse effect upon the
Company.
Dependence on PTN Facilities. PeterStar is also dependent on PTN's
buildings, ducts and tunnels in order to house its exchanges and to reach its
customers. Prior to 1998, PeterStar has not been required to pay rent to PTN to
house its exchanges in PTN buildings, nor has it paid rentals for ducts or
tunnels. Commencing in 1998, PeterStar has been required to pay a local line
rental charge to PTN, although roughly half of the fee otherwise payable during
1998 was offset against amounts owed to PeterStar by PTN in respect of the
Vassilievski Island project. The aggregate amount paid to PTN in 1998 for line
rental charges was $1.3 million. The amount of the 1999 line rental charged has
not yet been determined, but PeterStar expects to be able to offset amounts due
from PTN against such charges during 1999. However, any change in the terms on
which PeterStar has access to PTN's facilities, or any restrictions imposed by
PTN on the completion of calls from the PeterStar network, could have a material
adverse effect on PeterStar and, in turn, the Company.
Capital and Management Resources Required for Expansion of Direct Dial
Services; Management of Growth. PeterStar has commenced several projects
designed to expand its direct dial services in
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St. Petersburg and Northwest Russia. PeterStar has undertaken with PTN an
infrastructure project centering on the replacement of analog exchanges with
digital exchanges for certain parts of the network on Vassilievski Island, a
city district in St. Petersburg. This project requires the conversion of
approximately 30,000 business and residential lines that have previously been
operated by PTN, after which such lines become a part of the PeterStar network.
In addition, PeterStar plans to further enhance its transit network capabilities
in order to provide continued support to the cellular and other network
providers in terminating traffic in St. Petersburg and to the national and
international gateway. PeterStar also expects to increase its operating presence
in Northwest Russia through the targeted development of digital infrastructure
to connect business customers and develop operational relationships with the
regional telephone companies. These projects represent a major expansion of
PeterStar's operations which have and will require substantial capital and
special management efforts if they are to be carried into effect successfully.
See "-- Risks Involving the Company -- Capital Requirements."
Pressure to Provide Residential Service. The Vassilievski Island project
also represents part of a continuing effort on the part of PTN to modernize a
portion of its network. The local calling element of residential service is
presently provided free of charge (other than connection fees and line rental
charges), and there has been considerable political resistance to the
introduction of time-based charges for local calls. Even after calling charges
have been introduced, it is likely to remain a low margin business for the
foreseeable future. Even though PTN has now been privatized, the Company does
not believe that the pressures on PTN to improve residential service have
lessened. Although the Company believes that PeterStar has fulfilled its
commitment to the residential customers, there can be no assurance that PTN will
not continue to try to involve PeterStar in this effort, or that PTN's continued
support for PeterStar's access to the business market may be linked to
PeterStar's further commitment to develop the residential market in St.
Petersburg.
RISKS INVOLVING ALTEL
Limited Operating History. ALTEL was formed in January 1994 and commenced
commercial operations in September 1994. Although ALTEL generated profits for
the years ended December 31, 1997 and 1998, there can be no assurance that ALTEL
will be able to generate sufficient revenues or control its costs sufficiently
to remain profitable in the future.
Reliance on Telecommunications License. ALTEL's business is dependent on
the 15-year renewable license issued in February 1994 for the creation and
operation of cellular communications networks in Kazakhstan for local, long
distance and international calling, using the 800 MHZ frequency band and "AMPS"
technology. Under the terms of the license ALTEL was required to provide
cellular services to Almaty and ten to twelve additional regional centers by the
end of 1996, a condition which has been met. The license specifies that ALTEL is
to be the exclusive provider of cellular service in Kazakhstan for the first
five years of the license term, which period expired in February 1999. In 1998,
before the expiration of the exclusivity period, ALTEL commenced discussions
with the KMOC on substituting a new license with revised terms for its existing
license. One aspect of any such new license would have been the elimination of
the exclusivity provisions in exchange for other concessions. Although such
exclusivity has since terminated according to the terms of the license, ALTEL
and the KMOC are continuing to discuss the terms of a new license for ALTEL. See
"-- ALTEL -- Telecommunications License." Although such discussions are
continuing, there can be no assurance that any new license issued by the KMOC
will not contain revised terms which are detrimental to ALTEL's business.
Issuance of Additional Telecommunications Licenses. Until 1998, ALTEL was
the only licensed national cellular operator in Kazakhstan. In 1998, the KMOC
awarded two licenses for the development of a national GSM network in
Kazakhstan. One license was issued to Kcell, a joint venture of included
TurkCell and Kazakhtelekom, and the other license was issued to Kmobile, a joint
venture of Telsim, a Turkish company, and local Kazakh interests. Active
marketing was begun by Kcell in early February 1999 and by Kmobile in
mid-February 1999. Management of ALTEL currently believes that, by virtue of its
cost structure and its market penetration to date, it is in a good position to
compete with the new GSM operations. However, ALTEL has already experienced some
downward pressure on its tariffs as a result of competition from the new
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licensees. ALTEL is currently assessing its response to the new competition, and
there can be no assurance that it will in fact be able to compete successfully
with the new licensees.
Effect of Network Expansion on Management Resources; Management of
Growth. ALTEL has engaged in a significant expansion of its cellular network,
from its initial base of operations in Almaty to a total of 12 cities throughout
Kazakhstan as of December 31, 1998. The timing of such expansion was dictated by
the terms of the license, so that in some regions it occurred at a time when
economic activity in those regions was still at a sufficiently low level as to
raise a question as to whether, and if so, when, cellular service in such
regions will be commercially viable. Furthermore, because of the distances
involved, the difficulty of hiring, training and supervising staff at remote
locations and the underdeveloped nature of the business infrastructure, such as
banks and professional advisers in many of the proposed locations for expansion,
the establishment and provision of cellular service have presented, and will
continue to present, significant challenges to the management of ALTEL, and
there can be no assurance that these challenges will be met successfully in all
cases. In addition, further network development is planned on a targeted basis
to address key market sectors. Failure to manage the ALTEL network, and any
future expansion of the network, successfully could have a material adverse
effect on the Company.
Effect of Sale of Stake in Kazakhtelekom on ALTEL and the
Telecommunications Market in Kazakhstan. Since its formation, ALTEL has been
50% owned, directly or indirectly, by the government of Kazakhstan. ALTEL
believes that the attitude of the government towards its operations has
generally been favorable and that this has derived in some part from the
government's interest in ALTEL. Currently, the government's 50% interest in
ALTEL is held through Kazakhtelekom, which until May 1997 was owned 100% by the
government. In May 1997, the Kazakh government announced that it had sold a 40%
interest in Kazakhtelekom to Daewoo, creating considerable uncertainty as to the
government's attitude towards Kazakhtelekom. In March 1998, it was reported that
Daewoo had sold a portion of its stake (reported to be approximately 10%) to an
unnamed third party. It was later confirmed that Daewoo had sold its entire
stake in Kazakhtelekom to Kazcommertzbank, a commercial bank based in
Kazakhstan. It is understood that the Kazakh government is seeking to sell a 15%
stake in Kazakhtelekom to private investors. In addition, the KMOC recently
issued a revised license to Kazakhtelekom specifically naming it as the
exclusive national network operator in Kazakhstan, and giving it a wide range of
powers to carry out this function. The Company has not yet fully assessed what
impact these matters may or will have on ALTEL and its business. There can be no
assurance that the government's favorable attitude towards ALTEL will continue
to the same degree. Any significant change in the government's attitude toward
ALTEL could have a material adverse effect on the Company.
Dependence on Interconnect Parties. Under the terms of its license, ALTEL
is entitled to interconnection free of charge to networks operated by
Kazakhtelekom, the public switched telephone network operator, for the
completion of its local, long distance and international calls. The loss of, or
any significant limitation on, its access to such network could have a material
adverse effect on the Company. Further, under its revised license, Kazakhtelekom
was directed to assess interconnection charges for connection to its network,
and to levy such charges on a basis which will yield it a profit. Kazakhtelekom
may try to use this authority to endeavor to assess interconnection charges on
ALTEL, notwithstanding the fact that its license exempts it from payment of such
charges. The imposition of such interconnection charges would impact ALTEL's
profitability, perhaps materially.
RISKS INVOLVING TECHNOCOM LIMITED AND TELEPORT-TP
Limited Operating History. Technocom was formed in January 1992. Until
1995, its principal business was Teleport-TP, which commenced operations in late
1993. In view of their limited operating history, there can be no assurance that
they will generate sufficient revenues or control their costs sufficiently to
become and remain profitable in the future. Nor can there be any assurance that
Technocom's other businesses, all of which have only just commenced operations
or are still in the planning stage, will become or remain profitable.
Reliance on Telecommunications Licenses; Risks of Revocation or
Renegotiation of Licenses. Teleport-TP's business is dependent on four
telecommunications licenses from the RFCTI, although it holds a
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total of 12 such licenses. Two of these principal licenses expire in 2004, one
in 2002 and one in 2001. One of the licenses, expiring in November 2004, limits
the number of subscribers under such license to 18,050 (15,000 within Moscow's
city limits) and requires that 12,635 be in place by November 1997. Another
license, expiring in October 2004, limits the number of subscribers to 1,700 and
requires that 1,190 be in place by October 1997. Teleport-TP did not meet these
minimum subscriber numbers. The third license, expiring in January 2002,
provides that the installed subscriber capacity of Teleport-TP's data network
must permit the connection of at least 70,000 subscribers by December 2000 and
at least 100,000 subscribers by the expiration of the term of the license, but
it does not impose any limit on the number of subscribers. The fourth license,
expiring in 2001, provides that the total installed capacity of Teleport-TP's
long distance network should be at least 100,000 numbers with at least 70,000
numbers operational by May 2000. Based on its experience in renewing existing,
and obtaining new, licenses and its general knowledge of the licensing
environment in Russia, management of Teleport-TP believes that the subscriber
numbers are not strict requirements but are instead designed to provide general
guidance as to the number of subscribers intended to be included on the system.
Based on that knowledge and experience, management further believes that, so
long as a license is being actively utilized, such license will not be
terminated nor other sanctions imposed if Teleport-TP failed to have the minimum
number of subscribers in place by the specified date or if it exceeded the
maximum number of subscribers permitted by the license, but there can be no
assurance that the RFCTI would not take a different position, which in turn
could result in the revocation of the license or its renegotiation on terms
unfavorable to Teleport-TP or the imposition of penalties. It is not possible to
calculate the amount of any penalties which might be imposed, which are in the
discretion of the RFCTI. The loss of, or the failure to obtain renewal of, or
any substantial limitation upon the terms of, any of Teleport-TP's licenses
could have a material adverse effect on the Company.
No assurance can be given that Teleport-TP will be able to maintain its
licenses, that the terms will not be interpreted, altered or renegotiated to its
disadvantage or that they will be renewed upon expiration. See "-- Country
Risks -- Legal Risks." The loss of, or a substantial limitation upon the terms
of, Teleport-TP's licenses could have a material adverse effect on the Company.
Although Teleport-TP's failure to satisfy any of the conditions of the
foregoing licenses could result in the revocation of such licenses, which in
turn could have a material adverse effect upon Teleport-TP and the Company, the
management of Technocom believes that this would be unlikely to occur as long as
Teleport-TP is otherwise providing needed services to its customers. The Company
also knows of no reason why any of these licenses will not be renewed upon their
expiration; however, the expiration of these licenses without renewal, or their
renewal on less favorable terms, could have a material adverse impact upon the
Company.
Dependence on Rostelecom as Customer; Necessity to Further Develop Customer
Base. Rostelecom accounted for approximately 30% of Teleport-TP's total
revenues for the year ended December 31, 1998, as compared to 27% for the year
ended December 31, 1997. Teleport-TP will seek, through the installation of its
long distance network facilities, to develop a substantial alternative customer
base in order to reduce its dependence on Rostelecom; however, there can be no
assurance that it will be able to do so successfully. Thus, for the immediate
future Rostelecom will likely remain Teleport-TP's single largest customer.
While the risk of Rostelecom taking action which could harm Teleport-TP should
be ameliorated because of the fact that Rostelecom itself owns 44% of
Teleport-TP, any significant negative change in the relationship with Rostelecom
could have a material adverse effect upon both Teleport-TP and Technocom.
Additionally, while Rostelecom currently utilizes approximately 800 circuits, it
is only contractually committed to utilize, on a long-term basis, 100 circuits.
Until Teleport-TP is able to develop a broader customer base, any significant
cutback by Rostelecom in the number of circuits it utilizes could have a
material adverse impact on Teleport-TP and Technocom.
In addition, at this time it is unclear what impact the consolidation of
the Russian government's holdings in Sviazinvest and Rostelecom and the sale of
significant stakes in Sviazinvest to Russian and foreign investors will have on
the Russian telecommunications market in general and the Company and Technocom
in particular. See "-- Risks Involving the Company -- Impact of Auction of
Stakes in Sviazinvest on the Company and the Telecommunications Market in
Russia."
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Dependence on MGTS Facilities. Teleport-TP is dependent upon the
facilities of MGTS for the operation of its existing network in Moscow, since a
substantial part of the fiber optic cabling it uses is laid in the ducts of MGTS
pursuant to agreements under which Teleport-TP pays MGTS for the use of such
facilities. The agreements between Teleport-TP and MGTS are one year agreements
which are subject to automatic one year renewals unless MGTS provides a timely
notice of cancellation. The current agreements expire on December 31, 1999.
Technocom knows of no reason why MGTS would refuse to renew these agreements.
However, the failure on the part of MGTS to renew these agreements or to honor
their terms could have a material adverse effect on Teleport-TP.
Dependence on MTR-Sviaz Facilities. Teleport-TP is dependent upon the
facilities of MTR-Sviaz to terminate certain traffic to users on the MTR-Sviaz
network. MTR-Sviaz uses leased circuits from a number of providers, access to
the Teleport-TP fiber cable facilities and the Mosenergo internal communications
network to terminate its calls. Teleport-TP uses the MTR-Sviaz facilities to
locate its Internet gateway, from which links to Internet service providers
(ISPs) are provided via leased and dial-up lines on the public network.
Furthermore, Teleport-TP acts as the long distance gateway for subscribers to
the MTR-Sviaz network.
In addition, like many major Russian companies, Mosenergo experiences
liquidity problems from time to time. While the relationship with Mosenergo has
the potential to be mutually beneficial as described above, the increased
dependence on the Mosenergo network may make Technocom more vulnerable to
Mosenergo's liquidity problems, both in terms of pressure for financial support
for the expansion of its network, and in its ability to achieve prompt
settlement of accounts.
Capital and Management Resources Required for Network Expansion; Management
of Growth -- Capital and Management Resources. Technocom, through Teleport-TP,
has commenced a major program for the provision to cities and other locations
throughout the Russian Federation of satellite-based long distance and
international telecommunications service (the latter through Teleport-TP's
international gateway in Moscow). Installation of the first phase of the long
distance network program commenced in 1996, with 36 sites installed as of
December 31, 1998. The Company currently plans to install equipment in a total
of 45 sites by mid-1999. This installation program represents a major expansion
of Teleport-TP's operations which has required, and will continue to require,
substantial capital and special management efforts if it is to be carried into
effect successfully. See "-- Risks Involving the Company -- Capital
Requirements."
Further expansion of the network program beyond the initial 45 sites will
be defined by customer demand and, therefore, has yet to be fully determined.
The ability of the Company to expand such a program further will also be heavily
dependent on the efforts of management, as well as the availability of
additional capital on favorable terms or internally generated cash. Failure on
the part of Teleport-TP to manage the development of this network successfully
could have a material adverse effect on the Company.
-- Difficulties in Implementing Network Expansion. Teleport-TP has
experienced significant delays in its network roll-out program. Factors in these
delays have included: (i) logistical difficulties installing sites during the
winter season; (ii) unsuitable local site conditions; (iii) administrative
difficulties with local and regional governmental authorities; (iv) technical
interconnect difficulties with local switching exchanges; and (v) lack of
suitable human resources. In particular, notwithstanding the licenses granted to
Teleport-TP by the Former MOC, and administered by its successor, the RFCTI,
local and regional governmental authorities have imposed, and may continue to
attempt to impose, licensing and other conditions with respect to Teleport-TP's
operations in their respective jurisdictions or areas of influence. The need on
the part of Teleport-TP to comply with such unanticipated local initiatives has
significantly delayed, and may continue to delay, the implementation of the
network program.
For the program to be commercially successful, Teleport-TP will have to
identify commercially viable markets for its services in each of the locations
which it intends to serve. In many areas of the Russian Federation the economic
conditions are still very weak and growth rates uncertain, and hence the ability
of a particular region to be, or to become within the short term, a successful
market for the network may be difficult to gauge. The results of operations will
be directly affected by Teleport-TP's success in identifying economically viable
locations for the development of its network.
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Furthermore Teleport-TP has had, and in all likelihood will continue to
have, to form alliances with suitable regional partners. There can be no
assurance that the arrangements made so far, or any future arrangements, will
prove to be commercially viable.
-- Significant Competition. Teleport-TP anticipates significant
competition from other companies seeking to serve the Russian long distance
telephone market. While Rostelecom, the principal long distance carrier in the
Russian Federation, appears to be supportive of Teleport-TP's development
program, any decision by Rostelecom to compete directly with Teleport-TP or to
impede the implementation of Teleport-TP's network could have a material adverse
effect upon the program itself and upon the Company. See "-- Dependence upon
Rostelecom as Customer; Necessity to Further Develop Customer Base." In
addition, at this time, it is unclear what impact the consolidation of the
Russian government's telecommunications holdings (including Rostelecom) in
Sviazinvest and the auction of significant stakes in Sviazinvest will have on
the Russian telecommunications market in general and the Company in particular.
See "-- Risks Involving the Company -- Impact of Auction of Stakes in
Sviazinvest on the Company and the Telecommunications Market in Russia."
RISKS INVOLVING BELCEL
The Company acquired its interest in BELCEL in August 1998 and is in the
process of assessing the risks involving BELCEL and its operations. The
principal risks affecting BELCEL are:
- BELCEL is as reliant as the Company's other operating companies on the
licenses under which it operates. The termination, non-renewal or
re-negotiation on unfavorable terms of these licenses could have a
material adverse effect on BELCEL's business and operations.
- BELCEL's business has been and will continue to be adversely affected by
the weak state of the Belarus economy.
- BELCEL's ability to service its U.S. dollar -- and other hard
currency -- denominated indebtedness and other obligations will be
severely impacted by the inconvertibility of the Belarussian Ruble, the
currency in which it receives payments from customers. This could lead to
default in respect of those hard currency obligations, which could have a
material adverse effect upon its business.
- BELCEL's operations are dependent upon the facilities of Beltelekom, the
Belarussian national telephone operator, for the connection of its calls.
These facilities are of limited capacity and in urgent need of upgrading,
which will inhibit the further expansion of BELCEL's network and customer
base.
- BELCEL will likely be dependent upon the availability of Western
expatriate personnel to oversee its operations. Recent initiatives by the
Government of Belarus which may restrict the entry of such personnel into
Belarus may adversely affect the Company's ability to oversee and develop
BELCEL's business.
At the same time, the impact of these risks upon the Company is
significantly ameliorated by the fact that the Company's investment in BELCEL,
which the Company valued at approximately $4.4 million, is relatively
insignificant in relation to the Company's overall assets, and the further fact
that the Company intends to limit further investment in BELCEL until such time
as the uncertainties described above have been better defined and/or the
commercial viability of any additional investment has been established.
ITEM 2. PROPERTIES
Executive Offices and Representative Office. The Company has its executive
office in New York, New York, consisting of approximately 11,000 square feet of
office space, which it has leased through December 2005.
The Representative Office of PLD is located within the premises of BCL in
St. Petersburg.
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PLD Management Services Limited. PLD Management Services Limited, a wholly
owned English subsidiary of the Company, maintains an operational support
facility in London, England where it leases approximately 2,400 square feet of
office space pursuant to a long-term lease.
PeterStar Company Limited. PeterStar's principal office, which it leases
from PTN, is located on Vassilievski Island, St. Petersburg, Russia. Its
principal switches are also located at this site. PeterStar also occupies other
space in St. Petersburg which is used to house other switching and transmission
equipment.
Baltic Communications Limited. BCL's principal office, which it leases on
a commercial basis, is located in the Admiralteiski district of St. Petersburg,
Russia. BCL's commercial and technical facilities are located at this location.
Technocom Limited. Technocom uses Teleport-TP's office space and does not
own any real property. Teleport-TP leases premises, which also house its
administrative functions, at VVC. Teleport-TP's core network, comprising the
switching facilities and the four Intelsat and Eutelsat earth stations, are also
located at VVC.
ALTEL. Space for most ALTEL switches, cell sites and associated equipment
is provided by Kazakhtelekom. ALTEL also uses space in a Kazakhtelekom exchange
building in Almaty for office and administrative purposes and leases other
premises in Almaty which combines its central warehouse and a larger customer
service center and retail outlet. ALTEL has also established, and will continue
to establish, customer service centers in each city in which service is offered.
Virtually all space for customer service centers and equipment not provided by
Kazakhtelekom is leased, although ALTEL has purchased its facilities in Taraz,
one base station site and building in Chimkent and a base station building in
Karaganda.
BELCEL. BELCEL's principal office, which it leases on a commercial basis,
is located in central Minsk. BELCEL's customer service center and switch is also
located at this site. BELCEL also leases space for its interconnect equipment in
the buildings housing the national and international exchanges, and leases space
to house its base stations in Minsk and the other cities and regions in which it
is operating.
The Company believes that its offices and the various facilities used by
PeterStar, BCL, ALTEL, BELCEL, Technocom and Teleport-TP are suitable and
adequate for their respective current businesses and operations.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its subsidiaries are parties to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "PLDI" (as of March 6, 1997). Prior to this date it was quoted under
the symbol "PLDIF." The Company's Common Stock is also listed on The Toronto
Stock Exchange under the symbol "PLD." It is also traded on the Berlin and
Frankfurt Stock Exchanges. Prior to the continuance of the Company from Ontario
to Delaware on February 28, 1997 (the "Continuance"), the Company's Common Stock
was referred to as "Common Shares." The Common Shares began trading on The
Toronto Stock Exchange on September 28, 1987 and on the Nasdaq National Market
on February 18, 1993. The Company's principal market, based on the percentage of
trading volume, is the Nasdaq National Market.
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The following table sets forth the high and low closing prices for the
Company's Common Stock, as reported by Nasdaq, for each full quarterly period
within the two most recent fiscal years. The prices below represent prices
between dealers, without adjustment for retail mark-ups, mark-downs or
commissions, and may not reflect actual transactions.
<TABLE>
<CAPTION>
CLOSING PRICES
------------------
HIGH LOW
------- -------
<S> <C> <C>
1997
First quarter.................................. $8.000 $ 5.625
Second quarter................................. $5.875 $ 4.4375
Third quarter.................................. $9.250 $ 4.875
Fourth quarter................................. $9.750 $ 5.250
1998
First quarter.................................. $8.125 $ 5.500
Second quarter................................. $9.3125 $ 6.4375
Third quarter.................................. $8.000 $ 1.125
Fourth quarter................................. $3.000 $ 1.250
</TABLE>
On March 29, 1999, the closing sale price for a share of Common Stock as
reported on the Nasdaq National Market was $3.00. As of March 26, 1999, there
were 306 holders of record of the Company's Common Stock.
The Company did not declare dividends on its Common Stock in 1998 and does
not intend to declare dividends on its Common Stock in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the three years ended December 31, 1998, the following issuances of
unregistered securities of the Company were made:
(a) On June 12, 1996, the Company issued the following securities: (i)
$123,000,000 aggregate principal amount at maturity of Senior Notes; (ii)
123,000 Placement Warrants to purchase an aggregate of 4,182,000 shares of
Common Stock; and (iii) $26,500,000 aggregate principal amount of Convertible
Notes. The Senior Notes and the Placement Warrants were initially issued as
Units, and the Placement Warrants became separable from the Senior Notes on
December 12, 1996.
The Units and the Convertible Notes were issued to Smith Barney Inc., as
initial purchaser (the "Initial Purchaser"), in a transaction exempt from the
registration requirements of the Securities Act pursuant to Regulation D. The
Initial Purchaser then sold the Units and the Convertible Notes to a limited
number of U.S. institutional investors in transactions exempt from the
registration requirements of the Securities Act pursuant to Rule 144A thereof.
Discounts and commissions of approximately $4.6 million were paid to the Initial
Purchaser in connection with the issuance of the Units and the Convertible Notes
and the Company agreed to indemnify the Initial Purchaser against certain
liabilities, including those arising under the Securities Act. In addition, the
Company issued an aggregate of 100,000 warrants (the "Initial Purchaser
Warrants") to the Initial Purchaser in consideration for its financial advisory
activities on behalf of the Company.
The Convertible Notes are convertible into shares of Common Stock, at a
price of $6.90 per share. Each $1,000 principal amount of Convertible Notes is
convertible into 144.93 shares of Common Stock. The Placement Warrants are
exercisable at any time on or before June 1, 2006 into shares of Common Stock,
at a price of $6.60 per share. Each Placement Warrant is exercisable for 34
shares of Common Stock. The Initial Purchaser Warrants are exercisable at any
time on or before April 30, 2001 into shares of Common Stock, at a price of
$4.70 per share. Each Initial Purchaser Warrant is exercisable for one share of
Common Stock.
The net proceeds from the issuance of the Senior Notes were used for
repayment of the Company's bank facility, capital expenditures for the operating
businesses and general corporate purposes. The proceeds from
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the Senior Notes, except for the repayment of the bank facility and the amounts
to be used for general corporate purposes, were deposited into an escrow account
for the benefit of the holders of the Senior Notes. As of March 31, 1998, the
balance in the escrow account was approximately $34.3 million. The net proceeds
from the issuance of the Convertible Notes were used for the acquisition of $20
million of Preferred Shares of Technocom and for general corporate purposes.
In August 1998, the Securities and Exchange Commission declared effective
the registration statements with respect to the resale by the holders thereof of
the Convertible Notes and Placement Warrants and the shares of Common Stock
issuable thereunder. In October 1998, the Company completed the Exchange Offer
in respect of the Senior Notes. See "Business -- Recent
Developments -- Registration of Outstanding Securities; Completion of Exchange
Offer."
(b) On November 26, 1997, the Company issued $12.32 million in Series A
Notes and $3.1 million in Series B Notes, to The Travelers Parties. The Series A
Notes and the Series B Notes were issued to a limited number of institutional
investors in reliance upon Section 4(2) of the Securities Act of 1933 as a
transaction not involving a public offering. No commissions were paid to any
underwriter, broker or dealer in connection with such issuance. The net proceeds
from the issuance of the Series A Notes and the Series B Notes were used in
connection with the Company's acquisition of additional interests in Technocom.
The Series B Notes were to have come due on September 30, 1998, but their
maturity date was deferred to December 31, 1998. The Series A Notes also would
have come due on December 31, 1998, but their maturity date, together with the
maturity date for the Series B Notes, was deferred by the Travelers Parties, the
holders of such Notes, from time to time thereafter, the latest such deferral
having been given on February 28, 1999 and giving a new maturity date for both
series of Notes of April 30, 1998. Both the Series A Notes and the Series B
Notes are secured by the Company's inventory and accounts receivable. In
addition, the Series A Notes are secured by 28 of the Technocom shares acquired.
In addition to issuing the Series A and Series B Notes, the Company also
issued to the Travelers Parties a total of 423,000 warrants to purchase Common
Stock at $8.625 at any time up to December 31, 2008. As a result of not making
certain "targeted reductions in commitment", in the period July through December
1998 the Company issued a further 182,000 warrants to purchase shares of Common
Stock at $8.625 at any time up to December 31, 2008 to the Travelers Parties.
All of the foregoing warrants were issued in reliance upon Section 4(2) of
the Securities Act of 1933 as transactions not involving a public offering. No
commissions were paid to any underwriter, broker or dealer in connection with
such issuance. There were no cash proceeds from the issuance of such warrants.
(c) In partial consideration for the acquisition of additional interests in
Technocom from Elite, on November 26, 1997, the Company issued, at the direction
of Elite, an aggregate of 1,316,240 shares of Common Stock to P.S. Marketing &
Consulting Services Limited, a Gibraltar company. The shares of Common Stock
were issued to a single institutional investor in reliance upon Section 4(2) of
the Securities Act of 1933 as a transaction not involving a public offering. No
commissions were paid to any underwriter, broker or dealer in connection with
such issuance.
(d) On May 29, 1998, the Company issued an aggregate of 196,458 shares (the
"Ultra Pass Shares") of the Company's Common Stock to the shareholders of Ultra
Pass Systems Limited, a Scottish company, in connection with the Company's
acquisition of 98% of the share capital of Ultra Pass. The Ultra Pass Shares,
which were issued in reliance upon Section 4(2) of the Securities Act of 1933 as
a transaction not involving a public offering, are "restricted" securities but
the holders thereof have demand registration rights. No commissions were paid to
any underwriter, broker or dealer in connection with such issuance. There were
no cash proceeds from the issuance of the Ultra Pass Shares.
(e) In connection with the Company's consent solicitation relating to
certain amendments to the indentures governing the Company's Senior Notes and
Convertible Notes intended to give the Company more flexibility in conducting
its business and also to clarify certain provisions of those indentures, the
Company issued Consent Warrants to those holders of the Senior Notes and the
Convertible Notes which consented to the amendments. The Company issued a total
of 123,000 five-year Consent Warrants to purchase 1.8 shares of
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Common Stock at $6.90 per share to the holders of the Senior Notes, and a total
of 22,700 five-year Consent Warrants to purchase 2 shares of Common Stock at a
price of $6.90 per share to the holders of the Convertible Notes. If all of the
Consent Warrants are exercised, the Company will issue a total of 266,800 shares
of Common Stock. The Consent Warrants were issued in reliance upon Section 4(2)
of the Securities Act of 1933 as a transaction not involving a public offering.
The Company has agreed to register the resale of the shares issuable upon
exercise of the Consent Warrants.
(f) On August 14, 1998, the Company issued an aggregate of 4,326,041 shares
(the "Transaction Shares") of Common Stock in a series of transactions with
Cable & Wireless and News, as described above. See "Business -- Recent
Developments -- Transactions with Cable & Wireless and News." The Company issued
500,000 Transaction Shares to Cable & Wireless in consideration of the
acquisition by the Company of a 50% indirect interest in BELCEL; Cable &
Wireless transferred such Transaction Shares to News as part of the series of
transactions. An additional 3,826,041 Transaction Shares were issued by the
Company to News in consideration of the acquisition by the Company of an
additional 11% interest in PeterStar.
The Transaction Shares, which were issued in reliance upon Section 4(2) of
the Securities Act of 1933 as transactions not involving a public offering, are
"restricted" securities but News, as the holder of all of the Transaction
Shares, has demand registration rights with respect to such Shares. No
commissions were paid to any underwriter, broker or dealer in connection with
such issuance. There were no cash proceeds from the issuance of the Transaction
Shares.
(g) On November 30, 1998 (but effective September 30, 1998), the Company
entered into the News Revolving Credit Agreement under which News agreed to
advance up to $8.1 million to the Company. On March 22, 1999 News agreed to
increase the amount it would advance to $9.1 million. Each advance under the
News Revolving Credit Agreement bears interest at an annual rate of 20% and is
repayable on June 30, 1999. Advances are evidenced by notes which are
convertible at News' option into shares of Common Stock of the Company at
conversion rates determined as of the date of issue of the applicable note. In
addition, in the event that News guarantees obligations of the Company, a note
is issued reflecting the Company's reimbursement obligation should such
guarantee be called. Amounts so guaranteed are treated as advances under the
News Revolving Credit Agreement, meaning that they count with respect to the
$9.1 million ceiling on total advances. In addition, in the event a guarantee is
called, the Company will owe interest on its reimbursement obligation at the
annual rate of 20% calculated from the date News makes payment under its
guarantee. Notes issued in respect of reimbursement obligations are also
convertible into shares of Common Stock at conversion rates determined as of
their date of issue. News can cease making advances at any time and for any
reason. Currently, however, the full amount available under the News Revolving
Credit Agreement has been used, and notes have been issued to News as follows:
<TABLE>
<CAPTION>
DATE PRINCIPAL AMOUNT TYPE CONVERSION PRICE NO. OF SHARES
- - ---- ---------------- ---- ---------------- -------------
<S> <C> <C> <C> <C>
9/30/98 1,100,000 G 1.120 982,143
10/31/98 1,000,000 G 1.300 769,231
11/30/98 1,000,000 G 1.945 514,139
11/30/98 1,000,000 A 1.945 514,139
12/18/98 2,500,000 A 1.459 1,713,502
1/27/99 1,500,000 A 1.544 971,503
3/22/99 1,000,000 A 2.550 392,157
--------- ---------
Total 9,100,000 5,858,814
</TABLE>
- - ---------------
A -- refers to notes issued in respect of actual advances
G -- refers to notes issued in respect of guarantees given by News
The notes issued under the News Revolving Credit Agreement were issued, and
any shares which are issued upon conversion of such Notes will be issued, in
reliance upon Section 4(2) of the Securities Act of 1933 as transactions not
involving a public offering. No commissions were paid to any underwriter, broker
or dealer in connection with such issuances.
70
<PAGE> 73
ITEM 6. SELECTED FINANCIAL DATA
The following summary consolidated financial and operating data was derived
from, and should be read in conjunction with, the audited Consolidated Financial
Statements of the Company and the related notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
contained elsewhere herein. Prior to the Continuance the Company's audited
Consolidated Financial Statements were prepared in accordance with Canadian
GAAP, which differ in certain respects from U.S. GAAP. See Note 15 to the
Company's audited Consolidated Financial Statements. As a result of the
Continuance, the consolidated financial data presented below for the fiscal year
1994 has been restated in accordance with U.S. GAAP.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Operating revenues................ $145,360 $114,424 $ 61,966 $ 29,120 $ 8,526
Operating expenses................ 135,412 102,406 59,099 38,266 17,248
-------- -------- -------- -------- --------
Operating income/(loss)........... 9,948 12,018 2,867 (9,146) (8,722)
-------- -------- -------- -------- --------
Loss before income taxes and
minority interest.............. (23,561) (3,428) (6,271) (13,440) (9,491)
Income taxes...................... 9,864 7,739 3,669 1,490 --
Loss before minority interest..... (33,425) (11,167) (9,940) (14,930) (9,491)
Minority interest................. 9,386 9,399 2,521 551 --
-------- -------- -------- -------- --------
Net loss for the year............. $(42,811) $(20,566) $(12,461) $(15,481) $ (9,491)
======== ======== ======== ======== ========
Loss per common share............... $ (1.21) $ (0.64) $ (0.39) $ (0.49) $ (0.78)
======== ======== ======== ======== ========
Weighted average number of shares of
common stock outstanding (basic
and diluted)...................... 35,274 32,061 31,579 31,315 12,663
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents(1)...... $ 4,579 $ 17,256 $ 40,674 $ 15,676 $ 56,710
Non-cash working capital
deficiency..................... (20,578) (18,642) (26,440) (22,001) (17,706)
Escrow funds...................... 14,908 33,868 40,984 -- --
Property and equipment, net....... 168,937 134,998 93,039 45,357 21,718
Telecommunications licenses,
net............................ 77,359 81,837 72,310 49,583 54,099
Investments and other assets...... 53,507 32,801 39,052 29,293 18,925
Investment in Teleport-TP(2)...... -- -- -- 23,564 15,699
Total assets...................... 352,108 335,586 306,357 178,092 171,760
Long-term debt...................... 151,814 133,516 107,954 -- --
Shareholders' equity................ 124,877 127,231 137,954 135,832 147,470
</TABLE>
- - ---------------
(1) The December 31, 1996 and 1995 balances include cash of $9.0 million and
$6.1 million, respectively, held on deposit as collateral to secure bank
indebtedness of the same amount.
(2) Teleport-TP became a consolidated subsidiary as of December 31, 1996 as a
result of the acquisition of an additional ownership interest on December
20, 1996.
ITEM 7. 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
71
<PAGE> 74
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, 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 Disclosure
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 December 31, 1998 include a 71% equity
interest in PeterStar, which provides telecommunications services in St.
Petersburg, Russia; a 50% equity interest in ALTEL, which provides cellular
services in Kazakhstan; a 50% interest in BELCEL, which provides cellular
services in Belarus; and an 80.4% equity interest in Technocom which, through
its 49.3% equity interest in Teleport-TP, operates an international teleport in
Moscow, fiber optic networks in Moscow and its environs and a satellite-based
long distance network across Russia.
EBITDA is used as a measure of operating performance and is defined as
earnings (or loss) from continuing operations before income taxes and minority
interest plus net interest (interest expense less interest and other income)
plus depreciation and amortization. It is presented as supplemental disclosure
because it assists in understanding the Company's operating results. EBITDA,
however, may not be comparable to similarly titled measures of other companies
and should not be considered in isolation or as a substitute for net income,
cash flow provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
Certain of the Company's subsidiaries pay management fees to their
shareholders, including the Company. The figures presented for the subsidiaries
reflect all payments of such fees (i.e. management fees are included in
operating expenses in the same way as other expenses of the subsidiary).
Profitability measures -- EBITDA, operating profit and net income -- are
therefore quoted after accounting for such payments.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997
Overview. The Company reported a net loss of $42.8 million ($1.21 per
share) and operating income of $9.9 million on revenues of $145.4 million for
the year ended December 31, 1998, compared to a net loss of $20.6 million ($0.64
per share) and operating income of $12.0 million on operating revenues of $114.4
million reported in 1997. EBITDA was $23.9 million in 1998 as compared with
$30.3 million in 1997.
Revenues. Revenues increased 27% from $114.4 million in 1997 to $145.4
million in 1998. This increase was primarily a result of the strong year-on-year
revenue growth in PeterStar and ALTEL, which in 1998 together accounted for 77%
of the Company's consolidated revenues. PeterStar's subscriber line numbers
reached 168,166 by the end of the year, up 53,392 over the previous year.
ALTEL's number of subscribers increased to 20,768, up 9,666 over last year, its
accelerated rate of growth being primarily due to the introduction of prepaid
cellular service in August 1998. Teleport-TP added an additional seven earth
stations in the C.I.S. in 1998 which will become contributors to overall
revenues as they become fully operational in 1999.
72
<PAGE> 75
The following table shows the Company's consolidated revenues by principal
operating subsidiary for 1998 and 1997 and the percentage growth in revenues
between the periods:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 %
-------------------------- -------------------------- CHANGE OVER
($ MILLION) % ($ MILLION) % PRIOR PERIOD
----------------- ----- ----------------- ----- ------------
<S> <C> <C> <C> <C> <C>
PeterStar..................... 72.4 49.8% 54.5 47.6% 32.8%
ALTEL......................... 39.5 27.2% 30.0 26.2% 31.7%
Technocom..................... 22.2 15.3% 21.0 18.4% 5.7%
BCL........................... 9.9 6.8% 7.6 6.6% 30.3%
Other......................... 1.4 0.9% 1.3 1.1% 7.7%
----- ----- ----- ----- ----
145.4 100.0% 114.4 100.0% 27.1%
</TABLE>
Although revenue growth was significant in 1998, the rate of revenue growth
decreased from 85% in 1997 to 27% in 1998. The reduced rate of revenue growth
for the year as a whole was largely the result of a slow down in revenue growth
late in the year, attributable to the operating businesses feeling the effects
of the Russian economic crisis. This resulted in the loss of some customers
(principally customers of the three cellular operators in St. Petersburg whose
calls are routed over the PeterStar network), as well as reduced calling
activity among businesses who remained customers. In the case of Teleport-TP,
where tariffs to certain customers were quoted in Roubles, revenues were
adversely affected by the Rouble devaluation. In addition, receipts slowed in
the last half of the year, with the businesses having to devote more resources
to the process of collecting receivables.
Management believes that revenues for its existing businesses in 1999 are
unlikely to grow at the same rate as they have in recent years. Given the many
uncertainties in the Russian political and economic situation 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 likely
impact the Company's businesses adversely. See "Business -- Recent
Developments -- Russian Economic and Political Turmoil." While management
believes that it is taking all available measures to protect the Company and its
businesses from the negative effects of any further problems in Russia, there
can be no assurance that those measures will be successful.
At the same time the Company expects the slower revenue growth projected
for Company's existing businesses to be offset to some degree by growth in
revenues from PLDncompass (PLD's new long distance business), which is expected
to become a contributor to the Company's revenues in 1999. See "Business --
Carrier Services Business."
Gross profit. Gross profit increased 33% to $100.0 million in 1998 from
$75.2 million recorded in 1997. Gross profit, as a percentage of revenues,
increased from 66% in 1997 to 69% in 1998. Tariff reductions experienced at the
operating level continued to be offset by reductions in carrier charges levied
by the operating companies' carriers. However, margins are generally expected to
come under pressure in 1999 due to the continuing impact of the Russian economic
crisis.
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 49%
to $57.7 million in 1998 from $38.7 million in 1997. This increase has been
required to support the Company's efforts to grow revenues during the year and
to expand its businesses through acquisitions and other transactions.
As a percentage of revenues, general and administrative expenses increased
to 40% in 1998 from 34% in 1997 reflecting additional costs principally in
PeterStar, ALTEL and at the corporate level, as well as an approximate $3.2
million provision for a finance lease receivable from one lessee. The increase
in corporate general and administrative expense of approximately $4 million was
the result of additional costs incurred relating to the Company's Cardlink
business, which is in the process of implementing wireless card validation
systems using proprietary technology, and PLDncompass, the Company's Carrier
Services Business, as well as non-recurring professional costs relating to the
evaluation of potential acquisitions by the Company.
73
<PAGE> 76
Depreciation. Depreciation increased 41% to $14.7 million in 1998 compared
to $10.4 million incurred in 1997 reflecting the investment of over $42.6
million in property and equipment over the past 12 months and a full year of
depreciation for assets placed in service in 1997. Depreciation will likely
continue to grow as capital expenditures will continue, albeit at a slower pace,
over the coming year. Depreciation represented 10% of revenues in 1998 compared
to 9% in 1997, but over time is expected to decrease as a percentage of revenues
as the Company nears completion of the build-out of its core networks.
Amortization expense. In 1998, the Company incurred total amortization
charges of $13.1 million compared to $9.0 million in 1997. Of the 1998 charges,
$11.3 million related to the amortization of telecommunications licenses held by
PeterStar, ALTEL and Teleport-TP and $1.8 million related to amortization of
deferred finance costs. Deferred financing costs relating to the June 1996 high
yield offering are amortized over eight years, the term of the Senior Notes,
while deferred financing costs relating to the November 1997 revolving credit
financing were fully amortized by the end of 1998.
The increase in amortization expense in 1998 was primarily due to the
acquisition by the Company in November 1997 of an additional 29.65% interest in
Technocom for consideration, including acquisition costs, of $33.3 million. The
excess of the purchase price over identifiable, tangible assets, amounting to
$27.1 million, was allocated to goodwill and telecommunications licenses. The
amount allocated to goodwill ($11.1 million) is being amortized over 20 years
and the amount allocated to Teleport-TP's licenses ($16.0 million) is being
amortized over its remaining term which expires in 2004. This acquisition
resulted in additional amortization charges of $2.9 million in 1998.
In addition, effective September 30, 1998, the Company acquired an
additional 11% interest in PeterStar for consideration of $33.4 million. The
excess of the purchase price over identifiable, tangible assets, amounting to
$27.8 million, has been allocated to goodwill and telecommunications licenses.
The value allocated to goodwill ($24.2 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
resulted in additional amortization charges of $0.4 million in 1998 which will
increase to an annual charge of $1.8 million in 1999.
ALTEL's telecommunications license, which expires in 2009, is also being
amortized over its remaining term and resulted in an amortization charge of $2.1
million in 1998, 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 although no assurance can be provided in this regard.
Share of income/(loss) from equity investments. The Company's share in
losses from equity investments increased from $0.5 million in 1997 to $1.0
million in 1998. The 1998 loss consisted of a 50% share of MTR-Sviaz's loss of
$1.0 million, a 50% share of BELCEL's fourth quarter loss of $0.6 million and a
50% share of Rosh Telecom's net loss of $0.4 million.
Interest and other income. Interest and other income of $2.4 million in
1998 compared with $3.6 million earned in 1997. The 1998 figure included $1.3
million earned on the Company's funds held in escrow and a $0.5 million tax
indemnity payment from Cable and Wireless plc relating to Baltic Communications
Limited. The 1997 comparative figure includes a $1.0 million gain related to the
Company's disposal of its 10.4% interest in SPMMTS in June 1997 for gross
proceeds of $17.2 million.
Interest expense. Interest expense of $22.0 million in 1998 compared with
$17.8 million incurred in 1997 and consisted of interest on bank indebtedness
and short-term borrowings of $2.4 million, interest accreted on the Senior Notes
of $17.1 million and interest expense related to the Convertible Notes of $2.4
million. Interest on the Senior Notes becomes payable in cash semi-annually
commencing June 1999 while interest on the Convertible Notes is currently paid
in cash semi-annually. The increase in interest expense in 1998 reflects
primarily the interest paid on the $15.4 million Revolving Credit Notes issued
to Travelers, which commenced in November 1997 and carried an annual interest
rate of 12% to May 31, 1998, increasing to 15% on June 1, 1998. See "Liquidity
and Capital Resources."
74
<PAGE> 77
Foreign exchange loss. In 1998, the Company incurred foreign exchange
losses of $5.3 million as compared to $0.3 million a year ago. The significant
increase in losses in 1998 relate to the substantial devaluation of the
Company's Rouble cash balances in August and September when the extreme market
conditions resulting from the Russian financial crisis caused major disruptions
in the Russian banking system. This prevented the Company's subsidiaries from
converting Roubles into hard currency at a time when the value of the Rouble was
depreciating significantly.
At the same time, foreign exchange losses were also incurred when payments
made by customers in Roubles at Russian banks were not credited immediately to
the operating subsidiaries' accounts, due to banking delays. The Company has
sought, and will continue to seek, to limit the effects of such conditions by
minimizing the amount of Rouble balances held by its subsidiaries and by taking
measures to accelerate collection and currency conversion procedures in so far
as this is possible in the current banking and legislative environment.
Income taxes. The income tax charge for 1998 was $9.9 million compared
with $7.7 million in 1997. The provision for income taxes relates substantially
to current income taxes in the Company's Russian and Kazakh businesses.
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 $9.4 million for the
year compared with $9.4 million in 1997. Effective September 30, 1998, the
Company acquired an additional 11% of PeterStar. Accordingly, PeterStar's
minority interest percentage reduced to 29% from 40% effective October 1, 1998.
The following table compares the results of operations of the Company's
principal operating subsidiaries in 1998 with 1997:
<TABLE>
<CAPTION>
PETERSTAR ALTEL TECHNOCOM BCL
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
------------ ------------ -------------- --------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ----- ----- ----- -----
($ MILLION)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ 72.4 54.5 39.5 30.0 22.2 21.0 9.9 7.6
Gross profit -- $....................... 51.5 38.6 31.5 23.1 11.0 7.9 4.7 4.7
Gross profit -- %....................... 71.1% 70.8% 79.7% 77.0% 49.5% 37.6% 47.5% 61.8%
Operating income/(loss) -- $............ 24.5 20.5 15.4 10.9 (13.3) (3.6) 1.1 1.2
Operating income/(loss) -- %............ 33.8% 37.6% 39.0% 36.3% (59.9)% (17.1)% 11.1% 15.8%
Net income -- $......................... 17.8 16.5 9.2 7.2 (16.1) (4.5) 0.4 0.8
Net income -- %......................... 24.6% 30.3% 23.3% 24.0% (72.5)% (21.4)% 4.0% 10.5%
EBITDA -- $............................. 28.1 24.1 19.2 13.9 (6.3) (1.5) 1.4 1.7
EBITDA -- %............................. 38.8% 44.2% 48.6% 46.3 (28.3)% (7.0)% 14.0% 22.4%
% PLD ownership at end of period........ 71.0% 60.0% 50.0% 50.0% 80.4% 80.4% 100.0% 100.0%
</TABLE>
YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996
Overview. The Company reported a net loss of $20.6 million ($0.64 per
share) and operating income of $12.0 million on revenues of $114.4 million for
the year ended December 31, 1997, compared to a net loss of $12.5 million ($0.39
per share) and operating income of $2.9 million on operating revenues of $62.0
million reported in 1996. EBITDA of $30.3 million reported in 1997 compared with
$12.1 million in 1996.
Revenues. Revenues increased 85% from $62.0 million in 1996 to $114.4
million in 1997. This increase was primarily a result of the strong year-on-year
revenue growth in PeterStar and ALTEL and the consolidation of a full year's
revenues from BCL and Teleport -- TP in 1997. PeterStar's subscriber line
numbers increased to 114,744 by the end of the year, up from 52,005 the previous
year. ALTEL's number of subscribers increased to 11,120, up from 6,957 the
previous year.
75
<PAGE> 78
The following table shows the Company's consolidated revenues by principal
operating subsidiary for 1997 and 1996 and the percentage growth in revenues
between the periods:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 %
-------------------- -------------------- CHANGE OVER
($ MILLION) % ($ MILLION) % PRIOR PERIOD
----------- ----- ----------- ----- ------------
<S> <C> <C> <C> <C> <C>
PeterStar............................... 54.5 47.6% 32.5 52.4% 67.7%
ALTEL................................... 30.0 26.2% 19.1 30.8% 57.1%
Technocom............................... 21.0 18.4% 4.7 7.6% 346.8%
BCL..................................... 7.6 6.6% 5.1 8.2% 49.0%
Other................................... 1.3 1.2% 0.6 1.0% 116.7%
----- ----- ---- ----- -----
114.4 100.0% 62.0 100.0% 84.5%
</TABLE>
Gross profit. Gross profit increased 86.9% to $75.2 million in 1997 from
$40.3 million recorded in 1996. Gross profit, as a percentage of revenues,
increased marginally in 1997 to 65.8%. Any tariff reductions experienced at the
operating level were generally offset by reductions in carrier charges levied by
the operating companies' carriers.
General and administrative expenses. General and administrative expenses
increased 56% to $38.7 million in 1997 from $24.8 million in 1996. This
increase, in all functional areas, including sales and marketing, customer
service, technical, and finance and administration, reflected the continued
growth in the scale and extent of the operating businesses and the full
consolidation of BCL and Teleport-TP. As a percentage of revenues, these costs
exhibited a downward trend, falling from 40% in 1996 to 34% in 1997.
Depreciation. Depreciation increased 100% to $10.4 million in 1997
compared to $5.2 million incurred in 1996 reflecting the investment of over
$43.0 million in property and equipment during the year as the build-outs of the
PeterStar. ALTEL and Teleport-TP networks progressed. Depreciation represented
9.1% of revenue in 1997 compared to 8.4% in 1996.
Amortization expense. In 1997, the Company incurred total amortization
charges of $9.0 million compared to $5.6 million in 1996. Of the 1997 charges,
$7.4 million related to the amortization of telecommunications licenses held by
PeterStar ($2.6 million), ALTEL ($2.1 million) and Teleport-TP ($2.7 million)
and $1.2 million related to amortization of deferred finance costs. In 1996,
amortization charges of $2.5 million relating to Teleport-TP were included in
Technocom's share of losses from equity investments.
Share of income/(loss) from equity investments. The Company's share in
losses from equity investments decreased from $2.7 million in 1996 to $0.5
million in 1997. In 1996, Teleport-TP's net earnings were included in this
figure. In 1997, they were fully consolidated within Technocom.
Interest and other income. Interest and other income of $3.6 million in
1997 compared with $4.9 million earned in 1996. The 1997 figure includes a $1.0
million gain related to the Company's disposal of its 10.4% interest in SPMMTS
in June 1997 for gross proceeds of $17.2 million. The 1996 figure was comprised
primarily of interest earned on the $46.0 million put into escrow during the
year plus interest earned on funds held by Technocom.
Interest expense. Interest expense of $17.8 million in 1997 compared with
$10.0 million incurred in 1996 and consisted of interest on bank indebtedness
and short-term borrowings of $1.3 million, interest accreted on the Senior Notes
of $14.1 million and interest paid on the Convertible Notes of $2.4 million.
Foreign exchange loss. In 1997, the Company incurred foreign exchange
losses of $0.3 million as compared to $0.6 million in 1996 which related to
unfavorable movements in the U.S. exchange rate vis-a-vis a number of foreign
currencies during the year in relation to the Company's net monetary assets.
Income taxes. The income tax charge for 1997 was $7.7 million compared
with $3.7 million in 1996. The provision for income taxes relates substantially
to current income taxes in the Company's Russian and Kazakh businesses and its
increase over 1996 reflects the increased operating profitability of these
subsidiaries during the year.
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<PAGE> 79
Minority interest. Minority interest related principally to the minority
shareholdings held in PeterStar (40%), ALTEL (50%) and Technocom (19.6%).
Minority interest of $9.4 million in 1997 compared with $2.5 million in 1996
reflecting the improved profitability of these businesses during the year.
The following table compares the results of operations of the Company's
principal operating subsidiaries in 1997 with 1996:
<TABLE>
<CAPTION>
PETERSTAR ALTEL TECHNOCOM BCL
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
------------ ------------ -------------- ----------------
($ MILLION) 1997 1996 1997 1996 1997 1996 1997 1996(1)
- - ----------- ---- ---- ---- ---- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ 54.5 32.5 30.0 19.1 21.0 4.7 7.6 5.3
Gross profit -- $............... 38.6 20.7 23.1 13.7 7.9 2.2 4.7 3.2
Gross profit -- %............... 70.8% 63.7% 77.0% 71.7% 37.6% 46.8% 61.8% 60.4%
Operating income/ (loss) -- $... 20.5 8.0 10.9 6.0 (3.6) (0.4) 1.2 1.1
Operating income/ (loss) -- %... 37.6% 24.6% 36.3% 31.4% (17.1)% (8.5)% 15.8% 20.8%
Net income/(loss) -- $.......... 16.5 5.9 7.2 4.5 (4.5) (0.3) 0.8 0.8
Net income/(loss) -- %.......... 30.3% 18.2% 24.0% 23.6% (21.4)% (6.4)% 10.5% 15.1%
EBITDA -- $..................... 24.1 10.3 13.9 7.8 (1.5) (0.6) 1.7 1.4
EBITDA -- %..................... 44.2% 31.7% 46.3% 40.8% (7.0)% (12.8)% 22.4% 26.4%
% PLD ownership at end of
period........................ 60.0% 60.0% 50.0% 50.0% 80.4% 50.8% 100.0% 100.0%
</TABLE>
- - ---------------
(1) Nine months ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, a total of $19.9 million in cash was
generated from operations (1997 -- $10.8 million; 1996 -- $15.6 million), $20.8
million was used in net investing activities (1997 -- $40.9 million;
1996 -- $88.2 million) and $11.8 million was used in financing activities
(1997 -- $6.7 million provided by financing activities; 1996 -- $97.6 million
provided by financing activities).
Funds held in escrow at December 31, 1998 decreased to $14.9 million from
$33.9 million at the end of 1997 reflecting various escrow draw downs used to
finance capital equipment purchases. As of December 31, 1998, the Company had a
working capital deficit of $16.0 million compared to a working capital deficit
of $1.4 million at the end of 1997.
As of December 31, 1998, the Company reported consolidated total assets of
$352.1 million ($335.6 million as of December 31, 1997) which consisted of $37.4
million in current assets (including $4.6 million in cash and cash equivalents),
$168.9 million in property and equipment, $77.4 million in unamortized
telecommunications licenses relating to PeterStar, ALTEL and Teleport-TP, escrow
funds of $14.9 million and other assets and investments of $52.3 million,
including $10.6 million in goodwill, net of amortization, relating to the
Company's November 1997 acquisition of an additional 29.65% interest in
Technocom and $24.4 million in goodwill relating to the Company's August 1998
acquisition of an additional 11% interest in PeterStar.
Long-term indebtedness of $151.8 million, consisting primarily of the
Company's Senior and Convertible Notes, as a percentage of total assets, was 43%
as of December 31, 1998, compared to $133.5 million or 40% of total assets as of
December 31, 1997.
Shareholders' equity of $124.9 million, as of December 31, 1998, compared
with $127.2 million as of December 31, 1997, and consisted of $244.8 million in
common stock and additional paid-in capital offset by the Company's deficit of
$119.9 million. The Company's ratio of long-term indebtedness to equity at
December 31, 1998 was 122% compared to 105% at December 31, 1997.
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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 Parties in November 1997
in connection with the Company's additional investment in Technocom. See
"Business -- Recent Developments -- Travelers Financing." 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. See "Business -- Recent
Developments -- Transactions with Cable & Wireless and News" and "-- Travelers
Financing."
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 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 February 28, 1999 and defers
payment of the Notes to April 30, 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 Travelers Warrants 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. See "Risk Factors -- Risks Involving the Company -- Repayment
of Travelers Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
In addition, the Company may become obligated to make payments in July 1999
of up to $28.2 million to Plicom and Elite, the two minority shareholders of
Technocom, as a result of the following. The Company has
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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. See "Risk Factors -- Risks Involving the
Company -- Technocom Minority Shareholders' Put Options."
The Company's ongoing operations (including advances to and investments in
its existing subsidiaries and affiliates for capital expenditures and
operational expenses) have to date been financed using the Company's cash
balances, the escrow funds, internally generated cash flow from operations and
supplier financing. The Company's operating businesses are now, for the large
part, self-sustaining. However, to the extent that the operating businesses
experience lower than expected revenues, higher operating costs or higher
development costs in connection with the build-out of their networks, or as a
result of continuing economic difficulties in Russia, the Company may need to
seek other sources of financing to fund such operations.
Implementation of the Company's Cardlink business and the 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 approximately $17 million. Some part of the capital
expenditures required for the Carrier Services Business is expected to come from
the Senior Note escrow account, and a further part from vendor financing.
However, some additional funding will likely be required to develop the 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
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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.
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 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.
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 is not
expected to have a material effect on the Company's consolidated financial
statements.
YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications,
particularly older systems and applications, use a two-digit, rather than a
four-digit, date field to designate a particular year. As a result of the
century change, date-sensitive systems may recognize dates in the twenty-first
century (i.e., after 2000) as dates in the twentieth century (i.e., the
corresponding year commencing with the prefix 19--). Equally, such systems may
not recognize dates in the twenty-first century at all. All of this could lead
to system failures or miscalculations which could lead to disruption of
operations such as data being lost, an inability to process transactions,
incorrect data being generated and critical deadlines being overlooked. The
impact of these disruptions could be significant.
The Company has conducted, and has caused each of its operating
subsidiaries to conduct a survey of the equipment and software used by them.
The Company's business involves the supply of services. To the very limited
extent that it maintains actual inventory for sale (e.g., cellular telephone
equipment sold to subscribers for its cellular telephony services), it does not
manufacture such inventory itself but resells goods supplied by recognized
manufacturers of such goods.
Its survey has involved testing of equipment as well as contacting the
manufacturers of equipment and producers of software (or review of materials
published by such parties, including websites) to assess such parties' Year 2000
readiness. Such survey has indicated that, except in a few instances, the
equipment and software which it uses are Year 2000 compliant. The Company is
taking steps to upgrade or replace those items which are not compliant. In many
cases the items required to be upgraded or replaced were due to be upgraded or
replaced in any event, so that the Company's exposure has been the acceleration
of already planned expenditures, rather than new or unanticipated expenditures.
The Company expects that essentially all of its upgrading and replacement work,
and any remaining testing required, will be complete by the end of the third
quarter of 1999.
To date, the Company has expended approximately $400,000 for remediation
efforts and expects that its total remediation costs, including scheduled
upgrades and replacements of approximately $3,100,000, will be approximately
$4,000,000.
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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 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.
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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.
TAXATION
The Company and its subsidiaries are subject to a number of taxes in
different jurisdictions. The most significant taxes affecting the Company and
its subsidiaries are likely to be taxes in Russia, Kazakhstan and Belarus
(including withholding taxes) and income taxes payable by the Company in the
United States. Withholding taxes could apply to distributions by the Company's
operating businesses in Russia, Kazakhstan and Belarus and to distributions by
intermediate level companies in jurisdictions outside Russia, Kazakhstan,
Belarus and the United States. The Company has attempted to mitigate the
potential for withholding tax liabilities in Russia by structuring its interests
through a Cypriot holding company, thereby taking advantage of the double
taxation treaty between the Russian Federation and Cyprus. As a result of the
Continuance and its ability to take advantage of the double taxation treaties
between the United States and the Russian Federation and Kazakhstan,
respectively, the Company may elect to hold its interests through one or more
Delaware holding companies. Notwithstanding this, obtaining the benefits of
applicable tax treaties can be extremely difficult due to the documentary and
other requirements imposed by the Russian and Kazakh authorities. For example,
the Kazakh tax authorities require withholding on almost any kind of
out-payment, including management fees and expense reimbursements, not just
items of income, and additionally specify that an exemption application be
submitted in respect of every payment made (as opposed to permitting blanket
exemptions), while at the same time requiring non-standard certifications from
the home country taxing authority. In addition, a recent instruction issued by
the Russian State Tax Service mandates full withholding regardless of any treaty
and requires the recipient to seek to obtain a refund for withholding in excess
of treaty amounts, although in practice those refunds can be difficult to
obtain. The need to comply with these provisions may negate or impair tax
planning initiatives undertaken by the Company to reduce its and its
subsidiaries' overall tax obligations in Russia and Kazakhstan. As respects
Belarus, the opportunities for minimizing tax liabilities is very limited, given
the relatively undeveloped tax system in that country, and the uncertain status
of its tax treaty network.
In general, the Company's Russian, Kazakh and Belarussian operating
businesses are faced with a wide variety of taxes, including property taxes,
advertising taxes, road taxes, housing taxes, transport taxes and education
taxes. In addition, PeterStar, Technocom and ALTEL are subject to corporate
profits taxes of 34%, 35% and 30%, respectively. The tax systems in Russia,
Kazakhstan and Belarus have changed rapidly in recent years and may undergo
additional changes, which may have a material adverse effect on the Company.
Technocom established a representative office in Moscow in October 1995 and
registered this office with the relevant Russian tax authorities. This resulted
in Technocom becoming subject to profits and other Russian taxes as of such
date. Inasmuch as Technocom operated to some extent in the Russian Federation
prior to this date, without clarifying its tax status with any Russian taxing
authority, it is also possible that tax officials may take the position that
Technocom may be subject to VAT and/or profits and other Russian taxes with
respect to the period before October 1995.
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At December 31, 1998, the Company had operating loss carryforwards for U.S.
federal income tax purposes of approximately $56.2 million. In assessing the
realizability of the deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of the deferred tax assets is
dependent upon the generation of future taxable future income during the periods
in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments.
At December 31, 1996, the Company had operating loss carryforwards for
Canadian income tax purposes of approximately $36.0 million and allowable
capital loss carryforwards of approximately $19.0 million. Upon the Company's
emigration to the United States in February 1997, these losses did not carryover
for U.S. tax purposes.
CURRENCY CONTROLS
THE RUSSIAN FEDERATION
Exchange Controls. Following the economic crisis in August and September
1998, the Russian Federation introduced more stringent procedural requirements
on Russian residents wishing to pay non-residents in hard currency. The main
reason for this was to attempt to reduce the level of illegal hard currency
outflow from the country. Significant documentary requirements may be required
in respect of payments in U.S. Dollars between Russian residents (which
generally includes all Russian companies and citizens resident in Russia) and
non-residents (which generally includes non-Russian companies even if they have
a representative office or other permanent establishment in Russia) for current
currency transactions (generally those where payment is made within 90 days of
the provision of goods and services). Payments in U.S. Dollars classified as
movements of capital (which generally includes direct investments, portfolio
investments, acquisition of real estate and payments made pursuant to loan
agreements, or agreements for the lease or sale of goods and services having
terms of over 90 days) are subject to licensing by the Central Bank. The Company
believes that all of its operating subsidiaries hold, or have applied for and
expect eventually to receive, all required Central Bank licenses. The need to
apply for Central Bank licenses can be burdensome, because of the substantial
documentary and other requirements involved and because of the considerable
length of time involved, often running into several months. Failure to apply for
the appropriate licenses, or to receive the outstanding licenses could result in
fines and penalties. See "Business -- Risk Factors -- Risks Involving the
Company -- Currency Controls." Finally, banks in Russia require that certain
hard currency transfers be accompanied by a "transaction passport" setting forth
that all required tax and regulatory requirements have been followed. Other
requirements may be introduced in the future by the Russian Federation to
control further hard currency payments from the country.
Payments between Russian residents must generally be made in Roubles.
Russian companies may exchange Roubles for U.S. Dollars if they can document
U.S. Dollar-denominated liabilities that are due and payable within specified
periods. Russian companies are required to convert 75% of most hard currency
earnings into Roubles, but (as noted in the preceding sentence) may be able to
reconvert such amounts into hard currency if they can document hard currency
denominated liabilities that are due and payable within a specified period.
Roubles may not be lawfully exported from, or converted into, other currencies
outside of Russia.
Availability of Hard Currency for Conversion Purposes. The ability of
foreign investors to convert Roubles into hard currency is also subject to the
availability of hard currency in the Russian currency markets. Although there is
an existing market within Russia for the conversion of Roubles into other
currencies, including the interbank currency exchange, over-the-counter and
currency futures markets, conversion of Roubles at times of crisis, such as in
August 1998, may be difficult.
Exchange Rates. Significant fluctuations in the value of the Rouble
against the U.S. Dollar and other hard currencies can also have a material
impact on the value of a foreign investor's Rouble dividend income or Rouble
proceeds from the sale of Rouble denominated securities. The history of trading
in the Russian Rouble against the U.S. Dollar has been characterized by
significant declines in value and considerable volatility, although the Russian
Rouble experienced relative stability against the U.S. dollar during 1996 and
1997. However, during 1998 and the early part of 1999, the Russian Rouble has
been under considerable pressure
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and suffered substantial declines against the U.S. Dollar and other currencies.
See "Risk Factors -- Country Risks -- Russian Economic and Political Turmoil."
These substantial declines resulted in foreign exchange losses by the Company's
operating businesses during the second half of 1998, and may continue to
adversely affect the results of such businesses. See "Business -- Risk
Factors -- Country Risks -- Restrictions on Currency Conversion; Historical
Volatility in Currency Prices."
Repatriation. Although Russian law governing foreign investment guarantees
foreign investors the right to repatriate their earnings from Russian
investments, the Russian exchange control regime, including licensing
requirements administered by the Central Bank, may materially affect their
ability to do so and may increase the cost of such repatriation. See
"Business -- Risk Factors -- Risks Involving the Company -- Currency Controls."
Impact upon the Company. In general, the impact on the Company of the
Russian exchange controls regime has not been particularly adverse. While no
dividends have been paid by any of the operating subsidiaries in Russia,
payments of interest and management fees have been made relatively freely. The
need to apply for Central Bank licenses for certain types of transactions, and
the delays in the receipt of such licenses, has delayed the completion of
certain transactions. Additionally, the process of applying for such licenses
has been time consuming and expensive. Finally, delays in the receipt of
licenses has delayed the time at which the Company can start to realize
cashflows from the sale or leasing of assets to its operating subsidiaries in
Russia. See "Business -- Risk Factors -- Risks Involving the Company -- Currency
Controls -- Currency Licensing Requirements."
KAZAKHSTAN
Exchange Controls. Kazakhstan currently has in place relatively liberal
policies governing hard currency transfers by Kazakh residents to non-residents.
Residents (which generally includes all Kazakh companies and citizens resident
in Kazakhstan) can use hard currency to pay non-residents (which generally
includes all non-Kazakh companies and their branch offices and representative
offices in Kazakhstan) for current currency transactions (generally those where
payment is made within 180 days of the provision of goods or services). Payments
in U.S. Dollars classified as movements of capital (which generally includes
direct investments, portfolio investments, payments with respect to real estate
and payments made after 180 days for goods and services) are subject to
licensing by the National Bank of Kazakhstan.
Payments between Kazakh residents must generally be made in Tenge. Kazakh
companies may exchange Tenge for U.S. Dollars if they can document U.S.
Dollar-denominated liabilities that are due and payable within specified
periods. The National Bank of Kazakhstan does not currently require the
conversion of hard currency earnings into Tenge. Tenge may not be lawfully
exported from Kazakhstan or converted into other currencies outside of
Kazakhstan.
Availability of Hard Currency for Conversion Purposes. The ability of
foreign investors to convert Tenge into hard currency is also subject to the
availability of hard currency in the Kazakh currency markets. Although there is
an existing market within Kazakhstan for the conversion of Tenge into other
currencies, including the interbank currency exchange and the over-the-counter
markets, the development of this market is uncertain.
Exchange Rates. Significant fluctuations in the value of the Tenge against
the U.S. Dollar and other hard currencies can also have a material impact on the
value of a foreign investor's Tenge dividend income or Tenge proceeds for the
sale of Tenge-denominated securities. In Kazakhstan a market exists for the
conversion of Tenge into other currencies, but it is limited in size and is
subject to rules limiting the purposes for which conversion may be effected. The
history of trading in the Kazakh Tenge against the U.S. Dollar has been
characterized by significant declines in value and considerable volatility,
although the Kazakh Tenge experienced relative stability against the U.S. dollar
during 1996 and 1997. After remaining relatively stable during 1998, the Kazakh
Tenge has started to weaken, reflecting concerns about the health of the
country's economy, as a result of Russia's economic and financial problems. See
"Risk Factors -- Country Risks -- Russian Economic and Political Turmoil."
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Repatriation. Kazakhstan's foreign investment legislation provides that
earnings from investments made by foreign investors may be freely repatriated
provided that all applicable fees and taxes have been paid. However, the
exchange control regime in Kazakhstan may materially affect an investor's
ability to do so and may increase the cost of such repatriation. See
"Business -- Risk Factors -- Risks Involving the Company -- Currency Controls."
Impact upon the Company. The Company has not experienced particular
difficulties with the Kazakh exchange control regime. Both dividends and
management fees have been received from ALTEL during 1998. While there are
paperwork requirements in relation to hard currency transfers, these have not
delayed the making of such transfers.
INFLATION
Since the break-up of the Soviet Union, the economies of Russia, Kazakhstan
and Belarus have been characterized by high rates of inflation. Although in 1996
and 1997, inflation in the first two countries decreased substantially,
inflation in Russia increased dramatically following the August 1998 financial
crisis, and there increased risks of inflation in Kazakhstan. The inflation
rates in Belarus have been at hyperinflationary levels for some years, and as a
result the currency has essentially lost all intrinsic value. If the Company's
operating businesses are unable to increase prices in line with inflation, due
to competitive pressures or otherwise, the results of operations of the
Company's operating businesses may be adversely affected.
EXCHANGE RATES
The following tables summarize the Rouble-U.S. Dollar and Tenge-U.S. Dollar
exchange rates since January 1995 (rates are not provided for the Belarussian
Ruble because this is essentially inconvertible):
ROUBLE/U.S. DOLLAR EXCHANGE RATES(1)
<TABLE>
<CAPTION>
MONTH 1995 1996 1997 1998
- - ----- ----- ----- ----- ------
<S> <C> <C> <C> <C>
January.................................................... 3,550 4,640 5,636 6,021
February................................................... 4,059 4,736 5,676 6,070
March...................................................... 4,400 4,830 5,726 6,106
April...................................................... 4,008 4,940 5,760 6,133
May........................................................ 5,130 5,031 5,773 6,160
June....................................................... 4,958 5,105 5,771 6,198
July....................................................... 4,539 5,189 5,798 6,238
August..................................................... 4,405 5,352 5,824 10,050
September.................................................. 4,445 5,396 5,861 15,910
October.................................................... 4,495 5,455 5,887 16,650
November................................................... 4,509 5,511 5,917 18,225
December................................................... 4,578 5,550 5,997 20,620
</TABLE>
- - ---------------
(1) Spot rate on the last business day of each month.
85
<PAGE> 88
TENGE/U.S. DOLLAR EXCHANGE RATES(1)
<TABLE>
<CAPTION>
MONTH 1995 1996 1997 1998
- - ----- ---- ---- ---- -----
<S> <C> <C> <C> <C>
January..................................................... 55.6 65.5 75.8 76.4
February.................................................... 60.1 65.3 75.5 76.4
March....................................................... 60.8 66.0 75.3 76.5
April....................................................... 63.5 67.1 75.4 76.5
May......................................................... 64.3 66.9 75.5 76.6
June........................................................ 64.3 67.2 75.6 76.8
July........................................................ 63.2 67.5 75.5 77.3
August...................................................... 59.0 68.1 75.6 78.6
September................................................... 60.9 68.8 75.6 80.2
October..................................................... 61.7 69.5 75.6 81.2
November.................................................... 63.9 70.4 75.6 82.6
December.................................................... 59.6 73.1 76.2 83.8
</TABLE>
- - ---------------
(1) Spot rate on the last business day of each month.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's finance department is responsible for the evaluation and, to
the extent practicable, management of the Company's exposure to market risks.
The Company's primary market risk is related to the movement in foreign
currency exchange rates in the countries in which its operating businesses
operate: Russia, Kazakhstan and Belarus. See "Risk Factors -- Country
Risks -- Restrictions on Currency Conversion; Historical Volatility in Currency
Prices" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Currency Controls." The Company periodically evaluates
the materiality of its foreign exchange exposures and the financial instruments
available to mitigate this exposure. However, the Company does not currently
believe that it is practical or economical to hedge these foreign currency
exchange risks and as a result will continue to experience foreign currency
gains and losses.
With the exception of certain vendor financing at the operating business
level (approximately $3 million in the aggregate), the Company's debt
obligations, and those of its operating businesses, are fixed rate obligations,
and are therefore not exposed to market risk from changes in interest rates. The
Company does not believe that it is exposed to a material market risk from
changes in interest rates. Furthermore, with the exception of the approximately
$3 million in vendor financing which is denominated in Euros, the Company's
long-term debt and that of its operating businesses is denominated in U.S.
dollars. The Company does not believe that this Euro-denominated debt exposes
the Company to a material market risk from changes in foreign exchange rates.
The Company does not use any derivative instruments, either as a trading or
non-trading activity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries
and supplementary data required by this item are attached to this report
beginning on page F-1. In addition, the financial statements of (i) NWE Capital
(Cyprus) Ltd., Wireless Technology Corporations Limited, as pledgees and
guarantors under the terms of the Senior Notes and the Convertible Notes, (ii)
Baltic Communications Limited, PLD Leasing and PLDCA, as guarantors under the
terms of the Senior Notes and the Convertible Notes, and (iii) Technocom
Limited, as a pledgee under the terms of the Senior Notes and the Convertible
Notes, are attached to this report beginning on page F-35. No financial
statements are included for PLD Capital Limited, a Cypriot company, even though
it is a guarantor of the Senior Notes and Convertible Notes, because it is
inactive and is to be liquidated in 1999.
86
<PAGE> 89
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934 called for by this Item, will be contained in
the Company's definitive proxy statement for the 1999 Annual Meeting of
Shareholders (the "Proxy Statement"), and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this Item will be contained in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item will be contained in the Proxy
Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item will be contained in the Proxy
Statement and is incorporated herein by reference.
87
<PAGE> 90
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. Financial Statements listed in the
accompanying Index to Financial Statements and Financial Statement
Schedules appearing on page F-1 are filed as part of this annual
report on Form 10-K.
2. Exhibits. (see (c) below).
(b)Reports on Form 8-K
None
(c) Exhibits.
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<C> <S>
2 Certificate of Domestication. (Exhibit 3.1)(9)
3.1 Certificate of Incorporation. (Exhibit 3.2)(9)
3.2 By-Laws. (Exhibit 3.3)(9)
4.1 Indenture, dated as of May 31, 1996, among the Registrant,
as Issuer, NWE Capital (Cyprus) Limited, PLD Asset Leasing
Limited, PLD Capital Limited, Baltic Communications Limited
and Wireless Technology Corporations Limited as Guarantors,
and The Bank of New York, as Trustee, with respect to
$123,000,000 aggregate principal amount at stated maturity
of 14% Senior Discount Notes due 2004 (the "Senior Note
Indenture") (including exhibits B, C, D and K only).
(Exhibit 4.1)(10)
4.2 Indenture, dated as of May 31, 1996, among the Registrant as
Issuer, NWE Capital (Cyprus) Limited, PLD Asset Leasing
Limited, PLD Capital Limited, Baltic Communications Limited
and Wireless Technology Corporations Limited as Guarantors,
and The Bank of New York, as Trustee, with respect to
$26,500,000 aggregate principal amount of 9% Convertible
Subordinated Notes due 2006 (the "Convertible Note
Indenture") (including exhibit B only). (Exhibit 4.2)(10)
4.3 First Supplemental Indenture, Amendment Agreement, Consent
and Waiver, dated as of March 20, 1998, among the
Registrant, as Issuer, NWE Capital (Cyprus) Limited, PLD
Asset Leasing Limited, PLD Capital Limited, Wireless
Technology Corporations Limited and Baltic Communications
Limited, as Guarantors, Clayton A. Waite and Apropos
Investments Ltd., as nominee shareholders, and The Bank of
New York, as Trustee. (Exhibit 4.3)(11)
4.4* Second Supplemental Indenture, dated as of June 15, 1998,
among the Registrant, as Issuer, NWE Capital (Cyprus)
Limited, PLD Asset Leasing Limited, PLD Capital Limited, PLD
Capital Asset (U.S.) Inc., Wireless Technology Corporations
Limited and Baltic Communications Limited, as Guarantors,
Clayton A. Waite and Apropos Investments Ltd., as nominee
shareholders, and The Bank of New York, as Trustee.
4.5* Third Supplemental Indenture, dated as of January 12, 1999,
among the Registrant, as Issuer, NWE Capital (Cyprus)
Limited, PLD Asset Leasing Limited, PLD Capital Limited, PLD
Capital Asset (U.S.) Inc., Wireless Technology Corporations
Limited and Baltic Communications Limited, as Guarantors,
Clayton A. Waite and Apropos Investments Ltd., as nominee
shareholders, and The Bank of New York, as Trustee.
4.6* Global Exchange Note representing 14% Senior Discounted
Notes due 2004.
4.7 Global Note representing 9% Convertible Subordinated Notes
due 2006. (Exhibit 4.4)(10)
</TABLE>
88
<PAGE> 91
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<C> <S>
4.8 Warrant Agreement, dated as of May 31, 1996, between the
Registrant and The Bank of New York as Warrant Agent.
(Exhibit 4.9)(10)
4.9 Warrant Certificate of the Registrant for 123,000 Warrants
exercisable on or after December 10, 1996 and on or before
June 12, 2006. (Exhibit 4.5)(10)
4.10 Smith Barney Warrant Agreement, dated as of May 31, 1996,
between the Registrant and The Bank of New York as Warrant
Agent. (Exhibit 4.10)(10)
4.11 Smith Barney Warrant Certificate of the Registrant for
100,000 Warrants exercisable as to 50,000 Common Shares on
or after June 12, 1996 and as to 50,000 Common Shares on or
after October 30, 1996 and on or before April 30, 2001.
(Exhibit 4.6)(10)
4.12 Registration Rights Agreement, dated as of May 31, 1996,
between the Registrant and Smith Barney Inc. (Exhibit
4.7)(10)
4.13 Purchase Agreement, dated May 24, 1996, between the
Registrant and Smith Barney Inc. (without exhibits).
(Exhibit 4.8)(10)
4.14 Company Senior Note Escrow Account Agreement, dated as of
May 31, 1996, among The Bank of New York as Escrow Agent, as
Trustee under the Senior Note Indenture, as Trustee under
the Convertible Note Indenture and the Registrant. (Exhibit
4.11)(10)
4.15 Company Convertible Note Escrow Account Agreement, dated as
of May 31, 1996, among The Bank of New York as Escrow Agent,
as Trustee under the Senior Note Indenture, as Trustee under
the Convertible Note Indenture and the Registrant. (Exhibit
4.12)(10)
4.16 Leasing Company Escrow Account Agreement (PLD Asset Leasing
Limited), dated as of May 31, 1996, among The Bank of New
York as Escrow Agent, as Trustee under the Senior Note
Indenture, as Trustee under the Convertible Note Indenture
and PLD Asset Leasing Limited. (Exhibit 4.13)(10)
4.17 Leasing Company Escrow Account Agreement (PLD Capital
Limited), dated as of May 31, 1996, among The Bank of New
York as Escrow Agent, as Trustee under the Senior Note
Indenture, as Trustee under the Convertible Note Indenture
and PLD Capital Limited. (Exhibit 4.14)(10)
4.18* Leasing Company Escrow Account Agreement (PLD Capital Asset
(U.S.) Inc.), dated as of June 15, 1998, among The Bank of
New York as Escrow Agent, as Trustee under the Senior Note
Indenture, and as Trustee under the Convertible Note
Indenture and PLD Capital Asset (U.S.) Inc.
4.19 Company Senior Note Security and Pledge Agreement, dated as
of May 31, 1996, by the Registrant in favor of The Bank of
New York, as Trustee under the Senior Note Indenture, as
Trustee under the Convertible Note Indenture, and as
Collateral Agent. (Exhibit 4.15)(10)
4.20 Company Convertible Note Security and Pledge Agreement,
dated as of May 31, 1996, by the Registrant in favor of The
Bank of New York, as Trustee under the Convertible Note
Indenture, as Trustee under the Convertible Note Indenture,
and as Collateral Agent. (Exhibit 4.16)(10)
4.21 Leasing Company Security and Pledge Agreement (PLD Asset
Leasing Limited), dated as of May 31, 1996, by PLD Asset
Leasing Limited in favor of The Bank of New York, as Trustee
under the Senior Note Indenture, as Trustee under the
Convertible Note Indenture, and as Collateral Agent.
(Exhibit 4.17)(10)
4.22 Leasing Company Security and Pledge Agreement (PLD Capital
Limited), dated as of May 31, 1996, by PLD Capital Limited
in favor of The Bank of New York, as Trustee under the
Senior Note Indenture, as Trustee under the Convertible Note
Indenture, and as Collateral Agent. (Exhibit 4.18)(10)
4.23 NWE Cyprus Senior Note Security and Pledge Agreement, dated
as of May 31, 1996, by NWE Capital (Cyprus) Ltd. in favor of
The Bank of New York, as Trustee under the Senior Note
Indenture, as Trustee under the Convertible Note Indenture,
and as Collateral Agent. (Exhibit 4.19)(10)
</TABLE>
89
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<C> <S>
4.24* Leasing Company Security and Pledge Agreement (PLD Capital
Asset (U.S.) Inc.), dated as of June 15, 1998, by PLD
Capital Asset (U.S.) Inc. in favor of The Bank of New York,
as Trustee under the Senior Note Indenture, as Trustee under
the Convertible Note Indenture, and as Collateral Agent.
4.25 Revolving Credit Agreement, dated as of November 26, 1997,
between the Registrant, The Travelers Insurance Company and
The Travelers Indemnity Company. (Exhibit 4.21)(11)
4.26 Form of 12% Series A Senior Secured Revolving Credit Note.
(Exhibit 4.22)(11)
4.27 Form of 12% Series B Senior Secured Revolving Credit Note.
(Exhibit 4.23)(11)
4.28 Warrant Agreement, dated as of November 26, 1997, between
the Registrant and The Bank of New York, as Warrant Agent.
(Exhibit 4.24)(11)
4.29 Form of Series A Warrant Certificate. (Exhibit 4.25)(11)
4.30 Form of Series B Warrant Certificate. (Exhibit 4.26)(11)
4.31 Registration Rights Agreement, dated as of November 26,
1997, between the Registrant, The Travelers Insurance
Company and The Travelers Indemnity Company. (Exhibit
4.27)(11)
4.32 Guaranty Agreement, dated as of November 26, 1997, made and
given by Wireless Technology Corporations Limited and Baltic
Communications Limited in favor of The Travelers Insurance
Company and The Travelers Indemnity Company. (Exhibit
4.28)(11)
4.33 Trust Agreement, dated as of November 26, 1997, between the
Registrant and The Bank of New York, as Trustee. (Exhibit
4.29)(11)
4.34 Security Agreement (Inventory and Receivables), dated as of
November 26, 1997, between the Registrant and The Bank of
New York, as Trustee. (Exhibit 4.30)(11)
4.35 Pledge Agreement, dated as of November 26, 1997, between the
Registrant and The Bank of New York, as Trustee. (Exhibit
4.31)(11)
4.36* Revolving Credit Agreement, dated as of September 30, 1998,
between PLD Telekom Inc. and News America Incorporated,
including the form of promissory note issuable thereunder.
4.37* Schedule of Promissory Notes issued under the Revolving
Credit Agreement, dated as of September 30, 1998, between
PLD Telekom Inc. and News America Incorporated.
10.1 PLD Telekom Inc. 1997 Equity Compensation Plan. (Exhibit
10.1)(11)
10.2 Service Agreement, dated August 1, 1997, between the
Registrant and James R.S. Hatt. (Exhibit 10.2)(11)
10.3 Employment Letter, effective June 1, 1997, between the
Registrant and John G. Davies. (Exhibit 10.3)(11)
10.4 Amendment, dated July 30, 1997, to Employment Letter between
the Registrant and John G. Davies. (Exhibit 10.4)(11)
10.5 Service Agreement, dated July 1, 1997, between the
Registrant and Simon Edwards. (Exhibit 10.5)(11)
10.6 Service Agreement, dated November 26, 1997, between the
Registrant and Boris Antoniuk. (Exhibit 10.8)(11)
10.7 Consultancy Agreement, dated December 28, 1994, between
Technocom Limited and Elite International Limited. (Exhibit
10.9)(11)
10.8 Amendment, dated November 26, 1997, to the Consultancy
Agreement between Technocom Limited and Elite International
Limited. (Exhibit 10.10)(11)
10.9 Service Agreement between the Registrant and Newmark Capital
Limited dated as of January 1, 1995. (Exhibit 2(o))(8)
</TABLE>
90
<PAGE> 93
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<C> <S>
10.10 Warrant to Purchase Common Shares, dated July 28, 1994,
between the Company and Dominion Capital Inc. (Exhibit
10.28)(4)
10.11 Agreement to Purchase Warrants, dated July 28, 1994, between
the Registrant and Cable & Wireless. (Exhibit 10.25)(4)
10.12 Agreement dated May 31, 1992 between Tiller International
Limited and the Registrant. (Exhibit 2(m))(1)
10.13 Joint Venture Agreement, dated as of December 31, 1993,
between Wireless Technology Corporations Limited and
Kompania Besprovodnye Seti Sviazi. (Exhibit 3(b))(3)
10.14 Interconnection Agreement, dated as of February 4, 1994,
between the Ministry of Communications of the Republic of
Kazakhstan and ALTEL. (Exhibit 3(d))(3)
10.15 Amendment, dated February 28, 1996, to the Interconnection
Agreement between Kazakhtelekom and ALTEL. (Exhibit
10.28)(11)
10.16 Cellular System Equipment Purchase Agreement dated as of May
4, 1994 between ALTEL and Motorola Inc. (Exhibit 3(k))(3)
10.17 Cellular System Installation & Optimization Agreement dated
as of May 4, 1994 between ALTEL and Motorola Inc. (Exhibit
3(l))(3)
10.18 Put and Call Letter Agreement, dated as of June 3, 1994,
between the Company and Monogram Telecommunications Limited.
(Exhibit 3(i))(3)
10.19 Subscription Agreement, dated February 21, 1995, for
$3,000,000 convertible note issued to the Registrant by
Monogram. (Exhibit 2(a))(7)
10.20 Agreement for the Acquisition of Ninety Percent of the
Issued Share Capital of St. Petersburg Mayoralty & Tiller,
dated as of March 7, 1994, among the Registrant, Tiller
International Limited and Dian A/O. (Exhibit 3(j))(3)
10.21 Purchase Agreement between Baltic Communications Limited and
the Registrant dated January 27, 1996. (Exhibit 2(a))(8)
10.22 Side letter between the Registrant and Baltic Communications
Limited dated January 27, 1996. (Exhibit 2(c))(8)
10.23 Share Purchase Agreement, dated April 26, 1995, between Lant
Investments Limited and the Registrant. (Exhibit 2(b))(7)
10.24 Escrow Agreement among the Registrant, Lant Investments
Limited and Montreal Trust Company of Canada. (Exhibit
2(c))(7)
10.25 Registration Rights Agreement, dated as of April 26, 1995,
between the Registrant and Lant Investments Limited.
(Exhibit 2(d))(7)
10.26 Share Sale and Purchase Agreement, dated November 2, 1994,
between the Registrant and Plicom Limited. (Exhibit 2.3)(4)
10.27 Form of Subscription and Shareholder Agreement between the
Registrant, Plicom Limited, Elite International Limited and
Technocom Limited. (Exhibit 2.4)(6)
10.28 Amendment, dated November 26, 1997, to Subscription and
Shareholder Agreement between the Registrant, Plicom
Limited, Elite International Limited and Plicom Limited.
(Exhibit 10.42)(11)
10.29 Form of Deed of Covenant between the Registrant and Plicom
Limited. (Exhibit 2.5)(4)
10.30 Form of Put and Call Option Agreement dated November 4, 1994
between the Company and Plicom Limited. (Exhibit 10.20)(4)
10.31 Amendment, dated November 26, 1997, to Put and Call Option
Agreement between the Registrant and Plicom Limited.
(Exhibit 10.46)(11)
</TABLE>
91
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<C> <S>
10.32 Amended and Restated Put and Call Option Agreement, dated
November 26, 1997, between the Registrant and Elite
International Limited. (Exhibit 10.47)(11)
10.33 Share Purchase Agreement, dated November 26, 1997, among the
Registrant, Technocom Limited, Plicom Limited and Mark
Klabin. (Exhibit 10.48)(11)
10.34 Share Purchase Agreement, dated November 26, 1997, among the
Registrant, Technocom Limited and Elite International
Limited. (Exhibit 10.49) (11)
10.35 Securities Sale and Purchase Agreement between the
Registrant and Redford Limited relating to SPMMTS. (Exhibit
10.50)(11)
10.36 Asset Exchange Agreement, dated April 19, 1998, between News
America Incorporated and PLD Telekom Inc. (Exhibit 99.2)(13)
10.37 Stock Purchase Agreement, dated April 19, 1998, between PLD
Telekom Inc. and Cable and Wireless plc. (Exhibit 99.3)(13)
10.38 Agreement for Lease, dated as of April 27, 1994, between the
Registrant and The Scottish Life Assurance Company. (Exhibit
3(o))(3)
10.39* Lease, dated as of October 15, 1998, between G.S. 505 Park,
LLC and the Registrant.
10.40* Lease, dated as of December 1, 1998, between 67 Broad Street
LLC and the Registrant.
10.41 License Granted to ALTEL for the Operation of a Cellular
Telecommunication System Providing Mobile
Radiocommunications Services dated as of February 4, 1994.
(Exhibit 3(c))(3)
10.42 License No. 2463 issued to MTR-Sviaz dated September 21,
1995 (Russian). (Exhibit 2(f))(8)
10.43 License No. 4904 issued by the RSCC to PeterStar Company
Limited for the provision of local, national and
international telecommunications services via a dedicated
network. (Exhibit 10.3)(10)
10.44 License No. 4274 issued by the RSCC to PeterStar Company
Limited for the provision of local and intercity telephone
communications services. (Exhibit 10.4)(10)
10.45 License No. N4199 issued by the RSCC to Teleport-TP for the
provision of local and international telephone
communications. (Exhibit 10.5)(10)
10.46 License No. N4207 issued by the RSCC to Teleport-TP for the
provision of international telecommunication services via
dedicated network. (Exhibit 10.6)(10)
10.47 License No. N4437 issued by the RSCC to Teleport-TP for the
provision of international leased lines and circuits for the
transmission of television signals. (Exhibit 10.7)(10)
10.48 License No. 3654 issued to Teleport-TP for providing data
transmission services. (Exhibit (2(e))(8)
21* List of Subsidiaries.
23.1* Consent of KPMG LLP.
23.2* Consent of KPMG LLP.
23.3* Consent of KPMG.
23.4* Consent of KPMG.
23.5* Consent of Moore Stephens.
23.6* Consent of KPMG LLP.
23.7* Consent of KPMG.
23.8* Consent of KPMG.
</TABLE>
- - ---------------
* Filed herewith
(1) Filed as an Exhibit to the Company's Annual Report on Form 20-F for the
year ended December 31, 1991.
92
<PAGE> 95
(2) Filed as an Exhibit to the Company's Form 8 Amendment to Form 20-F for the
year ended December 31, 1991.
(3) Filed as an Exhibit to the Company's Annual Report on Form 20-F for the
year ended December 31, 1993.
(4) Filed as an Exhibit to the Company's Registration Statement on Form F-1
(File No. 33-86184).
(5) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the Company's
Registration Statement on Form F-1 (File No. 33-86184).
(6) Filed as an Exhibit to Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form F-1 (File No. 33-86184).
(7) Filed as an Exhibit to the Company's Annual Report on Form 20-F for the
year ended December 31, 1994.
(8) Filed as an Exhibit to the Company's Annual Report on Form 20-F for the
year ended December 31, 1995.
(9) Filed as an Exhibit to the Company's Current Report on Form 8-K dated March
7, 1997.
(10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
(11) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, as filed with the Commission on March 31,
1998.
(12) Filed as an Exhibit to Amendment No. 2 to the Company's Annual Report on
Form 10-K/A for the year ended December 31, 1997, as filed with the
Commission on July 22, 1998.
(13) Filed as an Exhibit to the Company's Current Report on Form 8-K dated April
22, 1998.
93
<PAGE> 96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in New York, New York
on March 31, 1999.
PLD TELEKOM INC.
By: /s/ JAMES R. S. HATT
------------------------------------
James R. S. Hatt
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BORIS ANTONIUK Director March 31, 1999
- - ---------------------------------------------------
Boris Antoniuk
/s/ EDWARD CHARLES DILLEY Director March 31, 1999
- - ---------------------------------------------------
Edward Charles Dilley
/s/ SIMON EDWARDS Director and Chief Financial March 31, 1999
- - --------------------------------------------------- Officer (Principal Financial
Simon Edwards Officer)
/s/ JAMES R. S. HATT Director, President and Chief March 31, 1999
- - --------------------------------------------------- Executive Officer (Principal
James R. S. Hatt Executive Officer)
/s/ GORDON HUMPHREY Director March 31, 1999
- - ---------------------------------------------------
Gordon Humphrey
/s/ GENNADY KUDRIATSEV Director March 31, 1999
- - ---------------------------------------------------
Gennady Kudriatsev
/s/ VLADIMIR KVINT Director March 31, 1999
- - ---------------------------------------------------
Vladimir Kvint
/s/ I. MARTIN POMPADUR Director March 31, 1999
- - ---------------------------------------------------
I. Martin Pompadur
/s/ DAVID STOVEL Director March 31, 1999
- - ---------------------------------------------------
David Stovel
</TABLE>
<PAGE> 97
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------- -----------
<C> <S>
4.4 Second Supplemental Indenture, dated as of June 15, 1998,
among the Registrant, as Issuer, NWE Capital (Cyprus)
Limited, PLD Asset Leasing Limited, PLD Capital Limited, PLD
Capital Asset (U.S.) Inc., Wireless Technology Corporations
Limited and Baltic Communications Limited, as Guarantors,
Clayton A. Waite and Apropos Investments Ltd., as nominee
shareholders, and The Bank of New York, as Trustee.
4.5 Third Supplemental Indenture, dated as of January 12, 1999,
among the Registrant, as Issuer, NWE Capital (Cyprus)
Limited, PLD Asset Leasing Limited, PLD Capital Limited, PLD
Capital Asset (U.S.) Inc., Wireless Technology Corporations
Limited and Baltic Communications Limited, as Guarantors,
Clayton A. Waite and Apropos Investments Ltd., as nominee
shareholders, and The Bank of New York, as Trustee.
4.6 Global Exchange Note representing 14% Senior Discounted
Notes due 2004.
4.18 Leasing Company Escrow Account Agreement (PLD Capital Asset
(U.S.) Inc.), dated as of June 15, 1998, among The Bank of
New York as Escrow Agent, as Trustee under the Senior Note
Indenture, and as Trustee under the Convertible Note
Indenture and PLD Capital Asset (U.S.) Inc.
4.24 Leasing Company Security and Pledge Agreement (PLD Capital
Asset (U.S.) Inc.), dated as of June 15, 1998, by PLD
Capital Asset (U.S.) Inc. in favor of The Bank of New York,
as Trustee under the Senior Note Indenture, as Trustee under
the Convertible Note Indenture, and as Collateral Agent.
4.36 Revolving Credit Agreement, dated as of September 30, 1998,
between PLD Telekom Inc. and News America Incorporated,
including the form of promissory note issuable thereunder.
4.37 Schedule of Promissory Notes issued under the Revolving
Credit Agreement, dated as of September 30, 1998, between
PLD Telekom Inc. and News America Incorporated.
10.39 Lease, dated as of October 15, 1998, between G.S. 505 Park,
LLC and the Registrant.
10.40 Lease, dated as of December 1, 1998, between 67 Broad Street
LLC and the Registrant.
21 List of Subsidiaries.
23.1 Consent of KPMG LLP.
23.2 Consent of KPMG LLP.
23.3 Consent of KPMG.
23.4 Consent of KPMG.
23.5 Consent of Moore Stephens.
23.6 Consent of KPMG LLP.
23.7 Consent of KPMG.
23.8 Consent of KPMG.
</TABLE>
<PAGE> 98
<PAGE> 99
PLD TELEKOM INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE
- - ---- ----
<S> <C>
Independent auditors' report................................ F-2
Consolidated balance sheets as of December 31, 1998 and
1997...................................................... F-4
Consolidated statements of operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-5
Consolidated statements of shareholders' equity for the
years ended December 31, 1998, 1997 and 1996.............. F-6
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-7
Notes to consolidated financial statements.................. F-9
</TABLE>
F-1
<PAGE> 100
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Directors
PLD Telekom Inc.:
We have audited the accompanying consolidated balance sheets of PLD Telekom
Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PLD Telekom
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
1 to the consolidated financial statements, the Company has suffered recurring
losses, has a working capital deficiency, and does not presently have sufficient
funds on hand to meet its current debt obligations. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG LLP
New York, NY
March 30, 1999
F-2
<PAGE> 101
AUDITORS' REPORT
Shareholders and Board of Directors
PLD Telekom Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of PLD Telekom Inc. and subsidiaries for the
year ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations of the
Company and subsidiaries and their cash flows for the year ended December 31,
1996 in accordance with United States generally accepted accounting principles.
KPMG LLP
Chartered Accountants
Toronto, Canada
March 21, 1997
F-3
<PAGE> 102
PLD TELEKOM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 7)........................ $ 4,579 $ 17,256
Trade receivables, net of allowance of $3,809 and $3,226,
respectively........................................... 14,905 17,078
Other receivables and prepaids............................ 4,609 8,615
Inventory................................................. 4,152 2,802
Due from related parties (note 13(c))..................... 9,152 6,320
--------- --------
Total current assets................................... 37,397 52,071
Escrow funds (note 9)....................................... 14,908 33,868
Property and equipment, net (note 4)........................ 168,937 134,998
Telecommunications licenses (note 3), net of amortization of
$37,737 and $26,294, respectively......................... 77,359 81,837
Due from related parties (note 13(c))....................... 2,011 3,011
Other investments (note 5).................................. 5,183 4,036
Goodwill, net of accumulated amortization of $1,656 and
$575, respectively (notes 3(a) and (c))................... 36,368 12,709
Other assets (note 6)....................................... 9,945 13,056
--------- --------
Total assets...................................... $ 352,108 $335,586
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings (note 8)............................ 18,124 20,320
Accounts payable.......................................... 10,278 13,597
Accrued liabilities....................................... 3,281 5,750
Taxes payable............................................. 3,664 944
Due to related parties (note 13(d))....................... 4,639 5,336
Deferred revenues......................................... 2,869 3,128
Customer deposits......................................... 4,271 3,070
Other current liabilities................................. 6,270 1,312
--------- --------
Total current liabilities......................... 53,396 53,457
--------- --------
Long-term debt (note 9)..................................... 151,814 133,516
Minority interest........................................... 22,021 21,382
Commitments and contingencies (note 14).....................
Shareholders' equity (notes 9 and 10):
Preferred stock, par value $.01 per share.
Authorized 100,000,000 shares; issued and outstanding
446,884 shares......................................... 4 4
Common stock, par value $.01 per share.
Authorized 100,000,000 shares; issued and outstanding
37,846,789 shares in 1998 and 33,324,290 shares in
1997................................................... 378 333
Additional paid-in capital.................................. 244,419 204,007
Accumulated deficit......................................... (119,924) (77,113)
--------- --------
Total shareholders' equity........................ 124,877 127,231
--------- --------
Total liabilities and shareholders' equity........ $ 352,108 $335,586
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 103
PLD TELEKOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Telecommunications (note 13(a))....................... $ 143,474 $ 112,468 $ 60,562
Finance lease income................................ 1,886 1,956 1,404
----------- ----------- -----------
145,360 114,424 61,966
Direct costs.......................................... 45,348 39,186 21,709
----------- ----------- -----------
Gross profit..................................... 100,012 75,238 40,257
----------- ----------- -----------
Operating expenses:
General and administrative.......................... 57,672 38,716 24,791
Depreciation........................................ 14,745 10,433 5,226
Amortization........................................ 11,326 7,867 4,883
Taxes other than income taxes....................... 6,321 6,204 2,490
----------- ----------- -----------
Total operating expenses.................... 90,064 63,220 37,390
----------- ----------- -----------
Operating income/(loss)..................... 9,948 12,018 2,867
Other income/(expense):
Share of loss from equity investments, after
amortization of licenses of $0, 0, and $2,477,
respectively..................................... (958) (537) (2,692)
Interest and other income........................... 2,384 3,614 4,859
Interest expense.................................... (21,953) (17,846) (9,973)
Amortization of deferred financing costs............ (1,779) (1,152) (684)
Foreign exchange loss............................... (5,322) (274) (648)
Other expense (note 16)............................. (5,881) 749 --
----------- ----------- -----------
Loss before income taxes and minority
interest.................................... (23,561) (3,428) (6,271)
Income taxes (note 11)................................ 9,864 7,739 3,669
----------- ----------- -----------
Loss before minority interest.................. (33,425) (11,167) (9,940)
Minority interest..................................... 9,386 9,399 2,521
----------- ----------- -----------
Net loss....................................... $ (42,811) $ (20,566) $ (12,461)
=========== =========== ===========
Net loss per common share:
Basic............................................... $ (1.21) $ (0.64) $ (0.39)
=========== =========== ===========
Diluted............................................. $ (1.21) $ (0.64) $ (0.39)
=========== =========== ===========
Weighted average common shares outstanding............ 35,274,151 32,061,070 31,579,201
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 104
PLD TELEKOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- ----------------------
NUMBER NUMBER ADDITIONAL
OF OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 446,884 $31 31,507,034 $ 179,887 -- (44,086) 135,832
Exercise of options................ -- -- 189,000 991 -- -- 991
Issuance of warrants (note 9)...... -- -- -- -- 13,592 -- 13,592
Net loss for the year.............. -- -- -- -- -- (12,461) (12,461)
------- --- ---------- --------- ------- -------- -------
Balance at December 31, 1996....... 446,884 31 31,696,034 180,878 13,592 (56,547) 137,954
Increase in par value from none to
$.01 (note 10)................... -- -- -- (180,561) 180,561 -- --
Change in par value of preferred
stock (note 10).................. -- (27) -- -- 27 -- --
Common stock cancellations......... -- -- (150) -- -- -- --
Exercise of options and warrants... -- -- 312,166 3 1,736 -- 1,739
Issuance of shares (note 3(c))..... -- -- 1,316,240 13 7,668 -- 7,681
Issuance of warrants (note 8(a))... -- -- -- -- 423 -- 423
Net loss for the year.............. -- -- -- -- -- (20,566) (20,566)
------- --- ---------- --------- ------- -------- -------
Balance at December 31, 1997....... 446,884 4 33,324,290 333 204,007 (77,113) 127,231
Common stock cancellations......... -- -- -- -- -- -- --
Exercise of options and warrants... -- -- -- -- -- -- --
Issuance of shares (notes 3(a),
3(f) and 3(g))................... -- -- 4,522,499 45 39,174 -- 39,219
Issuance of warrants (notes 8(a)
and 10(c))....................... -- -- -- -- 449 -- 449
Non-cash compensation expense (note
12).............................. -- -- -- -- 789 -- 789
Net loss for the year.............. -- -- -- -- -- (42,811) (42,811)
------- --- ---------- --------- ------- -------- -------
Balance at December 31, 1998....... 446,884 $ 4 37,846,789 $ 378 244,419 (119,924) 124,877
======= === ========== ========= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 105
PLD TELEKOM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(42,811) $(20,566) (12,461)
Adjustments to reconcile net loss to net cash provided
by/(used in) operating activities:
Depreciation and amortization.......................... 27,850 19,452 10,793
Accrued interest on senior discount notes.............. 17,183 14,260 7,349
Minority interest...................................... 9,386 9,399 2,521
Write-off of minority shareholder receivable........... 2,000 -- --
Provision for finance lease receivable.................. 3,203 -- --
Write-down of asset.................................... 2,000
Gain on sale of SPMMTS................................. -- (1,001) --
Deferred revenue....................................... (259) 2,050 (898)
Share of loss of equity investments.................... 958 537 2,692
Other.................................................. 789 -- 300
Changes in operating assets and liabilities, net of
effects of acquisitions:
(Increase)/decrease in trade receivables............. 2,173 (6,550) (2,478)
(Increase)/decrease in other receivables and
prepaids.......................................... 4,009 (5,093) 1,827
Increase in inventory................................ (1,350) (962) (392)
Change in amounts due from or to related parties..... (4,529) 386 (4,743)
Increase/(decrease) in accounts payable, accrued
liabilities, customer deposits, and other current
liabilities....................................... (683) (1,119) 11,108
-------- -------- -------
Net cash provided by/(used in) operating
activities...................................... 19,919 10,793 15,618
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (39,944) (38,990) (43,201)
Proceeds from sale of SPMMTS.............................. -- 17,180 --
Escrow funds.............................................. 18,960 7,116 (40,984)
Purchase of 30% investment in Technocom................... -- (25,608) --
Teleport-TP finance lease and advances.................... -- -- 3,916
Cash paid for acquisition................................. (500) -- --
Investments in Baltic Communications Limited, J.V.
Technopark Limited and Teleport-TP, net of cash
acquired............................................... -- -- (7,515)
Other investments......................................... -- 181 (140)
Other assets.............................................. 703 (747) (267)
-------- -------- -------
Net cash used in investing activities............. (20,781) (40,868) (88,191)
-------- -------- -------
</TABLE>
F-7
<PAGE> 106
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt borrowings/(repayments)................... (4,900) (10,929) (6,550)
Proceeds from issuance of 12% Revolving Credit Notes...... -- 15,420 --
Repayment of credit notes................................. (2,000) -- --
Proceeds from issuance of 14% Senior Discount Notes....... -- -- 87,697
Proceeds from issuance of 9% Convertible Subordinated
Notes.................................................. -- -- 26,500
Long-term debt repayment.................................. (5,074) -- --
Deferred financing costs.................................. -- -- (9,224)
Proceeds from issuance of common stock.................... -- 1,739 991
Cash dividends paid to minority shareholders.............. (3,000) (1,000) --
Loans from shareholders................................... 3,500 -- (1,843)
Related company advances.................................. -- --
Due to equipment supplier................................. -- -- --
Recapitalization of PeterStar............................. 1,427 --
Other financing........................................... (341) -- --
-------- -------- -------
Net cash provided by financing activities......... (11,815) 6,657 97,571
-------- -------- -------
(Decrease)/increase in cash and cash
equivalents..................................... (12,677) (23,418) 24,998
Cash and cash equivalents at beginning of year.............. 17,256 40,674 15,676
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 4,579 $ 17,256 40,674
======== ======== =======
Supplementary disclosures:
Non-cash investing and financing activities:
Issuance of warrants................................... 449 423 --
Acquisition of equipment under capital lease........... 4,019 -- --
Issued shares for acquired businesses.................. 39,219 -- --
Supplier financing..................................... $ 7,037 $ 11,302 --
======== ======== =======
Issuance of common stock for a portion of purchase
price of Technocom................................... $ -- $ 7,681 --
======== ======== =======
Interest paid............................................... $ 5,574 $ 3,381 2,425
======== ======== =======
Income taxes paid........................................... $ 6,690 $ 7,424 3,678
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 107
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) ORGANIZATION AND GOING CONCERN
Business, Operations, Future Activities and Russian Business Environment
The Company was previously incorporated under the laws of Ontario, Canada.
Effective February 28, 1997, PLD Telekom Inc. ("PLD") was incorporated in the
United States as a Delaware corporation. Through its majority-owned and
controlled subsidiaries, the Company is a provider of local, long distance and
international telecommunications services in the former Soviet Union.
The Company's telecommunications businesses are at various stages of
development and are growing rapidly in an emerging economy which, by its nature,
has an uncertain economic, political and regulatory environment. The general
risks of operating businesses in the former Soviet Union include the possibility
for rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations.
Ultimate recoverability of the Company's investments is dependent upon its
ability to achieve and maintain profitability, which is dependent to a certain
extent on the stabilization of the economies of the former Soviet Union, the
ability to maintain the necessary telecommunications licenses and the ability to
obtain adequate financing to meet capital commitments.
In recent years, Russia has undergone fundamental political and economic
change. As a result, operations carried out in Russia involve significant risks
which are not typically associated with many other world markets. Instability in
the market reform process could subject the Company to unpredictable changes in
the basic business environment in which it currently operates. Uncertainties
regarding the political, legal, tax or regulatory environment including the
potential for adverse and retroactive changes in any of these, could
significantly affect the Company's ability to operate commercially. Management
is unable to estimate what changes may occur or the resulting effects of any
such changes on the Company's financial position or future results from
operations.
In 1998, the effects of adverse economic conditions in Russia included a
national liquidity crisis, devaluation of the rouble, higher interest rates, and
reduced opportunity for refinancing or refunding of maturing debts. In order to
partially address this situation, the Russian government announced policies
intended to address the structural weaknesses in the Russian economy and
financial sector.
While the policies are intended to alleviate the economic crisis in Russia,
the immediate effects could include slower economic growth or decline, a
reduction in the availability of credit and the ability to service debt, an
increase in interest rates, changes and increases in taxes, an increased rate of
inflation or hyperinflation, further devaluation of the rouble, and restriction
on convertibility of the rouble and movements of hard currency, an increase in
the number of bankruptcies of entities (including bank failures), labor unrest
and strikes resulting from the possible increase in unemployment, and political
unrest. These conditions and future policy changes could have a material adverse
effect on the operations of the Company and the realization and settlement of
its assets and liabilities.
The accompanying financial statements reflects management's assessment of
the impact of this economic situation on the financial position of the Company.
Actual results could differ from management's current assessments and such
differences could be material. In addition, the effect on the Company's
financial position of future developments and access to further financial
information concerning the Company's customers, suppliers, financiers, and
others and their ability to continue to transact with the Company cannot
presently be determined. The financial statements therefore may not include all
adjustments that might ultimately result from these adverse conditions.
F-9
<PAGE> 108
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Going Concern
The Company has suffered recurring losses and has a working capital
deficiency. Additionally, as discussed in note 8(a), 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 February 28, 1999 and defers payment of the notes
to April 30, 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 Senior Discount Notes
and the Convertible Subordinated Notes, which have an aggregate principal amount
of $149.5 million (see note 9). 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 (as
described in note 3(c)), 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 financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarized as follows:
(a) Basis of Presentation
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(U.S. GAAP).
The consolidated financial statements include the accounts of the Company
and its majority-owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Investments in
affiliates in which the Company has significant influence, but does not exercise
control, are accounted for under the equity method. Investments of the Company
over which significant influence is not exercised are carried under the cost
method.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31, 1998
and 1997, the Company's cash equivalents consist of term deposits of
approximately $1.4 million and $7.2 million, respectively.
F-10
<PAGE> 109
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Investments
Management determines the appropriate classification of its investments at
the time of purchase and classifies them as trading, available-for-sale or
held-to-maturity in accordance with the provisions of Statement of Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities." At December 31, 1998 and 1997, the Company's
investments which are held in escrow, consist of U.S. Treasury Bonds with a
carrying value of $14.9 million and $33.9 million, respectively, and have been
classified as available-for-sale. In accordance with SFAS 115, the Company
carries its available-for-sale investments at fair value, with unrealized gains
and losses reported as a separate line item in shareholders' equity. Due to the
short maturity period (1998 -- maturing on January 5, 1999 and 1997 -- maturing
on January 7, 1998), the carrying value of these investments approximates its
fair market value at December 31, 1998 and 1997.
(d) Revenue Recognition
The Company records telecommunication revenues as earned, at the time
services are provided.
(e) Inventory
Inventory is stated at the lower of average cost or net realizable value
and is composed of telephony products held for resale to customers.
(f) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Telecommunications equipment............................. 10 years
Buildings................................................ 28.5 years
Leasehold improvements................................... 10 years
Office furniture and equipment (including computer
equipment)............................................. 3-5 years
Software................................................. 5 years
</TABLE>
Interest cost incurred during the period of construction of property and
equipment is capitalized. The interest cost capitalized in 1998 and 1997
amounted to and $1,289,628 and $927,791, respectively.
(g) Intangible Assets
Telecommunications licenses are being amortized on a straight-line basis
over the terms of the licenses.
Goodwill represents the excess of the purchase price over the fair values
of the net assets acquired and is being amortized on a straight-line basis over
periods ranging from ten to twenty years.
Deferred financing costs represent costs incurred to issue debt. Deferred
financing costs are capitalized and amortized over the term of the related debt.
(h) Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, escrow funds, trade and other receivables, amounts due
from or to related parties, bank indebtedness and accounts payable approximate
fair value due to their short maturities. The fair value of long-term debt is
based on discounted cash flow analysis.
F-11
<PAGE> 110
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Reporting Currency and Foreign Currency Translation
The statutory accounts of the Company's consolidated subsidiaries are
maintained in accordance with local accounting regulations and are stated in
local currencies.
Local statements are adjusted to U.S. GAAP and then translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
(SFAS 52), "Foreign Currency Translation."
Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are measured in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations have been translated using the monthly average exchange
rates. Translation differences resulting from the use of these different rates
are included in the accompanying consolidated statements of operations.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income or expense in the period it occurs.
(k) Net Loss Per Common Share
Basic Earnings (Loss) per Share (EPS) is computed by dividing income or
loss by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options, at the beginning of the
period being reported on.
Net loss and weighted average shares outstanding used for computing diluted
loss per common share were the same as that used for computing basic loss per
common share for each of the years ended December 31, 1998, 1997 and 1996.
The Company had potentially dilutive common stock equivalents of
19,629,601, 11,715,914 and 10,285,080 for the years ended December 31, 1998,
1997 and 1996, respectively, which were not included in the computation of
diluted net loss per common share because they were antidilutive for the periods
presented.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
(m) Equity Compensation
The Company accounts for its stock option plan in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 123 which allows entities to
continue to apply the provisions of Accounting Principles Board ("APB") Opinion
No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based
F-12
<PAGE> 111
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method, as defined in SFAS No. 123, had been applied. The Company has elected to
apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure
required by SFAS No. 123. See Note 12.
(n) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(o) Comprehensive Income
SFAS 130, "Reporting Comprehensive Income," was issued in June 1997. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 as of January 1, 1998. For
the years ended December 31, 1998, 1997 and 1996 comprehensive loss was equal to
consolidated net loss reported on the consolidated statement of operations. As
SFAS 130 only requires additional disclosures in the Company's consolidated
financial statements, its adoption did not have any impact on the Company's
consolidated financial position or results of operations.
(p) Segments
SFAS No. 131 (SFAS 131), "Disclosure about Segments of an Enterprise and
Related Information," was issued in June 1997. SFAS 131 establishes standards
for the manner in which public companies should report information about
operating segments in annual financial statements and requires that those
companies report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 for its annual reporting in 1998.
(q) Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
(3) BUSINESSES AND ACQUISITIONS
The Company's key interests at December 31, 1998 include a 71% equity
interest in PeterStar Company Limited ("PeterStar"); a 50% equity interest in
ALTEL, formerly known as BECET International ("ALTEL"); an approximate 80%
equity interest in Technocom Limited ("Technocom"), which holds an approximate
49% equity interest in Teleport-TP ("Teleport-TP"); and a 50% interest in
BELCEL. The Company also owns 100% of Baltic Communications Limited ("BCL") and
100% of CPY Yellow Pages Limited ("Yellow Pages").
(a) PeterStar
PeterStar is a joint stock company registered in 1992 under the laws of the
Russian Federation to provide international and domestic telecommunications
services for St. Petersburg. In November 1994, PeterStar was
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PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
granted a new license to provide these services for a further ten years. The
license was reissued in June 1996 and requires that at least 74,200 lines be
introduced by June 1999. At December 31, 1998, PeterStar had 168,166 lines in
place.
In October 1992, the Company acquired a 50% interest in PeterStar for
consideration of $19.8 million. An additional 9% interest was acquired in March
1994 for consideration of $8.2 million and an additional 1% interest was
acquired in April 1996 for $1.8 million. All of the consideration through April
1996 has been allocated to telecommunications licenses. The Company's interest
in PeterStar is owned by its wholly owned subsidiary, NWE Capital (Cyprus)
Limited ("NWE Cyprus"), a company incorporated in Cyprus.
Effective September 30, 1998 the Company acquired an additional 11%
interest in PeterStar by acquiring 100% of the shares of PLD Holdings Limited, a
Bermuda company and the owner of that 11% interest, from News America
Incorporated ("News") -- which had acquired the interest from Cable and Wireless
plc. News is the owner, through an affiliate, of 38% of the Company's Common
Stock. The acquisition was accounted for by the purchase method of accounting.
The total consideration for the acquisition was approximately $33.4 million (the
Company issued 3,826,041 shares of its common stock with a market value of $8.73
per share) and was allocated to telecommunication licenses, goodwill and
purchase of minority interests in the amounts $3.4 million, $24.2 million and
$5.8 million, respectively. The goodwill will be amortized on a straight-line
basis over 20 years and the telecommunication license will be amortized over its
remaining term, which expires in 2004.
(b) ALTEL
ALTEL provides cellular services pursuant to a 15-year license to operate a
cellular telephony system in Kazakhstan until February 2009. The Company's 50%
interest in ALTEL is owned by its wholly owned subsidiary, Wireless Technology
Corporations Limited ("WTC"), a company incorporated in the territory of the
British Virgin Islands, which in turn is owned by NWE Cyprus. In connection with
the acquisition of ALTEL, the Company was committed to provide financing of up
to $3.0 million to fund a number of special telecommunication projects
undertaken by the Ministry of Communication in Kazakhstan. Such amount, which
was paid in 1995, has been treated as additional cost of the Company's
investment in ALTEL.
(c) Technocom
The Company subscribed for preferred shares of Technocom, a company
incorporated in the Republic of Ireland, in the amount of $40.0 million, of
which $20.0 million was subscribed for on acquisition in 1994 and the remaining
$20.0 million was subscribed for in June 1996 from the proceeds of the financing
described in note 9. The preferred shares entitle the Company to the first $20.0
million of Technocom's dividend distributions. After receipt of such preference
dividends, all the preferred shares will be converted into a single ordinary
share of Technocom. The carrying value of the Company's investment in
Teleport-TP and minority interest were each increased by a total of $10.0
million in 1995/1996 to reflect the minority interest's ultimate share in the
preferred equity.
On November 26, 1997, PLD acquired an additional 59 ordinary shares of
Technocom increasing its ownership from 50.1% to 80.4%. The total consideration
for the acquisition was $32.5 million, plus acquisition costs of approximately
$840,000 and was allocated to telecommunications licenses, goodwill, and
purchase of minority interest in the amounts of $16.0 million, $11.1 million,
and $6.0 million, respectively. Approximately $24.8 million was paid in cash and
the remainder in shares of PLD common stock (1,316,240 shares of common stock
with a fair market value of $5.85 per share, which cannot be sold until the year
2000). The cash element of the transaction was funded with escrowed funds and
with the proceeds from the Company's 12% Revolving Credit Notes (see note 8).
F-14
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PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, on November 26, 1997, the Company restructured certain "put
and call" arrangements with the other two shareholders of Technocom. Under these
arrangements, as originally structured, the remaining ordinary shares of
Technocom held by these shareholders (29 shares, or approximately 14.6% of the
total ordinary shares outstanding, and 10 shares, or approximately 5% of the
total ordinary shares outstanding) were to have been independently valued in
1999 and the Company had the right to call, and the other two shareholders had
the right to put, their respective interests at the per share value established
by the valuation. The arrangements were restructured as a part of the
transaction whereby PLD acquired an additional interest in Technocom from such
shareholders, and PLD requested, and the shareholders agreed to, such
restructuring in consideration for PLD agreeing to acquire part of their
interests.
These arrangements were restructured as follows. In the case of the holder
of the 29 shares, while the date on which the put or call could be exercised did
not change, the valuation procedure was eliminated and the "put and call" price
for its interest was set at a fixed $17.5 million. In the case of the holder of
the 10 shares, 2 of its remaining 10 ordinary shares were made subject to a new
put and call arrangement which would come into effect in 1998, with the "put and
call" price to be $1 million or, at the holder's option, that number of shares
of common stock which results from dividing $1 million by the lower of $5.85 and
the average closing price of such shares over the preceding 10 trading days. The
remaining 8 ordinary shares continue to be subject to the existing put and call
arrangements in 1999, except that the valuation will be made by the Company and
the amount paid pursuant to the exercise of either the put or the call cannot
exceed $9.6 million or be less than $6.7 million.
Both of the other two shareholders of Technocom provide services to
Technocom and PLD under management contracts with Technocom (see note 13).
On December 20, 1996, Technocom acquired 55.5% of the outstanding shares of
J.V. Technopark Limited ("Technopark") from the minority shareholders of
Technocom for $3.0 million. Technopark is incorporated in Russia and owns a 7.5%
equity interest in Teleport-TP and commercial property in Moscow. The
acquisition of Technopark has been accounted for using the purchase method.
(d) Teleport-TP
The Company currently controls 56% of the voting interests in Teleport-TP
through its ownership of Technocom (see note 3(c)), which has a 49.3% equity
interest in Teleport-TP. The Company originally acquired a 41.8% equity
investment in Teleport-TP through its acquisition of 50.8% of the outstanding
common stock of Technocom. In May 1996, Technocom acquired an additional 3.3%
indirect equity interest in Teleport-TP for cash consideration of $2.0 million,
substantially all of which was allocated to Teleport-TP's telecommunications
licenses. The additional interest was acquired through a company controlled by a
minority shareholder of Technocom.
Teleport-TP is a Russian joint stock company which holds four principal
operating licenses. The first license expires in November 2004 and authorizes
Teleport-TP to provide long distance and international telecommunications
services to private networks within Moscow and, to a limited extent, elsewhere
in the Russian Federation. Teleport-TP is required by the terms of the license
to have at least 10,500 subscribers (which is 70% of the maximum number of
subscribers permitted under the license) in place by October 1999. Under the
terms of the license agreement, there are no penalties should Teleport-TP not
attain the required number of lines.
The second license expires in October 2004 and permits the operation of
1,000 international leased circuits for the transmission of television and
telecommunications services. The third license, which expires in January 2002,
permits the provision of data services with interconnection to the public
network and requires capacity for 70,000 subscribers by December 2000. The
fourth license, which expires in May 2001, is an
F-15
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PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
overlay license which permits Teleport-TP to offer local, long distance and
international voice and data services which are interconnected to the public
telephone network in 40 regions across Russia.
As a result of the acquisition of Technopark, the Company consolidated
Teleport-TP's balance sheet at December 31, 1996. The results of operations of
Teleport-TP have been included in the consolidated statements of operations from
January 1, 1997.
Condensed financial information of Teleport-TP for the year ended December
31, 1996 is as follows:
<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Telecommunications revenues................................. $11,104
Cost of sales............................................... 6,534
-------
Gross profit......................................... 4,570
-------
Operating expenses:
General and administrative.................................. 2,617
Other taxes................................................. 592
Depreciation of assets under capital lease.................. 1,016
Other depreciation and amortization......................... 200
-------
4,425
-------
Operating income..................................... 145
Interest on capital lease................................... (531)
Other interest and financing charges, net................... 251
-------
Earnings/(loss) before income taxes.................. (135)
Income taxes................................................ --
-------
Net loss............................................. $ (135)
=======
Technocom's interest therein................................ (75)
Amortization of excess purchase price....................... (2,477)
-------
Share of Teleport-TP loss............................ $(2,552)
=======
</TABLE>
Teleport-TP's revenues for the years ended December 31, 1996 include sales
to its minority shareholder of $4.6 million, making Teleport-TP to some extent
economically dependent on its minority shareholder.
Teleport-TP's cost of sales for the year ended December 31, 1996 includes
costs of $2.9 million charged by a company controlled by one of the minority
shareholders of Technocom.
General and administrative expenses for the year ended December 31, 1996
include costs of $576,000 related to marketing services provided by a company
controlled by one of the minority shareholders of Technocom.
(e) BCL
Effective April 1, 1996, the Company acquired all of the outstanding shares
of BCL from Cable & Wireless and its Russian partners for cash consideration of
$3.0 million, plus acquisition costs of $253,000. BCL is a Russian joint stock
company which provides international direct dial, international pay phone and
private line services to a corporate customer base in St. Petersburg. BCL's
results of operations are included in the consolidated financial statements from
the date of acquisition.
The acquisition has been accounted for using the purchase method.
F-16
<PAGE> 115
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Ultra Pass Systems Limited
During the second quarter of 1998, the Company purchased 98% of the
authorized and issued share capital of Ultra Pass Systems Limited ("Ultra
Pass"), from the shareholders of Ultra Pass. In consideration for the purchase
of the Ultra Pass shares, the Company issued 196,458 of shares of its Common
Stock, par value $0.01 per share, having an aggregate market value of
approximately $1.8 million and paid $500,000 in cash. The acquisition has been
accounted for by the purchase method of accounting and the purchase price has
been allocated to licenses and software in the amounts of $0.8 million and $1.5
million, respectively.
(g) CommStruct International Byelorussia BV
Effective September 30, 1998 the Company acquired a 50% interest in BELCEL,
a mobile telephone business in the Republic of Belarus, together with certain
intercompany indebtedness, from Cable and Wireless plc. The Company acquired its
50% interest in BELCEL by acquiring all of the shares of CommStruct
International Byelorussia BV (CIBBV), a corporation organized under the laws of
the Netherlands, which owned such 50% interest. The acquisition was accounted
for by the purchase method of accounting. The total consideration for the
acquisition was 500,000 shares of common stock valued at approximately $4.4
million, which has been allocated as follows:
<TABLE>
<S> <C>
Fixed assets................................................ $1,211
Investment in and advances to BELCEL........................ 3,184
Current assets.............................................. 81
Current liabilities......................................... (111)
------
$4,365
======
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consist of the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Telecommunications equipment:
Installed................................................. $152,454 $123,902
Uninstalled............................................... 33,649 10,396
Buildings................................................... 6,114 5,434
Office furniture and equipment (including computer
equipment)................................................ 7,524 6,129
Leasehold improvements...................................... 6,734 6,082
Advances to equipment suppliers............................. 3,124 4,252
Motor vehicles.............................................. 1,248 1,925
-------- --------
Total property and equipment...................... 210,847 158,120
Less: accumulated depreciation.............................. (41,910) (23,122)
-------- --------
Property and equipment, net....................... $168,937 $134,998
======== ========
</TABLE>
Property and equipment at December 31, 1998 and 1997 includes
telecommunications equipment with a cost of $17.6 million, $16.5 million,
respectively which has been pledged under the terms of the long-term installment
agreements (see note 9).
F-17
<PAGE> 116
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) OTHER INVESTMENTS
Other investments at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Equity investment in Belcel(a).............................. $2,830 $ --
Equity investment in MTR-Sviaz(b)........................... 1,752 3,128
Equity investment in Rosh Telecom........................... 92 542
Investment in Gorizont-RT, at cost.......................... 224 224
Other investments, at cost.................................. 285 142
------ ------
Total............................................. $5,183 $4,036
====== ======
</TABLE>
(a) Equity Investment in Belcel
As discussed in note 3(g), the Company acquired a 50% interest in BELCEL, a
mobile telephone business in Belarus, together with certain intercompany
indebtedness, from Cable and Wireless plc. The Company acquired its 50% interest
in BELCEL by acquiring all of the shares of CommStruct International Byelorussia
BV (CIBBV), a corporation organized under the laws of the Netherlands, which
owned such 50% interest. Belcel is accounted for using the equity method.
(b) Equity Investment in MTR-Sviaz
Technocom has a 49% equity interest in a Russian joint stock company,
MTR-Sviaz, which is a joint venture with Mosenergo, the Moscow city power
utility, to modernize and commercialize a portion of Mosenergo's internal
telecommunications network. MTR-Sviaz holds two operating licenses and commenced
operations in late 1996. The first license authorizes MTR-Sviaz to provide local
and long distance leased line services within the city and region of Moscow.
Under the second license, MTR-Sviaz is authorized to provide local telephone
services through interconnection (via the Mosenergo network) with the public
switched telephone network within the city and region of Moscow. During 1998 and
1997, Technocom leased telecommunications equipment and access rights with a net
book value of $4.0 million and $4.7 million, respectively, to MTR-Sviaz under
finance leases. For the years ended December 31, 1998 and 1997, the Company
recorded finance lease income of $1.7 million and $2.0 million, respectively,
related to these leases. At December 31, 1998 and 1997, the investment in
MTR-Sviaz is composed of a finance lease receivable of $3.6 million and $4.5
million, offset by the Company's share of losses of MTR-Sviaz of $1.9 million
and $1.4 million, respectively.
Future minimum lease payments receivable from MTR-Sviaz, by year and in the
aggregate, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................ $2,530
2000........................................................ 1,704
2001........................................................ 547
2002........................................................ 547
2003........................................................ 547
Thereafter.................................................. 1,411
------
Total minimum lease payments......................... 7,286
</TABLE>
F-18
<PAGE> 117
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Amounts representing interest............................... (3,667)
------
Present value of minimum lease payments..................... $3,619
======
</TABLE>
(c) Investment in St. Petersburg Intercity & International Telephone (SPMMTS)
The Company held a 10.4% equity interest (13.9% voting interest) in SPMMTS,
a privatized Russian company which operates the long distance and international
gateway in St. Petersburg. In June 1997, the Company sold its investment in
SPMMTS for proceeds of $17.2 million. A gain of $1.0 million is included in gain
on disposal of investments and property and equipment in the consolidated
statement of operations.
(6) OTHER ASSETS
Other assets at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred financing costs, net of accumulated amortization of
$3,615 and $1,836......................................... $ 6,482 $7,811
Deferred charges............................................ -- 861
Other....................................................... 3,463 4,384
------- ------
$ 9,945 $13,506
======= ======
</TABLE>
(7) CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents at December 31, 1998 and 1997
consist of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents on deposit:
In Russia and Kazakhstan.................................. $ 3,468 $ 7,611
Outside Russia and Kazakhstan............................. 1,111 9,645
------- -------
$ 4,579 $17,256
======= =======
</TABLE>
(8) SHORT-TERM BORROWINGS
The Company's short-term borrowings at December 31, 1998 and 1997 consist
of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
12% Revolving Credit Notes(a)............................... $13,420 $15,420
Notes payable(b)............................................ 4,704 4,000
Bank loan facility(c)....................................... -- 900
------- -------
$18,124 $20,320
======= =======
</TABLE>
(a) 12% Revolving Credit Notes
In November 1997, the Company issued $12.4 million in Series A secured
revolving credit notes (the "Series A Notes"), and $3.1 million in Series B
revolving credit notes (the "Series B Notes"), to The Travelers Insurance
Company and The Travelers Indemnity Company (collectively, the "Travelers
Parties").
F-19
<PAGE> 118
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Both the Series A Notes and the Series B Notes are secured by the Company's
inventory and accounts receivable. In addition, the Series A Notes are secured
by 28 of the 59 Technocom ordinary shares acquired (see note 3(c)). In addition
to issuing the Series A and Series B Notes, the Company also issued to the
Travelers Parties a total of 423,000 warrants to purchase Common Stock at $8.625
at any time up to December 31, 2008 (the "Travelers Warrants"). These warrants
have been valued at $423,000 and were amortized over the original term of the
revolving credit notes.
Both the Series A and B Notes bear interest at an annual rate of 12%,
payable monthly in cash. This interest rate increased from 12% to 15% on June 1,
1998 as the Company did not raise $20.0 million in additional equity by May 31,
1998. The Series A and Series B Notes were required to be amortized starting in
July 1998.
Pursuant to the terms of the Series A Notes and the Series B Notes, the
Company had the option of making certain "targeted reductions in commitment"
with respect to such Notes commencing in July 1998, or of issuing additional
warrants to purchase shares of the Company's Common Stock (the "Additional
Warrants") at an exercise price of $8.625 each, expiring on December 31, 2008.
The Company elected not to make any such "targeted reductions in commitment"
and, as a result, issued a total of 182,000 Additional Warrants to the Travelers
Parties. These warrants have been valued at $182,000 and were amortized over the
remaining original term of the debt.
The Company made required amortization payments due with respect to the
Series B Notes on July 31 and August 31, 1998. The $1.1 million balance due on
the Series B Notes was payable in full on September 30, 1998 but, as a result of
News issuing a guarantee in respect of the amount due, the maturity date was
deferred by the Travelers Parties to December 31, 1998.
The $1.0 million required payments due on the Series A Notes on October 31
and November 30, 1998 were also deferred by the Travelers Parties to December
31, 1998, also as a result of News issuing guarantees in respect of these
amounts due.
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 $13.42 million.
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 February 28, 1999 and defers
payment of the Notes to April 30, 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 Travelers Warrants and the Additional
Warrants has been reset at $0.01 per share.
On the basis that the Travelers Parties have only reserved their rights in
relation to the Default Warrants and the reset of the exercise price of the
Travelers Warrants and the Additional Warrants, the Company has taken the
position that: (i) the Default Warrants need not be recognized since they have
not been issued; and
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<PAGE> 119
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) revaluation of the Travelers Warrants and Additional Warrants to reflect an
exercise price of $0.01 per share is not required.
(b) Notes Payable
Notes payable at December 31, 1998 include a promissory note issued to
Scientific Atlanta, Inc. for $1.2 million on May 20, 1998, in settlement for
equipment and services, and due on November 20, 1999.
Also included are notes payable totalling $3.5 million issued to News in
November and December 1998.
On November 30, 1998 (but effective September 30, 1998), the Company
entered into a revolving credit agreement with News (the "News Revolving Credit
Agreement") under which News agreed to advance up to $8.1 million to the
Company. On March 22, 1999, News increased the amount it would advance to $9.1
million. Each advance under the News Revolving Credit Agreement bears interest
at an annual rate of 20% and is repayable on June 30, 1999. Advances are
evidenced by notes which, together with interest thereon, are convertible at
News' option into shares of Common Stock of the Company at conversion rates
determined as of the date of issue of the applicable note. In addition, in the
event that News guarantees obligations of the Company, a note is issued
reflecting the Company's reimbursement obligation should such guarantee be
called. Amounts so guaranteed are treated as advances under the News Revolving
Credit Agreement, meaning that they count with respect to the $9.1 million
ceiling on total advances. In addition, in the event a guarantee is called, the
Company will owe interest on its reimbursement obligation at the annual rate of
20% calculated from the date payment by News is made under its guarantee. Notes
issued in respect of reimbursement obligations, together with interest thereon,
are also convertible into shares of Common Stock at conversion rates determined
as of their date of issue. News can cease making advances at any time and for
any reason. Currently, however, the full amount available under the News
Revolving Credit Agreement has been advanced or applied in respect of News'
guarantees. Of the total, notes aggregating $3.1 million have been issued in
respect of guarantees of the Series A and Series B Notes as described in (a)
above.
Notes payable at December 31, 1997 consisted of a promissory note issued to
Scientific Atlanta on June 10, 1997. The promissory note, in settlement of
equipment and services, was paid on June 10, 1998.
(c) Bank Loan Facility
At December 31, 1998, the Company had no bank loan facility. In December
1997, PeterStar entered into a $2.0 million, one-year loan facility with BNP
Dresdner Bank for the purchase of telecommunications equipment. Interest was
charged on borrowed amounts at three-month LIBOR plus 2.5% per annum. The
amounts drawn on the loan facility at December 31, 1997 were $900,000. The bank
indebtedness was guaranteed by the Company.
(9) LONG-TERM DEBT
The Company's long-term debt at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
14% Senior Discount Notes(a)................................ $112,897 $ 95,714
9% Convertible Subordinated Notes(a)........................ 26,500 26,500
Supplier financing(b)....................................... 9,233 11,302
Obligation under capital lease(b)........................... 3,184 --
-------- --------
Total............................................. $151,814 $133,516
======== ========
</TABLE>
F-21
<PAGE> 120
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(a) 14% Senior Discount Notes and 9% Convertible Subordinated Notes
On June 12, 1996, the Company completed a $149.5 million private placement
consisting of: (i) 123,000 Units consisting of $123.0 million 14% Senior
Discount Notes ("Senior Notes") due 2004 and ten-year Warrants ("Placement
Warrants") to purchase a total of 4,182,000 shares of Common Stock ("Placement
Warrant Shares") at a price of $6.60 per share; and (ii) $26.5 million 9%
Convertible Subordinated Notes ("Convertible Notes") due 2006, convertible into
Common Stock of the Company at a price of $6.90 per share. The Placement
Warrants became separable from the Senior Notes on December 10, 1996.
The 123,000 Units were issued at a discount for gross proceeds of $87.7
million, of which $13.6 million was allocated to the Placement Warrants and
$74.1 million was allocated to the Senior Notes for accounting purposes. The
Senior Notes had a zero coupon until December 1, 1998. After such date, the
notes require semi-annual cash interest payments on June 1 and December 1. The
difference between the carrying value and the principal amount of $123.0 million
is being charged to earnings on an effective yield basis which, together with
cash interest payments, results in an effective yield of 16.8%.
The Convertible Notes require semi-annual cash interest payments on June 1
and December 1.
The terms of the Senior Notes required the Company to raise additional
equity of at least $20.0 million by May 31, 1998. The Company did not raise the
additional equity, 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 Company is party to a Registration Rights Agreement pursuant to which
the Senior Notes were to have been exchanged for registered securities and the
Convertible Notes registered for the shelf by October 1996. Failure to cause the
registration to become effective in October 1996 resulted in additional interest
payable at a rate of $0.01 per week per $1,000 of accreted value of the Senior
Notes and principal amount of the Convertible Notes, increasing by $0.01 per
week for each 90-day period that the securities were not registered.
On July 30, 1998, the Securities and Exchange Commission declared effective
the registration statements relating to: (i) the exchange offer (the "Exchange
Offer") pursuant to which the outstanding Senior Notes (the "Outstanding Senior
Notes") would be exchanged for identical Senior Notes which had been registered
under the Securities Act of 1933 (the "Exchange Notes"); (ii) the resale by the
holders thereof of the Convertible Notes and the shares of Common Stock issuable
upon the conversion thereof; and (iii) the resale by the holders thereof of the
Placement Warrants and the Placement Warrant Shares. As a result of the
effectiveness of the registration statement relating to the Convertible Notes
and the Common Stock issuable upon conversion thereof, additional interest
ceased to be payable with respect to the Convertible Notes on July 30, 1998.
The Exchange Offer with respect to the Senior Notes commenced on August 28,
1998 and was completed at the close of business on October 9, 1998, with the
holders of 100% of the Outstanding Senior Notes tendering such Notes for
Exchange Notes. Upon completion of the Exchange Offer, the Exchange Notes were
issued in exchange for such Outstanding Senior Notes, in the form of a global
Exchange Note held through the facilities of the Depository Trust Company. As a
result of the completion of the Exchange Offer, additional interest ceased to be
payable with respect to the Senior Notes on October 9, 1998.
All, or a portion, of the Senior Notes are redeemable at the option of the
Company after June 13, 2001 at 108% of the principal amount plus accrued and
unpaid interest, reducing to 104% for the year commencing June 1, 2002 and 100%
on or after June 1, 2003.
The Convertible Notes are redeemable at the option of the Company on or
after June 1, 2000 under certain conditions at a redemption price equal to the
principal amount plus accrued and unpaid interest.
F-22
<PAGE> 121
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Senior Notes and the Convertible Notes were issued under the terms of
Indentures dated May 31, 1996. Pursuant to the Indentures, the Company has
pledged its investments in NWE Cyprus (which holds the Company's interests in
PeterStar, WTC, and Yellow Pages), WTC (which holds the Company's interest in
ALTEL), BCL, a wholly-owned special purpose leasing subsidiary incorporated in
Cyprus, a wholly-owned special purpose subsidiary incorporated in Delaware
(since mid-1998), and the Company's investment in preferred stock of Technocom.
In addition, each of these subsidiaries (except Technocom) have guaranteed the
Senior Notes and the Convertible Notes.
A portion of the net proceeds of $105.0 million (after agent's commission
and expenses) was used to meet the Company's $20.0 million commitment to
Technocom (see note 3(c)) and to repay a revolving credit facility in the amount
of $22.5 million. Under the terms of the Indentures, $46.0 million was deposited
into an escrow account which is invested in eligible cash equivalents, as
defined by the Indentures. The escrow funds are also pledged as security for the
Company's obligations under the Indentures. Escrow funds may be disbursed for
purposes of making qualifying investments of up to $9.0 million in
telecommunications companies operating in Russia or Kazakhstan, or for purposes
of investing in telecommunications equipment through the Company's special
purpose leasing subsidiary, which then leases that equipment to the Company's
operating subsidiaries. Investments in leases are also pledged as security under
the Indentures and all payments received under the terms of the leases are
required to be deposited into a separate escrow account, to be used to purchase
additional telecommunications equipment for lease. On or after November 30,
1998, the Company must also maintain sufficient funds in the escrow accounts to
meet the next interest payment due on both the Senior Notes and Convertible
Notes.
In 1997, based upon the Company's experience in operating under the terms
of the Indentures since they were first executed in June 1996, the Company made
the determination to solicit the holders of the Senior Notes and the Convertible
Notes with a view to making certain amendments to the Indentures governing such
Notes, intended to give the Company more flexibility in conducting its business
and also to clarify certain provisions of those Indentures.
Under each of the Indentures, the consents of holders of not less than a
majority in principal amount at stated maturity of each of the Senior Notes and
the Convertible Notes are required to authorize their amendment.
On March 4, 1998, the Company mailed to the holders of record on March 3,
1998 of the Senior Notes and the Convertible Notes a consent solicitation
statement (the "Consent Solicitation"). Pursuant to the Consent Solicitation,
the Company offered to each holder of the Senior Notes who consented to the
amendment of the Senior Note Indenture, a five-year warrant to purchase 1.8
shares of Common Stock at a price of $6.90 per share for each $1,000 in unpaid
principal amount at stated maturity of the Senior Notes held by such holder, and
to each holder of the Convertible Notes who consented to the amendment of the
Convertible Note Indenture a five-year warrant to purchase 2 shares of Common
Stock at a price of $6.90 per share for each $1,000 in unpaid principal amount
of the Convertible Notes held by such holder.
As of close of business on March 18, 1998, when the solicitation period
ended, parties holding 100% in principal amount at stated maturity of the Senior
Notes and 85.7% in principal amount at stated maturity of the Convertible Notes
had consented to the amendments. Pursuant to such consents, The Bank of New
York, as trustee under the Indentures, the Company and certain other parties
executed a supplemental indenture bringing the amendments to the Indentures and
certain related documents into effect. This supplemental indenture incorporated
a range of amendments to the Indentures of June 1996, the most important of
which -- from an operational perspective -- was to broaden the range of
transactions by which the Company can use escrowed funds in order to make
telecommunications assets available to its operating companies. The Company has
recognized $266,800 in deferred financing costs as a result of the issuance of
warrants, which is being amortized over the remaining life of the Senior Notes
and Convertible Notes.
F-23
<PAGE> 122
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998 and 1997, the fair value of the Convertible Notes and
Senior Notes approximates $76.9 million and their carrying value respectively.
(b) Supplier Financing and Obligation Under Capital Lease
Amounts payable under the terms of the supplier financing and capital lease
arrangements are as follows (see notes 4):
<TABLE>
<CAPTION>
YEAR AMOUNT
- - ---- --------------
(IN THOUSANDS)
<S> <C>
1999........................................................ $ 6,332
2000........................................................ 6,395
2001........................................................ 4,647
2002........................................................ 1,958
2003........................................................ 855
-------
20,187
Less: amounts representing interest......................... (2,697)
-------
17,490
Current portion............................................. 5,073
-------
Long-term portion........................................... $12,417
=======
</TABLE>
The above amounts have been calculated using interest rates of 5.5% to
8.5%.
(10) SHAREHOLDERS' EQUITY
(a) Common Stock
On February 28, 1997, as a result of the Company's continuance as a
Delaware corporation, the authorized capital stock was changed from an unlimited
number of common shares without nominal or par value to 100,000,000 common
shares with a par value of $.01 per share. As a result of the change in the par
value, the Common Stock was decreased by $180.6 million and additional paid-in
capital was increased by the same amount.
(b) Preferred Stock
The Company had the following preferred shares issued and outstanding at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
NUMBER OF
SHARES 1998 1997
--------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Series II................................................... 405,217 $ 4 $ 4
Series III.................................................. 41,667 -- --
--- ---
$ 4 $ 4
=== ===
</TABLE>
In addition, the capital stock was also changed from an unlimited number of
preferred shares issuable in series to 100,000,000 preferred shares with a par
value of $.01 per share issuable in series. As a result of the change in par
value, the preferred stock has been reflected at its par value in the 1997 and
1998 consolidated financial statements.
The Series II and III preferred shares, issued at a price of Cdn.$1 (US
$0.74) per share, are redeemable at the option of the Company at Cdn.$1 per
share. The shares do not pay dividends and holders thereof do not have voting
rights.
F-24
<PAGE> 123
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Shares Reserved
In addition to stock options outstanding (see note 12), the Company has
reserved 4,182,000 common shares for issuance on exercise of the Placement
Warrants and 3,840,580 common shares on conversion of outstanding Convertible
Notes (see note 9). In addition, at December 31, 1998, the Company has 400,000
warrants outstanding to purchase common shares of the Company at a
weighted-average exercise price of $6.69 of which 250,000 warrants at an
exercise price of Cdn.$11.31 were granted to Cable and Wireless plc in 1994 (and
purchased by News in August 1998), and 100,000 warrants at an exercise price of
US$4.70 were granted in 1996 to the agent in relation to the debt financing
described in note 9. All these warrants expire five years after the date of
grant.
In connection with the issuance of the Series A and Series B Notes in
November 1997 (see note 8(a)), the Company issued to the Travelers Parties a
total of 423,000 warrants to purchase Common Stock at $8.625 at any time up to
December 31, 2008. In addition, between July and November 1998, the Company
elected to issue an additional 182,000 warrants to the Travelers Parties, on the
same terms as those issued in November 1997, instead of making certain targeted
amortization payments on the Series A and Series B Notes.
At the end of March of 1998, in connection with the Consent Solicitation
(see note 9(a)), the Company issued a total of 123,000 five-year warrants to
purchase 1.8 shares of Common Stock at $6.90 per share to the holders of the
Senior Notes, and a total of 22,700 five-year warrants to purchase 2 shares of
Common Stock at a price of $6.90 per share to the holders of the Convertible
Notes. If all these warrants are exercised, the Company will issue a total of
266,800 shares of Common Stock.
(11) INCOME TAXES
The geographic components of loss before income taxes and minority interest
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
United States...................................... $(36,570) $(35,163) $ --
Canada............................................. -- (20,829)
Russia and Kazakhstan.............................. 13,009 31,735 14,558
-------- -------- --------
$(23,561) $(23,501) $ (6,271)
======== ======== ========
</TABLE>
The provision for income taxes, which relates substantially to current
income taxes in the Company's Russian and Kazakh businesses, differs from the
United States (34% -- February 28, 1997 to December 31,
F-25
<PAGE> 124
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
199? and 35% in 1998) and Canadian (44% -- January 1, 1995 to February 27, 1997)
Federal and state/provincial statutory tax rates as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision for income taxes at statutory rates....... $(8,246) $ (1,166) $ (2,760)
Add/(deduct) the tax effect of:
Non-deductible amortization of licenses and
goodwill....................................... 3,886 2,561 3,238
Other non-deductible expenses..................... 4,181 2,273 1,753
Concessions on capital expenditures............... (726) (3,854) (1,000)
Differences in Russian and Kazakh statutory tax
rates.......................................... (997) (210) (1,696)
Exchange differences.............................. (7,661) -- --
State tax, net of federal benefit................. (2,787) -- --
Other............................................. 452 -- --
Change in valuation allowance related to deferred
tax assets..................................... 21,762 8,135 4,134
------- -------- --------
Provision for income tax....................... $ 9,864 $ 7,739 $ 3,669
======= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Share issue costs......................................... $ -- $ --
Operating loss carryforwards.............................. 24,368 8,929
Capital loss carryforwards................................ -- --
Basis in assets........................................... 920 --
Other..................................................... 82 --
Expenses not yet deducted for Russian and Kazakh tax
purposes............................................... 19,736 18,646
-------- --------
45,106 27,575
-------- --------
Less: valuation allowance................................... (30,008) (8,246)
-------- --------
Net deferred tax assets................................ 15,098 19,329
Deferred tax liabilities:
Debt issue costs.......................................... -- (1,160)
Expenses not currently deducted for book purposes......... (14,622) (705)
Tax on revenues not yet realized for Russian tax
purposes............................................... (31) (17,464)
Fixed assets, principally due to difference in
depreciation........................................... (476) --
-------- --------
Deferred tax liabilities.................................... (15,129) (19,329)
-------- --------
$ (31) $ --
======== ========
</TABLE>
At December 31, 1998 and 1997, the Company had operating loss carryforwards
for United States (U.S.) federal income tax purposes of approximately $56.4
million and $24.1 million, respectively. In assessing the realizability of the
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax assets
F-26
<PAGE> 125
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
is dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning in making these assessments. As a result of various sales of
company stock and issuances of new stock, a change in ownership for Federal
income tax purposes may have occurred. This would subject the future use of the
Company's Federal net operating loss to an annual limitation.
At December 31, 1996, the Company had operating loss carryforwards for
Canadian income tax purposes of approximately $36.0 million and allowable
capital loss carryforwards of approximately $19.0 million. Upon the Company's
emigration to the United States in February 1997, the Company was deemed to
dispose of all its assets at fair value. As a result, a substantial portion of
the operating and capital loss carryforwards were utilized. Remaining losses do
not carry over for U.S. tax purposes.
(12) EQUITY COMPENSATION PLAN
The Company has an Equity Compensation Plan (the "Plan"), which was
approved by the shareholders at the Annual Meeting in June of 1997. The Plan
amends and supersedes in its entirety the PLD Telekom Inc. Stock Option Plan
(the "Prior Plan"). No further grants will be made under the Prior Plan
following the adoption of the Plan and grantees under the Prior Plan have the
option of continuing to have existing grants covered by the terms of the Prior
Plan, or having these grants instead covered by the terms of the Plan.
Pursuant to the Plan, the Company's Board of Directors may grant stock
options, stock appreciation rights, restricted stock and performance units to
directors, officers and key employees of, and certain consultants and advisors
to, the Company and its subsidiaries. The Plan is administered by a committee of
the Board of Directors of the Company consisting solely of "outside directors"
and to date awards under the Plan have been limited to stock options.
The exercise price of each option is generally equal to the fair market
value of the shares of PLD's common stock on the date of grant. The maximum term
for which options are exercisable is ten years. Options shall become exercisable
in accordance with such terms and conditions, consistent with the Plan, as may
be determined by the committee. However, stock options granted to Non-Employee
Directors are immediately exercisable.
On November 12, 1998 the Company's Board of Directors, wishing to further
incentivise management in light of the severe economic crisis in Russia and its
effect on the Company's share price, approved the granting of a total of
4,487,000 new stock options. 650,000 of these options were in respect of new PLD
employees and 3,837,000 were granted simultaneously with the cancellation of
3,837,000 options granted previously to existing employees and directors of the
Company. The options were granted with exercise prices of $3.00, $4.00 and $5.00
per share, as summarized in the table below. Options granted at $3.00 per share
vested immediately, options granted at $4.00 per share vest on November 12, 1999
and options granted at $5.00 per share vest on November 12, 2000. The market
price for the Company's shares on November 12, 1998 was $2.4375. The effect of
the cancellation and reissuance of these shares was to reduce the weighted
average exercise price of the Company's outstanding employee stock options to
$3.70 from $6.41 at the end of 1997.
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996 was $1.27, $2.51 and $2.11, respectively, on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1998 -- risk-free interest rate of 4.8%, expected
life of six years and expected volatility of 60%; 1997 -- risk-free interest
rate of 6.5%, expected life of six years and expected volatility of 40%; 1996
- - -- risk-free interest rate of 6.5%, expected life of five years and expected
volatility of 30%.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
recognizes compensation expense related to stock option grants only when the
fair market value of the related stock exceeds the exercise
F-27
<PAGE> 126
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
price on the date of grant. Had the Company determined compensation cost based
on the fair value at the date of grant for its stock options under SFAS 123, the
Company's loss would have been increased to $45.9 million ($1.30 per share),
$22.9 million ($0.71 per share) and $13.6 million ($0.43 per share) for the
years ended December 31, 1998, 1997 and 1996, respectively. The pro forma loss
for the year reflects only options granted since January 1, 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS 123 is
not reflected in the pro forma loss for the year because compensation cost is
reflected over the options' vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
During 1998, the Company granted 790,000 options for which the exercise
price on the date of grant was less than the fair market value of the related
stock. As a result, total non-cash compensation expense of $1.1 million will be
recognized over the vesting periods of the options, of which $0.8 million was
expensed during the year.
Changes in stock options outstanding are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICES
---------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995..................... 981,500 $6.61
Granted.............................................. 1,010,000 $7.38
Exercised............................................ (189,000) $5.25
Canceled............................................. (120,000) $5.93
---------- -----
Outstanding at December 31, 1996..................... 1,682,500 $7.25
Granted.............................................. 1,405,000 $5.27
Exercised............................................ (302,166) $5.68
Canceled............................................. (15,000) $5.25
---------- -----
Outstanding at December 31, 1997..................... 2,770,334 $6.41
Granted.............................................. 5,832,000 $4.54
Exercised............................................ -- $ --
Canceled............................................. (3,975,334) $6.83
---------- -----
Outstanding at December 31, 1998..................... 4,627,000 $3.70
========== =====
</TABLE>
At December 31, 1998 and 1997, the number of options exercisable was
2,725,327 and 382,500 and the weighted-average exercise price of those options
was $3.23 and $7.92, respectively.
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -----------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AT CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES 12/31/98 LIFE PRICE 12/31/98 PRICE
- - --------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.00 2,615,327 9.9 $3.00 2,615,327 $3.00
4.00 1,263,335 9.9 4.00 -- 4.00
5.00 608,338 9.9 5.00 -- 5.00
6.25 -- 10.12 140,000 1.0 8.51 110,000 8.71
</TABLE>
(13) RELATED PARTY TRANSACTIONS
(a) PeterStar has entered into a barter agreement with an indirect minority
shareholder under which the two parties have exchanged services valued at $2.7
million, $3.4 million and $3.0 million during 1998, 1997
F-28
<PAGE> 127
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and 1996, respectively. The amounts are recorded in the consolidated statements
of operations as telecommunications revenues and direct costs.
During 1998, PeterStar entered into a series of agreements with an indirect
minority shareholder under which PeterStar exchanged telecommunications
equipment for telecommunication and other facility infrastructures. The total
value of equipment exchanged during 1998 is $2.6 million. The infrastructure
received under this exchange has been valued at the same amount. As a result of
this arrangement PeterStar will be the sole provider of telecommunications
services to one of the districts of St. Petersburg.
During 1998, PeterStar paid a total of $1.2 million on behalf of an
indirect minority shareholder. This amount has been capitalized as a prepayment
in relation to the purchase of an exchange building.
(b) Direct costs for the years ended December 31, 1998, 1997 and 1996
include $4.4 million, $4.2 million and $3.3 million, respectively, paid to the
other shareholder of ALTEL in relation to the carriage of traffic over the
public telephone network. Balances outstanding of $0.5 million and $0.8 million
as of December 31, 1998 and 1997, respectively, in relation to these charges,
are included in due to related parties.
(c) Amounts due from related parties at December 31, 1998 include $4.7
million principal and interest due from MTR-Sviaz in relation to a finance lease
(see note 5(c)), $2.6 million due from a minority shareholder of PeterStar under
a long-term loan, and $2.9 million due from a company controlled by a minority
shareholder of Technocom for telecommunications services.
Amounts due from related parties at December 31, 1997 include $2.5 million
principal and interest due from MTR-Sviaz in relation to a finance lease (see
note 5(c)), $1.6 million and $3.0 million due from a minority shareholder of
PeterStar under short-term and long-term loans, respectively, and $2.2 million
due from a company controlled by a minority shareholder of Technocom for
telecommunications services.
(d) Amounts due to related parties at December 31, 1998 include a loan due
to the minority shareholder of Teleport-TP in the amount of $0.1 million, trade
payables of Teleport-TP in the amount of $3.2 million due to a company
controlled by one of the minority shareholders of Technocom, and payments due to
MTR-Sviaz for telephone services and connection charges in the amount of $0.2
million.
Amounts due to related parties at December 31, 1997 include a loan due to
the minority shareholder of Teleport-TP in the amount of $0.5 million, trade
payables of Teleport-TP in the amount of $3.2 million due to a company
controlled by one of the minority shareholders of Technocom, a loan due to a
company controlled by a minority shareholder of Technocom in the amount of $0.3
million, payments due to MTR-Sviaz for telephone services and connection charges
in the amount of $0.3 million, and an amount due to a company controlled by one
of the minority shareholders of Technocom for equipment received from them in
the amount of $0.2 million.
In 1998, 1997 and 1996, Technocom paid a total of $0.4 million, $0.2
million and $0.2 million, respectively, pursuant to two management contracts
with its two minority shareholders for provision of the services of two
directors of Technocom.
(e) The Company guaranteed telephone billing system lease payments of an
indirect shareholder of PeterStar totaling $2.5 million. Lease payments of $0.1
million were due quarterly until July 1998. At December 31, 1995, full provision
was made for all amounts paid to date under the guarantee and for all future
amounts. The balances of $0 and $0.4 million remaining under the lease as of
December 31, 1998 and 1997 are included in other current liabilities.
(f) General and administrative expenses for the years ended December 31,
1998, 1997 and 1996 include consulting fees of $5.6 million, $1.7 million and
$42,000, respectively, charged by a minority shareholder of PeterStar.
F-29
<PAGE> 128
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(g) The Company paid certain costs on behalf of, and made certain loans to,
PeterStar, resulting in an intercompany balance of approximately $27.0 million
at December 31, 1996. During 1997, an agreement was reached with the minority
shareholders to recapitalize PeterStar. The recapitalization of PeterStar in an
amount of $13.8 million was completed during September 1997, with such funds
being used to repay an equal amount of these advances. Negotiations with the
minority shareholders of PeterStar as to the repayment of the remaining
intercompany balance due to the Company were concluded in March 1998 and
resulted in a further reduction of approximately $5.3 million in PeterStar's
liability. The effect of this settlement was to increase minority interest
expense by approximately $2.1 million in 1997.
(h) Consulting fees of $0.4 million, $0.1 million, and $0.1 million for the
years December 31, 1998, 1997 and 1996, respectively, were charged to ALTEL by
the other shareholder of ALTEL. There was no balance outstanding as of December
31, 1998 and 1997 in relation to these charges.
(i) See also notes 3(c), (d), (e), 5(c) and 8(b).
F-30
<PAGE> 129
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) COMMITMENTS AND CONTINGENCIES
(a) Currency Licenses
Under applicable Russian currency control regulations, the Company's
Russian subsidiaries are required to have certain licenses from the Central Bank
of Russia to enable them to make payments of and accept receipts of hard
currency. While PeterStar, 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 such fines and penalties would
be material.
(b) Russian and Kazakh Taxation
Certain of the Company's Russian and Kazakh subsidiaries have accrued
profits and other taxes based on interpretations of the law which may ultimately
be disputed by the Russian and Kazakh 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.
The Russian taxation system is relatively new and is characterized by
numerous taxes and frequently changing legislation, which may be applied
retroactively and is often unclear, contradictory, and subject to
interpretation. Often, differing interpretations exist among numerous taxation
authorities and jurisdictions.
Taxes are subject to review investigation by a number of authorities, who
are enabled by law to impose severe fines, penalties and interest charges.
Generally, tax filings are subject to inspection for a period of six years. The
occurrence of a review does not preclude subsequent review.
These facts may create tax risks in Russia substantially more significant
than in other countries. Management believes that it has adequately provided for
tax liabilities based on its interpretation of tax legislation. However, the
relevant authorities may have differing interpretations and the effects could be
significant.
(c) Purchase Commitments
At December 31, 1998, PeterStar has commitments of approximately $3.4
million under long-term installment purchase agreements. The related contracts
provide for financing of the amounts over approximately five years.
(d) Transponder Capacity
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.
(e) Management Services
On January 1, 1998, ALTEL entered into a two year agreement with its other
shareholder, by which the shareholder would provide certain consulting services,
management support services and personnel expertise. Payments under this
agreement are 300,000 tenge per month ($3,580 at the December 31, 1998 exchange
rate) plus 1% of monthly gross revenues.
(f) Motorola, USA
Motorola, USA is the major supplier of ALTEL's network equipment. Under the
supply contract, ALTEL files preliminary purchase orders for the delivery of
equipment with a prepayment of 5% of the cost of the purchase order. Once a
purchase order is presented, ALTEL may be exposed to potential liabilities to
F-31
<PAGE> 130
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Motorola, USA in the amount of $1.2 million as at December 31, 1998.
(g) Operating Leases
As of December 31, 1998, the Company had long-term operating leases
primarily involving business facilities and equipment. The leases have varying
terms and contain renewal options. Future minimum lease payments under
non-cancelable operating leases consist of the following as of December 31, 1998
(in thousands):
<TABLE>
<S> <C>
1999........................................................ $1,524
2000........................................................ 1,376
2001........................................................ 1,040
2002........................................................ 886
2003........................................................ 872
Thereafter.................................................. 2,720
------
Total future minimum lease payments....................... $8,418
------
</TABLE>
Rent expense for the years ending December 31, 1998 and 1997 was $824,261
and $614,446 respectively.
(15) CANADIAN ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance
with U.S. GAAP which, in the case of the Company, conform with Canadian GAAP,
except as follows:
(a) Net loss for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss for the year, as reported................. $(42,811) $(20,566) $(12,461)
Non-cash interest on Convertible Notes............. (781) (508) (252)
-------- -------- --------
Net loss for the year under Canadian GAAP.......... $(43,592) $(21,074) $(12,713)
======== ======== ========
</TABLE>
Under Canadian GAAP, the Convertible Notes are a compound financial
instrument and the debt and equity elements of the instrument are separately
accounted for. For Canadian GAAP purposes, $13.9 million of the Convertible
Notes were classified as equity and $12.6 million were classified as debt on
issuance. Additional interest expense is charged to the consolidated statements
of operations to accrete the debt portion to the principal amount of $26.5
million at maturity which, together with cash interest payments, results in an
effective yield of 22.3%. Accordingly, long-term debt at December 31, 1998 and
1997 would amount to $139.5 million and $120.3 million, respectively, and
shareholders' equity would amount to $137.2 million and $140.4 million,
respectively, under Canadian GAAP.
Effective December 31, 1996, the Company changed its Canadian GAAP policy
with respect to pre-operating costs. Such costs may not be capitalized under
U.S. GAAP and, therefore, all such costs have been retroactively expensed for
Canadian GAAP purposes. The change in accounting policy decreased the Canadian
GAAP loss in 1995 by $636,000. The deficit at December 31, 1995 was increased by
$2.2 million.
Effective December 31, 1998, the Company adopted new Canadian accounting
standards for cash flow statements for Canadian GAAP purposes. These new
standards are substantially the same as U.S. GAAP reporting requirements for all
periods.
F-32
<PAGE> 131
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) OTHER EXPENSE
At the end of 1998, as a result of the economic conditions in Russia, the
Company re-evaluated certain assets. As a result, the Company: (a) determined
that $1.7 million of costs relating to transactions the Company no longer
intends to pursue, should be written off; (b) recorded a $2.0 million valuation
allowance related to a receivable from the minority shareholder of PeterStar.
Such receivable arose in the 1997 recapitalization of PeterStar, at which time
the Company advanced the minority shareholder the funds for its pro rata
contribution; and (c) recorded an approximate $3.2 million provision against a
finance lease receivable from one lessee.
In addition, during February 1999 the Company entered into a transaction
whereby it exchanged its ownership interest in a company whose sole asset was a
cargo ship, with a carrying value of $3.0 million, for a 37% interest in an
entity that is developing a telemedicine business in the FSU. The Company has
determined that the ownership interest has a fair value of approximately $1
million and, as a result, has written down the carrying value of the asset
exchanged to that amount.
(17) CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 QUARTERS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues................... $35,166 $ 39,240 $ 38,426 $ 32,528
Operating income..................... 7,199 5,922 972 (4,145)
Interest and other income............ 871 946 298 269
Interest expense..................... (5,190) (5,359) (5,714) (5,690)
Income taxes......................... 2,997 2,174 4,224 469
Minority interest.................... 3,665 3,869 381 1,471
Net loss for the period.............. (4,509) (5,358) (13,241) (19,703)
======= ======== ======== ========
Net loss per common share............ $ (0.14) $ (0.16) $ (0.36) $ (0.55)
======= ======== ======== ========
</TABLE>
Adjustments recorded in the fourth quarter of 1998, resulting principally
from the economic condition in Russia, are described in Note 16.
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues.................... $23,891 $26,389 $29,534 $34,610
Operating income...................... 2,481 2,634 2,872 4,031
Interest and other income............. 1,394 1,260 625 335
Interest expense...................... (4,269) (4,120) (4,457) (5,000)
Income taxes.......................... 1,074 2,366 2,048 2,251
Minority interest..................... 1,766 1,457 1,391 4,785
Net loss for the period............... (4,342) (3,725) (5,377) (7,122)
======= ======= ======= =======
Net loss per common share............. $ (0.14) $ (0.12) $ (0.17) $ (0.22)
======= ======= ======= =======
</TABLE>
Minority interest for the fourth quarter of 1997 includes $2.1 million in
connection with the settlement reached with the minority shareholders of
PeterStar (see note 13(g)).
F-33
<PAGE> 132
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) 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, income/(loss) before
income taxes and minority interest, and identifiable assets.
A summary of the Company's operations by geographic region is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Russia........................................... $105,527 $ 84,412 $ 42,661
Kazakhstan....................................... 39,549 30,012 19,305
Other............................................ 284 0 0
-------- -------- --------
Total revenues........................... $145,360 $114,424 $ 61,966
======== ======== ========
EBIT:
Russia........................................... $ 10,721 $ 21,603 $ 9,615
Kazakhstan....................................... 15,142 10,132 4,943
Other............................................ (49,424) (35,163) (20,829)
-------- -------- --------
Total EBIT............................... $(23,561) $ (3,428) $ (6,271)
======== ======== ========
Total assets:
Russia........................................... $251,142 $218,759
Kazakhstan....................................... 62,282 61,871
Other............................................ 38,684 54,956
-------- --------
Total assets............................. $352,108 $335,586
======== ========
</TABLE>
F-34
<PAGE> 133
PLD TELEKOM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Company's operations by segment is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
PeterStar........................................ $ 72,371 $ 54,536 $ 32,355
Technocom........................................ 22,180 21,188 4,401
ALTEL............................................ 39,549 30,012 19,305
BCL.............................................. 9,854 7,648 5,101
Other............................................ 1,406 1,040 804
-------- -------- --------
Total revenues........................... $145,360 $114,424 $ 61,966
======== ======== ========
Income/(loss) before income taxes and minority
interest:
PeterStar........................................ $ 21,401 $ 25,739 $ 8,846
Technocom........................................ (10,753) (5,037) (108)
ALTEL............................................ 15,142 10,132 4,943
BCL.............................................. 395 887 845
Other............................................ (49,746) (35,149) (20,797)
-------- -------- --------
Total income/(loss) before income taxes
and minority interest.................. $(23,561) $ (3,428) $ (6,271)
======== ======== ========
Total assets:
PeterStar........................................ $132,814 $ 89,196
Technocom........................................ 107,722 116,846
ALTEL............................................ 62,282 58,249
BCL.............................................. 6,700 8,101
Other............................................ 42,590 63,194
-------- --------
Total assets............................. $352,108 $335,586
======== ========
</TABLE>
F-35
<PAGE> 134
F-35
<PAGE> 135
BALTIC COMMUNICATIONS LIMITED
FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
<TABLE>
<S> <C>
Independent auditors' report................................ F-37
Balance sheets.............................................. F-38
Statements of operations and retained earnings.............. F-39
Statements of cash flows.................................... F-40
Notes to financial statements............................... F-41
</TABLE>
F-36
<PAGE> 136
INDEPENDENT AUDITORS' REPORT
Shareholder and Board of Directors of
Baltic Communications Limited:
We have audited the accompanying balance sheets of Baltic Communications
Limited as of December 31, 1998 and 1997, and the related statements of
operations and retained earnings and cash flows for the years ended December 31,
1998, 1997 and the nine months ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Baltic Communications
Limited as of December 31, 1998 and 1997 and the results of its operations and
its cash flows for the years ended December 31, 1998, 1997 and the nine months
ended December 31, 1996 in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 9(c) to the
financial statements, the Company's parent, PLD Telekom Inc. (PLD) does not
presently have sufficient funds on hand to meet its current debt obligations.
The Company is a guarantor of such obligations. PLD's failure to make payment in
full when required could result in a claim being made against the Company under
its guaranty and a cross-default under and acceleration of other debt
obligations for which the Company is also a guarantor. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Without qualifying our opinion, we draw your attention to the information
contained in Note 1 to the financial statements regarding the uncertain
operating environment in Russia. The ultimate effect that these significant
economic uncertainties could have on the stated values, classification,
realisation or settlement of assets and liabilities stated in these financial
statements cannot presently be determined and accordingly no provisions have
been made.
Without qualifying our opinion, we draw your attention to the disclosures
in Note 9 to the financial statements concerning the uncertainty relating to the
effects of the Year 2000 problem.
St. Petersburg, Russia
March 30, 1999
F-37
<PAGE> 137
BALTIC COMMUNICATIONS LIMITED
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 266,076 241,949
Trade receivables, net (note 3)........................... 995,919 1,239,370
Due from related parties (note 7)......................... 531,998 --
Prepayments............................................... 80,800 167,908
Prepaid taxes............................................. 171,759 --
Inventory................................................. 76,025 214,394
---------- ---------
Total current assets.............................. 2,122,577 1,863,621
Property and equipment, net (note 4)........................ 4,668,005 4,801,791
Investments................................................. 8,000 8,000
Intangible assets, net (note 5)............................. 84,052 49,505
---------- ---------
Total assets...................................... $6,882,634 6,722,917
========== =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... 1,510,134 1,871,857
Accrued liabilities....................................... 87,177 154,288
Deferred revenues......................................... 4,019 3,861
Taxes payable............................................. 100,211 151,499
Deferred income tax liability............................. 30,706 --
Due to related parties (note 6)........................... 932,646 686,609
Customer deposits......................................... 26,234 27,217
---------- ---------
Total current liabilities......................... 2,691,127 2,895,331
---------- ---------
Shareholder's equity:
Common stock (note 8)..................................... 2,183,000 2,183,000
Retained earnings......................................... 2,008,507 1,644,586
---------- ---------
Total shareholder's equity........................ 4,191,507 3,827,586
---------- ---------
Total liabilities and shareholder's equity........ $6,882,634 6,722,917
========== =========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 138
BALTIC COMMUNICATIONS LIMITED
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Telecommunications revenues.......................... $9,780,176 $7,562,269 $5,266,803
Other non-telecommunications revenues................ 73,678 39,980 36,704
---------- ---------- ----------
Total revenues....................................... 9,853,854 7,602,249 5,303,507
Direct costs........................................... 5,110,896 2,904,632 2,053,763
---------- ---------- ----------
Gross profit................................. 4,742,958 4,697,617 3,249,744
---------- ---------- ----------
Operating expenses:
General and administrative........................... 2,599,278 2,470,769 1,510,934
Depreciation......................................... 575,708 557,494 331,256
Amortisation......................................... 12,943 6,783 319
Taxes other than income taxes........................ 447,429 422,094 323,266
---------- ---------- ----------
Total operating expenses..................... 3,635,358 3,457,140 2,165,775
---------- ---------- ----------
Operating income............................. 1,107,600 1,240,477 1,083,969
Other income/(expense):
Interest income...................................... 3,093 35,777 3,424
Foreign exchange loss (note 1)....................... (672,087) (43,082) (7,206)
Loss on disposal of property and equipment........... (43,979) (42,069) (49,059)
---------- ---------- ----------
Income before income taxes................... 394,627 1,191,103 1,031,128
Income taxes (note 10)................................. 30,706 383,255 194,390
---------- ---------- ----------
Net income................................... 363,921 807,848 836,738
---------- ---------- ----------
Retained earnings, beginning of period................. 1,644,586 836,738 --
---------- ---------- ----------
Retained earnings, end of period....................... $2,008,507 $1,644,586 $ 836,738
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-39
<PAGE> 139
BALTIC COMMUNICATIONS LIMITED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $363,921 807,848 836,738
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 575,708 557,494 331,256
Amortisation............................................ 12,943 6,783 319
Loss on disposal of property and equipment.............. 43,979 42,069 49,059
Changes in operating assets and liabilities:
(Increase)/decrease in trade receivables................ 243,451 (359,164) 355,754
(Increase)/decrease in prepayments...................... 87,108 (13,250) (93,937)
(Increase)/decrease in inventory........................ 138,369 (143,949) 17,947
(Increase)/decrease in prepaid taxes.................... (171,759) 16,765 (16,765)
Increase in due from related parties.................... (531,998) -- --
Increase/(decrease) in due to related parties........... 246,037 (361,311) 1,047,920
Increase/(decrease) in deferred revenues................ 158 3,861 (18,255)
Decrease in customer deposits........................... (983) (1,642) (10,530)
Increase/(decrease) in taxes payable.................... (51,288) 151,499 (386,557)
Increase/(decrease) in accrued liabilities.............. (67,111) 83,318 70,970
Increase in deferred income tax liability............... 30,706 -- --
Increase/(decrease) in accounts payable................. (361,723) 90,685 (912,575)
-------- -------- ----------
Net cash provided by operating activities............ 193,597 73,158 434,606
-------- -------- ----------
Cash flows from investing activities:
Capital expenditures.................................... (538,658) (854,151) (1,845,522)
Proceeds on disposal of fixed assets.................... 5,267 44,986 7,000
-------- -------- ----------
Net cash used in investing activities................ (533,391) (809,165) (1,838,522)
-------- -------- ----------
Increase/(decrease) in cash.......................... 24,127 71,841 (567,178)
Cash at beginning of period............................... 241,949 170,108 737,286
-------- -------- ----------
Cash at end of period..................................... $266,076 241,949 170,108
======== ======== ==========
Supplementary disclosures:
Income tax paid........................................... $368,431 240,047 --
======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-40
<PAGE> 140
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) BACKGROUND
(a) 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.
On April, 1 1996 PLD Telekom Inc. ("PLD" the "Parent") purchased 100% of
the common shares of the Company for a net purchase price of $2,183,000. Such
purchase price was allocated to the assets and liabilities of the Company as
follows:
<TABLE>
<S> <C>
Cash........................................................ $ 737,000
Other current assets........................................ 1,385,000
Fixed assets................................................ 3,199,000
Current liabilities......................................... (3,138,000)
-----------
$ 2,183,000
===========
</TABLE>
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.
(b) Russian Business Environment
In recent years, Russia has undergone fundamental political and economic
change. As a result, operations carried out in Russia involve significant risks
which are not typically associated with many other environments.
The immediate and ongoing effects of severe economic instability in Russia
include or may include slower economic growth or decline, a reduction in the
availability of credit and the ability to service debt, volatile interest rates,
changes and increases in taxes, higher inflation or hyperinflation, further
devaluation of the rouble, restrictions on convertibility and movements of
funds, bankruptcies including bank failures, and other severe economic and
political consequences. These conditions and future policy changes could have a
material adverse effect on the operations of the Company and the realisation and
settlement of its assets and liabilities.
The accompanying financial statements reflect management's current
assessment of the impact of the economic situation on the financial position of
the Company. Actual results could differ from management's current assessments
and such differences could be material. In addition, the effect of future
developments on the Company's financial position and the ability of others to
continue to transact with the Company cannot presently be determined. The
financial statements therefore may not include all adjustments that might
ultimately result from these adverse conditions.
(c) Uncertain Operating Environment in Russia
The recoverability of the Company's assets, as well as the future operation
of the Company, may be significantly affected by the current and future economic
environment in Russia. The accompanying financial statements do not include any
adjustments with regard thereto.
F-41
<PAGE> 141
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(d) Convertibility of the Rouble
The Russian rouble is not a convertible currency outside the Russian
Federation and, accordingly, any conversion of Russian rouble amounts to US
dollars should not be construed as a representation that Russian rouble amounts
have been, could be, or will be in the future, convertible into US dollars at
the exchange rate used, or at any other exchange rate.
The ability of the Russian government to maintain the stability of the
rouble will depend on many political and economic factors, including its ability
to control inflation and the availability of sufficient reserves to support the
rouble. Uncertainty also exists with respect to the Central Bank's policy
direction. The possibility of further restrictions on convertibility and
currency movements cannot be ruled out.
As a result of the devaluation of the rouble during the latter part of 1998
the Company has suffered transaction losses of $672,087 (1997: a loss of
$43,082; 1996: a loss of $7,206).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarised as follows:
(a) Basis of Presentation
The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP).
The financial statements have been presented on the push-down basis of
accounting.
The accompanying financial statements present the financial position and
results of operations of the Company on a stand-alone basis. The Company incurs
and pays its own expenses. Management assistance is provided by the Parent under
the terms of negotiated management agreements and specific costs incurred by the
Parent on behalf of the Company are charged thereto. All intercompany
transactions and charges are disclosed in note 11, "Related Party Transactions."
Income tax expense is based upon a calculation of current tax expense and
deferred tax expense in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," on a stand-alone basis. Refer
to note 10, "Income Taxes."
There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Services provided by the Parent are furnished under the terms of the
negotiated management agreements -- refer to note 11, "Related Party
Transactions." Management of the Company believes that the accompanying
financial statements include all the costs incurred by the Company in its
operations.
(b) Reporting Currency and Foreign Currency Translation
The statutory accounts of the Company are maintained in accordance with
local accounting regulations and are stated in local currencies.
Local statements are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52 (SFAS 52), "Foreign Currency
Translation."
Under SFAS 52, the financial statements of entities in highly inflationary
economies are measured in all cases using the U.S. dollar as the functional
currency. U.S. dollar transactions are shown at their historical value. Monetary
assets and liabilities denominated in local currencies are translated into U.S.
dollars at the prevailing period-end exchange rate. All other assets and
liabilities are translated at historical exchange rates. Results of operations
have been translated using the exchange rates effective at the date of the
transaction.
F-42
<PAGE> 142
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Translation differences resulting from the use of these different rates are
included in the accompanying statements of operations except where otherwise
noted.
(c) Revenue Recognition
The Company records telecommunications revenues as earned, at the time
services are provided.
(d) Inventory
Inventory is stated at the lower of cost or net realisable value and is
comprised of spare parts for maintenance of the Company's transmission network
and telephony products held for resale to customers.
(e) Property and Equipment
Property and equipment and other assets are stated at cost less accumulated
depreciation and amortisation. Costs directly related to the installation of
telecommunications equipment are included in the cost of the equipment.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<CAPTION>
ASSET ESTIMATED USEFUL LIFE
- - ----- ---------------------
<S> <C>
Telecommunications equipment............ 10 years
Office furniture and equipment.......... 8 years
Motor vehicles.......................... 7.5 years
Computer equipment...................... 8 years
</TABLE>
(f) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, trade and
other receivables, amounts due to or from related parties, and accounts payable
approximate fair value due to their short maturity.
(g) Income Taxes
Tax on the profit or loss for the year comprises current tax and the change
in deferred tax. Current tax comprises tax payable calculated on the basis of
the expected taxable income for the year, using the tax rates enacted at the
balance sheet date, and any adjustment of tax payable for previous years.
Deferred tax is provided using the balance sheet liability method on all
temporary differences between the carrying amounts for financial reporting
purposes and the amounts used for taxation purposes, except differences relating
to the initial recognition of assets or liabilities which affect neither
accounting nor taxable profit (taxable loss).
The tax value of losses expected to be available for utilisation against
future taxable income is set off against the deferred tax liability within the
same legal tax unit and jurisdiction. Net deferred tax assets are reduced to the
extent that it is no longer probable that the related tax benefit will be
realised.
Deferred tax is calculated on the basis of the tax rates that are expected
to apply to the period when the asset is realised or the liability is settled.
The effect on deferred tax of any changes in tax rates is charged to the
statement of operations, except to the extent that it relates to items
previously charged or credited directly to equity.
(h) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
F-43
<PAGE> 143
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the year. Actual results could differ
from those estimates.
(i) Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be recognised is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(j) Comprehensive Income
SFAS 130 "Reporting Comprehensive Income" was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 as of January 1, 1998. For
the years ended December 31, 1998, 1997, and 1996 comprehensive income was equal
to net income reported in the statement of operations. As SFAS 130 only requires
additional disclosures in the Company's financial statements, its adoption did
not have any impact on the Company's financial position or results of
operations.
(3) TRADE RECEIVABLES
Trade receivables at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Trade receivables.................................... $1,113,564 1,303,650
Less: allowance for doubtful accounts................ (117,645) (64,280)
---------- ---------
Trade receivables, net of allowance................ $ 995,919 1,239,370
========== =========
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Telecommunications equipment....................... 5,654,426 5,249,255
Office furniture and equipment..................... 627,792 758,934
Vehicles and leasehold improvements................ 708,777 577,424
----------- ----------
Total property and equipment..................... 6,990,995 6,585,613
Less: accumulated depreciation..................... (2,322,990) (1,783,822)
----------- ----------
Property and equipment, net...................... $ 4,668,005 4,801,791
=========== ==========
</TABLE>
F-44
<PAGE> 144
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Computer software........................................ $40,264 35,637
Licenses................................................. 45,560 30,057
Other.................................................... 27,361 --
------- -------
Total intangible assets................................ 113,185 65,694
Less: accumulated amortisation........................... (29,133) (16,189)
------- -------
Intangible assets, net................................. $84,052 49,505
======= =======
</TABLE>
Amortisation of intangible assets is provided over the estimated useful
life of 3-10 years.
(6) DUE TO RELATED PARTIES
The Company's liability to related parties at December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
PLD Telekom Inc......................................... 615,000 455,000
PeterStar............................................... 37,875 --
PLD Management Services Limited......................... 256,254 231,609
Teleport-TP............................................. 23,517 --
-------- -------
$932,646 686,609
======== =======
</TABLE>
(7) DUE FROM RELATED PARTIES
The receivables due from related parties at December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- ----
<S> <C> <C>
PLD Telekom Inc........................................... 182,553 --
PeterStar................................................. 103,797 --
Teleport-TP............................................... 237,985 --
CPY Yellow Pages Limited.................................. 7,663 --
-------- --
$531,998 --
======== ==
</TABLE>
(8) SHAREHOLDER'S EQUITY
(a) Common stock
At December 31, 1998 and 1997 the Company had authorised share capital of
72,540 shares with a par value of 100 roubles each.
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Issued and outstanding common shares with a par value
of 100 roubles each................................ $ 1,494 1,494
Additional paid-in capital........................... 2,181,506 2,181,506
---------- ---------
Issued, outstanding and fully contributed............ $2,183,000 2,183,000
========== =========
</TABLE>
F-45
<PAGE> 145
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(b) Distributable reserves
Distributable reserves are restricted to the retained earnings of the
Company which are determined according to Russian legislation. At December 31,
1998 and 1997 there are no reserves for distribution. No dividends have been
approved for payment.
(9) 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 are 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 during the periods, 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) The Year 2000 Issue (unaudited)
The Year 2000 problem (or "Millennium Bug") arises as a result of
information systems and/or equipment with embedded chips that incorrectly read
the date 2000 and incorrectly perform calculations related to it. Any
information technology that relies on a time or date function may not operate
correctly, producing an inaccurate date when dealing with dates beyond 1999.
The Company may experience the effects of the Year 2000 problem before, on,
or after January 1, 2000 and the effects on operations and financial reporting,
if not addressed, may range from minor errors to significant systems failures
which could affect the Company's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
The Company is incurring significant costs in its efforts to mitigate any
possible effects of the Year 2000 problem. These costs totalled approximately
$100,000 in 1998, with approximately $80,000 planned to be spent during 1999.
(c) 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.
F-46
<PAGE> 146
BALTIC COMMUNICATIONS LIMITED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. The Company is a
guarantor of such 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 April
30, 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 claim being made against the Company
under its guaranty and a cross-default under and acceleration of senior discount
notes and convertible subordinated notes with an aggregate principal amount in
excess of $150 million 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.
(10) INCOME TAXES
At December 31, 1998 Company has deferred income tax liabilities of $30,706
(deferred tax assets of $94,000 as of December 31, 1997). As a result of the
rapid change in the regulatory environment and uncertainty surrounding the
Russian tax regime, the Company had provided a valuation allowance against the
deferred tax assets, calculated as of December 31, 1997.
The tax effects of temporary differences that gave rise to the deferred tax
assets are as follows:
<TABLE>
<CAPTION>
1998 1997
---- -------
<S> <C> <C>
Expenses not yet deducted for Russian tax purposes......... $ -- 94,000
Less: valuation allowance.................................. -- (94,000)
---- -------
Deferred tax asset....................................... $ -- --
==== =======
</TABLE>
The tax effects of temporary differences that give rise to the deferred tax
liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Income not recognised yet for Russian tax purposes....... $30,706 --
------- -------
Deferred tax liability................................. $30,706 --
======= =======
</TABLE>
The provision for current income taxes differs from that expected by
applying statutory tax rates as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Provision for income tax at statutory rates.......... $ 130,227 $ 393,064
Tax effect of temporary differences.................. 30,706 (94,000)
Tax effect of non-deductible expenditures or losses
deductible for statutory purposes.................. (130,227) 84,191
--------- ---------
Income tax expense................................... $ 30,706 $ 383,255
========= =========
</TABLE>
(11) RELATED PARTY TRANSACTIONS
There have been various transactions with the following related parties:
Teleport-TP, CPY Yellow Pages Limited, PeterStar, PLD Management Services
Limited and PLD Telekom Inc.
These transactions are of a minor routine nature and generally involve the
provision of telecommunications services.
F-47
<PAGE> 147
F-48
<PAGE> 148
NWE CAPITAL (CYPRUS) LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE
- - ---- ----
<S> <C>
Independent Auditors' Report................................ F-50
Consolidated balance sheets as of December 31, 1998 and
1997...................................................... F-51
Consolidated statements of operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-52
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-53
Consolidated statements of shareholders' equity for the
years ended December 31, 1998, 1997 and 1996.............. F-54
Notes to consolidated financial statements.................. F-55
</TABLE>
F-49
<PAGE> 149
INDEPENDENT AUDITORS' REPORT
Shareholder and Board of Directors of
NWE Capital (Cyprus) Ltd.:
We have audited the accompanying consolidated balance sheets of NWE Capital
(Cyprus) Ltd. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholder's equity and cash flows for
each of the years in the three year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NWE Capital
(Cyprus) Ltd. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
16(d) to the consolidated financial statements, the Company's parent, PLD
Telekom Inc. (PLD) does not presently have sufficient funds on hand to meet its
current debt obligations. PLD's failure to make payment in full when required
could result in a cross-default under and acceleration of other debt obligations
for which the Company is a guarantor. 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.
Without qualifying our opinion, we draw your attention to the information
contained in Note 1 to the financial statements regarding the uncertain
operating environment in Russia. The ultimate effect that these significant
economic uncertainties could have on the stated values, classification,
realisation or settlement of assets and liabilities stated in these financial
statements cannot presently be determined and accordingly no provisions have
been made.
Without qualifying our opinion, we draw your attention to the disclosures
in Note 16 to the financial statements concerning the uncertainty relating to
the effects of the Year 2000 problem.
St. Petersburg, Russia
March 30, 1999
F-50
<PAGE> 150
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 7)........................ $ 2,816 7,849
Trade receivables, net of allowances of $1,788 and $3,002
respectively........................................... 11,260 12,725
VAT receivable............................................ -- 2,154
Other receivables and prepaids............................ 2,024 3,266
Due from related parties.................................. -- 468
Inventory................................................. 4,076 2,566
-------- -------
Total current assets.............................. 20,176 29,028
Property and equipment, net (note 6)........................ 106,542 79,002
Telecommunications licenses, net of amortization of $24,077
and $19,356, respectively (note 3)........................ 37,663 42,286
Other receivables (note 4).................................. 2,012 3,012
Goodwill, net of amortization $789 and $574, respectively
(note 5).................................................. 1,365 1,580
Other assets................................................ 410 280
-------- -------
Total assets...................................... $168,168 155,188
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 8)................................ $ -- 900
Accounts payable.......................................... 1,980 1,971
Accrued liabilities....................................... 2,640 3,044
Customer deposits and advances............................ 7,109 5,978
Advances from other group companies (note 10)............. 33,988 35,711
Due to related parties.................................... 462 818
Current portion of long-term debt (note 9)................ 3,479 2,180
-------- -------
Total current liabilities......................... 49,658 50,602
-------- -------
Long-term liabilities:
Advances from other group companies (note 10)............. 4,669 6,627
Long-term debt (note 9)................................... 7,165 7,975
-------- -------
Total long-term liabilities....................... 11,834 14,602
-------- -------
Minority interest........................................... 28,113 19,391
Commitments and contingencies (note 16)
Shareholder's equity (note 12):
Common stock, par value CY L1 per share. Authorised
3,246,174 shares in 1998 and 1997; Issued and
outstanding 3,246,174 shares in 1998 and 1997.......... 7,082 7,082
Contributed surplus....................................... 63,723 63,723
Accumulated surplus/(deficit)............................. 7,758 (212)
-------- -------
Total shareholders' equity........................ 78,563 70,593
-------- -------
Total liabilities and shareholders' equity........ $168,168 155,188
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-51
<PAGE> 151
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Telecommunications revenues................................. $113,041 85,588 52,651
Direct costs................................................ 29,081 23,120 17,527
-------- ------- -------
Gross profit...................................... 83,960 62,468 35,124
Operating expenses:
General and administrative................................ 28,030 15,742 12,396
Management fees........................................... 1,649 4,817 2,085
Depreciation.............................................. 10,266 7,194 4,758
Amortization.............................................. 4,935 4,936 4,884
Taxes other than income taxes............................. 4,021 3,257 1,667
-------- ------- -------
Total operating expenses.......................... 48,901 35,946 25,790
Operating income.................................. 35,059 26,522 9,334
Other income/(expense):
Interest and other income................................. 288 337 370
Interest on long-term debt................................ (769) (584) --
Foreign exchange loss (note 1)............................ (2,890) (676) (740)
Other expense............................................. (2,000) -- (9)
Settlement with minority shareholders (note 11)........... -- 5,339 --
-------- ------- -------
Income before income taxes and minority interest............ 29,688 30,938 8,955
Income taxes (note 13)...................................... 9,997 6,893 3,356
-------- ------- -------
Income before minority interest................... 19,691 24,045 5,599
Minority interest........................................... 11,721 12,336 2,615
-------- ------- -------
Net income........................................ $ 7,970 11,709 2,984
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-52
<PAGE> 152
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 7,970 11,709 2,984
Adjustments to reconcile net income to net cash provided
by/(used in) operating activities:
Depreciation and amortization.......................... 15,202 12,130 9,642
Minority interest...................................... 11,721 12,336 2,615
Settlement with minority shareholders (note 11)........ -- (5,339) --
Other.................................................. 2,000 133 9
Customer deposits and advances......................... 1,131 3,284 103
Changes in working capital (note 14)................... (332) (10,047) (331)
------- -------- -------
Net cash provided by/(used in) operating
activities........................................ 37,692 24,206 15,022
------- -------- -------
Cash flows from investing activities:
Capital expenditures...................................... (32,056) (19,367) (20,652)
Other assets.............................................. (130) 89 (58)
------- -------- -------
Net cash used in investing activities............. (32,186) (19,278) (20,710)
------- -------- -------
Cash flows from financing activities:
Bank indebtedness......................................... (900) 900 --
Long-term debt............................................ (2,558) -- 6,247
Advances from other group companies....................... (4,081) (3,591) 1,729
Recapitalisation of PeterStar............................. -- 1,427 --
Dividends paid............................................ (3,000) (1,000) --
------- -------- -------
Net cash provided by financing activities......... (10,539) (2,264) 7,976
------- -------- -------
Increase in cash and cash equivalents............. (5,033) 2,664 2,288
Cash and cash equivalents at beginning of year............ 7,849 5,185 2,897
------- -------- -------
Cash and cash equivalents at end of year.................. $ 2,816 7,849 5,185
======= ======== =======
Supplementary disclosures:
Non-cash investing and financing activities:
Purchase of equipment with PLD advances and under
long-term contracts.................................... $ 5,833 10,641 1,597
======= ======== =======
Recapitalisation of PeterStar (note 4).................... $ -- 4,012 --
======= ======== =======
Interest paid............................................... $ 1,685 728 --
======= ======== =======
Income taxes paid........................................... $10,133 6,924 3,999
======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-53
<PAGE> 153
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
ACCUMULATED
NUMBER OF CONTRIBUTED SURPLUS/
SHARES AMOUNT SURPLUS (DEFICIT) TOTAL
--------- ------ ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996.......... 1,000 $ 2 $ -- $(14,905) $(14,903)
Conversion of promissory note from
PLD
Telekom Inc....................... 928,591 2,000 18,000 -- 20,000
Acquisition of WTC from PLD
Telekom Inc....................... 2,316,583 5,080 45,723 -- 50,803
Net income for the year............. -- -- -- 2,984 2,984
--------- ------ ------- -------- --------
Balance at December 31, 1996........ 3,246,174 7,082 63,723 $(11,921) $ 58,884
Net income for the year............. -- -- -- 11,709 11,709
--------- ------ ------- -------- --------
Balance at December 31, 1997........ 3,246,174 $7,082 $63,723 $ (212) $ 70,593
Net income for the year............. -- -- -- 7,970 7,970
--------- ------ ------- -------- --------
Balance at December 31, 1998........ 3,246,174 $7,082 $63,723 $ 7,758 $ 78,563
========= ====== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-54
<PAGE> 154
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(THOUSANDS OF U.S. DOLLARS)
(1) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
(a) Background
The Company is incorporated under the laws of Cyprus. The Company is a
wholly-owned subsidiary of PLD Telekom Inc. ("PLD" or the "Parent"). Through its
majority-owned and controlled subsidiaries, the Company is a provider of local,
long distance and international telecommunications services in the former Soviet
Union.
The Company's telecommunications businesses are at various stages of
development and are growing in emerging economies which, by their nature, have
uncertain economic, political and regulatory environments. The general risks of
operating businesses in the former Soviet Union include the possibility for
rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations.
Ultimate recoverability of the Company's investments is dependent upon
their ability to maintain profitability, which is dependent to a certain extent
on the stabilisation of the economies of the former Soviet Union, the ability to
maintain the necessary telecommunications licenses and the ability to obtain
adequate financing to meet capital commitments.
The Company is in a net current liability position and will require the
continued support of PLD in order to meet its obligations as they fall due.
(b) Russian Business Environment
In recent years, Russia has undergone fundamental political and economic
change. As a result, operations carried out in Russia involve significant risks
which are not typically associated with many other environments.
The immediate and ongoing effects of severe economic instability in Russia
include or may include slower economic growth or decline, a reduction in the
availability of credit and the ability to service debt, volatile interest rates,
changes and increases in taxes, higher inflation or hyperinflation, further
devaluation of the rouble, restrictions on convertibility and movements of
funds, bankruptcies including bank failures, and other severe economic and
political consequences. These conditions and future policy changes could have a
material adverse effect on the operations of the Company and the realisation and
settlement of its assets and liabilities.
The accompanying financial statements reflect management's current
assessment of the impact of the economic situation on the financial position of
the Company. Actual results could differ from management's current assessments
and such differences could be material. In addition, the effect of future
developments on the Company's financial position and the ability of others to
continue to transact with the Company cannot presently be determined. The
financial statements therefore may not include all adjustments that might
ultimately result from these adverse conditions.
(c) Uncertain Operating Environment in Russia
The recoverability of the Company's assets, as well as the future operation
of the Company, may be significantly affected by the current and future economic
environment in Russia. The accompanying financial statements do not include any
adjustments with regard thereto.
F-55
<PAGE> 155
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) Convertibility of the Rouble
The Russian rouble is not a convertible currency outside the Russian
Federation and, accordingly, any conversion of Russian rouble amounts to US
dollars should not be construed as a representation that Russian rouble amounts
have been, could be, or will be in the future, convertible into US dollars at
the exchange rate used, or at any other exchange rate.
The ability of the Russian government to maintain the stability of the
rouble will depend on many political and economic factors, including its ability
to control inflation and the availability of sufficient reserves to support the
rouble. Uncertainty also exists with respect to the Central Bank's policy
direction. The possibility of further restrictions on convertibility and
currency movements cannot be ruled out.
As a result of the significant devaluation of the rouble during the latter
part of 1998 the Company's subsidiary PeterStar has suffered foreign exchange
losses of approximately $2,890. The corresponding loss in 1997 was approximately
$676 and in 1996 was approximately $740. The major portion of the loss in 1998
relates to a period in August/September 1998, when it was difficult to convert
roubles into other currencies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarised as follows:
(a) Basis of Presentation
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(U.S. GAAP) and present the financial position and results of operations of the
Company and subsidiaries (the "Company") on a stand-alone basis. The Company
incurs and pays its own expenses. Management assistance is provided by the
Parent under the terms of negotiated management agreements and specific costs
incurred by the Parent on behalf of the Company are charged thereto. All
intercompany transactions and charges are disclosed in note 15, "Related Party
Transactions".
Income tax expense is based upon a calculation of current tax expense and
deferred tax expense in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", on a stand-alone basis. Refer
to note 13, "Income Taxes".
Intercompany interest charges incurred are the result of, and are made
pursuant to, intercompany loan and/or lease agreements and are not a result of
allocations of interest by the Parent or its subsidiaries.
Telecommunication license amortization expense is based upon the cost of
the licenses. Amortization expense is calculated on a straight-line basis over
the terms of the licenses including the portion of the Parent's investment in
the Company which has been allocated to telecommunication licenses and pushed
down into the Company's consolidated financial statements.
There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Services provided by the Parent are furnished under the terms of the
negotiated management agreements. Refer to note 15, "Related Party
Transactions". Management of the Company believes that the accompanying
consolidated financial statements include all the costs incurred by the Company
in its operations.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
F-56
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NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31, 1998
and 1997, the Company's cash equivalents consist of term deposits of $1.4
million and $4.6 million respectively.
(d) Revenue Recognition
The Company records telecommunication revenues as earned, at the time
services are provided with the exception of terminal sales. Terminal sales are
recognised when the equipment is delivered and the supporting contract is
signed.
(e) Inventory
Inventory is stated at the lower of average cost or net realisable value
and is comprised of telephony products held for resale to customers.
(f) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Telecommunications equipment.................... 10 years
Buildings....................................... 10 years
Office furniture and equipment.................. 3-5 years
Leasehold improvements.......................... 15 years
</TABLE>
Interest costs incurred during the period of installation of
telecommunications equipment are capitalised. The interest cost capitalised in
1998 amounted to $1,289,628 (1997: $927,791, 1996: $0).
(g) Telecommunications Licenses
Telecommunications licenses are amortized on a straight-line basis over the
terms of the licenses.
(h) Goodwill
Goodwill represents the excess of the purchase price over the fair values
of the net assets acquired of C.P.Y. Yellow Pages Limited, and is being
amortized on a straight-line basis over ten years.
(i) Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, trade and other receivables, amounts due from or to
related parties, bank indebtedness and accounts payable approximate fair value
due to their short maturities. The fair value of long-term debt is based on
discounted cash flow analysis.
(j) Reporting Currency and Foreign Currency Translation
The statutory accounts of the Company's consolidated subsidiaries are
maintained in accordance with local accounting regulations and are stated in
local currencies.
Local statements are adjusted to U.S. GAAP and then translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
(SFAS 52), "Foreign Currency Translation."
F-57
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NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are measured in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations have been translated using the exchange rates effective at
the date of the transaction. Translation differences resulting from the use of
these different rates are included in the accompanying consolidated statements
of operations.
(k) Income Taxes
Tax on the profit or loss for the year comprises current tax and the change
in deferred tax. Current tax comprises tax payable calculated on the basis of
the expected taxable income for the year, using the tax rates enacted at the
balance sheet date, and any adjustment of tax payable for previous years.
Deferred tax is provided using the balance sheet liability method on all
temporary differences between the carrying amounts for financial reporting
purposes and the amounts used for taxation purposes, except differences relating
to the initial recognition of assets or liabilities which affect neither
accounting nor taxable profit (taxable loss).
The tax value of losses expected to be available for utilisation against
future taxable income is set off against the deferred tax liability within the
same legal tax unit and jurisdiction. Net deferred tax assets are reduced to the
extent that it is no longer probable that the related tax benefit will be
realised.
Deferred tax is calculated on the basis of the tax rates that are expected
to apply to the period when the asset is realised or the liability is settled.
The effect on deferred tax of any changes in tax rates is charged to the
statement of operations, except to the extent that it relates to items
previously charged or credited directly to equity.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
(m) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", on January 1, 1996. SFAS
121 requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognised is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(n) Comprehensive Income
SFAS 130 "Reporting Comprehensive Income" was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement
F-58
<PAGE> 158
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that is displayed with the same prominence as other financial statements. The
Company adopted SFAS 130 as at January 1, 1998. For the years ended December 31,
1998, 1997, and 1996 comprehensive income was equal to net income reported in
the statement of operations. As SFAS 130 only requires additional disclosures in
the Company's financial statements, its adoption did not have any impact on the
Company's financial position or results of operations.
(o) Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
(3) BUSINESSES AND ACQUISITIONS
The Company's key interests at December 31, 1998 include a 60% equity
interest in PeterStar Company Limited ("PeterStar") and a 50% indirect equity
interest in ALTEL (before April 1998 named BECET International).
(a) PeterStar
PeterStar is a joint stock company registered in 1992 under the laws of the
Russian Federation to provide international and domestic telecommunications
services to St. Petersburg, Russia. In November 1994, PeterStar was granted a
license to provide these services for a further ten years. The license was
reissued in June 1996 and sets the number of lines which PeterStar may have and
requires that at least 74,200 lines be introduced by June 1999. At December 31,
1998, PeterStar had 168,166 lines in place.
Other licenses, all of which expire in 2001, are for telematic services,
video conferencing, 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.
In October 1992, PLD acquired a 50% interest in PeterStar for consideration
of $20.0 million. All of the consideration was allocated to telecommunications
licenses. This interest was subsequently transferred to the Company in exchange
for a promissory note in the amount of $20.0 million. During 1996 the promissory
note was exchanged for 928,591 shares of the Company.
In March 1994, PLD acquired 90% of the outstanding shares of PMT Ltd., a
Russian company whose sole asset was a 10% interest in PeterStar, for
consideration of $8.2 million. PLD acquired the remaining 10% of PMT Ltd. in
April 1996 for consideration of $1.8 million. All of the consideration was
allocated to telecommunications licenses. In April 1996, PLD transferred its 10%
interest in PeterStar to the Company in exchange for a $10.0 million
non-interest bearing promissory note payable on demand and convertible to common
shares at the option of either PLD or the Company. This acquisition has been
accounted for using the continuity of interests method. Accordingly, PLD's
historical cost of the PeterStar telecommunications licenses transferred to the
Company is recorded in these financial statements and comparative figures have
been restated to reflect the historical net book value of the PeterStar licenses
and the related amortization expense.
(b) ALTEL
ALTEL provides cellular services pursuant to a 15 year license to operate a
cellular and mobile telephone system in Kazakstan until February 2009. The
Company's 50% interest in ALTEL is held by its wholly-owned subsidiary, Wireless
Technology Corporations Limited ("WTC"), a company incorporated in the territory
of the British Virgin Islands.
F-59
<PAGE> 159
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 1994, PLD acquired all the outstanding shares of WTC for
consideration of $30.0 million. The acquisition was accounted for by the
purchase method. As of the date of acquisition, ALTEL had not commenced
operations and did not have any tangible assets or liabilities. Therefore, the
entire purchase price, including acquisition costs of $0.8 million was allocated
to telecommunications licenses. ALTEL commenced commercial operations in
September 1994. During 1994 and 1995, PLD contributed additional equity of $20.0
million to WTC which in turn contributed $20.0 million of working capital and
equipment to ALTEL in exchange for its 50% equity interest.
On January 5, 1996, PLD transferred its shares in WTC to the Company for
consideration of 2,316,583 shares of the Company. This acquisition has been
accounted for using the continuity of interests method. Accordingly, PLD's
historical cost of the ALTEL license is recorded in these financial statements
and comparative figures have been restated to reflect the historical net book
value of the licenses and the related expense.
(4) OTHER RECEIVABLES
During 1997, a $13.6 million receivable by PLD from PeterStar was assigned
to the Company. This amount was subsequently repaid by PeterStar with proceeds
from a share issue. $4.0 million was advanced to a minority shareholder of
PeterStar so that it could participate in the share issue. $4.0 million of the
assigned amount is outstanding at December 31, 1998 (1997: $4.0 million), all of
which is classified as long-term. At the end of 1998, as a result of the
economic conditions in Russia, the Company recorded a $2.0 million valuation
allowance with respect to this receivable.
(5) GOODWILL
Effective April 26, 1995, PLD acquired all the outstanding shares of C.P.Y.
Yellow Pages Limited ("Yellow Pages"), a company incorporated in the Republic of
Cyprus, for consideration of $2.1 million. Yellow Pages publishes a Yellow Pages
directory and owns a database of Russian and foreign businesses in St.
Petersburg. The acquisition was accounted for by the purchase method and
substantially all of the consideration was allocated to goodwill.
On March 1, 1996, PLD transferred the shares of Yellow Pages to the Company
in exchange for a non-interest bearing promissory note in the amount of $2.1
million. The note is payable in ten years and may be converted to common shares
at the option of either PLD or the Company. This transaction has been accounted
for as a transfer of assets between entities under common control and, as such,
the assets are reflected at PLD's historical cost.
F-60
<PAGE> 160
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1997 consist of the
following (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Telecommunications equipment:
Installed................................................. $ 84,388 68,492
Uninstalled............................................... 31,289 11,473
Buildings................................................... 2,760 2,333
Office furniture and equipment.............................. 5,714 4,156
Leasehold improvements...................................... 5,929 5,277
Advances to equipment suppliers............................. 3,124 3,917
-------- -------
Total property and equipment...................... 133,204 95,648
Less accumulated depreciation............................... (26,662) (16,646)
-------- -------
Property and equipment, net............................... $106,542 79,002
======== =======
</TABLE>
Property and equipment includes telecommunications equipment with a cost of
$30.0 million (1997: $16.5 million) which has been pledged under the terms of
long-term instalment agreements and $0 (1997: $6.6 million) which has been
acquired under capital lease (note 9).
(7) CASH AND CASH EQUIVALENTS
The Company's cash and cash equivalents at December 31, 1998 and 1997
consist of the following (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Cash on deposit:
In Russia and Kazakstan................................... $2,816 $6,621
Outside Russia and Kazakstan.............................. -- 1,228
------ ------
$2,816 7,849
====== ======
</TABLE>
(8) BANK INDEBTEDNESS
At December 31, 1998, the Company had no bank indebtedness. In December
1997, PeterStar entered into a $2.0 million, one-year loan facility with BNP
Dresdner Bank for the purchase of telecommunications equipment. Interest was
charged on borrowed amounts at three-month LIBOR plus 2.5% per annum. The
amounts drawn on the loan facility at December 31, 1997 were $900,000. The bank
indebtedness was guaranteed by PLD.
F-61
<PAGE> 161
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) LONG-TERM INDEBTEDNESS
Amounts payable under the terms of the long-term instalment purchase
agreements are as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Less than one year.......................................... $ 4,381 3,060
One to two years............................................ 4,129 3,214
Two to three years.......................................... 2,424 2,595
Three to four years......................................... 1,158 1,927
Four to five years.......................................... 530 1,791
------- ------
Total minimum payments............................ 12,622 12,587
Amounts representing interest............................... (1,978) (2,432)
------- ------
10,644 10,155
Current portion............................................. 3,479 2,180
------- ------
Non-current portion......................................... $ 7,165 7,975
======= ======
</TABLE>
Amounts payable are in respect of purchases of telecommunications equipment
under long-term instalment purchase agreements. They represent future amounts
payable discounted at a rate of 8% per annum. They are secured by pledges of the
related assets until final payment is made in 2002.
(10) ADVANCES FROM OTHER GROUP COMPANIES
Amounts due to other group companies as of December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
PLD Telekom Inc............................................. $28,222 $33,701
PLD Capital Asset (U.S.) Inc................................ 10,214 --
PLD Asset Leasing Limited................................... -- 7,384
PLD Management Services Ltd................................. 221 1,253
------- -------
Total............................................. 38,657 42,338
Current portion............................................. 33,988 35,711
------- -------
Non current portion......................................... $ 4,669 $ 6,627
======= =======
</TABLE>
The amounts due to PLD at December 31, 1998 and 1997, represent advances
($25.7 million) to PeterStar and NWE, and fees due to PLD for management
services ($2.3 million) provided to PeterStar and ALTEL. Such amounts have no
scheduled repayment terms and are classified as current.
In September 1996, PeterStar entered into a capital lease for switching
equipment. The lessor of the equipment was PLD Asset Leasing Limited (PLDAL), a
Cypriot company, a wholly owned subsidiary of PLD. On June 25, 1998, PLD Asset
Leasing transferred its interests in this lease and in three additional leases
for equipment entered into during the first six months of 1998 to PLD Capital
Asset (U.S.) Inc. (PLDCA), a United States company, which is also wholly owned
by PLD. The three additional leases entered into during 1998 resulted in
approximately $2,117 of equipment acquired under capital leases and a capital
lease liability of an equal amount. At the date of transfer from PLDAL to PLDCA,
the net liability under capital leases amounted to approximately $1,824. On the
date of transfer, the capital leases were restructured as installment purchase
agreements with substantially the same payment terms. Additionally, during 1998,
PeterStar entered into an additional installment purchase agreement with PLDCA
for approximately $1,097 of equipment. All installment purchase agreements carry
interest rates ranging from 8% to 10%.
F-62
<PAGE> 162
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future payments due under these installment purchase agreements, including
interest, are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 6,220
2000........................................................ 2,623
2001........................................................ 2,338
2003........................................................ 350
-------
Total payments.................................... 11,531
Less amount representing interest........................... 2,436
-------
Principal amounts due....................................... 9,095
Add accrued interest at December 31, 1998................... 1,119
-------
Total due to PLDCA................................ $10,214
=======
</TABLE>
$12.1 million in advances from PLD Telekom Inc. arose on the acquisition of
a 10% interest in PeterStar and on the acquisition of Yellow Pages (notes 3(a)
and 5).
(11) SETTLEMENTS WITH MINORITY SHAREHOLDERS
During 1997, the Company and the minority shareholders of PeterStar reached
a settlement regarding management fees and other costs previously charged by the
Company, and expensed by PeterStar. As a result of the settlement, a charge to
PeterStar of $5.4 million was disallowed. This amount was reflected by the
Company as an increase in expenses.
(12) COMMON STOCK
At December 31, 1998 and 1997 the authorised capital stock of the Company
consists of 3,246,174 common shares with par value of CY (pound) 1 per share.
3,246,174 shares are issued as of December 31, 1998 and 1997.
Distributable reserves are restricted to the retained earnings of the
Company's subsidiaries which are determined according to Russian, Cypriot and
British Virgin Islands legislation. At December 31, 1998, that amount is the
rouble equivalent of $6.7 million (1997 -- $14.8 million). No dividends have
been approved for payment.
F-63
<PAGE> 163
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) INCOME TAXES
PeterStar and ALTEL are subject to income tax at statutory rates of 33% and
30%, respectively. The provision for income taxes, which relates substantially
to current income taxes in PeterStar and ALTEL, differs from the U.S. federal
and state statutory tax rates as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Provision for income taxes at statutory rates........... $10,391 10,828 3,134
Add (deduct) the tax effect of:
Exchange differences.................................. (7,661) -- --
Difference in rate.................................... (979) 58 692
Foreign withholding taxes............................. 450 -- --
Other................................................. (96) -- --
Non-deductible amortization of licenses and
goodwill........................................... 1,835 633 626
Other non-deductible expenses......................... 4,075 1,045 1,348
Concessions on capital expenditures................... (726) (3,775) (2,292)
Change in valuation allowance related to deferred tax
assets............................................. 2,708 (1,896) (152)
------- ------ ------
Provision for income tax...................... $ 9,997 6,893 3,356
======= ====== ======
</TABLE>
F-64
<PAGE> 164
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Expenses not yet deducted for Russian and Kazak tax
purposes............................................... $ 3,571 863
Less valuation allowance.................................... (3,571) (863)
------- ------
$ -- --
======= ======
</TABLE>
As a result of the rapid change in the regulatory environment and
uncertainty surrounding the Russian and Kazakh tax regimes, the Company has
provided a valuation allowance against deferred tax assets.
(14) CHANGES IN WORKING CAPITAL
Changes in working capital in each of the years in the three year period
ended December 31, 1998 consist of the following (in thousands of U.S. dollars):
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Decrease/(Increase) in trade receivables.................... $ 1,465 (6,832) (2,465)
Decrease/(Increase) in VAT receivable....................... 2,154 (1,528) 281
(Increase)/Decrease in other receivables and prepaids....... (1,758) (1,088) 1,592
Increase in inventory....................................... (1,510) (868) (409)
Change in amounts due from or to related parties............ (288) 213 --
(Decrease)/Increase in amounts payable and accrued
liabilities............................................... (395) 56 670
------- -------- -------
Changes in working capital.................................. $ (332) (10,047) (331)
======= ======== =======
</TABLE>
(15) RELATED PARTY TRANSACTIONS
(a) Petersburg Telephone Network ("PTN"), an indirect minority shareholder
of PeterStar has provided PeterStar during the years 1998, 1997 and
1996 with office space in St. Petersburg for no consideration.
(b) Lease payments for the office in Almaty and other premises of $0.3
million, $0.1 million and $0.1 million for each of the years ended
December 31, 1998, 1997 and 1996 were paid by ALTEL to Kazakhtelecom
("KT"), the other shareholder of ALTEL. There was no balance
outstanding in relation to these leases as of December 31, 1998 and
1997.
(c) PeterStar entered into a barter agreement with PTN under which the two
parties have exchanged services valued at $2.7 million, $3.4 million
and $3.0 million during 1998, 1997 and 1996, respectively. The amounts
are recorded in the consolidated statements of operations as
telecommunications revenues and direct costs. During 1998 the Company
paid $1.2 million to PTN for certain of these services.
(d) Direct costs for the years ended December 31, 1998, 1997 and 1996
include $4.4 million, $4.2 million and $3.3 million, respectively,
paid to KT, the other shareholder of ALTEL in relation to the carriage
of traffic over the public telephone network. Balances outstanding of
$0.5 million, $0.8 million and $0.2 million as of December 31, 1998,
1997 and 1996, respectively, in relation to these charges, are
included in due to related parties.
(e) PeterStar entered into a capital lease with a wholly-owned subsidiary
of PLD in 1996 (see note 9).
F-65
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NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(f) During 1998, PeterStar entered into a series of agreements with PTN
under which PeterStar exchanged telecommunications equipment for
telecommunications and other facility infrastructures. The total value
of equipment exchanged during 1998 is $2.6 million. The infrastructure
received under this exchange has been valued at the same amount. As a
result of this arrangement PeterStar will be the sole provider of
telecommunications services to one of the districts of St. Petersburg.
(g) During 1998, PeterStar paid a total of $1.2 million on behalf of PTN.
This amount has been capitalised as a prepayment in relation to the
purchase of an exchange building.
(h) PLD charged management fees of $2.1 million related to PeterStar and
$1.6 million related to ALTEL during the year ended December 31, 1998
(1997 -- $2.0 million and $1.2 million, respectively; 1996 -- $1.2
million and $0.9 million, respectively). These amounts are recorded in
the consolidated statements of operations as management fee expense.
Balances outstanding of $0.1 million and $0.1 million as of December
31, 1998 and 1997 respectively are included in advances from other
group companies.
(i) PeterStar was charged management fees of $5.6 million, $1.7 million
and $42,000 during 1998, 1997 and 1996, respectively, by OAO
Telecominvest, a minority shareholder. These are included as general
and administrative expenses in the consolidated statements of
operations. As at December 31, 1998, PeterStar has prepaid a further
$0.4 million in relation to management fees.
(j) Consulting fees of $0.4 million, $0.1 million and $0.1 million for
the years ended December 31, 1998, 1997 and 1996 respectively, were
paid by ALTEL to KT. These amounts are included in general and
administrative expenses, There was no balance outstanding as of
December 31, 1998 and 1997 in relation to these charges.
(k) Additional charges, related to management services of $0.1 million,
$0.2 million and $26,000 for the years ended December 31, 1998, 1997
and 1996 respectively, were charged to ALTEL by PLD and another PLD
subsidiary. These amounts are recorded in the consolidated statements
of operations as general and administrative expenses.
(l) PeterStar was charged $0 in service fees by PLD relating to recharged
expenses and capital equipment in 1998 (1997: $3.6 million, 1996:
$2.1 million). These amounts have been recorded in general and
administrative expenses in the consolidated statements of operations
or property and equipment in the consolidated balance sheets as
appropriate.
(m) During 1996 PeterStar entered into a five year instalment purchase
agreement with PTN, an indirect minority shareholder, for
telecommunications equipment. Total contract value was $13.7 million
(note 9).
(n) During 1998, PeterStar entered into a three year (1997: three to five
year) instalment purchase agreement with wholly-owned subsidiaries of
PLD for telecommunications equipment. The total contract value was
$1.9 million (1997: $2.3 million) (note 10).
(o) During 1997, the Company forgave certain amounts due to it from
PeterStar, resulting in a loss to the Company of $5.4 million (note
11).
(16) COMMITMENTS AND CONTINGENCIES
(a) Purchase Commitments
At December 31, 1998 PeterStar has commitments of approximately $3.4
million under long-term instalment purchase agreements. All commitments relate
to acquisition of the undelivered portion of
F-66
<PAGE> 166
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
telecommunications equipment from suppliers as outlined in note 9. The related
contracts provide for financing of the amounts over approximately five years.
(b) Russian and Kazak Taxation
The PeterStar and ALTEL subsidiaries have accrued profits and other taxes
based on interpretations of the law which may ultimately be disputed by the
local taxation authorities.
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 are 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 (as examples,
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.
PeterStar has had extensive tax inspections during the periods, which have
resulted in minimal penalties. These inspections have covered most of the taxes
applicable to PeterStar.
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.
(c) Management Services
On January 1, 1995, WTC entered into a two year agreement with PLD, under
which PLD would provide certain consulting, informational services, management
support services and personnel expertise. Payments under this agreement were
$25,000 per month plus 3% of monthly gross revenues. This agreement was renewed
for a further year on January 1, 1997 and was terminated as of December 31,
1997. On January 1, 1998, ALTEL entered into an agreement directly with PLD
covering the same range of services, with payments of $25,000 per month plus
3.4% of monthly gross revenues. This 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 April 30, 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 senior discount notes and convertible
subordinated notes
F-67
<PAGE> 167
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with an aggregate principal amount in excess of $150 million for which the
Company serves as a guarantor. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
(e) Motorola, USA
Motorola, USA is the major supplier of ALTEL's network equipment. Under the
supply contract, ALTEL files preliminary purchase orders for the delivery of
equipment with a prepayment of 5% of the cost of the purchase order. Once a
purchase order is presented, ALTEL may be exposed to potential liabilities to
Motorola, USA in the amount of $1.2 million as at December 31, 1998.
(f) The Year 2000 Issue (unaudited)
The Year 2000 problem (or "Millennium Bug") arises as a result of
information systems and/or equipment with embedded chips that incorrectly read
the date 2000 and incorrectly perform calculations related to it. Any
information technology that relies on a time or date function may not operate
correctly, producing an inaccurate date when dealing with dates beyond 1999.
The Company may experience the effects of the Year 2000 problem before, on,
or after January 1, 2000 and the effects on operations and financial reporting,
if not addressed, may range from minor errors to significant systems failures
which could affect the Company's ability to conduct normal business operations.
It is not possible to be certain that all aspects of the Year 2000 issue
affecting the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
The Company is incurring significant costs in its efforts to mitigate any
possible effects of the Year 2000 problem.
F-68
<PAGE> 168
F-69
<PAGE> 169
PLD ASSET LEASING LIMITED
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent auditors' report................................ F-71
Balance sheet............................................... F-72
Statements of operations.................................... F-73
Statements of cash flows.................................... F-74
Notes to the financial statements........................... F-75
</TABLE>
F-70
<PAGE> 170
INDEPENDENT AUDITORS' REPORT
SHAREHOLDERS AND BOARD OF DIRECTORS
PLD ASSET LEASING LIMITED
We have audited the accompanying Balance Sheets of PLD Asset Leasing
Limited as of December 31, 1997 and 1996, and the related statements of
operations, shareholders' equity and cash flows for each of the years in the two
year period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position PLD Asset Leasing Limited as of
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the years in the two year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
MOORE STEPHENS
CHARTERED ACCOUNTANTS
Nicosia, Cyprus
May 20, 1998
F-71
<PAGE> 171
PLD ASSET LEASING LIMITED
BALANCE SHEETS
AS AT DECEMBER 31
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
NOTE 1997 1996
---- --------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT:
Cash................................................... 10,482 10,490
Lease payments receivable-interest..................... 5 782,849 0
Lease payments receivable-principal.................... 5 2,117,954 977,151
--------- ---------
2,911,285 987,641
NON CURRENT:
Lease payments receivable-principal.................... 5 4,483,483 5,624,287
--------- ---------
7,394,768 6,611,928
========= =========
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... 6 0 2,065,420
Taxation payable....................................... 35,739 0
Accrued liabilities.................................... 3 8,281 5,667
Due to PLD Telekom Inc................................. 6,638,607 4,571,121
--------- ---------
6,682,627 6,642,208
SHAREHOLDER'S EQUITY
CAPITAL STOCK:
Share capital -- 1,900,000 shares authorized at Cy Pds
1 per share.......................................... 4 2,140 2,140
--------- ---------
--------- ---------
2,140 2,140
Surplus/(deficit)........................................... 710,001 (32,420)
--------- ---------
712,141 (30,280)
--------- ---------
7,394,768 6,611,928
========= =========
</TABLE>
The notes on pages 6-8 form an integral part
of these financial statements
F-72
<PAGE> 172
PLD ASSET LEASING LIMITED
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
(EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
REVENUE:
Finance lease income...................................... 782,849 0
--------- ---------
Gross profit........................................... 782,849 0
OPERATING EXPENSES:
General and administrative................................ 4,681 31,475
Interest expense.......................................... 8 945
--------- ---------
4,689 32,420
========= =========
Income/(loss) before income taxes........................... 778,160 (32,420)
Income taxes................................................ 35,739 0
--------- ---------
Net income/(loss)...................................... 742,421 (32,420)
========= =========
</TABLE>
The notes on pages 6-8 form an integral part
of these financial statements
F-73
<PAGE> 173
PLD ASSET LEASING LIMITED
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
(EXPRESSED IN UNITED STATES DOLLARS
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
CASH PROVIDED BY/(USED IN):
OPERATIONS:
Net earnings................................................ 742,421 (32,420)
Non-cash items:
Changes in non-cash working capital......................... (3,950,719) 1,093,936
---------- ----------
(3,208,298) (1,061,516)
INVESTING:
Lease payments receivable................................... 1,140,804 (5,624,287)
---------- ----------
1,140,804 (5,624,287)
FINANCING:
Due to PLD Telekom Inc...................................... 2,067,486 4,571,121
Issue of share capital and premium.......................... 0 2,140
---------- ----------
2,067,486 4,573,261
---------- ----------
(Decrease)/increase in cash and cash equivalents............ (8) 10,490
Cash and cash equivalents, beginning of period.............. 10,490 0
---------- ----------
Cash and cash equivalents, end of period.................... 10,482 10,490
========== ==========
</TABLE>
The notes on pages 6-8 form an integral part
of these financial statements
F-74
<PAGE> 174
PLD ASSET LEASING LIMITED
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
(EXPRESSED IN UNITED STATES DOLLARS)
1. ACTIVITIES
The Company has entered into a lease agreement at the end of 1996 to
provide telecommunication equipment to a Russian Company.
2. ACCOUNTING POLICIES
2.1. ACCOUNTING CONVENTION
The financial statements have been prepared under the historical cost
convention.
2.2. CURRENCY
The books of the Company are maintained in United States Dollars and the
accompanying financial statements and notes thereto are expressed in this
currency.
2.3. TRANSLATION IN FOREIGN CURRENCIES
Balances in foreign currency are translated at the closing rates prevailing
at the balance sheet date.
Expenses denominated in currencies other than the US $ are recorded in the
accounting records and stated in the financial statements at the amounts
actually converted into US $ at the rate ruling on the transaction date.
2.4. FINANCE LEASES
Leases are recognised in the Company's balance sheet as a receivable equal
to the net investment in the lease. Interest is recognised in the profit and
loss at a constant periodic rate of return based on the net cash investment
method. Principal repayments due within one year are shown as current assets.
3. ACCRUED EXPENSES
<TABLE>
<CAPTION>
1997 1996
US $ US $
----- -----
<S> <C> <C>
Professional fees........................................... 8,281 5,667
===== =====
</TABLE>
4. SHARE CAPITAL
The Company's authorised share capital of Cy Pds 1,900,000 is made up of
1,900,000 ordinary shares of Cy Pds 1 each.
The Company's issued and fully paid share capital amounts to Cy Pds 1,000
made up of 1,000 ordinary shares of Cy Pds 1 each.
The amount of US $2,140 represents the equivalent of Cy Pds 1,000
translated at the exchange rate ruling on the date of issue.
The above notes form an integral part
of these financial statements
F-75
<PAGE> 175
PLD ASSET LEASING LIMITED
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. FINANCE LEASES
<TABLE>
<CAPTION>
1997 1996
US $ US $
--------- ---------
<S> <C> <C>
Gross investment in the lease......................... 8,800,000 8,800,000
Unearned finance income............................... 1,415,713 2,198,562
--------- ---------
7,384,287 6,601,438
========= =========
Amounts receivable within one year.................... 2,900,804 997,151
Amounts receivable after more than one year........... 4,483,483 5,604,287
--------- ---------
7,384,287 6,601,438
========= =========
</TABLE>
6. ACCOUNTS PAYABLE
Represent amounts due to equipment suppliers relating to the finance lease
entered into by the Company.
7. TAXATION
The Company is liable to income tax under Section 28(a) of the Cyprus
Income Tax Laws.
The Company has tax payable of US $35,739 (Cy Pds 18,379).
8. SHAREHOLDERS ADVANCES
The advances are interest free and without fixed date of repayment.
9. SECURITIES, PLEDGES AND CHARGES
a) The Company's shares have been pledged as collateral security for the
amount of US $123 million, representing "Senior Discount Notes" issued by the
parent company.
b) A charge has been established on the Company's receipts from the parent
company, fees receivable from subsidiaries and receipts from other leasing
companies as collateral for the US $123 million "Senior Discount Notes" issued
by the parent company.
c) An assignment of the Company's lease rental receipts, receivable from
Peterstar Co Ltd amounting to US $8,800,000 has been made.
All the above described charges, pledges and assignments are in favour of The
Bank of New York.
10. POST BALANCE SHEET EVENTS
The Company allotted an additional 349,000 ordinary Cy Pds 1 shares to the
existing shareholders on the 4th May 1998, increasing the issued share capital
to Cy Pds 350,000 (nominal value).
The above notes form an integral part
of these financial statements
F-76
<PAGE> 176
F-77
<PAGE> 177
PLD CAPITAL ASSET (U.S.) INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent auditors' report................................ F-79
Balance sheet as of December 31, 1998....................... F-80
Statement of operations for the period ended December 31,
1998...................................................... F-81
Statement of shareholder's equity for the period ended
December 31, 1998......................................... F-82
Statement of cash flows for the period ended December 31,
1998...................................................... F-83
Notes to financial statements............................... F-84
</TABLE>
F-78
<PAGE> 178
INDEPENDENT AUDITORS' REPORT
Shareholder and Board of Directors
PLD Capital Asset (U.S.) Inc.:
We have audited the accompanying balance sheet of PLD Capital Asset (U.S.)
Inc. as of December 31, 1998 and the related statement of operations,
shareholder's equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement preparation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PLD Capital Asset (U.S.)
Inc. as of December 31, 1998 and the results of its operations and cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 9 to the
financial statements, the Company's parent, PLD Telekom Inc. (PLD) does not
presently have sufficient funds on hand to meet its current debt obligations.
PLD's failure to make payment in full when required could result in a
cross-default under and acceleration of other debt obligations for which the
Company is a guarantor. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG
New York, New York
March 30, 1999
F-79
<PAGE> 179
PLD CAPITAL ASSET (U.S.) INC.
BALANCE SHEET
AS OF DECEMBER 31
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Assets:
Current:
Cash and cash equivalents.............................. $ 10
Other receivables and prepaids......................... 228
Assets held for resale (note 5)........................ 3,949
Due from related parties -- installment sales contracts
(note 3).............................................. 6,408
-------
10,595
Escrow funds (note 4)..................................... 528
Due from related parties -- installment sales contracts
(note 3)............................................... 3,806
-------
$14,929
=======
Liabilities and Shareholder's Equity:
Current liabilities:
Accounts payable and accrued liabilities (note 6)...... 1,977
Due to related parties................................. 5,035
-------
7,012
Commitments and contingencies (note 9)
Shareholder's Equity:
Capital stock (note 7):
Additional paid-in capital............................. 6,641
Retained earnings......................................... 1,276
-------
Total Shareholder's Equity................................ 7,917
-------
$14,929
=======
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE> 180
PLD CAPITAL ASSET (U.S.) INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998
----
<S> <C>
Revenue:
Interest income........................................... $813
Operating Expenses:
General and administrative................................ 15
----
Income before taxes......................................... 798
Income taxes (note 8)....................................... 232
----
Net income.................................................. $566
====
</TABLE>
See accompanying notes to financial statements.
F-81
<PAGE> 181
PLD CAPITAL ASSET (U.S.) INC.
STATEMENT OF SHAREHOLDER'S EQUITY
YEAR ENDED DECEMBER 31, 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
BALANCE, BEGINNING OF YEAR.................................. 7,351
Net profit.................................................. 566
-----
BALANCE, END OF YEAR........................................ 7,917
=====
</TABLE>
See accompanying notes to financial statements.
F-82
<PAGE> 182
PLD CAPITAL ASSET (U.S.) INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Cash provided by/(used in):
Operations:
Net income............................................. $ 566
Non-cash items:
Decrease/(increase) in deposits...................... (228)
Decrease/(increase) in assets held for resale........ (3,949)
Change in due from or due to related parties......... 2,205
Increase/(decrease) in accounts payable and accrued
liabilities......................................... 1,934
-------
528
Investing:
Escrow................................................. (528)
-------
(528)
-------
Increase /(decrease) in cash and cash equivalents........... 0
Cash and cash equivalents, beginning of period.............. 10
-------
Cash and cash equivalents, end of period.................... $ 10
=======
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE> 183
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) BUSINESS AND OPERATIONS
PLD Capital Asset (U.S.) Inc. ("PLDCA" or "the Company") 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.").
During 1998, PLDCA assumed the assets, liabilities and business of PLD Asset
Leasing Limited (PLDAL). PLDCA has recorded such assets and liabilities at the
historical cost of PLDAL and has reflected the results of operations of PLDAL
from January 1, 1998 until June 30, 1998, the date of transfer since the
entities were under common control. 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.
Upon assumption of PLDAL's business, the leases previously entered into
with related companies were restructured to be installment sales.
Additionally during 1998, PLD transferred installment sales agreements with
a combined carrying value of $1,824,000 it had previously entered into with
related companies to PLDCA. The Company has recorded these assets at historical
cost of PLD and has recorded an intercompany liability to PLD at the same
amount.
The accompanying financial statements present the financial position and
results of operations of the Company on a stand-alone basis. The Company incurs
and pays it own expenses. Specific costs incurred by the parent on behalf of the
Company are charged thereto. All intercompany transactions and charges are
disclosed in note 10, "Related Party Transactions".
Income tax expense is based upon a calculation of current tax expenses and
deferred tax expenses in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", on a stand-alone basis. Refer
to note 8, "Income Taxes".
Intercompany interest charges incurred are the result of, and are made
pursuant to, intercompany loan and/or installment sales agreements and are not a
result of allocations of interest by the Parent or its subsidiaries.
There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Services provided by the Parent are furnished under the terms of
negotiated management agreements. Refer to note 10, "Related Party
Transactions". Management of the Company believes that the accompanying
financial statements include all the costs incurred by the Company in its
operations.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarized as follows:
(a) Basis of Presentation
The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP).
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Funds held in
escrow, totaling $528,000 at December 31, 1998, are shown separately under
non-current assets.
F-84
<PAGE> 184
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(c) Revenue Recognition
The Company records interest income on installment sales contracts as
earned.
(d) Receivables
Receivables reflect amounts owing pursuant to installment sales contracts
outstanding with PLD's operating subsidiaries and include accrued interest at
varying rates of interest.
(e) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash and cash
equivalents, escrow funds, accounts receivable and accounts payable approximate
fair value due to their short maturities.
(f) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the year. Actual results could differ from those estimates.
(3) INSTALLMENT SALES CONTRACTS
<TABLE>
<S> <C>
Installment sales contract payments due:
1999 $6,189
2000 2,654
2001 2,338
2002 350
-------
11,531
Amounts representing interest............................... 1,317
-------
Present value of installment sales contract payments due.... $10,214
=======
</TABLE>
(4) ESCROW FUNDS
At December 31, 1998, the Company had $528,000 deposited in an escrow
account maintained with the Bank of New York. Escrow funds are generally
invested in U.S. Treasury backed securities with maturities less than 30 days.
Use of the escrow funds is governed by the detailed provisions contained within
the revised indentures relating to PLD's senior discount notes which were issued
in June 1996.
(5) ASSETS HELD FOR RESALE
Assets held for resale, consisting solely of telecommunications equipment,
is stated at cost and includes assets acquired by the Company which have yet to
be accepted by a PLD subsidiary or which have yet to be used for billable
commercial services. Accordingly, no depreciation is charged on this equipment
as it has yet to be commissioned. At December 31, 1998, a total of $3,949,000 in
equipment had yet to be accepted or put into service by PLD subsidiaries.
F-85
<PAGE> 185
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(6) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
A total of $1,948,000 was owed to suppliers by the Company at December 31,
1998 relating to telecommunications equipment yet to be delivered to and/or
accepted by PLD subsidiaries.
(7) COMMON STOCK
At December 31, 1998, the authorized capital stock of the Company consisted
of (an unlimited number of) common shares with a par value of $0.01 per share of
which 1,000 were issued and outstanding.
(8) INCOME TAXES
PLDCA is included in the consolidated federal and certain state and local
income tax returns of PLD. PLD accounts for its income taxes under the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
For Income Taxes (SFAS 109). In accordance with SFAS 109, when separate
financial statements are prepared for a member of a group that files a
consolidated return, the consolidated amount of current and deferred tax expense
for the consolidated group must be allocated among the members of the group. The
method of allocation must be consistent with the broad principles of SFAS 109.
For the Company's financial statements, a separate return method was utilized
for income taxes whereby current and deferred taxes were calculated by applying
the provisions of SFAS 109 as if the Company was a separate individual taxpayer.
The components of income taxes for the year ended December 31, 1998 are as
follows:
<TABLE>
<S> <C>
Current
Federal and foreign....................................... $152,000
State and local........................................... 80,000
--------
232,000
Deferred.................................................... --
--------
$232,000
========
</TABLE>
The effect of foreign and state income tax provisions caused the Company's
effective tax rate to differ from the U.S. statutory income tax rate during
1998.
As of December 31, 1998, $217,000 of tax related balances owed to PLD is
included in Due to related parties.
(9) 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.
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 April 30, 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 senior discount notes and convertible
subordinated notes with an aggregate principal amount in excess of $150 million
for which the Company serves as a guarantor. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
F-86
<PAGE> 186
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(b) As of December 31, 1998, the Company had entered into purchase
commitments with unaffiliated companies relating to telecommunications equipment
amounting to $2,051,000.
(10) RELATED PARTY TRANSACTIONS
PLDCA has sold to PeterStar Company Limited ("PeterStar")
telecommunications equipment valued at $9,815,000 pursuant to five installment
sales contracts either signed directly with PeterStar, or assigned from PLD and
PLDAL. The Company recorded interest income of $813,000 in respect of these
contracts in 1998. As of December 31, 1998, PeterStar owes PLDCA a total of
$10,214,000 in respect of these contracts.
As of December 31, 1998, PLDCA owed PLD $4,818,000 in respect of assets
assigned or transferred to PLDCA during the year.
F-87
<PAGE> 187
F-88
<PAGE> 188
TECHNOCOM LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE
- - ---- ----
<S> <C>
Independent Auditors' Report................................ F-90
Consolidated balance sheets as of December 31, 1998 and
1997...................................................... F-91
Consolidated statements of operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-92
Consolidated statements of shareholders' equity for the
years ended December 31, 1998, 1997 and 1996.............. F-93
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-94
Notes to consolidated financial statements.................. F-95
</TABLE>
F-89
<PAGE> 189
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TECHNOCOM LIMITED:
We have audited the accompanying consolidated balance sheets of Technocom
Limited and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Technocom
Limited and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
1 to the consolidated financial statements, the Company has suffered recurring
losses, has a working capital deficiency, and does not presently have sufficient
funds on hand to meet its current obligations. 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.
KPMG
Chartered Accountants
Dublin, Ireland
March 30, 1999
F-90
<PAGE> 190
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1998 1997
US$ US$
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and term deposits (note 4)........................... 390 4,671
Trade receivables, net of allowance of $630
(1997 -- $220)......................................... 2,394 2,942
Other receivables......................................... 1,880 2,806
Due from related parties (note 12)........................ 8,162 5,591
------- -------
TOTAL CURRENT ASSETS.............................. 12,826 16,010
Property and equipment, net (note 5)........................ 48,408 50,656
Telecommunications licenses, net (note 6)................... 31,904 36,632
Goodwill, net (note 7)...................................... 10,572 11,129
Due from related parties (note 12).......................... 1,752 2,253
Other investments and assets, net (note 8).................. 593 1,307
------- -------
TOTAL ASSETS...................................... 106,055 117,987
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... 2,915 6,331
Accrued liabilities....................................... 757 1,590
Due to related parties (note 12).......................... 21,621 21,867
Deferred taxes (note 11).................................. -- 549
Taxes payable............................................. 3,571 --
Supplier financing (note 9)............................... 759 1,905
------- -------
TOTAL CURRENT LIABILITIES......................... 29,623 32,242
Other liabilities........................................... -- 337
Due to related parties (note 12)............................ 8,000 336
Supplier financing (note 9)................................. 2,068 3,327
SHAREHOLDERS' EQUITY (note 10)
Share capital............................................. 1 1
Share premium............................................. 40,390 40,390
Additional paid-in capital................................ 46,439 45,756
Retained deficit.......................................... (20,466) (4,402)
------- -------
TOTAL SHAREHOLDERS' EQUITY........................ 66,364 81,745
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ 106,055 117,987
======= =======
</TABLE>
See accompanying notes to the consolidated financial statements
F-91
<PAGE> 191
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ -----
US$ US$ US$
<S> <C> <C> <C>
REVENUES:
Telecommunications..................................... 20,506 19,024 3,302
Finance lease income................................... 1,674 1,956 1,404
------- ------ -----
TOTAL REVENUES.................................... 22,180 20,980 4,706
DIRECT COSTS................................................ 11,156 13,034 2,487
------- ------ -----
GROSS PROFIT................................................ 11,024 7,946 2,219
OPERATING EXPENSES:
General and administrative............................. 14,856 8,739 2,383
Depreciation........................................... 3,665 2,561 138
Amortization........................................... 5,968 281 10
Other expenses and taxes............................... -- -- 125
------- ------ -----
TOTAL OPERATING EXPENSES.......................... 24,489 11,581 2,656
OPERATING LOSS.............................................. (13,465) (3,635) (437)
OTHER INCOME/(EXPENSES):
Share of losses of equity investments (note 3)......... (604) (677) (359)
Interest income........................................ 151 607 1,233
Interest expenses...................................... (242) (1,126) (589)
Other expenses......................................... (790) -- --
Foreign exchange loss.................................. (1,470) -- --
------- ------ -----
LOSS BEFORE TAXATION AND MINORITY INTEREST.................. (16,420) (4,831) (152)
Income taxes (note 11)...................................... 356 (273) (104)
------- ------ -----
Loss before minority interest............................... (16,064) (5,104) (256)
Minority interest........................................... -- 638 (19)
------- ------ -----
NET LOSS.................................................... (16,064) (4,466) (275)
======= ====== =====
</TABLE>
See accompanying notes to the consolidated financial statements
F-92
<PAGE> 192
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
US$ US$ US$
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR................................ 81,745 40,455 20,730
Premium on shares issued.................................... -- -- 20,000
Additional paid in capital.................................. 683 45,756 --
Net loss.................................................... (16,064) (4,466) (275)
------- ------ ------
BALANCE AT END OF YEAR...................................... 66,364 81,745 40,455
======= ====== ======
</TABLE>
See accompanying notes to the consolidated financial statements
F-93
<PAGE> 193
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
US$ US$ US$
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... (16,064) (4,466) (275)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for loss on lease receivable.................... 3,203 -- --
Depreciation and amortisation............................. 9,633 2,842 148
Share of loss of equity investments....................... 604 677 359
Minority interest......................................... -- (638) 19
Other..................................................... 200 337 --
Changes in operating assets and liabilities:
Increase/(decrease) in trade receivables.................. 548 1,019 (270)
(Decrease)/increase in other receivables.................. 422 (2,263) 2,455
Changes in due from/to related parties.................... (585) (2,440) 2,052
(Decrease)/increase in accounts payable................... (199) 3,104 (29)
(Decrease)/increase in accrued liabilities................ (833) (1,713) 3,440
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... (3,071) (3,541) 7,899
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease)/increase in bank indebtedness.................... (2,516) (15,829) 7,951
Related party financing..................................... 7,842 12,886 4,757
Proceeds from issuance of preferred shares.................. -- -- 20,000
------- ------- -------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES......... 5,326 (2,943) 32,708
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (5,793) (16,567) (20,766)
Investment in Technopark, net of cash acquired.............. -- -- (2,866)
Investment in Teleport, net of cash acquired................ -- -- (2,133)
Other investments and assets................................ (743) (275) 491
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES....................... (6,536) (16,842) (25,274)
------- ------- -------
(Decrease)/increase in cash................................. (4,281) (23,326) 15,333
Cash at beginning of year................................... 4,671 27,997 12,664
------- ------- -------
Cash at end of year......................................... 390 4,671 27,997
======= ======= =======
SUPPLEMENTAL DISCLOSURES
Non-cash financing activity: supplier financing........... -- 3,327 --
======= ======= =======
Income taxes paid........................................... -- -- 238
======= ======= =======
Interest paid............................................... 211 1,126 589
======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements
F-94
<PAGE> 194
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
1 BUSINESS OPERATIONS AND FUTURE ACTIVITIES
Technocom Limited and subsidiaries ("the Company") was incorporated under
the laws of the Republic of Ireland in January 1992. The Company's principal
activity is the provision of telecommunications services in Russia. The Company
conducts its business activities directly and through a number of subsidiaries
and other affiliates, most of which are incorporated in Russia. The Company
established a registered foreign representative office in Russia in October
1995. The Company's parent is PLD Telekom Inc. ("PLD", or the "Parent"), a
United States publicly listed company. 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 form the outcome of this uncertainty.
Ultimate recoverability of the Company's investments is dependent upon its
ability to achieve and maintain profitability, which is dependent to a certain
extent on the stabilisation 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.
In recent years, Russia has undergone fundamental political and economic
change. As a result, operations carried out in Russia involve significant risks
which are not typically associated with many other world markets. Instability in
the market reform process could subject the Company to unpredictable changes in
the basic business environment in which it currently operates. Uncertainties
regarding the political, legal, tax or regulatory environment including the
potential for adverse and retroactive changes in any of these, could
significantly affect the Company's ability to operate commercially. Management
is unable to estimate what changes may occur or the resulting effects of any
such changes on the Company's financial position or future results from
operations.
In 1998, the effects of adverse economic conditions in Russia included a
national liquidity crisis, devaluation of the rouble, higher interest rates, and
reduced opportunity for refinancing or refunding of maturing debts. In order to
partially address this situation, the Russian government announced policies
intended to address the structural weaknesses in the Russian economy and
financial sector.
While the policies are intended to alleviate the economic crisis in Russia,
the immediate effects could include slower economic growth or decline, a
reduction in the availability of credit and the ability to service debt, an
increase in interest rates, changes and increases in taxes, an increased rate of
inflation or hyperinflation, further devaluation of the rouble, and restrictions
on convertibility of the rouble and movements of hard currency, an increase in
the number of bankruptcies of entities (including bank failures), labour unrest
and strikes resulting from the possible increase in unemployment and political
unrest. These conditions and future policy changes could have a material adverse
effect on the operations of the Company and the realisation and settlement of
its assets and liabilities.
The accompanying financial statements reflect management's assessment of
the impact of this economic situation on the financial position of the Company.
Actual results could differ from management's current assessments and such
differences could be material. In addition, the effect on the Company's
financial position of future developments and access to further financial
information concerning the Company's customers, suppliers, financiers and others
and their ability to continue to transact with the Company cannot presently be
determined. The financial statements therefore may not include all adjustments
that might ultimately result from these adverse conditions.
F-95
<PAGE> 195
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are summarised as follows:
(a) Basis of presentation
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(U.S. GAAP).
The company's parent is PLD. On November 26, 1997, PLD acquired 29.6% of
the common stock of the Company for $32.5 million plus acquisition costs of
$840,000, raising its interest to 80.4%. As of December 31, 1997, 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 1997, reflects the effect of this push down accounting and the related
amortization has been reflected in the Company's consolidated statement of
operations as of January 1, 1998. The cost of the telecommunications licenses is
amortised on a straight line basis over the terms of the related licenses.
Goodwill is amortised on a straight line basis over 20 years.
The accompanying consolidated financial statements present the financial
position and results of operations of the Company on a stand-alone basis. The
Company incurs and pays its own expenses. All intercompany transactions and
charges are disclosed in note 12, "Related Parties".
Income tax expense is based upon a calculation of current tax expense and
deferred tax expense in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", on a stand-alone basis. Refer
to note 11, "Income Taxes".
Intercompany interest charges incurred are the result of, and are made
pursuant to, intercompany loan and/or lease agreements and are not a result of
allocations of interest by the Parent or its subsidiaries.
Telecommunication license amortization expense is based upon the cost of
the licenses. Amortization expense is calculated on a straight-line basis over
the terms of the licenses including the portion of the Parent's investment in
the terms of the licenses including the portion of the Parent's investment in
the Company which has been allocated to telecommunication licenses and pushed
down into the Company's consolidated financial statements.
There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Management of the Company believes that the accompanying consolidated
financial statements include all the costs incurred by the Company in its
operations.
(b) Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its majority-owned and controlled subsidiaries. All significant intercompany
transactions and balances have been eliminated on consolidation. Investments in
affiliates in which the Company has significant influence, but does not exercise
control, are accounted for under the equity method. Investments of the Company
over which significant influence is not exercised are carried under the cost
method.
(c) Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
F-96
<PAGE> 196
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) Revenue recognition
All the Company's revenues are earned in Russia and consist of the supply
of telecommunications services and leasing of telecommunications equipment.
All revenues are recorded as earned at the time services are provided.
(e) Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Costs directly related to the installation of telecommunications equipment are
included in the cost of the equipment. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Telecommunications equipment................... 10 years
Buildings...................................... 28.5 years
Leasehold improvements......................... 10 years
Office furniture and equipment................. 3-5 years
</TABLE>
(f) Intangible assets
Telecommunications licenses are amortized on a straight-line basis over the
terms of the licenses.
Goodwill represents the excess of the purchase price over the fair values
of the net assets acquired and is being amortised on a straight line basis over
periods ranging from five to ten years.
(g) Net investment in finance leases
The total net investment in finance leases included in the balance sheet
represents total lease payments receivable, net of finance charges relating to
future accounting periods. Finance charges are allocated to accounting periods
so as to give a constant rate of return on the net cash investment in the lease.
(h) Fair value of financial instruments
The carrying amounts reported in the consolidated balance sheets for cash
and term deposits, trade and other receivables, amounts due from/to related
parties, bank indebtedness and accounts payable approximate fair value due to
their short maturities.
(i) Reporting currency and foreign currency translation
The statutory accounts of the Company's consolidated subsidiaries are
maintained in accordance with local accounting regulations and are stated in
local currencies.
Local statements are adjusted to U.S. GAAP and then translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
(SFAS 52), "Foreign Currency Translation."
Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are measured in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations have been translated using the monthly average exchange
rates. Translation differences resulting from the use of these different rates
are included in the accompanying consolidated statements of operations.
F-97
<PAGE> 197
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(j) Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income or expense in the period it occurs.
(k) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(m) Comprehensive income
SFAS 130, "Reporting Comprehensive Income", was issued in June 1997. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The company adopted SFAS 130 as of January 1, 1998. For
the years ended December 31, 1998, 1997 and 1996 comprehensive loss was equal to
net loss reported in the statements of operations. As SFAS 130 only requires
additional disclosures in the company's financial statements, its adoption did
not have any impact on the company's financial position or results of
operations.
(n) Reclassification
Certain reclassifications have been made to prior year's financial
statements to conform to the current year's presentation.
F-98
<PAGE> 198
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3 TELECOMMUNICATIONS LICENSES AND SIGNIFICANT INVESTMENTS
The Company's key interests at December 31, 1998 include approximately 49%
equity interests in (a) Teleport-TP ("Teleport") (56% voting interest) and (b)
MTR-Sviaz; and (c) an approximately 56% interest in J.V. Technopark Limited
("Technopark").
(a) Teleport
Teleport is a Russian joint stock company which holds four operating
licenses. The first license expires in November 2004 and authorizes Teleport to
provide long distance and international telecommunications services to private
networks within Moscow and, to a limited extent, elsewhere in the Russian
Federation. Teleport is required by the terms of the license to have at least
10,500 subscribers (which is 70% of the maximum number of subscribers permitted
under the license) in place by October 1999. Under the terms of the license
agreement, there are no penalties should Teleport not attain the required number
of lines. The second license expires in October 2004 and permits the operation
of 1,000 international leased circuits for the transmission of television and
telecommunications services. The third license permits the provision of data
services with interconnection to the public network. This expires in January
2002 and requires capacity for 70,000 subscribers by December 2000. The fourth
license is an overlay license which permits Teleport to offer local, long
distance and international voice and data services which are interconnected to
the public telephone network in 40 regions across Russia. The overlay license
expires in May 2001.
The Company initially held a 42% equity interest in Teleport. In May 1996,
the Company acquired an additional 3.3% indirect equity interest in Teleport for
cash consideration of US$2.0 million, substantially all of which has been
allocated to Teleport's telecommunication licenses. The additional interest was
acquired through a company controlled by a minority shareholder of Technocom.
The acquisition of Technopark, a company incorporated in Russia, on December 20,
1996 increased Technocom's equity interest in Teleport to 49.3% and its voting
interest to 56%.
As a result of this acquisition, the Company consolidated Teleport's
balance sheet at December 31, 1996. The results of operations of Teleport have
been included in the consolidated statements of operations from January 1, 1997.
F-99
<PAGE> 199
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed financial information of Teleport for the year ended December 31,
1996 is as follows:
<TABLE>
<CAPTION>
1996
------
US$
<S> <C>
Telecommunications revenues................................. 11,104
Cost of sales............................................. 6,534
------
Gross profit........................................... 4,570
------
Operating expenses:
General and administrative............................. 2,617
Other taxes............................................ 592
Depreciation of assets under capital leases............ 1,016
Other depreciation and amortisation.................... 200
------
4,425
------
Operating income..................................... 145
Interest on capital lease.............................. (531)
Other interest and financing charges, net.............. 251
------
Loss before income taxes............................... (135)
Income taxes........................................... --
------
Net loss............................................... (135)
Technocom's interest therein.............................. (75)
Amortization of excess purchase price..................... (2,477)
------
Share of Teleport loss................................. (2,552)
======
</TABLE>
Teleport's revenues for the year ended December 31, 1996, include sales to
its minority shareholder of US$4.6 million making Teleport to some extent
economically dependent on its minority shareholder.
Teleport's cost of sales for the year ended December 31, 1996 includes
costs of US$2.9 million charged by a company controlled by one of the minority
shareholders of Technocom.
(b) MTR-Sviaz
The Company has a 49% equity interest in a Russian joint stock company,
MTR-Sviaz, which is a joint venture with Mosenergo, the Moscow city power
utility, to modernize and commercialize a portion of Mosenergo's internal
telecommunications network. MTR-Sviaz holds two operating licenses and commenced
operations in late 1996. The first license authorizes MTR-Sviaz to provide local
and long distance leased line services within the city and region of Moscow.
Under the second license, MTR-Sviaz is authorized to provide local telephone
services through interconnection (via the Mosenergo network) with the public
switched telephone network within the city and region of Moscow. During 1998 and
1997, Technocom leased telecommunications equipment and access rights with a net
book value of US$4,029,000 and US$4,700,000, respectively, to MTR-Sviaz under
finance leases. The Company recorded finance lease income of US$1,674,000 and
US$1,956,000 for the years ended December 31, 1998 and 1997. At December 31,
1998 and 1997, the investment in MTR-Sviaz comprises a finance lease receivable
of US$3,619,000 and US$4,492,000, offset by the Company's share of losses of
MTR-Sviaz of US$1,867,000 and US$1,364,000, respectively.
F-100
<PAGE> 200
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments receivable from MTR-Sviaz, by year end and in
the aggregate, are as follows:
<TABLE>
<CAPTION>
US$
------
<S> <C>
1999........................................................ 2,530
2000........................................................ 1,704
2001........................................................ 547
2002........................................................ 547
2003........................................................ 547
Thereafter.................................................. 1,411
------
Total minimum lease payments...................... 7,286
Amounts representing interest............................... (3,667)
------
Present value of minimum lease payments..................... 3,619
======
</TABLE>
(c) Technopark
On December 20, 1996 the Company acquired 55.51% of the outstanding shares
of Technopark, a company incorporated in Russia which holds a 7.5% equity
interest in Teleport and owns office space in Moscow, for cash consideration of
US$3 million. The sellers were the minority shareholders of Technocom. The
acquisition of Technopark has been accounted for using the purchase method and
therefore its operations have been included since January 1, 1997. The aggregate
purchase price equalled fair market value as of the date of the acquisition,
therefore no goodwill was recognized on either purchase.
4 CASH AND TERM DEPOSITS, BANK INDEBTEDNESS
The Company had no overdraft or demand bank loans at December 31, 1998 and
1997.
5 PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
1998 COST DEPRECIATION VALUE
- - ---- ------ ------------ --------
US$ US$ US$
------ ------------ --------
<S> <C> <C> <C>
Telecommunications equipment......................... 53,499 (8,408) 45,091
Buildings............................................ 3,354 (1,059) 2,295
Office furniture and equipment....................... 1,075 (514) 561
Leasehold improvements............................... 228 (77) 151
Motor vehicles....................................... 574 (264) 310
------ ------- ------
Total...................................... 58,730 (10,322) 48,408
====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
1997 US$ US$ US$
- - ---- ------ ----------- --------
<S> <C> <C> <C>
Telecommunications equipment......................... 51,886 (5,226) 46,660
Buildings............................................ 3,100 (109) 2,991
Office furniture and equipment....................... 1,149 (318) 831
Leasehold improvements............................... 228 (54) 174
------ ------- ------
Total...................................... 56,363 (5,707) 50,656
====== ======= ======
</TABLE>
F-101
<PAGE> 201
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6 TELECOMMUNICATIONS LICENSES
Telecommunications licenses are amortized over a period of 7 to 9 years.
The balances were as follows for December 31, 1998 and 1997:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
US$ US$ US$
------ ------------ --------
<S> <C> <C> <C>
As of December 31, 1998.............................. 44,252 (12,348) 31,904
As of December 31, 1997.............................. 43,569 (6,937) 36,632
</TABLE>
7 GOODWILL
Goodwill is amortized over 20 years. The balances were as follows for
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
------ ------------ --------
US$ US$ US$
<S> <C> <C> <C>
As of December 31, 1998.............................. 11,129 (557) 10,572
As of December 31, 1997.............................. 11,129 -- 11,129
</TABLE>
8 OTHER INVESTMENTS AND ASSETS
Other investments and assets consist of debt and equity instruments which
are not accounted for as equity investments. These investments, which do not
have a readily determinable market value, are stated at cost less provisions for
permanent diminutions in value.
9 SUPPLIER FINANCING
Payments to be made under supplier financing arrangements outstanding as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
US$
-----
<S> <C>
1999............................................... 926
2000............................................... 767
2001............................................... 723
2002............................................... 425
2003............................................... 324
-----
3,165
Amounts representing interest...................... (338)
-----
2,827
Current portion.................................... 759
-----
Long-term portion.................................. 2,068
=====
</TABLE>
The terms of the agreements require instalment payments over the next 3-5
years at interest rates of between LIBOR plus 50 basis points and LIBOR plus 300
basis points. Amounts are calculated based on an 8.5% discount rate.
F-102
<PAGE> 202
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10 SHAREHOLDERS' EQUITY
The authorized capital stock of the Company consists of 1,000,000 ordinary
shares with a par value of one Irish pound and 1,000 preferred shares with a par
value of US$1. Issued shares consist of 199 ordinary shares and 1,000 preferred
shares. The par value of ordinary shares is translated at the historical rate of
IRL1 = US$1.60.
During 1996, the Company allotted 500 preferred shares with a nominal value
of US$1 and a premium of US$39,999 per share in accordance with the terms of a
Subscription and Shareholder Agreement dated December 28, 1994.
The preferred shares entitle the Parent to the first US$20,000,000 of the
Company's dividend distributions. After receipt of such preference dividends,
all the preferred shares will be converted into a single ordinary share in the
Company.
11 INCOME TAXES
An income tax credit of US$356,000 for the year ended December 31, 1998,
and an expense of US$273,000 and of US$104,000 for the years ended December 31,
1997 and 1996, respectively differs from the amounts computed by applying the
U.S. federal income tax rate of 35% to pretax income from continuing operations
as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ----
US$ US$ US$
<S> <C> <C> <C>
Provision for income tax at statutory rates................ (2,314) (1,468) (47)
Increase/(reduction) in income taxes resulting from:
Non-deductible expenses.................................. 177 489 205
Non-taxable credits...................................... -- (115) (56)
Valuation allowance...................................... 1,075 882 --
Other.................................................... 706 485 2
------ ------ ---
(356) 273 104
====== ====== ===
</TABLE>
The tax effects of temporary differences that give rise to significant
portion of the deferred tax assets and liabilities as of December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
US$ US$
<S> <C> <C>
DEFERRED TAX ASSETS:
Tax on expenses not yet deducted for Russian tax
purposes............................................... 29,093 16,998
Less: valuation allowance................................. (1,054) (82)
------ ------
NET DEFERRED TAX ASSETS..................................... 28,039 16,916
DEFERRED TAX LIABILITIES:
Tax on revenues not yet realized for Russian tax
purposes............................................... 28,039 17,465
------ ------
NET DEFERRED TAX LIABILITIES................................ -- 549
====== ======
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1998 and
1997 was US$1,054,000 and US$82,000, respectively. The net change in the total
valuation allowance for the years ended December 31,
F-103
<PAGE> 203
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1998 and 1997 was an increase of US$982,000 and a decrease of US$372,000,
respectively. In assessing the realizability of deferred tax assets, management
determined that it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible.
12 RELATED PARTIES
During the year, the Company paid a total of US$358,333 (1997: US$220,833
and 1996: US$208,333) pursuant to two management contracts with two shareholders
for the provision of the services by two directors of the Company. In addition,
a significant portion of the Company's general and administrative expenses were
incurred by its three shareholders on behalf of the Company.
Significant amounts owed to/from related parties consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------ ------
US$ US$
<S> <C> <C>
AMOUNTS OWED TO:
Current:
PLD Telekom Inc........................................ 16,056 17,918
Lanstone Enterprises Limited........................... 3,185 3,174
PLD Management Services Limited........................ 727 482
PLD loan interest account.............................. 790 --
Rosh Group of Companies................................ 136 --
MTR-Sviaz.............................................. 184 --
Other current.......................................... 543 293
------ ------
Total current..................................... 21,621 21,867
====== ======
Non-current: other........................................ 8,000 336
====== ======
</TABLE>
Non-current: other in 1998 relates to an intercompany loan payable to PLD.
Such loan is repayable on April 20, 2001.
<TABLE>
<CAPTION>
1997 1996
------ ------
US$ US$
<S> <C> <C>
AMOUNTS OWED FROM:
Current:
MTR-Sviaz.............................................. 4,691 2,459
Lanstone Enterprises Limited........................... 2,864 2,240
ECI.................................................... 204 --
Finance lease receivable............................... -- 875
Others................................................. 403 17
------ ------
Total............................................. 8,162 5,591
====== ======
Non-current finance lease receivable...................... 1,752 2,253
====== ======
</TABLE>
The finance lease receivable consists of a single agreement with MTR-Sviaz.
The lease was entered into in August of 1996 for US$5,197,000 and requires
payments until July 2006.
F-104
<PAGE> 204
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13 COMMITMENTS AND CONTINGENCIES
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 US$1.3 million for the remainder of their terms.
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.
As of December 31, 1998, the Company has a commitment to pay its parent
company, PLD US$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% per
annum and will be payable annually in arrears on the anniversary of the
agreement date.
PLD issued senior discount notes and convertible subordinated notes with an
aggregate principal amount of US$149.5 million in June of 1996. PLD registered
these notes with the SEC in 1998. The Company, along with other PLD
subsidiaries, is a collateralee of the debt securities under the terms of the
related indentures.
F-105
<PAGE> 205
F-106
<PAGE> 206
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEM PAGE
- - ---- --------
<S> <C>
Independent Auditors' Report................................ F-108
Consolidated balance sheets as of December 31, 1998 and
1997...................................................... F-109
Consolidated statements of operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-110
Consolidated statements of shareholders' equity for the
years ended December 31, 1998, 1997 and 1996.............. F-111
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-112
Notes to consolidated financial statements.................. F-113
</TABLE>
F-107
<PAGE> 207
INDEPENDENT AUDITORS' REPORT
Shareholder and Board of Directors of
Wireless Technology Corporations Limited:
We have audited the accompanying consolidated balance sheets of Wireless
Technology Corporations Limited and subsidiary as of December 31, 1998 and 1997,
and the related consolidated statements of operations, accumulated deficit, and
cash flows for each of the years in the three year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
an audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wireless
Technology Corporations Limited and subsidiary as of December 31, 1998 and 1997
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1998 in conformity with generally
accepted accounting principles in the United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
9(d) to the consolidated financial statements, the Company's parent, PLD Telekom
Inc. (PLD) does not presently have sufficient funds on hand to meet its current
debt obligations. The Company is a guarantor of such obligations. PLD's failure
to make payment in full when required could result in a claim being made against
the Company under its guaranty and a cross-default under and acceleration of
other debt obligations for which the Company is also a guarantor. 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.
KPMG
Almaty, Kazahkstan
February 17, 1999
F-108
<PAGE> 208
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,642 5,294
Trade receivables, net of allowance of $1,143 and $1,139
respectively........................................... 3,811 3,462
Due from related parties (note 6)......................... 20 --
Inventory................................................. 1,495 1,640
Prepaid expenses and other current assets................. 713 798
------- ------
Total current assets.............................. 7,681 11,194
------- ------
Property and equipment, net (note 3)...................... 29,746 23,362
Telecommunications license, net (note 4).................. 21,581 23,693
------- ------
Total assets...................................... $59,008 58,249
======= ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 939 1,197
Due to related parties (note 6)........................... 602 1,875
Customer deposits and advances (note 7)................... 4,244 3,070
Income tax payable........................................ -- 58
------- ------
Total current liabilities......................... 5,785 6,200
------- ------
Commitments and contingencies (note 9)
Minority interest......................................... 6,102 4,489
Shareholder's equity:
Share capital (note 5)................................. 20,000 20,000
Contributed capital.................................... 30,803 30,803
Reserve capital (note 5)............................... 100 --
Accumulated deficit.................................... (3,782) (3,243)
------- ------
Total shareholder's equity........................ 47,121 47,560
------- ------
Total liabilities and shareholder's equity........ $59,008 58,249
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-109
<PAGE> 209
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Telecommunications revenues................................. $39,548 30,012 19,305
Direct costs (note 6)....................................... 8,076 6,873 5,376
------- ------ ------
Gross profit................................................ 31,472 23,139 13,929
Operating expenses:
General and administrative (note 6)....................... 9,709 7,501 4,387
Management fees (note 6).................................. 1,649 1,155 885
Depreciation and amortization............................. 6,267 5,325 4,133
Taxes other than income tax............................... 533 379 354
------- ------ ------
Total operating expenses.......................... 18,158 14,360 9,759
------- ------ ------
Operating income............................................ 13,314 8,779 4,170
Other income/(expense):
Interest and other income................................. 151 249 203
Foreign exchange loss..................................... (375) (242) (341)
------- ------ ------
Net income before income
taxes and minority interest.......................... 13,090 8,786 4,032
Income taxes (note 8)....................................... 5,916 3,648 1,547
------- ------ ------
Net income before minority interest.................... 7,174 5,138 2,485
Minority interest........................................... 4,613 3,611 1,878
------- ------ ------
Net income.................................................. $ 2,561 1,527 607
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-110
<PAGE> 210
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Accumulated deficit at beginning of year.................... $(3,243) (3,770) (4,377)
Net income.................................................. 2,561 1,527 607
Reserve capital (note 5).................................... (100) -- --
Dividends................................................... (3,000) (1,000) --
------- ------ ------
Accumulated deficit at end of year.......................... $(3,782) (3,243) (3,770)
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-111
<PAGE> 211
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(THOUSANDS OF UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,561 1,527 607
Adjustments to reconcile net income to net cash provided
(used in) operating activities:
Depreciation and amortization........................ 6,267 5,325 4,133
Bad debt expense..................................... 247 449 415
Minority interest.................................... 4,613 3,611 1,878
Changes in operating assets and liabilities:
Increase in trade receivables..................... (600) (1,329) (1,801)
Decrease/(Increase) in inventory.................. 145 (727) (255)
Decrease/(Increase) in prepaid expenses and other
current assets.................................. 85 (462) 1,071
Decrease in prepaid income taxes.................. -- -- 300
Increase in accrued interest...................... -- -- 316
Increase/(Decrease) in accounts payable and
accrued liabilities............................. (258) (1,427) 957
(Decrease)/Increase in due to/due from related
parties, net.................................... (1,293) 664 958
Increase in customer deposits and advances........ 1,174 1,275 1,034
Increase/(decrease) in income taxes payable....... (58) (107) 165
------- ------ ------
Net cash provided by operating activities......... 12,883 8,799 9,778
------- ------ ------
Cash flows from investing activities:
Prepaid equipment purchases............................... -- --
Purchases of property and equipment....................... (10,535) (4,238) (8,175)
------- ------ ------
Net cash used in investing activities............. (10,535) (4,238) (8,175)
------- ------ ------
Cash flows from financing activities:
Dividends paid............................................ (6,000) (2,000) --
------- ------ ------
Net cash used in financing activities.................. (6,000) (2,000) --
------- ------ ------
(Decrease)/increase in cash and cash equivalents....... (3,652) 2,561 1,603
Cash and cash equivalents at beginning of year.............. 5,294 2,733 1,130
------- ------ ------
Cash and cash equivalents at end of year.................... $ 1,642 5,294 2,733
======= ====== ======
Supplementary disclosures:
Interest paid............................................... $ -- -- --
======= ====== ======
Income taxes paid........................................... $ 6,249 3,755 1,082
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-112
<PAGE> 212
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(TABULAR AMOUNTS IN THOUSANDS OF UNITED STATES DOLLARS)
(1) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
Wireless Technology Corporations Limited (the "Company") was incorporated
in the British Virgin Islands as an international business company on October
27, 1993. The Company is a wholly-owned indirect subsidiary of PLD Telekom Inc.
("PLD", the "Parent"), a company incorporated in the United States. The
Company's only significant asset is a 50% controlling interest in CJSC ALTEL
("ALTEL") which was formed on January 14, 1994 as a joint stock company under
the laws of Kazakhstan. This subsidiary was formerly named CJSC BECET
International. In April 1998 its name was changed to CJSC ALTEL.
ALTEL was formed for the purpose of planning, developing, operating and
servicing a cellular telecommunications system throughout Kazakhstan, and for
the sale of related equipment to subscribers. ALTEL commenced operations in
September 1994 and continues to develop its service network throughout
Kazakhstan.
The ALTEL joint venture agreement required the Company to subscribe for
1,000 Class B shares in exchange for the contribution of working capital and
tangible equipment with a cost of $20.0 million. The Class B shares were fully
subscribed and paid as of December 31, 1995. Funding for the contribution was
provided by PLD. The Company is entitled to a priority return of its $20.0
million contribution upon dissolution, liquidation or wind-up of ALTEL before
the other shareholder receives any proceeds.
Kazakhtelecom ("KT"), the other shareholder of ALTEL, subscribed for 1,000
Class A shares in exchange for the contribution to ALTEL of a fifteen year
license for the use of certain cellular frequencies and the procurement of
access to the public telephone network. For accounting purposes, no value was
assigned to KT's contribution.
The Company's results are dependent upon ALTEL's ability to retain existing
subscribers, to attract new subscribers, and to control operating expenses. The
ability to retain and attract subscribers is dependent upon the general economic
conditions of the marketplace, the demographic characteristics of its
subscribers, the activities of competitors, if any, and other factors which may
be outside the control of the Company.
The Company's operations are also subject to the economic, political, and
social risks inherent in doing business in Kazakhstan. These include the
policies of the Kazakh government, economic conditions, imposition of or changes
to taxes or other similar changes by regulatory bodies, foreign exchange
fluctuations and controls, controlling of prices by the Anti-Monopoly
Commission, the potential for civil disturbance and the deprivation or
unenforceability of contractual rights.
The Kazakh government has exercised and continues to exercise substantial
influence over many aspects of the private sector. The government has been
attempting to implement economic reform policies and encourage substantial
private economic activity. These reforms have been partially successful to date.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Consolidation
The accompanying consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United States
("U.S. GAAP") and are presented in United States' dollars ("U.S. dollars"). The
consolidated financial statements include the accounts of the Company and its
subsidiary, ALTEL, which the Company effectively controls. Significant
intercompany transactions and balances have been eliminated.
The accompanying consolidated financial statements present the financial
position and results of operations of the Company and subsidiary (the "Company")
on a stand-alone basis. The Company incurs and
F-113
<PAGE> 213
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
pays its own expenses. Management assistance is provided by the Parent under the
terms of negotiated management agreements and specific costs incurred by the
Parent on behalf of the Company are charged thereto. All intercompany
transactions and charges are disclosed in note 6, "Related Party Transactions".
Income tax expense is based upon a calculation of current tax expense and
deferred tax expense in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", on a stand-alone basis. Refer
to note 8, "Income Taxes".
Intercompany interest charges incurred are the result of, and are made
pursuant to, intercompany loan and/or lease agreements and are not a result of
allocations of interest by the Parent or its subsidiaries.
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
telecommunication license. The cost of the telecommunication license is
amortized on a straight-line basis over the term of the license.
There are no common costs allocated to the Company by the Parent. Direct
costs incurred by the Parent on behalf of the Company are reimbursed by the
Company. Services provided by the Parent are furnished under the terms of the
negotiated management agreements. Refer to note 6, "Related Party Transactions".
Management of the Company believes that the accompanying consolidated financial
statements include all the costs incurred by the Company in its operations.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. As of December 31,
1998 and 1997, the Company's cash equivalents consist of cash on deposit and
term deposits. As of December 31, 1998 and 1997, the Company had $1,362,000 and
$4,625,000, respectively, in cash equivalents.
(c) Revenue Recognition
Telecommunications revenues include airtime revenues, terminal sales,
subscription fees, connection fees and other revenues. The Company records
airtime revenues, subscription fees, connection fees and other revenues as
earned, at the time the services are provided. Terminal sales are recognized
when the equipment is delivered and the supporting contract is signed.
(d) Inventory
Inventory includes cellular telephones and accessories held for sale and is
stated at the lower of average cost or net realizable value.
(e) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Base station equipment................................. 10
Leasehold improvements and renovations................. 15
Office equipment, computers, and software.............. 3-5
Other telecommunication equipment...................... 3
Vehicles............................................... 3-5
Residential apartments................................. 5
</TABLE>
F-114
<PAGE> 214
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(f) Telecommunications License
The telecommunications license is amortized on a straight-line basis over
15 years, the term of the license.
(g) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognised is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(h) Reporting Currency and Foreign Currency Translation
The statutory accounts of ALTEL are maintained in accordance with Kazakh
accounting rules and regulations and are stated in Kazakh tenge. The Kazakh
statements are translated into U.S. dollars and then adjusted to U.S. GAAP in
accordance with Statement of Financial Accounting Standards No. 52, "Accounting
for Foreign Currency Translation" ("SFAS 52"). ALTEL's functional currency is
the U.S. dollar as virtually all equipment expenditures are made in U.S. dollars
and revenues are collected in U.S. dollar equivalents.
In accordance with SFAS 52, ALTEL has re-measured its financial statements
since the functional currency is also the reporting currency. Accordingly, U.S.
dollar transactions are re-measured at their historical value. Monetary assets
and liabilities denominated in local currencies are translated into U.S. dollars
at the prevailing period-end exchange rate. All other assets and liabilities are
translated at historical exchange rates. Results of operations have been
translated using the monthly average exchange rates. Translation differences
resulting from the use of these different rates are included in the accompanying
statements of operations. The tenge to U.S. dollar exchange rates used as of
December 31, 1998 and 1997 were 83.8 tenge to 1 U.S. dollar and 75.5 tenge to 1
U.S. dollar, respectively.
(i) Income Tax
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income or expense in the period it occurs.
(j) Use of Estimates
The preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the year. Actual results could
differ from those estimates.
(k) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash, trade and
other receivables, amounts due to related parties and accounts payable
approximate fair value due to their short maturity.
F-115
<PAGE> 215
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(l) Comprehensive income
SFAS 130 "Reporting Comprehensive Income" was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognised under accounting
standards as components of comprehensive income be reported in an annual
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 as of January 1, 1998. For
the years ended December 31, 1998 and 1997, comprehensive income was equal to
net income reported in the statement of operations. As SFAS 130 only requires
additional disclosures in the Company's financial statements, its adoption did
not have any impact on the Company's financial position or results of operation.
(m) Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the current year's presentation.
(3) PROPERTY AND EQUIPMENT
Property and equipment, at cost, as of December 31, 1998 and 1997 consists
of the following:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Base station equipment...................................... $ 21,164 $16,998
Leasehold improvements and renovations...................... 5,929 5,277
Office equipment, computers, and software................... 4,537 3,193
Other telecommunications equipment.......................... 1,310 1,092
Vehicles.................................................... 500 456
Residential apartments...................................... 335 335
-------- -------
Total property and equipment...................... 33,775 27,351
Less accumulated depreciation............................... (10,430) (6,423)
-------- -------
Net book value of assets subject to depreciation............ 23,345 20,928
Uninstalled equipment....................................... 6,401 2,434
-------- -------
Property and equipment, net....................... $ 29,746 $23,362
======== =======
</TABLE>
(4) TELECOMMUNICATIONS LICENSE
The telecommunications license as of December 31, 1998 and 1997 consists of
the following:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Costs....................................................... $ 31,595 $31,595
Less accumulated amortization............................... (10,014) (7,902)
-------- -------
Telecommunications license, net........................... $ 21,581 $23,693
======== =======
</TABLE>
In March 1994, PLD acquired all of the outstanding shares of the Company
for consideration of $30.0 million plus costs of acquisition of $0.8 million and
$0.8 million of ALTEL's organization costs. The acquisition was accounted for by
the purchase method of accounting. As of the date of acquisition, ALTEL had not
commenced operations and did not have any tangible assets or liabilities.
Therefore, the entire purchase price was allocated to ALTEL's cellular license
and has been "pushed down" into the Company's financial statements.
F-116
<PAGE> 216
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) SHARE CAPITAL
The authorized share capital of the Company as of December 31, 1998 and
1997 was 20,001,000 ordinary shares of $1 par value each. The shares may be
divided into such number of classes and series as determined by the directors.
The issued and outstanding share capital of the Company as of December 31, 1998
and 1997 consisted of 20,000,002 shares with aggregate par value of $20,000,002.
Two shares were issued on incorporation on October 27, 1993 and an additional
20,000,000 shares were issued on December 20, 1995 to PLD for the contribution
to purchase the class B shares of ALTEL (see note 1). Total dividends declared
and paid were $3,000,000, $1,000,000 and $0 for the years ended December 31,
1998, 1997 and 1996, respectively.
The balance of reserve capital was created in the current year by transfer
from current year profits of the subsidiary. Under the legislation of Kazakhstan
and charter documents of the subsidiary, the subsidiary is required to create
reserve capital equivalent to 25% of its share capital over an undetermined
period. The current reserve capital is equivalent to 0.5% of share capital and
the balance of the required reserve of 24.5% is to be created in future periods.
(6) RELATED PARTY TRANSACTIONS
(a) Management fees of $1,649,000, $1,155,000 and $885,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, were charged to ALTEL by
PLD. In 1998 these amounts were paid direct to PLD; in 1997 and 1996 PLD
received the fees via the Company (See note 9). Balances outstanding of $140,000
and $129,000 as of December 31, 1998 and 1997, respectively, in relation to
these charges, are included in due to related parties.
(b) Additional charges, related to management services, of $94,000,
$191,000, and $26,000 for the years ended December 31, 1998, 1997 and 1996,
respectively, were charged by PLD and another PLD subsidiary. These amounts are
included in general and administrative expenses. A prepayment of $20,000 as of
December 31, 1998 and a balance outstanding of $929,000 as of December 31, 1997,
respectively, in relation to these charges, are included in due from and due to
related parties, respectively.
(c) Direct costs of $4,355,000, $4,163,000, and $3,291,000 for the years
ended December 31, 1998, 1997 and 1996, respectively, were charged by KT to
ALTEL. Balances outstanding of $462,000 and $817,000 as of December 31, 1998 and
1997, respectively, in relation to these charges, are included in due to related
parties.
(d) Consulting fees of $443,000, $88,000 and $81,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, were paid by ALTEL to KT (see
note 9). These amounts are included in general and administrative expenses.
There was no balance outstanding as of December 31, 1998 and 1997 in relation to
these charges.
(e) Lease payments for the office premises in Almaty and other premises of
$263,000, $91,000 and $91,000 for each of the years ended December 31, 1998,
1997 and 1996 were paid by ALTEL to KT. There was no balance outstanding in
relation to these leases as of December 31, 1998 and 1997.
(7) CUSTOMER DEPOSITS AND ADVANCES
(a) Deposits of $3,867,000 and $2,725,000 in the years ended December 31,
1998 and 1997, respectively, were received by ALTEL from customers as guarantee
deposits which should be paid back if contracts are annuled and if there are no
amounts payable to the Company. The size of deposits depends on the type of
subscription and access level.
(b) Advances of $377,000 and $345,000 in the years ended December 31, 1998
and 1997, respectively, were received from customers as prepayments for future
services.
F-117
<PAGE> 217
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) INCOME TAXES
The provision for income tax expense for the years ended December 31, 1998,
1997, and 1996 consists solely of current tax due to the government of Kazakh.
The statutory Kazakh income tax rate for the years ended December 31, 1998,
1997, and 1996 was 30%. The effective tax rates on income as calculated under
U.S. GAAP differ from the statutory rates due to differences between taxable
income under the tax laws of Kazakhstan and net income before income tax and
minority interest for U.S. GAAP purposes. These differences are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ----- -----
<S> <C> <C> <C>
Provision for income tax at statutory rate................. $4,582 3,075 1,400
Add/(deduct) the tax effect of:
Difference in Rates...................................... (655) (439) (200)
Non-deductible amortization of license................... 634 633 626
Foreign currency loss.................................... 98 73 102
Change in valuation allowance............................ 556 55 0
Other.................................................... 701 251 (381)
------ ----- -----
Provision for income tax......................... $5,916 3,648 1,547
====== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 343 342
Accumulated depreciation and amortization................. 1,083 267
Accounts payable and accrued liabilities.................. 59 45
Due to related parties.................................... -- 278
Other..................................................... 11 8
------ ----
1,496 940
Less: valuation allowance................................... (791) (235)
------ ----
Net deferred tax asset.................................... 705 705
Deferred tax liabilities:
Other..................................................... (705) (705)
------ ----
$ -- --
====== ====
</TABLE>
As a result of the rapid change in regulatory environment and uncertainty
surrounding the Kazakh tax regime, the Company has provided a valuation
allowance against deferred tax assets.
F-118
<PAGE> 218
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net change in the valuation allowance was an increase of $556,000 for
the year ended December 31, 1998, and a decrease of $51,000 for the year ended
December 31, 1997.
(9) COMMITMENTS AND CONTINGENCIES
(a) Leases
As of December 31, 1998, the Company had long-term operating leases
primarily involving business facilities and equipment. The leases have varying
terms and contain renewal options. Future minimum lease payments under
non-cancelable operating leases consist of the following as of December 31,
1998:
<TABLE>
<S> <C>
1999........................................................ $ 630
2000........................................................ 608
2001........................................................ 265
2002........................................................ 95
2003........................................................ 65
Thereafter.................................................. 47
------
Total future minimum lease payments............... $1,710
======
</TABLE>
Rent expense for the years ending December 31, 1998, 1997 and 1996 was
$565,000, $541,000, and $422,000 respectively.
(b) PLD
On January 1, 1995, ALTEL entered into a 2 year agreement with the Company,
acting on behalf of PLD, under which PLD would provide certain consulting,
informational services, management support services, and personnel expertise to
ALTEL. Payments under this agreement were $25,000 per month plus 3% of monthly
gross revenues. This agreement was renewed for a further year on January 1, 1997
and was terminated as of December 31, 1997. On January 1, 1998, ALTEL entered
into an agreement directly with PLD covering the same range of services, with
payments of $25,000 per month plus 3.4% of monthly gross revenues. This
agreement was for a one year term, automatically renewable for successive one
year periods unless terminated by either party.
(c) KT
On January 1, 1995, ALTEL entered into a 2 year agreement with KT, under
which KT would provide certain consulting services, management support services,
and personnel expertise. Payments under this agreement were 300,000 tenge per
month ($3,580 at the December 31, 1998 exchange rate) plus 0.15% of monthly
gross revenues. This agreement was renewed for a further year on January 1, 1997
and was terminated as of December 31, 1997. On January 1, 1998, ALTEL entered
into a new agreement with KT, under which KT would provide certain consulting
services, management support services, and personnel expertise. Payments under
this agreement are 300,000 tenge per month ($3,580 at the December 31, 1998
exchange rate) plus 1% of monthly gross revenues. This 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, along
with other PLD subsidiaries, is a guarantor of the debt under the terms of the
related indentures.
F-119
<PAGE> 219
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The Company is a
guarantor of such 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 April
30, 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 claim being made against the Company
under its guaranty and a cross-default under and acceleration of senior discount
notes and convertible subordinated notes with an aggregate principal amount in
excess of $150 million 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.
(e) Motorola, USA
Motorola, USA is the major supplier of ALTEL's network equipment. Under the
supply contract, ALTEL files preliminary purchase orders for the delivery of
equipment with a prepayment of 5% of the cost of purchase order. Once a purchase
order is presented, ALTEL may be exposed to potential liabilities to Motorola,
USA in the amount of $1,159,000 as at December 31, 1998.
F-120
<PAGE> 1
EXHIBIT 4.4
SECOND SUPPLEMENTAL INDENTURE
SECOND SUPPLEMENTAL INDENTURE, dated as of June 15,1998, among (i) PLD
TELEKOM INC. (formerly known as Petersburg Long Distance Inc.), a Delaware
corporation (formerly an Ontario company, that became a Delaware corporation
pursuant to Section 388 of the General Corporation Law of the State of Delaware
pursuant to a Certificate of Domestication filed in Delaware on February 28,
1997) (the "Company"), as issuer, (ii) NWE CAPITAL (CYPRUS) LIMITED, a Cypriot
corporation ("NWE Cyprus"), PLD ASSET LEASING LIMITED, a Cypriot corporation
("PLD Leasing"), PLD CAPITAL LIMITED, a Cypriot corporation ("PLD Capital"), PLD
CAPITAL ASSET (U.S.) INC., a Delaware corporation ("PLD Capital Asset"),
WIRELESS TECHNOLOGY CORPORATIONS LIMITED, a British Virgin Islands corporation
("WTC"), and BALTIC COMMUNICATIONS LIMITED, a Russian joint stock company of the
closed type ("BCL"), as Guarantors, (iii) CLAYTON WAITE, shareholder of NWE
Cyprus as nominee of the Company, and APROPOS INVESTMENTS LTD., shareholder of
PLD Leasing and PLD Capital as nominee of the Company, and (iv) THE BANK OF NEW
YORK, a New York banking corporation ("BONY"), as Senior Note Trustee under the
Senior Note Indenture and Convertible Note Trustee under the Convertible Note
Indenture (as each term is defined below).
RECITALS
WHEREAS, the Company, NWE Cyprus, PLD Leasing, PLD Capital, WTC, BCL
and BONY, as trustee thereunder (the "Senior Note Trustee"), have entered into
the Indenture (as supplemented and amended, the "Senior Note Indenture"), dated
as of May 31, 1996, pursuant to which the Company issued $123,000,000 in
principal amount at Stated Maturity of its 14% Senior Discount Notes due 2004
(the "Senior Notes"; capitalized terms used herein without definition have the
respective meanings defined in the Senior Note Indenture as in effect on the
date hereof);
WHEREAS, the Company, NWE Cyprus, PLD Leasing, PLD Capital, WTC, BCL
and BONY, as trustee thereunder (the "Convertible Note Trustee"), have entered
into the Indenture (as supplemented and amended, the "Convertible Note
Indenture"; together with the Senior Note Indenture, collectively the
"Indentures"), dated as of May 31, 1996, pursuant to which the Company issued
$26,500,000 in principal amount at Stated Maturity of its 9% Convertible
Subordinated Notes due 2006 (the "Convertible Notes");
WHEREAS, the Company has formed PLD Capital Asset for the limited
purpose of operating as a Leasing Company;
WHEREAS, Section 10.5 of each Indenture requires that the Company shall
cause each Subsidiary which, after the date of the Indentures, is required by
Section 4.10(a) of each
<PAGE> 2
Indenture to become a Guarantor to execute and deliver to the Trustee a
supplemental indenture in form and substance reasonably satisfactory to the
trustee which subjects such Restricted Subsidiary to the provisions of each of
the Indentures as a Guarantor;
WHEREAS, PLD Capital Asset desires to enter into this Second
Supplemental Indenture and to become bound by the terms of each of the
Indentures as a Guarantor;
WHEREAS, concurrently herewith, PLD Capital Asset and BONY, in its
capacities as Senior Note Trustee and Convertible Note Trustee and as collateral
agent thereunder (the "PLD Capital Asset Collateral Agent"), have entered into
the Leasing Company Security and Pledge Agreement (PLD Capital Asset) dated as
of the date hereof;
WHEREAS, concurrently herewith, PLD Capital Asset and BONY, in its
capacities as Senior Note Trustee and Convertible Note Trustee and as escrow
agent thereunder (the "PLD Capital Asset Escrow Agent"), have entered into the
Leasing Company Escrow Account Agreement (PLD Capital Asset) dated as of the
date hereof;
WHEREAS, all acts and things prescribed by the Indentures, by law and
by the Certificate of Incorporation and the Bylaws of the Company, of the
Guarantors and of BONY necessary to make this Second Supplemental Indenture a
valid instrument legally binding on the Company, the Guarantors and BONY in the
capacities in which it is a party hereto, in accordance with its terms, have
been duly done and performed;
WHEREAS, all conditions precedent to amend or supplement the
Indentures have been met;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Effect of this Second Supplemental Indenture. This Second
Supplemental Indenture is supplemental to the Indentures and does and shall be
deemed to form a part of, and shall be construed in connection with and as part
of, the respective Indentures for any and all purposes. Except as specifically
modified herein, the Indentures, the Senior Notes and the Convertible Notes are
in all respects ratified and confirmed and shall remain in full force and effect
in accordance with their terms.
SECTION 2. Agreement to Become a guarantor Under the Indentures. PLD
Capital Asset shall become party to each of the Indentures as a Guarantor
thereunder and agrees to be bound by all the terms binding on a Guarantor
thereunder.
SECTION 3. APPLICABLE LAW. THIS SECOND SUPPLEMENTAL INDENTURE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
-2-
<PAGE> 3
SECTION 4. Counterparts. The parties may sign any number of
counterparts or copies of this Second Supplemental Indenture. Each signed
counterpart or copy shall be an original, but all of such executed counterparts
or copies together shall represent the same agreement.
SECTION 5. Severability. In case one or more of the provisions in this
Second Supplemental Indenture shall be held invalid, illegal or unenforceable,
in any respect for any reason, the validity, illegality and enforceability of
any such provision in every other respect and of the remaining provisions shall
not in any way be affected or impaired thereby, it being intended that all of
the provisions hereof shall be enforceable to the full extent provided by law.
SECTION 6. Headings. The headings, the language preceding the text of
the amendments and the sections in this Second Supplemental Indenture have been
inserted for convenience of reference only, are not considered a part hereof and
in no way modify or restrict any of the terms or provisions hereof.
[Signature pages to follow.]
-3-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereby have caused this Second
Supplemental Indenture to be duly executed as of the date first written above.
PLD TELEKOM INC. (formerly known as
Petersburg Long Distance Inc.)
By: /s/ Clayton A. Waite
-------------------------------------
Name: Clayton A. Waite
Title: Vice President
By: /s/ Clive Anderson
-------------------------------------
Name: Clive Anderson
Title: Senior Vice President
NWE CAPITAL (CYPRUS) WAITED
By: /s/ Clayton A. Waite
-------------------------------------
Name: Clayton A. Waite
Title: Authorized Representative
PLD ASSET LEASING LIMITED
By: /s/ Clayton A. Waite
-------------------------------------
Name: Clayton A. Waite
Title: Director
PLD CAPITAL LIMITED
By: /s/ Clayton A. Waite
-------------------------------------
Name: Clayton A. Waite
Title: Director
-4-
<PAGE> 5
PLD CAPITAL ASSET (U.S.) INC.
By: /s/ E. Clive Anderson
----------------------------------
Name: E. Clive Anderson
Title: Vice President
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
By: /s/ E. Clive Anderson
----------------------------------
Name: E. Clive Anderson
Title: Authorized Representative
BALTIC COMMUNICATIONS LIMITED
By: /s/ E. Clive Anderson
----------------------------------
Name: E. Clive Anderson
Title: Authorized Representative
/s/ Clayton A. Waite
-------------------------------------
CLAYTON WAITE
APROPOS INVESTMENTS LTD.
By: /s/ Clayton A. Waite
----------------------------------
Name: Clayton A. Waite
Title: Authorized Representative
-5-
<PAGE> 6
THE BANK OF NEW YORK, as Senior Note
Trustee and Convertible Note Trustee.
By: /s/ Thomas E. Tabor
---------------------------------
Name: Thomas E. Tabor
Title: Assistant Vice President
-6-
<PAGE> 1
EXHIBIT 4.5
THIRD SUPPLEMENTAL INDENTURE
THIRD SUPPLEMENTAL INDENTURE, dated as of January 12, 1999, among (i)
PLD TELEKOM INC., a Delaware corporation (the "Company"), as issuer, (ii) NWE
CAPITAL (CYPRUS) LIMITED, a Cypriot company ("NWE Cyprus"), PLD ASSET LEASING
LIMITED, a Cypriot company ("PLD Leasing"), PLD CAPITAL LIMITED, a Cypriot
company ("PLD Capital"), PLD CAPITAL ASSET (U.S.) INC., a Delaware corporation
("PLDCA"), WIRELESS TECHNOLOGY CORPORATIONS LIMITED, a British Virgin Islands
company ("WTC"), and BALTIC COMMUNICATIONS LIMITED, a Russian joint stock
company of the closed type ("BCL"), as Guarantors, (iii) CLAYTON A. WAITE,
shareholder of NWE Cyprus as nominee for the Company, and APROPOS INVESTMENTS
LTD., a Cypriot company, shareholder of PLD Leasing and PLD Capital as nominee
for the Company, and (iv) THE BANK OF NEW YORK, a New York banking corporation
("SONY"), as trustee under the Indentures (as defined below).
RECITALS
WHEREAS, the Company, NWE Cyprus, PLD Leasing, PLD Capital, WTC, BCL
and BONY, as trustee thereunder (the "Senior Note Trustee"), entered into an
indenture dated as of May 31, 1996 (as amended up to the date hereof, the
"Senior Note Indenture"), pursuant to which the Company issued $123,000,000 in
principal amount at Stated Maturity of its 14% Senior Discount Notes due 2004
(the "Senior Notes", capitalized terms used herein without definition, having
the respective meanings given to them in the Senior Note Indenture);
WHEREAS, the Company, NWE Cyprus, PLD Leasing, PLD Capital, WTC, BCL
and BONY, as trustee thereunder (the "Convertible Note Trustee"), entered into
an indenture dated as of May 31, 1996 (as amended up to the date hereof, the
"Convertible Note Indenture", and, together with the Senior Note Indenture, the
"Indentures", pursuant to which the Company issued $26,500,000 in principal
amount at Stated Maturity of its 9% Convertible Subordinated Notes due 2006 (the
"Convertible Notes");
WHEREAS, the Company and the Guarantors and each of the other parties
to the Indentures desire to amend the terms of Section 10.2 of each of the
Indentures, relating to the limitation of liability of each individual
Guarantor, in the manner hereinafter provided;
1
<PAGE> 2
WHEREAS, such amendments may be made without notice to or consent of
any Holder of Notes pursuant to Section 9.1 (b) and Section 9.1 (f) of each of
the Indentures;
WHEREAS, all acts and things prescribed by the Indentures, by law and
by the Certificate of Incorporation and the Bylaws of the Company, of the
Guarantors and of BONY necessary to make this Third Supplemental Indenture a
valid instrument legally binding on the Company, the Guarantors and BONY in the
capacities in which each is a party hereto, in accordance with its terms, have
been duly done and performed; and
WHEREAS, all conditions precedent to amend or supplement the Indentures
have been met;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Effect of this Third Supplemental Indenture. This Third
Supplemental Indenture is supplemental to the Indentures and does and shall be
deemed to form a part of, and shall be construed in connection with and as a
part of, the respective Indentures for any and all purposes. In the event of any
conflict or inconsistency between the terms of this Third Supplemental Indenture
and either of the Indentures, the terms of this Third Supplemental Indenture
shall govern. The Senior Notes, the Convertible Notes and the Indentures, as
amended by this Third Supplemental Indenture, are in all respects ratified and
confirmed and shall remain in full force and effect in accordance with their
terms, as amended hereby.
SECTION 2. Amendment of Section 10.2 of the Senior Note Indenture. The
second sentence of Section 10.2 of the Senior Note Indenture shall be amended so
as to read hereafter as follows:
"To effectuate the foregoing intention, each such Guarantor hereby
irrevocably agrees that the obligation of such Guarantor under its
Guarantee under this Article X shall be limited to the maximum amount
as will, after giving effect to such maximum amount and all other
contingent and fixed liabilities of such Guarantor that are relevant
under such laws, (including, if applicable, its obligations under the
Convertible Notes) and after giving effect to any collections from,
rights to receive contribution from or payments made by or on behalf of
any other Guarantor in respect of the obligations of such other
Guarantor under this Article X, result in the obligations of such
Guarantor in respect of such maximum amount not constituting a
fraudulent conveyance or fraudulent transfer or not otherwise being
void, voidable or unenforceable under any bankruptcy, reorganization,
receivership, insolvency, liquidation or other similar legislation or
legal principles under any applicable foreign law."
2
<PAGE> 3
SECTION 3. Amendment of Section 10.2 of Convertible Note Indenture. The
second sentence of Section 10.2 of the Convertible Note indenture shall be
amended so as to read hereafter as follows:
"To effectuate the foregoing intention, each such Guarantor hereby
irrevocably agrees that the obligation of such Guarantor under its
Guarantee under this Article X shall be limited to the maximum amount
as will, after giving effect to such maximum amount and all other
contingent and fixed liabilities of such Guarantor that are relevant
under such laws, (including, if applicable, its obligations under the
Senior Notes) and after giving effect to any collections from, rights
to receive contribution from or payments made by or on behalf of any
other Guarantor in respect of the obligations of such other Guarantor
under this Article X, result in the obligations of such Guarantor in
respect of such maximum amount not constituting a fraudulent conveyance
or fraudulent transfer or not otherwise being void, voidable or
unenforceable under any bankruptcy, reorganization, receivership,
insolvency, liquidation or other similar legislation or legal
principles under any applicable foreign law."
SECTION 4. APPLICABLE LAW. THIS THIRD SUPPLEMENTAL INDENTURE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 5. Counterparts. The parties may sign any number of
counterparts or copies of this Third Supplemental Indenture. Each signed
counterpart or copy shall be an original, but all of such executed counterparts
or copies together shall represent the same agreement.
SECTION 6. Severability. In case one or more of the provisions of this
Third Supplemental Indenture shall be held invalid, illegal or unenforceable in
any respect for any reason, the validity, illegality and enforceability of any
such provision in every other respect and of the remaining provisions shall not
in any way be affected or impaired thereby, it being intended that all of the
provisions hereof shall be enforceable to the fullest extent provided by law.
SECTION 7. Headings. The headings in this Third Supplemental Indenture
have been inserted for convenience of reference only, are not considered a part
3
<PAGE> 4
hereof and in no way modify or restrict any of the terms or provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed as of the date first written above.
PLD TELEKOM INC.
By: /s/ Clive Anderson
------------------------------------
NWE CAPITAL (CYPRUS) LIMITED
By: /s/ Clayton A. Waite
------------------------------------
PLD ASSET LEASING LIMITED
By: /s/ Clayton A. Waite
------------------------------------
PLD CAPITAL LIMITED
By: /s/ Clayton A. Waite
------------------------------------
PLD CAPITAL ASSET (U.S.) INC.
By: /s/ Clive Anderson
------------------------------------
WIRELESS TECHNOLOGY
CORPORATIONS LIMITED
By: /s/ Clive Anderson
------------------------------------
4
<PAGE> 5
BALTIC COMMUNICATIONS LIMITED
By: Signature Illegible
-------------------------------
/s/ Clayton A. Waite
-------------------------------
CLAYTON A. WAITE
APROPOS INVESTMENTS LTD.
By: /s/ Clayton A. Waite
-------------------------------
THE BANK OF NEW YORK, as Senior Note Trustee and Convertible Note Trustee, and
as collateral agent or escrow agent under the other Amended Documents
By: /s/ Ming J. Shiang
-------------------------------
MING J. SHIANG
Vice President
5
<PAGE> 1
EXHIBIT 4.6
PLD TELEKOM INC.
(FORMERLY PETERSBURG LONG DISTANCE INC.)
CUSIP NO. 69340T-AA-8
14% SENIOR DISCOUNT NOTE DUE 2004
No. E-1
THIS NOTE IS A GLOBAL NOTE WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO.
UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY TO PLD TELEKOM INC. OR THE REGISTRAR FOR
REGISTRATION OF TRANSFER OR EXCHANGE AND ANY NOTE ISSUED IS REGISTERED
IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS HAS BEEN REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY
PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS HAS
BEEN REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFER OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
AND NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A
SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF
INTERESTS IN THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN
ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.6 OF THE
INDENTURE, DATED AS OF MAY 31, 1996, AS AMENDED, BETWEEN PLD TELEKOM
INC. (FORMERLY PETERSBURG LONG DISTANCE INC.), CERTAIN CORPORATIONS
ACTING AS GUARANTORS AND NAMED THEREIN, AND THE TRUSTEE NAMED THEREIN,
PURSUANT TO WHICH THIS NOTE WAS ISSUED.
<PAGE> 2
PLD Telekom Inc. (formerly Petersburg Long Distance Inc.), a
Delaware corporation (the "Company"), for value received, hereby promises to pay
to CEDE & CO., or its registered assigns, the principal sum indicated on
Schedule A hereof, on June 1, 2004.
Reference is hereby made to the further provisions of this
Note set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth in this place.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Note shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purposes.
IN WITNESS WHEREOF, the Company has caused this Note to be
duly executed under its corporate seal.
Dated: October 21, 1998
PLD TELEKOM INC.
By: /s/ James R.S. Hatt
Name: James R.S. Hatt
Title: President and
Chief Executive Officer
(Corporate Seal)
By: /s/ Simon Edwards
Name: Simon Edwards
Title: Senior Vice President and
Chief Financial Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
THE BANK OF NEW YORK, as Trustee,
certifies that this is one of the
Notes referred to in the Indenture.
By: /s/ Thomas Tabor
Authorized Signatory
PLD TELEKOM INC.
(FORMERLY PETERSBURG LONG DISTANCE INC.)
GLOBAL NOTE
REPRESENTING 14% SENIOR DISCOUNT NOTES DUE 2004
2
<PAGE> 3
1. Indenture.
This Note is one of a duly authorized issue of debt securities
of PLD Telekom Inc. (formerly Petersburg Long Distance Inc.), a Delaware
corporation (such corporation, and its successors and assigns under the
Indenture hereinafter referred to, being herein called the "Company"),
designated as its "14% Senior Discount Notes due 2004" (herein called the
"Notes") limited in aggregate principal amount at Stated Maturity to
$123,000,000 plus any additional amounts that may accrete from June 1, 1998
through November 30, 1998 (the "Total Principal Amount"), issued under an
indenture dated as of May 31, 1996 (as amended or supplemented from time to
time, the "Indenture") among the Company, the corporations acting as guarantors
and named therein (the "Guarantors"), and The Bank of New York, as trustee (the
"Trustee," which term includes any successor Trustee under the Indenture), to
which Indenture reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Guarantors, the Trustee and each Holder of Notes and of the terms upon which
the Notes are, and are to be, authenticated and delivered. The summary of the
terms of this Note contained herein does not purport to be complete and is
qualified by reference to the Indenture. All terms used in this Note which are
not defined herein shall have the meanings assigned to them in the Indenture.
The Indenture imposes certain limitations on the ability of
the Company and its Restricted Subsidiaries to, among other things, make certain
Investments and other Restricted Payments, pay dividends and other
distributions, incur Indebtedness, enter into or permit certain transactions
with Affiliates, create Liens, enter into or permit certain Sale and Leaseback
Transactions, make Asset Sales and engage in businesses other than the
Telecommunications Business. The Indenture also imposes limitations on the
ability of the Company to consolidate or merge with or into any other Person or
permit any other Person to merge with or into the Company, or sell, convey,
assign, transfer, lease or otherwise dispose of all or substantially all of the
Property of the Company to any other Person. In addition, the Indenture imposes
limitations on the ability of Restricted Subsidiaries to issue guarantees and
Preferred Shares and to create consensual restrictions upon their ability to pay
dividends and make certain other payments to the Company.
2. Principal and Interest.
The Company promises to pay the Total Principal Amount to the
Holder hereof on June 1, 2004.
This Note is issued at a discounted principal value of
$87,697,300. This Note will accrete interest at a rate computed as if this Note
had been issued bearing interest at the rate of 14% per annum on May 31, 1996
(being a rate of 14.9445% per annum for the period from the Issue Date through
November 30, 1996), compounded semi-annually, to an aggregate principal amount
of $123,000,000 by December 1, 1998 (subject to the provisions of the next
paragraph). Thereafter interest on this Note will accrue at the rate of 14% per
annum (subject to the provisions of the next paragraph) and will be payable in
cash semi-annually on June 1 and December 1 of each year, commencing June 1,
1999, until the principal amount hereof is paid or made available for payment.
The effect of the foregoing is that this Note will bear interest at the rate of
14.9445% per annum from the Issue Date through November 30, 1996 and 14% per
annum thereafter (subject to the provisions of the next paragraph). The payment
of interest on this Note in respect of the period from the Issue Date to
December 1, 1998, however, will effectively be deferred until Maturity and such
deferred interest will be compounded semi-annually and added to the outstanding
principal amount of this Note. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
<PAGE> 4
Since the Company did not receive on or before May 31, 1998,
$20,000,000 in Cash Proceeds from a sale or sales of Qualified Stock of the
Company occurring subsequent to the Issue Date (other than Qualified Stock
issued upon the exercise of Warrants or upon conversion of the Convertible
Notes), this Note will bear interest at the rate of 14.5% per annum commencing
on June 1, 1998 until any Interest Payment Date prior to which the Company shall
have received such $20,000,000 in Cash Proceeds from such a sale of Qualified
Stock. Commencing on such Interest Payment Date, this Note will again bear
interest at the rate of 14% per annum. For purposes of this interest rate
adjustment provision, the Company will be deemed to have received such
$20,000,000 in Cash Proceeds if a Change of Control has occurred. The interest
so payable, and punctually paid or duly provided for, on any Interest Payment
Date will, subject to certain exceptions provided in the Indenture, be paid to
the Person in whose name this Note (or the Note in exchange or substitution for
which this Note was issued) is registered at the close of business on the Record
Date for interest payable on such Interest Payment Date. The Record Date for any
Interest Payment Date is the close of business on May 15 or November 15, as the
case may be, whether or not a Business Day, immediately preceding the Interest
Payment Date on which such interest is payable. Any such interest not so
punctually paid or duly provided for ("Defaulted Interest") shall forthwith
cease to be payable to the Holder on such Record Date and shall be paid as
provided in Section 2.11 of the Indenture.
Each payment of interest in respect of an Interest Payment
Date will include interest (including Additional Amounts (as hereinafter
defined), if any, and Special Interest (as defined in the Indenture, if any)
accrued through the day before such Interest Payment Date. If an Interest
Payment Date falls on a day that is not a Business Day, the interest payment to
be made on such Interest Payment Date will be made on the next succeeding
Business Day with the same force and effect as if made on such Interest Payment
Date, and no additional interest will accrue as a result of such delayed
payment.
If this Note was issued in substitution for an Initial Note
pursuant to a Registered Exchange Offer on or prior to the Record Date for the
first Interest Payment Date following such substitution, accrued and unpaid
interest, if any, on the equivalent principal amount of the Initial Note in
substitution for which this Note was issued, up to but not including the date of
issuance of this Note, shall be paid on the first Interest Payment Date for this
Note to the Holder of this Note on the first Record Date with respect to this
Note. If this Note was issued in substitution for an Initial Note pursuant to a
Registered Exchange Offer subsequent to the Record Date for the first Interest
Payment Date following such substitution but on or prior to such Interest
Payment Date, then any accrued and unpaid interest with respect to the
equivalent principal amount of the Initial Note in substitution for which this
Note was issued and any accrued and unpaid interest on this Note, including
Additional Amounts, if any, and Special Interest, if any, through the day before
such Interest Payment Date shall be paid on such Interest Payment Date to the
Holder of such Initial Note on such Record Date. Any accretion of value with
respect to the principal amount at Stated Maturity of the Initial Note for which
this Note was issued up to but including the date of issuance of this Note shall
be included as Accreted Value with respect to this Note.
To the extent lawful, the Company shall pay interest on (i) if
prior to December 1, 1998, any overdue Accreted Value of (and premium, if any,
on) this Note, or if on or after December 1, 1998, any overdue principal of (and
premium, if any, on) this Note, at the interest rate borne on this Note, plus 1%
per annum, and (ii) Defaulted Interest (without regard to any applicable grace
period), including Additional Amounts, if any, and Special Interest, if any, at
the same rate. The Company's obligation pursuant to the previous sentence shall
apply whether such overdue amount is due at its Stated Maturity, as a result of
the Company's obligations pursuant to Section 3.6, Section 4.7 or Section 4.8 of
the Indenture, or otherwise.
<PAGE> 5
3. Additional Amounts.
Except to the extent required by law, any and all payments of,
or in respect of, this Note shall be made free and clear of and without
deduction for or on account of any and all present or future taxes, levies,
imposts, deductions, charges or withholdings and all liabilities with respect
thereto imposed by Canada, the Russian Federation, Cyprus or any other
jurisdiction with which the Company or any Guarantor has some connection
(including any jurisdiction (other than the United States of America) from or
through which payments under the Notes are made) or any political subdivision of
or any taxing authority in any such jurisdiction ("Canadian Taxes," "Russian
Taxes," "Cypriot Taxes" or "Other Taxes," respectively). If the Company or any
Guarantor shall be required by law to withhold or deduct any Canadian Taxes,
Russian Taxes, Cypriot Taxes or Other Taxes from or in respect of any sum
payable under this Note or pursuant to a Guarantee, the sum payable by the
Company or such Guarantor, as the case may be, thereunder shall be increased by
the amount ("Additional Amounts") necessary so that after making all required
withholdings and deductions, the Holder of this Note shall receive an amount
equal to the sum that it would have received had no such withholdings and
deductions been made; provided that any such sum shall not be paid in respect of
any Canadian Taxes, Russian Taxes, Cypriot Taxes or Other Taxes to the Holder of
this Note (an "Excluded Holder") (i) resulting from the beneficial owner of this
Note carrying on business or being deemed to carry on business in or through a
permanent establishment or fixed base in the relevant taxing jurisdiction or any
political subdivision thereof or having any other connection with the relevant
taxing jurisdiction or any political subdivision thereof or any taxing authority
therein other than the mere holding or owning of this Note, being a beneficiary
of the Guarantees, the receipt of any income or payments in respect of this Note
or the Guarantees or the enforcement of this Note or the Guarantees, (ii)
resulting from the Company or any Guarantor not dealing at arm's length (within
the meaning of the Income Tax Act (Canada)) with the Holder of this Note at the
time of such payment or at the time the amount of such payment is deemed to have
been paid or credited or (iii) that would not have been imposed but for the
presentation (where presentation is required) of this Note for payment more than
180 days after the date such payment became due and payable or was duly provided
for, whichever occurs later. The Company or the Guarantors, as applicable, will
also (i) make such withholding or deduction and (ii) remit the full amount
deducted or withheld to the relevant authority in accordance with applicable
law, and, in any such case, the Company will furnish to each Holder on whose
behalf an amount was so remitted, within 30 calendar days after the date the
payment of any Canadian Taxes, Russian Taxes, Cypriot Taxes or Other Taxes is
due pursuant to applicable law, certified copies of tax receipts evidencing such
payment by the Company or the Guarantors, as applicable. The Company will, upon
written request of each Holder (other than an Excluded Holder), reimburse each
such Holder for the amount of (i) any Canadian Taxes, Russian Taxes, Cypriot
Taxes or Other Taxes so levied or imposed and paid by such Holder as a result of
payments made under or with respect to any Notes, and (ii) any Canadian Taxes,
Russian Taxes, Cypriot Taxes or Other Taxes so levied or imposed with respect to
any reimbursement under the foregoing clause (i) so that the net amount received
by such Holder (net of payments made under or with respect to such Notes or the
Guarantees) after such reimbursement will not be less than the net amount the
Holder hereof would have received if Canadian Taxes, Russian Taxes, Cypriot
Taxes or Other Taxes on such reimbursement had not been imposed.
In addition, the Company or the Guarantors will pay any stamp,
issue, registration, documentary or other similar taxes and duties, including
interest and penalties, in respect of the creation, issue and offering of the
Notes payable in Canada, the United States, the Russian Federation or Cyprus or
any political subdivision thereof or taxing authority of or in the foregoing.
The Company and the Guarantors will also pay and indemnify the Holders from and
against all court fees and taxes or other taxes and duties, including interest
and penalties, paid by any of them in any jurisdiction in connection with any
action permitted to be taken by the Trustee or the Holders to create the Liens
on the Collateral and the Convertible Note Collateral and to enforce the
obligations of the Company or the Guarantors under the Notes, the Indenture, the
Guarantees, the Collateral Documents or the Convertible Note Collateral
Documents.
<PAGE> 6
4. Method of Payment.
The Company, through the Paying Agent, shall pay interest on
this Note to the registered Holder of this Note, as provided above. The Holder
must surrender this Note to a Paying Agent to collect principal payments. The
Company will pay principal and interest in money of the United States of America
that at the time of payment is legal tender for payment of all debts public and
private. Principal and interest will be payable at the office of the Paying
Agent but, at the option of the Company, interest may be paid by check mailed to
the registered Holders at their registered addresses.
5. Paying Agent and Registrar.
Initially, the Trustee will act as Paying Agent and Registrar
under the Indenture. The Company may, upon written notice to the Trustee,
appoint and change any Paying Agent or Registrar. The Company or any of its
subsidiaries may act as Paying Agent or Registrar.
6. Optional Redemption.
Except as set forth in the following paragraph, the Notes may
not be redeemed prior to June 13, 2001. Thereafter, the Notes will be subject to
redemption at the option of the Company, in whole or in part, upon not less than
30 calendar days' nor more than 60 calendar days' notice, at the prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest thereon (if any), Additional Amounts (if any) and Special
Interest (if any) to the applicable Redemption Date, if redeemed during the
period from June 13, 2001 through May 31, 2002 at a percentage of 108.000% and
thereafter during the twelve-month period beginning June 1 of the years
indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002 104.000%
2003 and thereafter 100.000%
</TABLE>
The Notes may be redeemed, at the option of the Company, in whole but
not in part, upon not less than 30 or more than 60 days' notice to the Holders
in accordance with the terms of the Indenture, at a redemption price equal to
the Accreted Value thereof, plus accrued and unpaid interest, if any, (including
Additional Amounts, if any, and Special Interest, if any) to the applicable
Redemption Date (subject to the right of Holders of record on the relevant
Record Date to receive interest (including Additional Amounts, if any, and
Special Interest, if any) due on the Interest Payment Date that is on or prior
to the Redemption Date) if, as a result of any change in or amendment to the
laws or the regulations or rulings promulgated thereunder of Canada, Cyprus, the
Russian Federation or any other jurisdiction with which the Company or any
Guarantor has any connection (other than as a result of a merger or
consolidation of the Company with or into a newly formed corporation solely for
the purpose of moving the Company's domicile out of Canada) or any political
subdivision thereof or any authority thereof or having power to tax therein, or
any change in the application or official interpretation of such laws or
regulations, or any change in administrative policy or assessing practice of the
applicable taxing authority, which change or amendment becomes effective on or
after May 24, 1996, the Company or the Guarantors (if the Guarantees are called)
are or would be required on the next succeeding Interest Payment Date to pay
Additional Amounts with respect to the Notes or the Guarantees and the payment
of such Additional Amounts cannot be avoided by the use of any reasonable
measures available to the Company or the Guarantors, as the case may be. The
Company will also pay to the Holders on the Redemption Date any Additional
Amounts payable in respect of the period ending on the Redemption Date. Prior to
the publication of any notice of redemption pursuant to this provision, which in
no event will be given earlier than 90 days prior to the earliest date on which
the Company or the Guarantors,
<PAGE> 7
as the case may be, would be required to pay such Additional Amounts were a
payment in respect of the Notes then due, the Company shall deliver to the
Trustee (i) an Officers' Certificate stating that the obligation to pay such
Additional Amounts cannot be avoided by the Company or the Guarantors, as the
case may be, taking reasonable measures and (ii) an Opinion of Counsel,
independent of the Company and the Guarantors and approved by the Trustee, to
the effect that the Company or the Guarantors have or will become obligated to
pay such Additional Amounts as a result of such change or amendment. Such
notice, once delivered by the Company to the Trustee, will be irrevocable. The
Trustee shall accept such Officers' Certificate and Opinion of Counsel as
sufficient evidence of the satisfaction of the condition precedent set forth in
clauses (i) and (ii) above, in which event it shall be conclusive and binding on
the Holders.
7. Notice of Redemption.
At least 30 calendar days but not more than 60 calendar days
before a Redemption Date, the Company will send a notice of redemption, first
class mail, postage prepaid, to Holders of Notes to be redeemed at the addresses
of such Holders as they appear in the Note Register.
If less than all of the Notes are to be redeemed at any time,
the Notes to be redeemed will be chosen by the Trustee in accordance with the
Indenture. If any Note is redeemed subsequent to a Record Date with respect to
any Interest Payment Date specified above and on or prior to such Interest
Payment Date, then any accrued interest (including Additional Amounts, if any,
and Special Interest, if any) will be paid on such Interest Payment Date to the
Holder of the Note at the close of business on such Record Date. If money in an
amount sufficient to pay the Redemption Price of all Notes (or portions thereof)
to be redeemed on the Redemption Date is deposited with the Paying Agent on or
before the applicable Redemption Date and certain other conditions are
satisfied, interest (including Additional Amounts, if any, and Special Interest,
if any) on the Notes to be redeemed on the applicable Redemption Date will cease
to accrue.
The Notes are not subject to any sinking fund.
8. Repurchase at the Option of Holders upon Change of Control.
Upon the occurrence of a Change of Control, each Holder of
Notes shall have the right to require the Company to purchase such Holder's
Notes, in whole or in part in a principal amount that is an integral multiple of
$1,000, pursuant to a Change of Control Offer, at a purchase price in cash equal
to 101% of the Accreted Value thereof on any Change of Control Payment Date,
plus accrued and unpaid interest, if any, Additional Amounts, if any, and
Special Interest, if any, to the Change of Control Payment Date.
Within 30 calendar days following any Change of Control, the
Company shall send, or cause to be sent, by first class mail, postage prepaid, a
notice regarding the Change of Control Offer to each Holder of Notes. The Holder
of this Note may elect to have this Note or a portion hereof in an authorized
denomination purchased by completing the form entitled "Option of Holder to
Require Purchase" appearing below and tendering this Note pursuant to the Change
of Control Offer. Unless the Company defaults in the payment of the Change of
Control Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Change of Control Offer will cease to
accrue interest, Additional Amounts, if any, and Special Interest, if any, from
and after the Change of Control Payment Date.
9. Repurchase at the Option of Holders upon Asset Sale.
Subject to the limitations set forth in the next following
paragraph, if at any time the Company or any Restricted Subsidiary engages in
any Asset Sale, as a result of which the aggregate amount
<PAGE> 8
of Excess Proceeds exceeds $5,000,000, the Company shall, within 30 calendar
days of the date the amount of Excess Proceeds exceeds $5,000,000, use the
then-existing Excess Proceeds to make an offer to purchase from all Holders, on
a pro rata basis, Notes in an aggregate principal amount equal to the maximum
principal amount that may be purchased out of the then-existing Excess Proceeds,
at a purchase price in cash equal to 100% of the Accreted Value thereof on any
Asset Sale Payment Date plus accrued and unpaid interest thereon, if any,
Additional Amounts, if any, and Special Interest, if any, to the Asset Sale
Payment Date, provided that Excess Proceeds attributed to an Asset Sale of
Convertible Note Collateral (as defined on the Indenture) must be used first to
make an "Asset Sale Offer" pursuant to the Convertible Note Indenture (as
defined in the Indenture). Upon completion of an Asset Sale Offer (including
payment of the Asset Sale Purchase Price for accepted Notes), any surplus Excess
Proceeds that were the subject of such offer shall cease to be Excess Proceeds,
and the Company may then use such amounts for general corporate purposes,
including the making of an "Asset Sale Offer" pursuant to the Convertible Note
Indenture.
Notwithstanding the paragraph above, the Company will not be
obligated to repurchase Notes in connection with an Asset Sale Offer
representing in aggregate more than 25% of the original aggregate principal
amount of the Notes (which original aggregate principal amount shall for these
purposes be the aggregate amount originally allocated to the Notes, net of any
amounts allocated to the Warrants, without any adjustment whatsoever) prior to
the date following the Five Year Date, and the original aggregate principal
amount of Notes repurchased in connection with any Asset Sale Offer having a
purchase date prior to the date following the Five Year Date shall represent no
more than 25% of the original aggregate principal amount of the Notes less the
original aggregate principal amount of Notes purchased pursuant to Asset Sale
Offers relating to all prior Asset Sales. To the extent that the amount of
Excess Proceeds exceeds the amount of Notes purchased because of the limitation
imposed by the immediately preceding sentence (the amount of such excess being
the "Aggregate Unused Proceeds"), such Aggregate Unused Proceeds shall
constitute Excess Proceeds for purposes of the first Asset Sale Offer that is
made after the Five Year Date and, in the event the amount of the Aggregate
Unused Proceeds exceeds $5,000,000, promptly after the Five Year Date, the
Company shall commence an Asset Sale Offer on a pro rata basis for an aggregate
principal amount of Notes equal to the Aggregate Unused Proceeds (and any other
Excess Proceeds that arise between the Five Year Date and such Asset Sale Offer)
at a purchase price equal to 100% of the Accreted Value of the Notes, plus
accrued interest, if any, Additional Amounts, if any, and Special Interest, if
any, to the date of purchase.
Within 30 calendar days of the date the amount of Excess
Proceeds exceeds $5,000,000, the Company shall send, or cause to be sent, by
first class mail, postage prepaid, a notice regarding the Asset Sale Offer to
each Holder of Notes. The Holder of this Note may elect to have this Note or a
portion hereof in an authorized denomination purchased by completing the form
entitled "Option of Holder to Require Purchase" appearing below and tendering
this Note pursuant to the Asset Sale Offer. Unless the Company defaults in the
payment of the Offer Purchase Price with respect thereto, all Notes or portions
thereof selected for payment pursuant to the Asset Sale Offer will cease to
accrue interest, Additional Amounts, if any, and Special Interest, if any, from
and after the Asset Sale Payment Date.
10. The Global Note.
So long as this Global Note is registered in the name of the
Depositary or its nominee, members of, or participants in, the Depositary
("Agent Members") shall have no rights under the Indenture with respect to this
Global Note held on their behalf by the Depositary or the Trustee as its
custodian, and the Depositary may be treated by the Company, the Guarantors, the
Trustee and any agent of the Company, the Guarantors or the Trustee as the
absolute owner of this Global Note for all purposes. Notwithstanding the
foregoing, nothing herein shall (i) prevent the Company, the Guarantors, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization
<PAGE> 9
furnished by the Depositary or (ii) impair, as between the Depositary and its
Agent Members, the operation of customary practices governing the exercise of
the rights of a Holder of Notes.
The Holder of this Global Note may grant proxies and otherwise
authorize any Person, including Agent Members and Persons that may hold
interests in this Global Note through Agent Members, to take any action which a
Holder of Notes is entitled to take under the Indenture or the Notes.
Whenever, as a result of an optional redemption of Notes by
the Company, a Change of Control Offer, an Asset Sale Offer or an exchange for
Certificated Notes, this Global Note is redeemed, repurchased or exchanged in
part, this Global Note shall be surrendered by the Holder thereof to the Trustee
who shall cause an adjustment to be made to Schedule A hereof so that the
principal amount of this Global Note will be equal to the portion not redeemed,
repurchased or exchanged and shall thereafter return this Global Note to such
Holder; provided that this Global Note shall be in a principal amount at Stated
Maturity of $1,000 or an integral multiple of $1,000.
11. Transfer and Exchange.
The Holder of this Global Note shall, by its acceptance of
this Global Note, agree that transfers of beneficial interests in this Global
Note may be effected only through a book entry system maintained by such Holder
(or its agent), and that ownership of a beneficial interest in the Notes
represented thereby shall be required to be reflected in book entry form.
Transfers of this Global Note shall be limited to transfers in
whole, and not in part, to the Depositary, its successors and their respective
nominees. Interests of beneficial owners in this Global Note may be transferred
in accordance with the rules and procedures of the Depositary (or its
successors).
This Global Note will be exchanged by the Company for one or
more Certificated Notes if (a) the Depositary (i) has notified the Company that
it is unwilling or unable to continue as, or ceases to be, a "Clearing Agency"
registered under Section 17A of the Exchange Act and (ii) a successor to the
Depositary registered as a "Clearing Agency" under Section 17A of the Exchange
Act is not appointed by the Company within 90 calendar days or (b) the
Depositary is at any time unwilling or unable to continue as Depositary and a
successor to the Depositary is not able to be appointed by the Company within 90
calendar days. If an Event of Default occurs and is continuing, the Company
shall, at the request of the Holder hereof, exchange all or part of this Global
Note for one or more Certificated Notes; provided that the principal amount at
Stated Maturity of each of such Certificated Notes and this Global Note, after
such exchange, shall be $1,000 or an integral multiple thereof. Whenever this
Global Note is exchanged as a whole for one or more Certificated Notes, it shall
be surrendered by the Holder to the Trustee for cancellation. Whenever this
Global Note is exchanged in part for one or more Certificated Notes, it shall be
surrendered by the Holder to the Trustee and the Trustee shall make the
appropriate notations thereon pursuant to Section 2.5(c) of the Indenture. All
Certificated Notes issued in exchange for this Global Note or any portion hereof
shall be registered in such names as the Depositary shall instruct the Trustee.
Any Certificated Notes issued in exchange for this Global Note shall include the
Unit Legend except as set forth in Section 2.6(j) of the Indenture. Interests in
this Global Note may not be exchanged for Certificated Notes other than as
provided in this paragraph.
Following the suspension or termination of a Shelf Registration
Statement, the Holder of this Note (or holders of interests therein) and
prospective purchasers designated by such Holder (or such holders of interests
therein) shall have the right to obtain from the Company upon request by such
Holder (or such holders of interests) or prospective purchasers, during any
period in which the Company is not subject to Section 13 or 15(d) of the
Exchange Act, or exempt from reporting pursuant to 12g3-2(b) under the
<PAGE> 10
Exchange Act, the information required by paragraph (d)(4)(i) of Rule 144 in
connection with any transfer or proposed transfer of such Note or interest.
12. Denominations.
The Notes are issuable only in registered form without coupons
in denominations of $1,000 of principal amount at Stated Maturity and integral
multiples thereof.
13. Unclaimed Money.
If money for the payment of principal or interest remains
unclaimed for two years, the Trustee or Paying Agent shall pay the money back to
the Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment unless such abandoned property
law designates another Person.
14. Discharge and Defeasance.
Subject to certain conditions, the Company at any time may
terminate some or all of its and the Guarantors' obligations under the Notes,
the Guarantees, the Indenture, the Collateral Documents and the Convertible Note
Collateral Documents if the Company irrevocably deposits with the Trustee money
or U.S. Government Obligations for the payment of principal and interest on the
Notes to redemption or maturity, as the case may be.
15. Amendment, Waiver.
Subject to certain exceptions set forth in the Indenture, (i)
the Indenture, the Notes, the Collateral Documents and the Convertible Note
Collateral Documents may be amended with the written consent of the Holders of
at least a majority in principal amount at Stated Maturity of the outstanding
Notes and (ii) any past Default and its consequences may be waived with the
written consent of the Holders of at least a majority in principal amount at
Stated Maturity of the outstanding Notes. Without the consent of any Holder of
Notes, the Company, the Guarantors and the Trustee may amend the Indenture, the
Notes, the Collateral Documents and the Convertible Note Collateral Document (i)
to evidence the succession of another Person to the Company or the Guarantors,
as applicable, and the assumption by such successor of the covenants of the
Company or the Guarantors under the Notes, the Indenture, the Collateral
Documents or the Convertible Note Collateral Documents; (ii) to add additional
covenants or to surrender rights and powers conferred on the Company or the
Guarantors by the Indenture, the Collateral Documents and the Convertible Note
Collateral Documents; (iii) to add any additional Events of Default; (iv) to
provide for uncertificated Notes in addition to or in place of Certificated
Notes; (v) to evidence and provide for the acceptance of appointment under the
Indenture of a successor Trustee; (vi) to add additional security for the Notes
and/or the Guarantees; (vii) to cure any ambiguity in the Indenture, the
Collateral Documents or the Convertible Note Collateral Documents, to correct or
supplement any provision in the Indenture, the Collateral Documents or the
Convertible Note Collateral Documents which may be inconsistent with any other
provision therein or to add any other provisions with respect to matters or
questions arising under the Indenture, the Collateral Documents or the
Convertible Note Collateral Documents, provided that such actions shall not
adversely affect the interests of the Holders in any material respect; or (viii)
to comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
<PAGE> 11
16. Defaults and Remedies.
Events of Default under the Indenture include in summary form:
default in payment of interest, including Additional Amounts, if any, or Special
Interest, if any, on the Notes for 30 days; default in payment of principal on
the Notes; failure to comply with certain of the covenants in the Indenture,
including the Change of Control covenant, the Asset Sale covenant or the
Restrictive Payments covenant; failure by the Company to comply with certain of
its other agreements in the Indenture or the Notes or any Collateral Document or
any Convertible Note Collateral Document or a breach of a representation or
warranty in any Collateral Document or any Convertible Note Collateral Document
and the continuance of such default or breach for 45 days after notice;
expropriation of assets of the Company or any of its Restricted Subsidiaries
having a book value, less the book value of the expropriation proceeds,
constituting more than 15% of the book value, on a consolidated basis, of the
Company's assets minus current assets; defaults in the payment of certain other
Indebtedness, or defaults, other than such payment defaults, which result in the
acceleration prior to express maturity of certain other Indebtedness or which
consist of the failure to pay at maturity; certain final judgments which remain
undischarged, unwaived, unappealed, unbonded, unstayed or unsatisfied; certain
events of bankruptcy or insolvency; failure of a Guarantee, a Collateral
Document or any Convertible Note Collateral Document to be in effect, the denial
of obligations under a Guarantee, a Collateral Document, a Convertible Note
Collateral Document or the Notes by the Company or the Guarantors party thereto
or the failure of the Notes and the Guarantees to be secured by the theretofore
perfected security interests in the Collateral or the Convertible Note
Collateral (except as permitted by the Indenture, the Collateral Documents or
the Convertible Note Collateral Documents), which in each circumstance continues
for 30 days after notice. If an Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in principal amount at Stated Maturity of
the Notes, subject to certain limitations, may declare all the Notes to be
immediately due and payable. Certain events of bankruptcy or insolvency are
Events of Default and shall result in the Notes being immediately due and
payable upon the occurrence of such Events of Default without any further act of
the Trustee or any Holder.
Holders of Notes may not enforce the Indenture, the
Guarantees, the Notes, the Collateral Documents or the Convertible Note
Collateral Documents except as provided in the Indenture. The Trustee may refuse
to enforce the Indenture, the Notes, the Guarantees, the Collateral Documents or
the Convertible Note Collateral Documents unless it receives reasonable
indemnity or security. Subject to certain limitations, Holders of a Majority in
principal amount at Stated Maturity of the Notes may direct the Trustee in its
exercise of any trust or power under the Indenture, the Collateral Documents and
the Convertible Note Collateral Documents. The Holders of a majority in
principal amount at Stated Maturity of the outstanding Notes, by written notice
to the Company and the Trustee, may rescind any declaration of acceleration and
its consequences if the rescission would not conflict with any judgment or
decree, and if all Events of Default have been cured or waived except nonpayment
of principal and interest (including Additional Amounts, if any, and Special
Interest, if any) that has become due solely because of the acceleration.
17. Collateral Documents.
As provided in the Indenture, the Collateral Documents and the
Convertible Note Collateral Documents and subject to certain limitations set
forth therein, the obligations of the Company and the Guarantors under the
Indenture, the Collateral Documents and the Convertible Note Collateral
Documents are secured by the Collateral and the Convertible Note Collateral as
provided in the Collateral Documents and the Convertible Note Collateral
Documents. Each Holder, by accepting a Note, agrees to be bound to all terms and
provisions of the Collateral Documents and the Convertible Note Collateral
Documents, as the same may be amended from time to time. The Liens created under
the Collateral Documents shall be released upon the terms and subject to the
conditions set forth in the Indenture, the Collateral Documents and the
Convertible Note Collateral Documents.
<PAGE> 12
18. Individual Rights of Trustee.
Subject to certain limitations imposed by the Trust Indenture
Act, the Trustee or any Paying Agent or Registrar, in its individual or any
other capacity, may become the owner or pledgee of Notes and may otherwise deal
with the Company, the Guarantors, its Restricted Subsidiaries or its Affiliates
with the same rights it would have if it were not Trustee, Paying Agent or
Registrar, as the case may be, under the Indenture.
19. No Recourse Against Certain Others.
No director, officer, employee, incorporator or stockholder of
the Company or any Guarantor, as such, shall have any liability for any
obligations of the Company or the Guarantors under the Notes, the Guarantees or
the Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation, solely by reason of his or her status as a
director, officer, employee, incorporator or stockholder of the Company or any
Guarantor. By accepting a Note, each Holder waives and releases all such
liability (but only such liability) as part of the consideration for issuance of
such Note to such Holder.
20. Governing Law.
THE INDENTURE, THE GUARANTEES AND THIS NOTE SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
21. Abbreviations.
Customary abbreviations may be used in the name of a Holder or
an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors
Act).
22. CUSIP Numbers.
Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures, the Company has caused CUSIP numbers
to be printed on the Notes and have directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Holders. No representation is made as
to the accuracy of such numbers either as printed on the Notes or as contained
in any notice of redemption and reliance may be placed only on the other
identification numbers placed thereon.
23. Subordination.
The indebtedness evidenced by this Note is, to the extent
provided in the Indenture, subordinate and subject in right of payment to the
prior payment in full of all Senior Indebtedness, and this Note is issued
subject to the provisions of the Indenture with respect thereto. Each Holder of
this Note, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
action as may be necessary or appropriate to effectuate the subordination so
provided, and (c) appoints the Trustee his attorney-in-fact for any and all such
purposes.
<PAGE> 13
The Company will furnish to any Holder of Notes upon written
request and without charge to the Holder a copy of the Indenture which has in it
the text of this Note. Requests may be made to:
PLD Telekom Inc.
680 Fifth Avenue
24th Floor
New York, New York 10019
SUBSIDIARY GUARANTEE
Subject to the limitations set forth in the Indenture, the
Guarantors (as defined in the Indenture referred to in this Note and each
hereinafter referred to as a "Guarantor," which term includes any successor or
additional Guarantor under the Indenture) have, jointly and severally,
irrevocably and unconditionally guaranteed (a) the due and punctual payment of
the principal (and premium, if any) of and interest (including Additional
Amounts, if any, and Special Interest, if any) on the Notes, whether at Stated
Maturity, by acceleration, call for redemption, upon a Change of Control Offer,
Asset Sale Offer, purchase or otherwise, (b) the due and punctual payment of
interest on the overdue principal of and interest (including Additional Amounts,
if any, and Special Interest, if any) on the Notes, if any, to the extent
lawful, (c) the due and punctual performance of all other obligations of the
Company and the Guarantors to the Holders under the Indenture, the Notes, the
Collateral Documents and the Convertible Note Collateral Documents and (d) in
case of any extension of time of payment or renewal of any Notes or any of such
other obligations, the same will be promptly paid in full when due or performed
in accordance with the terms of the extension or renewal, whether at Stated
Maturity, by acceleration, call for redemption, upon a Change of Control Offer,
Asset Sale Offer, purchase or otherwise. Capitalized terms used herein shall
have the same meanings assigned to them in the Indenture unless otherwise
indicated.
Payment on each Note is guaranteed jointly and severally, by
the Guarantors pursuant to Article X of the Indenture and reference is made to
such Indenture for the precise terms of the Guarantees.
The obligations of each Guarantor are limited to the lesser of
(a) an amount equal to such Guarantor's Adjusted Net Assets as of the date of
the Guarantee and (b) the maximum amount as will, after giving effect to such
maximum amount and all other contingent and fixed liabilities of such Guarantor
(including, if applicable, its obligations under the Convertible Notes), and
after giving effect to any collections from or payments made by or on behalf of
any other Guarantor in respect of the obligations of such other Guarantor under
its Guarantee or pursuant to its contribution obligations under the Indenture,
result in the obligations of such Guarantor under the Guarantee not constituting
a fraudulent conveyance or fraudulent conveyance or fraudulent transfer under
federal or state law or not otherwise being void, voidable or unenforceable
under any similar other bankruptcy, receivership, insolvency, liquidation or
other similar legislation or legal principles under applicable foreign law. Each
Guarantor that makes a payment or distribution under a Guarantee shall be
entitled to a contribution from each other Guarantor in a pro rata amount based
on the Adjusted Net Assets of each Guarantor.
Certain of the Guarantors may be released from their
Guarantees upon the terms and subject to the conditions provided in the
Indenture.
<PAGE> 14
The Guarantee shall be binding upon each Guarantor and its
successors and assigns and shall inure to the benefit of the Trustee and the
Holders and, in the event of any transfer or assignment of rights by any Holder
or the Trustee, the rights, the rights and privileges herein conferred upon that
party shall automatically extend to and be vested in such transferee or
assignee, all subject to the terms and conditions hereof and in the Indenture.
NWE CAPITAL (CYPRUS) LIMITED
By: /s/ Clayton A. Waite
PLD ASSET LEASING LIMITED
By: /s/ Clayton A. Waite
PLD CAPITAL LIMITED
By: /s/ Clayton A. Waite
PLD CAPITAL ASSET (U.S.) INC.
By: /s/ E. Clive Anderson
BALTIC COMMUNICATIONS LIMITED
By: /s/ E. Clive Anderson
WIRELESS TECHNOLOGY CORPORATIONS
LIMITED
By: /s/ E. Clive Anderson
<PAGE> 15
SCHEDULE A
SCHEDULE OF PRINCIPAL AMOUNT
The initial principal amount at Stated Maturity of this Note shall be
$123,000,000.00. The following decreases/increase in the principal amount at
maturity of this Note have been made:
<TABLE>
<CAPTION>
TOTAL PRINCIPAL
AMOUNT AT NOTATION
DECREASE IN INCREASE IN MATURITY MADE BY
DATE OF PRINCIPAL PRINCIPAL FOLLOWING SUCH OR ON
DECREASE/ AMOUNT AT AMOUNT AT DECREASE/ BEHALF OF
INCREASE MATURITY MATURITY INCREASE TRUSTEE
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE> 16
ASSIGNMENT
(To be executed by the registered Holder
if such Holder desires to transfer this Note)
FOR VALUE RECEIVED hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
TAX IDENTIFYING NUMBER OF TRANSFEREE
(Please print name and address of transferee)
this Note, together with all right, title and interest herein, and does hereby
irrevocably constitute and appoint ________________________ Attorney to transfer
this Note on the Security Register, with full power of substitution.
Dated: _______________________
______________________________ ________________________ Signature of Holder
Signatures must be guaranteed by an
"eligible guarantor institution" meeting the
requirements of the Registrar, in which
requirements include membership or
participation in the Security Transfer Agent
Medallion Program ("STAMP") or such other
"signature guarantee program" as may be
determined by the Registrar in addition to,
or in substitution for, STAMP, all in
accordance with the Securities Exchange Act
of 1934, as amended.
NOTICE: The signature to the foregoing Assignment must correspond to the Name as
written upon the face of this Note in every particular, without alteration or
any change whatsoever.
<PAGE> 17
OPTION OF HOLDER TO ELECT PURCHASE
(check as appropriate)
[ ] In connection with the Change of Control Offer made pursuant to
Section 4.7 of the Indenture, the undersigned hereby elects to have
[ ] the entire principal amount
[ ] $_____________________ ($1,000 in principal amount at Stated
Maturity or an integral multiple thereof) of this Note
repurchased by the Company. The undersigned hereby directs
the Trustee or Paying Agent to pay it or __________________an
amount in cash equal to 101% of the Accreted Value of this
Note, plus accrued and unpaid interest thereon, if any, and
Additional Amounts, if any, and Special Interest, if any, to
the Change of Control Payment Date.
[ ] In connection with the Asset Sale Offer made pursuant to Section 4.8
of the Indenture, the undersigned hereby elects to have
[ ] the entire principal amount
[ ] $_____________________ ($1,000 in principal amount at Stated
Maturity or an integral multiple thereof) of this Note
repurchased by the Company. The undersigned hereby directs the
Trustee or Paying Agent to pay it or ______________________an
amount in cash equal to 100% of the Accreted Value of this
Note, plus accrued and unpaid interest thereon, if any, and
Additional Amounts, if any, and Special Interest, if any, to
the Asset Sale Payment Date.
Dated: _______________________
______________________________ ________________________ Signature of Holder
Signatures must be guaranteed by an
"eligible guarantor institution" meeting the
requirements of the Registrar, in which
requirements include membership or
participation in the Security Transfer Agent
Medallion Program ("STAMP") or such other
"signature guarantee program" as may be
determined by the Registrar in addition to,
or in substitution for, STAMP, all in
accordance with the Securities Exchange Act
of 1934, as amended.
NOTICE: The signature to the foregoing must correspond to the Name as written
upon the face of this Note in every particular, without alteration or any change
whatsoever.
<PAGE> 1
EXHIBIT 4.18
LEASING COMPANY ESCROW ACCOUNT AGREEMENT
[PLD Capital Asset (U.S.) Inc.]
This LEASING COMPANY ESCROW ACCOUNT AGREEMENT (the "Agreement"), dated
as of June 15, 1998, among The Bank of New York, a Now York banking corporation,
as escrow agent (in such capacity, the "Escrow Agent"), The Bank of New York, a
New York banking corporation, as trustee (in such capacity, the "Senior Note
Trustee") under the Senior Note Indenture (as defined herein), The Bank of
New York, a New York banking corporation, as trustee (in such capacity, the
"Convertible Note Trustee") under the Convertible Note Indenture (as defined
herein), and PLD Capital Asset (U.S.) Inc., a Delaware corporation (the "Leasing
Company").
RECITALS
A. Pursuant to the Indenture, dated as of May 31, 1996 (as amended,
amended and restated, supplemented or otherwise modified from time to time, the
"Senior Note Indenture"), among Petersburg Long Distance Inc., an Ontario
corporation (the "Company"), the corporations acting as guarantors and named
therein (the "Senior Note Guarantors" and each, a "Senior Note Guarantor") and
the Trustee, the Company is issuing $123,000,000 aggregate principal amount at
stated maturity of its 14% Senior Discount Notes due June 1, 2004 (the ""Senior
Notes").
B. Pursuant to the Indenture, dated as of May 31, 1996 (as amended,
amended and restated, supplemented or otherwise modified from time to time, the
"Convertible Note Indenture"), among the Company, the corporations acting as
guarantors and named therein (the "Convertible Note Guarantors") and the
Convertible Note Trustee, the Company is issuing $26,500,000 aggregate principal
amount of its 9% Convertible Subordinated Notes due 2006 (the "Convertible
Notes").
C. Pursuant to the Senior Note Indenture and the Convertible Note
Indenture, the Leasing Company has jointly and severally, irrevocably and
unconditionally guaranteed all of the obligations of the Company under the
Senior Notes, the Senior Note Indenture and the Senior Note Collateral Documents
and under the Convertible Notes, the Convertible Note Indenture and the
Convertible Note Collateral Documents and all of the obligations of the Senior
Note Guarantors under the Senior Note Indenture, Senior Note Guarantees and the
other Senior Note Collateral Documents.
D. As security for its obligations, among other things, under the
Senior Notes and the Senior Note Indenture and as security for its obligations,
among other things, under the Convertible Notes and the Convertible Note
Indenture, the Leasing Company is required to enter into a Leasing Company
Security and Pledge Agreement of even date herewith (the "Leasing
<PAGE> 2
Company Security Agreement") with the Senior Note Trustee, the collateral agent
named therein (the "Senior Note Escrow Agent") and the Convertible Note Trustee,
in which the Company is granting Liens on and a security interest in certain
collateral described therein (the "Senior Note Collateral").
E. Under the terms of the Senior Note Indenture and the Leasing Company
Pledge and Security Agreement, the Leasing Company is required to deposit (i)
all funds which it receives from the Company, whether representing the proceeds
of the Senior Notes or otherwise, (ii) all payments which it receives from
Restricted Subsidiaries or Qualified Joint Ventures allocable or related to or
in connection with Telecommunications Asset Agreements, Investments constituting
lease or rental payments or other payments, or from Persons in which Qualified
Investments are made, whether constituting interest and principal payments,
dividends or distributions or other payments and (iii) all funds which it
receives from other Leasing Companies in a special, segregated and irrevocable
account in the name of and beneficially owned by the Leasing Company which is
pledged to, and to be under the sole dominion and control of, the Senior Note
Trustee, acting for its benefit and the equal and ratable benefit of the Holders
of the Senior Notes and the Convertible Note Trustee, acting for its benefit and
the equal and ratable benefit of the Holders of the Convertible Notes (the
"Leasing Company Escrow Account") pending the reinvestment of such amounts in
accordance with the Senior Note Indenture.
F. The parties have entered into this Agreement in order to set forth
the conditions upon which, and the manner in which, funds will be disbursed from
the Leasing Company Escrow Account and released from the security interest and
Liens described above.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1 . Defined Terms. Terms used herein and not defined herein shall have
the meanings as defined in the Senior Note Indenture. In addition to any other
defined terms used herein, the following terms shall constitute defined terms
for purposes of this Agreement and shall have the meanings set forth below:
"Affiliates" of any specified person means (i) any other person which,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified person or (ii) any other person who is a director or
officer (A) of such specified person, (B) of any subsidiary of such specified
person or (C) of any person described in clause (i) above or (iii) any person in
which such person has, directly or indirectly, a 5% or greater voting or
economic interest or the power to control. For purposes of this definition,
control of a person means the power, directly or indirectly, to direct or cause
the direction of the management or policies of such person whether through the
ownership of voting securities or by contract or otherwise and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
2
<PAGE> 3
"Applied" means that disbursed funds have been applied pursuant to
Section 3(a) or pursuant to Section 6(b)(iii).
"Available Funds" means (A) the sum of (i) all amounts deposited in the
Leasing Company Escrow Account from time to time and (ii) interest earned or
dividends paid on the funds in the Escrow Accounts (including holdings of
Eligible Cash Equivalents), less (B) the aggregate disbursements previously made
pursuant to this Agreement.
"Collateral" shall have the meaning given in Section 6(a) hereof.
"Company Senior Note Escrow Account" means the escrow account
established pursuant to Section 2(b) of the Company Senior Note Escrow Account
Agreement.
"Company Senior Note Escrow Account Agreement" means that certain
Company Senior Note Escrow Account Agreement of even date herewith among the
Escrow Agent, the Trustee and the Company.
"Default" means a "Default" as defined in Section 1.1 of the Senior
Note Indenture until the Senior Notes are no longer outstanding and the Senior
Note Indenture has been satisfied and discharged in which case a "Default"
means a "Default" as defined in the Convertible Note Indenture if not then
satisfied and discharged.
"Disbursement Request" means a notice sent by the Leasing Company to
the Escrow Agent requesting a disbursement of funds from the Leasing Company
Escrow Account, in substantially the form of Exhibit A hereto. Each Disbursement
Request shall be signed by the Chairman of the Board, a Vice Chairman of the
Board, the Chief Executive Officer, the Chief Operating Officer, the Chief
Financial Officer or any Vice President of the Company.
"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof), (ii) time deposits,
certificates of deposit, or Eurodollar deposits of any commercial bank organized
in the United States having capital and surplus in excess of $500,000,000, (iii)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (ii) above, (iv) direct
obligations issued by any state of the United States of America or any political
subdivision of any such state or any public instrumentality thereof maturing, or
subject to tender at the option of the holder thereof within ninety days after
the date of acquisition thereof and, at the time of acquisition having a rating
of A or better from Standard & Poor's or A-2 or better from Moody's, (v)
commercial paper issued by the parent corporation of any commercial bank
organized in the United States having capital and surplus in excess of
$500,000,000 and commercial paper issued by non-bank issuers rated A-1 by
Standard & Poor's or P-1 by Moody's and in each case maturing within 270 days
after the date of acquisition, (vi) overnight bank deposits and bankers'
3
<PAGE> 4
acceptances at any commercial bank organized in the United States having capital
and surplus in excess of $500,000,000, (vii) deposits available for withdrawal
on demand with a commercial bank organized in the United States having capital
and surplus in excess of $500,000,000 and (viii) investments in money market
funds substantially all of whose assets comprise securities of the types
described in clauses (i) through (vi).
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500,000,000 its equivalent in
foreign currency, whose debt is rated "A" (or higher) or the equivalent rating
according to Standard & Poor's or Moody's at the time as of which any investment
or rollover therein is made.
"Escrow Account Statement" shall have the meaning given in Section
2(g).
"Escrow Agent" shall have the meaning set forth in the preamble to this
Agreement.
"Initial Escrow Amount" shall mean $46,000,000 of the net proceeds
received by the Company from the sale of the Senior Notes pursuant to the
Purchase Agreement.
"Interest Payment Date" means June 1 and December 1 of each year,
commencing on December 1, 1996, until the Senior Notes and the Convertible Notes
are paid in full.
"Issue Date" means June 12, 1996.
"Leasing Company Escrow Account" shall have the meaning given in
Section 2(b).
"Senior Note Discharge Date" shall mean such time as the Senior Notes
are no longer outstanding and the Senior Note Indenture and the Senior Note
Collateral Documents have been satisfied and discharged.
"Trustees" means, collectively, the Convertible Note Trustee and the
Senior Note Trustee.
2. Leasing Company Escrow Account: Escrow Agent.
(a) Appointment of Escrow Agent. The Leasing Company and the Trustees
hereby appoint the Escrow Agent, and the Escrow Agent hereby accepts
appointment, as escrow agent, under the terms and conditions of this Agreement.
(b) Establishment of Leasing Company Escrow Account. Concurrent with
the execution and delivery hereof, the Escrow Agent shall establish and maintain
in the name of the Leasing Company at The Bank of New York, a special,
segregated and irrevocable escrow account designated "Leasing Company Escrow
Account pledged by PLD Capital Asset (U.S.) Inc. to The Bank of New York, as
Trustee" (the "Leasing Company Escrow Account". All funds accepted by
4
<PAGE> 5
the Escrow Agent pursuant to this Agreement shall be deposited in the name of
and beneficially owned by the Leasing Company and pledged to, and under the sole
dominion and control of, the Senior Note Trustee, acting for its benefit and the
equal and ratable benefit of the Holders of the Senior Notes and the Convertible
Note Trustee, acting for its benefit and the equal and ratable benefit of the
Holders of the Convertible Notes. All such funds shall be held in the Leasing
Company Escrow Account until disbursed in accordance with the terms hereof. The
Leasing Company Escrow Account, the funds held therein and any Eligible Cash
Equivalents held by the Escrow Agent in which such funds are invested shall be
beneficially owned by the Leasing Company and pledged to and under the sole
dominion and control of the Escrow Agent for the benefit of the Senior Note
Trustee acting for its benefit and the equal and ratable benefit of the Holders
of the Senior Notes, and for the benefit of the Convertible Note Trustee, acting
for its benefit and the equal and ratable benefit of the Holders of the
Convertible Notes.
(c) The Company shall provide notice to the Collateral Agent and the
Trustee of the source of any money deposited to the Escrow Account by reference
to the applicable provisions of the Senior Note Indenture, and shall keep an
ongoing record of the amounts so deposited and disbursed in accordance with this
Escrow Agreement. It shall be the Company's responsibility to satisfy the
Collateral Agent as to the accounting for the Escrow Account with a view to
ensuring that the amounts required to be calculated for any disbursement are
ascertainable.
(d) Escrow Agent Compensation. The Leasing Company shall pay to the
Escrow Agent such compensation for services to be performed by it under this
Agreement as the Leasing Company and the Escrow Agent may agree in writing from
time to time. The Escrow Agent shall be paid any compensation owed to it
directly by the Leasing Company and shall not disburse from the Leasing Company
Escrow Account any such amounts.
The Leasing Company shall reimburse the Escrow Agent upon request for
all reasonable expenses, disbursements, and advances incurred or made by the
Escrow Agent in implementing any of the provisions of this Agreement, including
compensation and the reasonable expenses and disbursements of its counsel. The
Escrow Agent shall be paid any such expenses owed to it directly by the Leasing
Company and shall not disburse from the Leasing Company Escrow Account any such
amounts.
The provisions of this Section 2(d) shall survive termination of this
Agreement.
(e) Investment of Funds in the Leasing Company Escrow Account. Pending
investment thereof in accordance with the Senior Note Indenture (and the
Convertible Note Indenture, if the Senior Notes are no longer outstanding and
the Senior Note Indenture and the Senior Note Collateral Documents have been
satisfied and discharged), funds deposited in the Leasing Company Escrow Account
shall be invested and reinvested only upon the following terms and conditions:
5
<PAGE> 6
(i) Acceptable Investments. All funds deposited or held in the
Leasing Company Escrow Account at any time shall be invested, at the
direction of the Leasing Company except during the continuance of a
Default or an Event of Default, and at the direction of the Senior Note
Trustee, if any of the Senior Notes are outstanding, or the Convertible
Note Trustee, if the Senior Notes are no longer outstanding and the
Senior Note Indenture and the Senior Note Collateral Documents have
been satisfied and discharged, during the continuance of a Default or
an Event of Default, by the Escrow Agent in Eligible Cash Equivalents
for the Company in accordance with the Company's or the applicable
Trustee's written instructions, as applicable, from time to time to the
Escrow Agent; provided, however, that any such written instruction
shall specify the particular Investment to be made, shall contain the
certification referred to in Section 2(d)(ii), if required, and shall
be executed by any officer of the Company. All Eligible Cash
Equivalents shall be assigned to and held in the possession of, or, in
the case of Eligible Cash Equivalents maintained in book entry form
with the Federal Reserve Bank, transferred to a book entry account in
the name of, the Escrow Agent, as pledgee, with such guarantees as are
customary, except that Eligible Cash Equivalents maintained in book
entry form with the Federal Reserve Bank shall be transferred to a book
entry account in the name of the Escrow Agent at the Federal Reserve
Bank that includes only Eligible Cash Equivalents held by the Escrow
Agent for its customers and segregated by separate recordation in the
books and records of the Escrow Agent.
(ii) Security Interest in and Lien on Investments. No
investment of funds in the Leasing Company Escrow Account shall be made
unless the Leasing Company has certified to the Escrow Agent and the
Trustees that, upon such investment, each of the Convertible Note
Trustee and the Senior Note Trustee will have a first priority
perfected Lien and security interest for the benefit of the Convertible
Note Trustee and the equal and ratable benefit of the Holders of the
Convertible Notes and for the benefit of the Senior Note Trustee and
the equal and ratable benefit of the Holders of the Senior Notes in the
applicable Investment. A certificate as to a class of investments need
not be issued with respect to individual investments in securities in
that class if the certificate applicable to the class remains accurate
with respect to such individual investments, which continued accuracy
the Escrow Agent may conclusively assume. Promptly after the Issue
Date, and within 3 months after the anniversary of the Issue Date,
until the payment in full of the Senior Notes in accordance with the
terms thereof and of the Senior Note Indenture, and all other
Obligations then due and owing under the Senior Notes, the Senior Note
Indenture, this Agreement and the other Senior Note Collateral
Documents, each of the Trustees and the Escrow Agent shall receive an
Opinion of Counsel, dated each such date as applicable, which opinion
shall meet the requirements of Section 314(b) of the Trust Indenture
Act of 1939, as amended (the "TIA").
(iii) Interest and Dividends. All interest earned and
dividends paid on funds invested in Eligible Cash Equivalents shall be
deposited in the Leasing Company Escrow Account as additional
Collateral beneficially owned by the Leasing Company and pledged
6
<PAGE> 7
to the Senior Note Trustee, acting for its benefit and the equal and
ratable benefit of the Holders of the Senior Notes, and to the
Convertible Note Trustee, acting for its benefit and the equal and
ratable benefit of the Holders of the Convertible Notes and shall be
reinvested in accordance with the terms hereof.
(iv) Limitation on Escrow Agent's Responsibilities. The Escrow
Agent's sole responsibilities under this Section 2 shall be (A) to
retain, or cause its agent in the State of New York to retain,
possession of certificated Eligible Cash Equivalents (except however,
that the Escrow Agent may surrender possession to the issuer of any
such Eligible Cash Equivalent for the purpose of effecting assignment,
crediting interest, or reinvesting such security or reducing such
security to cash) and to be the registered or designated owner of
Eligible Cash Equivalents which are not certificated, (B) to follow the
Leasing Company's or the applicable Trustee's written instructions, as
applicable, given in accordance with Section 2(e)(i), (C) to invest and
reinvest funds pursuant to this Section 2(e) and (D) to use reasonable
efforts to reduce to cash such Eligible Cash Equivalents as may be
required to fund any disbursement or payment in accordance with Section
3. In connection with clause (i) above, the Escrow Agent will maintain,
or cause its agent in the State of New York to maintain, continuous
possession in the State of New York of certificated Eligible Cash
Equivalents and cash included in the Collateral and will cause
uncertificated Eligible Cash Equivalents to be registered in the
book-entry system of, and transferred to an account of the Escrow Agent
or a sub-agent of the Escrow Agent at, the Federal Reserve Bank of New
York. Except as provided in Section 6, the Escrow Agent shall have no
other responsibilities with respect to perfecting or maintaining the
perfection of both Trustees' Liens and security interest in the
Collateral and shall not be required to file any instrument, document
or notice in any public office at any time or times. In connection with
clause (D) above, the Escrow Agent shall not be required to reduce to
cash any Eligible Cash Equivalents to fund any disbursement or payment
in accordance with Section 3 in the absence of written instructions
signed by an officer of the Leasing Company specifying the particular
investment to liquidate unless a Default or Event of Default has
occurred and is continuing, in which case such written instructions
shall be signed by a Trust Officer of the Senior Note Trustee or, after
the Senior Note Discharge Date, of the Convertible Note Trustee. If no
such written instructions are received, the Escrow Agent shall
liquidate those Eligible Cash Equivalents having the lowest interest
rate per annum, regardless of maturity, or if none such exist, those
having the nearest maturity. The Escrow Agent shall have no duty to
determine whether or not to file or record any document or instrument
in connection with this Agreement, but will follow the instructions of
the applicable Trustee.
(f) Substitution of Escrow Agent. The Escrow Agent may resign
by giving not less than 30 days' prior written notice to the Leasing Company and
the Senior Note Trustee or, after the Senior Note Discharge Date, to the
Convertible Note Trustee. Such resignation shall take effect upon the later to
occur of (i) delivery of all funds and Eligible Cash Equivalents maintained by
the Escrow Agent hereunder and copies of all books, records, plans and other
documents in the Escrow Agent's possession relating to such funds or Eligible
Cash Equivalents or this Agreement to a
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<PAGE> 8
successor Escrow Agent mutually approved by the Leasing Company and the Senior
Note Trustee or, after the Senior Note Discharge Date, to the Convertible Note
Trustee (which approvals shall not be unreasonably withheld or delayed) and (ii)
the Leasing Company, the Senior Note Trustee or, after the Senior Note Discharge
Date, to the Convertible Note Trustee and such successor Escrow Agent entering
into this Agreement or any written successor agreement no less favorable to the
interests of the Holders of the Convertible Notes, the Holders of the Senior
Notes and the Trustees than this Agreement; and the Escrow Agent shall thereupon
be discharged of all obligations under this Agreement and shall have no further
duties, obligations or responsibilities in connection herewith, except as set
forth in Section 4. If a successor Escrow Agent has not been appointed or has
not accepted such appointment within 30 days after notice of resignation is
given to the Leasing Company, the Escrow Agent may apply to a court of competent
jurisdiction for the appointment of a successor Escrow Agent.
(g) Escrow Account Statement. At least 30 days prior to each Interest
Payment Date, the Escrow Agent shall deliver to the Leasing Company, the
Trustees and the escrow agent for the Company Senior Note Escrow Account a
statement setting forth with reasonable particularity the balance of funds then
in the Leasing Company Escrow Account and the manner in which such funds are
invested (the "Escrow Account Statement").
3. Disbursements.
(a) Disbursement Requests; Disbursements. (i) At least two Business
Days prior to an Interest Payment Date, the Leasing Company and the Senior Note
Trustee, until the Senior Note Discharge Date, and thereafter, the Convertible
Note Trustee, shall submit to the Escrow Agent a completed Disbursement Request
substantially in the form of Exhibit A hereto requesting funds from the Leasing
Company Escrow Account in an amount equal to the interest owed on the Senior
Notes under the Senior Note Indenture until the Senior Note Discharge Date, and
thereafter, the Convertible Notes under the Convertible Note Indenture, for
payment of such interest on such Interest Payment Date, unless the Leasing
Company has disbursed and the Senior Note Trustee or the Convertible Note
Trustee, as the case may be, has received funds from the Leasing Company in such
amount on or before such date for such interest payment. Nevertheless, any funds
or Eligible Cash Equivalents (or the proceeds or reinvestments thereof)
previously designated in an Officer's Certificate delivered pursuant to Section
4 of this Agreement as representing funds or Eligible Cash Equivalents
designated to satisfy the requirements of Section 11.4 of the Senior Note
Indenture and Section 11.8 of the Convertible Note Indenture requiring the
Company and/or the Leasing Companies to retain in the Company Senior Note Escrow
Account and the Leasing Company Escrow Accounts the Senior Note Interest Payment
Escrow Amount at all times after November 30, 1998 shall not be disbursed to the
Leasing Company except as contemplated in such Section 11.4 and Section 11.8.
Provided that any such Disbursement Request is not rejected by it, the Escrow
Agent, at least on (or if the Senior Note Trustee and the Escrow Agent are the
same entity, two Business Days after) receipt of such Disbursement Request,
shall disburse the funds requested in such Disbursement Request by wire or
book-entry transfer of immediately available funds to the Senior Note Trustee,
and shall promptly notify the Convertible Note Trustee of such disbursement.
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<PAGE> 9
The Escrow Agent shall notify the Trustees as soon as reasonably possible if any
such Disbursement Request is rejected and the reason(s) therefor.
(ii) In addition, the Leasing Company may submit a completed Disbursement
Request for a release of funds to the Leasing Company or the Company, as
applicable, from the Leasing Company Escrow Account, provided that (i) the
applicable conditions set forth in Section 11.4 of the Senior Note Indenture and
Section 11.8 of the Convertible Note Indenture until such time as the
Convertible Notes are no longer outstanding and the Convertible Note Indenture
has been satisfied and discharged have been satisfied for such release to the
Leasing Company or the Company, as applicable, (ii) the Leasing Company shall
have delivered to the Senior Note Trustee or the Convertible note Trustee, as
applicable, the applicable Officer's Certificate required by such Section 11.4
of the Senior note Indenture or Section 11.8 of the Convertible Note Indenture,
as applicable, on or before such disbursement date and (iii) the Senior Note
Trustee or Convertible Note Trustee, as applicable, has executed the
certification contained in the Disbursement Request. Provided that any such
Disbursement Request is not rejected by it, the Escrow Agent at least two (2)
Business Days after the receipt of such Disbursement Request shall disburse the
funds requested in such Disbursement Request by wire or book-entry transfer of
immediately available funds to the Company or the Leasing Company, as
applicable. The Escrow Agent shall notify the Trustees and the Leasing Company
as soon as reasonably possible if any such Disbursement Request is rejected and
the reason(s) therefor.
(iii) If an Event of Default under the Senior Note Indenture or under the
Convertible Note Indenture has occurred and is continuing, the Senior Note
Trustee, in the case of an Event of Default under the Senior Note Indenture, or
the Convertible Note Trustee, in the case of an Event of Default under the
Convertible Note Indenture, shall be entitled unilaterally to initiate
withdrawals by executing a Disbursement Request which will be substantially
similar to the form of Exhibit A which need only to be executed by the Senior
Note Trustee, in the case of an Event of Default under the Senior Note
Indenture, or the Convertible Note Trustee, in the case of an Event of Default
under the Convertible Note Indenture.
(b) Conditions Precedent to Disbursement. Subject to Section 4 and any
mandatory provisions of applicable law, the Escrow Agent shall make the payments
to be made pursuant to a completed Disbursement Request if (i) the Company shall
have submitted, in accordance with the provisions of Section 3(a) herein, such
Disbursement Request to the Escrow Agent substantially in the form of Exhibit A
with blanks appropriately filled in containing the signed certification of the
Senior Note Trustee prior to the Senior Note Payment Date and thereafter of the
Convertible Note Trustee included in such form and (ii) the Escrow Agent shall
not have received any notice from the Senior Note Trustee that as a result of an
Event of Default the Indebtedness represented by the Senior Notes has been
accelerated and has become due and payable (in which event the Escrow Agent
shall apply all Available Funds as required by Section 6(b)(iii)).
(c) No Distributions. Provided that no Event of Default has occurred
and is continuing, the Leasing Company shall initiate all requests for
withdrawals of funds from the Escrow
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Account by executing a Disbursement Request and submitting such request to the
Senior Note Trustee, if prior to the Senior Note Discharge Date and to the
Convertible Note Trustee if subsequent to the Senior Note Discharge Date.
However, the Leasing Company shall not be entitled to make withdrawals or
distributions or to direct the Escrow Agent to make withdrawals or distributions
from the Escrow Accounts except upon certification by the Senior Note Trustee,
if prior to the Senior Note Discharge Date and by the Convertible Note Trustee
if subsequent to the Senior Note Discharge Date, on a Disbursement Request that
the applicable conditions of the Senior Note Indenture or Convertible Note
Indenture, as the case may be, have been satisfied, as provided in Section 3(a).
The Senior Note Trustee shall, prior to the Senior Note Discharge Date, be
entitled unilaterally to initiate withdrawals or any other act.
(d) Deposits Irrevocable. Any deposits made into the Leasing Company
Escrow Account hereunder shall be irrevocable and the amount of such deposits
and any instrument or security held in the Leasing Company Escrow Account
hereunder and all interest thereon shall be held in trust by the Escrow Agent
and applied solely as provided herein.
4. Limitation of the Escrow Agent's Liability; Responsibilities of the
Escrow Agent. The Escrow Agent's responsibility and liability under this
Agreement shall be limited as follows: (i) the Escrow Agent does not represent,
warrant or guaranty to the Holders of the Senior Notes from time to time or the
Holders of the Convertible Notes the performance of the Leasing Company; (ii)
the Escrow Agent shall have no responsibility to the Leasing Company or the
Holders of the Senior Notes, the Holders of the Convertible Notes or the
Trustees from time to time as a consequence of performance or non-performance by
the Escrow Agent hereunder, except for any negligence or willful misconduct of
the Escrow Agent; (iii) the Leasing Company shall remain solely responsible for
all aspects of the Leasing Company's business and conduct; and (iv) the Escrow
Agent is not obligated to supervise, inspect or inform the Leasing Company or
any third party of any matter referred to above.
No implied covenants or obligations shall be inferred from this
Agreement against the Escrow Agent, nor shall the Escrow Agent be bound by the
provisions of any agreement beyond the specific terms hereof. Specifically and
without limiting the foregoing, the Escrow Agent shall in no event have any
liability in connection with its investment, reinvestment or liquidation, in
good faith and in accordance with the terms hereof, of any funds or Eligible
Cash Equivalents held by it hereunder, including without limitation any
liability for any delay not resulting from negligence or willful misconduct in
such investment, reinvestment or liquidation, or for any loss of principal or
income incident to any such delay.
The Escrow Agent shall be entitled to rely upon any judicial order or
judgment, upon any written opinion of counsel or upon any certification,
instruction, notice, or other writing delivered to it by the Leasing Company or
the Trustees in compliance with the provisions of this Agreement without being
required to determine the authenticity or the correctness of any fact stated
therein or the propriety or validity of service thereof. The Escrow Agent may
act in reliance upon any instrument comporting with the provisions of this
Agreement or signature believed by it to be
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genuine and may assume that any person purporting to give notice or receipt or
advice or make any statement or execute any document in connection with the
provisions hereof has been duly authorized to do so.
The Escrow Agent may act pursuant to the written advice of counsel
chosen by it with respect to any matter relating to this Agreement and (subject
to clause (ii) of the first paragraph of this Section 4) shall not be liable for
any action taken or omitted in accordance with such advice.
The Escrow Agent shall not be called upon to advise any party as to
selling or retaining, or taking or refraining from taking any action with
respect to, any securities or other property deposited hereunder.
In the event of any ambiguity in the provisions of this Agreement with
respect to any funds or property deposited hereunder, the Escrow Agent shall be
entitled to refuse to comply with any and all claims, demands or instructions
with respect to such funds or property, and the Escrow Agent shall not be or
become liable for its failure or refusal to comply with conflicting claims,
demands or instructions. The Escrow Agent shall be entitled to refuse to act
until either any conflicting or adverse claims or demands shall have been
finally determined by a court of competent jurisdiction or settled by agreement
between the conflicting claimants as evidenced in a writing, satisfactory to the
Escrow Agent, or the Escrow Agent shall have received security or an indemnity
satisfactory to the Escrow Agent sufficient to save the Escrow Agent harmless
from and against any and all loss, liability or expense which the Escrow Agent
may incur by reason of its acting. The Escrow Agent may in addition elect in its
sole option to commence an interpleader action or seek other judicial relief or
orders as the Escrow Agent may deem necessary.
No provision of this Agreement shall require the Escrow Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder.
5. Indemnity. The Leasing Company shall indemnify, hold harmless and
defend the Escrow Agent and its directors, officers, agents, employees and
controlling persons, from and against any and all claims, actions, obligations,
liabilities and expenses, including defense costs, investigative fees and costs,
legal fees, and claims for damages, arising from the Escrow Agent's performance
under this Agreement, except to the extent that such liability, expense or claim
is directly attributable to the negligence or willful misconduct of any of the
foregoing persons. The provisions of this Section shall survive any termination,
satisfaction or discharge of this Agreement as well as the resignation or
removal of the Escrow Agent. The provisions of this paragraph 5 shall survive
the termination of this Agreement.
6. Grant of Liens and Security Interest; Instructions to Escrow Agent.
(a) The Leasing Company hereby irrevocably grants a first priority
security interest in and Lien on, and pledges, assigns and sets over to the
Senior Note Trustee for the equal and ratable benefit of the Holders of the
Senior Notes, and to the Convertible Note Trustee for the
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equal and ratable benefit of the Holders of the Convertible Notes, all of the
Leasing Company's right, title and interest in the Leasing Company Escrow
Account, and all property now or hereafter placed or deposited in, or delivered
to the Escrow Agent for placement or deposit in, the Leasing Company Escrow
Account, including, without limitation, all funds held therein, all Eligible
Cash Equivalents held by (or otherwise maintained in the name of) the Escrow
Agent pursuant to Section 2, and all proceeds thereof as well as all rights of
the Leasing Company under this Agreement (collectively, the "Collateral"), in
order to secure all obligations and indebtedness of the Leasing Company under
the Senior Notes and any other obligation, now or hereafter arising, of every
kind and nature, owed by the Leasing Company or the Senior Note Guarantors under
the Senior Note Indenture, the related guarantees thereunder or the Senior Note
Collateral Documents to the Holders of the Senior Notes or to the Senior Note
Trustee and all obligations and indebtedness of the Leasing Company under the
Convertible Notes and any other obligation, now or hereafter arising, of every
kind and nature, owed by the Leasing Company or the Convertible Note Guarantors
under the Convertible Note Indenture, the related guarantees thereunder or the
Convertible Note Collateral Documents to the Holders of the Convertible Notes or
to the Convertible Note Trustee. The Escrow Agent hereby acknowledges the
Trustees' security interest and Lien as set forth above. The Leasing Company
shall take all actions necessary on its part to insure the continuance of a
first priority security interest in and Lien on the Collateral in favor of the
Trustees in order to secure all such obligations and indebtedness.
(b) The Leasing Company and the Trustees hereby irrevocably instruct
the Escrow Agent to, and the Escrow Agent shall (i)(A) at all times maintain
sole dominion and control over funds and Eligible Cash Equivalents in the
Leasing Company Escrow Account, acting for the benefit of the Trustees to the
extent specifically required herein, (B) maintain, or cause its agent within the
State of New York to maintain, possession of all certificated Eligible Cash
Equivalents purchased hereunder that are physically possessed by the Escrow
Agent in order for the Trustees to enjoy a continuous perfected first priority
security interest therein under the law of the State of New York (the Leasing
Company hereby agreeing that in the event any certificated Eligible Cash
Equivalents are in the possession of the Leasing Company or a third party, the
Leasing Company shall use its best efforts to deliver all such certificates to
the Escrow Agent), (C) take all steps specified by the Leasing Company pursuant
to paragraph (a) above to cause the Trustees to enjoy a continuous perfected
first priority security interest and Liens under the New York Uniform Commercial
Code and any applicable law of the State of New York in all Eligible Cash
Equivalents purchased hereunder that are not certificated and (D) maintain the
Collateral free and clear of all Liens, security interests, safekeeping or other
charges, demands and claims against the Escrow Agent of any nature now or
hereafter existing in favor of anyone other than the Trustees; (ii) promptly
notify the Trustees if the Escrow Agent receives written notice that any Person
other than the Trustees has or claims to have a Lien on or security interest in
any portion of the Collateral and (iii) in addition to disbursing amounts held
in escrow pursuant to any Disbursement Requests given to it by the Senior Note
Trustee pursuant to Section 3(a)(iv), upon receipt of written notice from the
Trustee of the acceleration of the maturity of the Senior Notes, and direction
from the Senior Note Trustee to disburse all Available Funds to the Senior Note
Trustee, as promptly as practicable disburse all funds held in the Leasing
Company Escrow Account to the Senior Note Trustee and
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transfer title to all Eligible Cash Equivalents held by the Escrow Agent
hereunder to the Senior Note Trustee. The Escrow Agent shall not have any right
to receive compensation from either Trustee and is without any authority to
obligate either Trustee or to compromise or pledge its security interest and
Lien hereunder. Accordingly, the Escrow Agent is hereby directed to cooperate
with the Trustees in the exercise of their respective rights in the Collateral
provided for herein.
(c) Any money and Eligible Cash Equivalents collected by the Senior
Note Trustee pursuant to Section 6(b)(iii) shall be applied as provided in
Section 6.9 of the Senior Note Indenture.
(d) Upon demand, the Leasing Company will execute and deliver to either
Trustee such instruments and documents as such Trustee may reasonably deem
necessary or advisable to confirm or perfect the rights of the Trustees under
this Agreement and the Trustees' interest in the Collateral. The Trustees shall
be entitled to take all necessary action to preserve and protect the security
interest created hereby as a Lien and encumbrance upon the Collateral.
(e) The Leasing Company hereby appoints each Trustee as its
attorney-in-fact with full power of substitution, exercisable upon the
occurrence and during the continuance of a Default or Event of Default, to do
any act which the Leasing Company is obligated hereto to do, and each Trustee
may, but shall not be obligated to, exercise such rights as the Leasing Company
might exercise with respect to the Collateral and take any action in the Leasing
Company's name to protect the Trustees' Liens and security interest hereunder.
In addition to the rights provided under Section 6(b)(iii) hereof, upon an Event
of Default as defined in the Senior Note Indenture and for so long as such Event
of Default continues, the Senior Note Trustee may exercise in respect of the
Collateral, in addition to other rights and remedies provided for herein or
otherwise available to it, all the rights and remedies of a secured party under
the New York Uniform Commercial Code or other applicable law, and the Senior
Note Trustee may also upon obtaining possession of the Collateral as set forth
herein, without notice to the Leasing Company except as specified below, sell
the Collateral or any part thereof in one or more parcels at public or private
sale, at any exchange, broker's board or at any of the Senior Note Trustee's
offices or elsewhere, for cash, on credit or for future delivery, and upon such
other terms as the Senior Note Trustee may deem commercially reasonable. The
Leasing Company acknowledges and agrees that any such private sale may result in
prices and other terms less favorable to the seller than if such sale were a
public sale. The Leasing Company agrees that, to the extent notice of sale shall
be required by law, at least ten (10) days' notice to the Leasing Company of the
time and place of any public sale or the time after which any private sale is to
be made shall constitute reasonable notification. The Trustee shall not be
obligated to make any sale regardless of notice of sale having been given. The
Trustee may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned.
7. Termination. This Agreement shall terminate automatically ten (10)
days following disbursement of all funds remaining in the Leasing Company Escrow
Account (including Eligible Cash Equivalents) and the payment in full of the
Senior Notes and all other Obligations then
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<PAGE> 14
due and owing under the Senior Note Indenture, the related guarantees
thereunder, the Senior Note Collateral Documents, the Convertible Note
Indenture, Convertible Note Guarantees and the Convertible Note Collateral
Documents, unless sooner terminated by agreement of the parties hereto (in
accordance with the terms hereof, not in violation of the Senior Note Indenture
or the Convertible Note Indenture; neither the Senior Note Trustee nor the
Convertible Note Trustee may agree to terminate this Agreement unless the Senior
Note Trustee has received the consent of 100% of the Holders of all of the
Senior Notes outstanding or the Convertible Note Trustee has received the
consent of 100% of the Holders of all of the Convertible Notes outstanding);
provided, however, that the obligations of the Leasing Company under Section
2(d) and Section 5 (and any existing claims thereunder) shall survive
termination of this Agreement or the resignation of the Escrow Agent; provided,
further, however, that until such tenth day, the Leasing Company will cause this
Agreement (or any permitted successor agreement) to remain in effect and will
cause there to be an Escrow Agent (including any permitted successor thereto)
acting hereunder (or under any such permitted successor agreement).
8. Miscellaneous.
(a) Waiver. Any party hereto may specifically waive any breach of this
Agreement by any other party, but no such waiver shall be deemed to have been
given unless such waiver is in writing, signed by the waiving party and
specifically designating the breach waived, nor shall any such waiver constitute
a continuing waiver of similar or other breaches.
(b) Invalidity. If for any reason whatsoever any one or more of the
provisions of this Agreement shall be held or deemed to be inoperative,
unenforceable or invalid in a particular case or in all cases, such
circumstances shall not have the effect of rendering any of the other provisions
of this Agreement inoperative, unenforceable or invalid, and the inoperative,
unenforceable or invalid provision shall be construed as if it were written so
as to effectuate, to the maximum extent possible, the parties' intent.
(c) Assignment. This Agreement is personal to the parties hereto, and
the rights and duties of any party hereunder shall not be assignable except with
the prior written consent of the other parties. Notwithstanding the foregoing,
this Agreement shall inure to and be binding upon the parties and their
successors and permitted assigns. Nothing herein shall restrict the Escrow Agent
from performing its duties through a sub-agent.
(d) Benefit. The parties hereto and their successors and permitted
assigns, but no others, shall be bound hereby and entitled to the benefits
hereof; provided, however, that the holders of the Senior Notes and their
permitted assigns shall be entitled to the benefits hereof and to enforce this
Agreement.
(e) Time. Time is of the essence with respect to each provision of this
Agreement.
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(f) Entire Agreement: Amendments. This Agreement and the Senior Note
Indenture and the Convertible Note Indenture contain the entire agreement among
the parties with respect to the subject matter hereof and supersede any and all
prior agreements, understandings and commitments, whether oral or written. This
Agreement may be amended only in accordance with Article IX of the Senior Note
Indenture and Article IX of the Convertible Note Indenture and further by a
writing signed by a duly authorized representative of each party hereto.
(g) Notices. All notices and other communications required or permitted
to be given or made under this Agreement shall be in writing and shall be deemed
to have been duly given and received, regardless of when and whether received,
either: (a) on the day of hand delivery; (b) three Business Days following the
day sent, when sent by United States certified mail, postage and certification
fee prepaid, return receipt requested, addressed as set forth below; (c) when
transmitted by telecopy with verbal confirmation of receipt by the telecopy
operator to the telecopy number set forth below; or (d) one business day
following the day timely delivered to a next-day air courier addressed as set
forth below:
To Escrow Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Department
Telecopy: 212-815-5915 or 5917
To each Trustee:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Department
Telecopy: 212-815-5915 or 5917
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To the Leasing Company:
PLD Capital Asset (U.S.) Inc.
c/o PLD Telekom Inc.
680 Fifth Avenue
New York, New York 10019
Attention: E. Clive Anderson, Esq.
Telecopy: (212) 262-8870
Telephone: (212) 262-6060
or at such other address as the specified entity most recently may have
designated in writing in accordance with this Section.
(h) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
(i) Captions. Captions in this Agreement are for convenience only and
shall not be considered or referred to in resolving questions of interpretation
of this Agreement.
(j) Choice of Law: Waiver of Jury Trial. The existence, validity,
construction, operation and effect of any and all terms and provisions of this
Agreement shall be determined in accordance with and governed by the laws of the
State of New York, without regard to principles of conflicts of law. The parties
to this Agreement hereby agree that jurisdiction over such parties and over the
subject matter of any action or proceeding arising under this Agreement may be
exercised by a competent Court of the State of New York, or by a United States
Court, sitting in New York City. The Leasing Company hereby submits to the
personal jurisdiction of such courts, hereby waives personal service of process
upon it and hereby waives, to the extent permitted by applicable law, the right
to a trial by jury in any action or proceeding with the Escrow Agent, All
actions and proceedings brought by the Leasing Company against the Escrow Agent
relating to or arising from, directly or indirectly, this Agreement shall be
litigated only in courts within the State of New York. The Leasing Company
waives any objection that it may have to the location of the court in which the
Escrow Agent has commenced a proceeding described in this paragraph including,
without limitation, any objection to the laying of venue or based on the grounds
of forum non conveniens.
(k) Authority of the Leasing Company: Valid and Binding Agreement. The
Leasing Company hereby represents and warrants that this Agreement has been duly
authorized, executed and delivered on its behalf and constitutes the legal,
valid and binding obligation of the Leasing Company. The execution, delivery and
performance of this Agreement by the Leasing Company does not violate any
applicable law or regulation to which the Leasing Company is subject
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<PAGE> 17
and does not require the consent of any governmental or other regulatory body to
which the Leasing Company is subject, except for such consents and approvals as
have been obtained and are in full force and effect.
(1) Authority of the Escrow Agent and the Trustees: Valid and Binding
Agreement. Each of the Escrow Agent and the Trustees hereby represents and
warrants that this Agreement has been duly authorized, executed and delivered on
its behalf and constitutes its legal, valid and binding obligation.
(m) Agent for Service: Submission to Jurisdiction: Waiver of
Immunities. By the execution and delivery of this Agreement, the Leasing Company
(i) acknowledges that it has, by separate written instrument, irrevocably
designated and appointed CT Corporation System, 1633 Broadway, New York, New
York 10019 (or any successor), as its authorized agent upon which process may be
served in any suit or proceeding arising out of or relating to this Agreement
that may be instituted in any federal or state court in the State of New York,
or brought under federal or state securities laws, and acknowledges that CT
Corporation System has accepted such designation, (ii) submits to the
jurisdiction of any such court in any such suit or proceeding, and (iii) agrees
that service of process upon CT Corporation System (or any successor) and
written notice of said service to the Leasing Company (mailed or delivered to
Messrs. Morgan, Lewis & Bockius, 4 Carlton Gardens, Pall Mall, London, United
Kingdom, SW1Y 5AA, Attention: Thomas J. Benz, Esq. shall be deemed in every
respect effective service of process upon the Leasing Company in any such suit
or proceeding. The Leasing Company further agrees to take any and all action,
including the execution and filing of any and all such documents and
instruments, as may be necessary to continue such destination and appointment of
CT Corporation System (or any successor) in full force and effect so long as any
of the Senior Notes shall be outstanding.
To the extent that the Leasing Company has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service of notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property, it
hereby irrevocably waives such immunity in respect of its obligations under this
Agreement, to the extent permitted by law.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Leasing Company Escrow Account Agreement as of the day first above written.
ESCROW AGENT: THE BANK OF NEW YORK,
as Escrow Agent
By: /s/ Thomas E. Talen
--------------------------------
Name: Thomas E. Talen
Title: Assistant Vice President
SENIOR NOTE TRUSTEE: THE BANK OF NEW YORK,
as Senior Note Trustee
By: /s/ Thomas E. Talen
--------------------------------
Name: Thomas E. Talen
Title: Assistant Vice President
CONVERTIBLE NOTE TRUSTEE: THE BANK OF NEW YORK,
as Convertible Note Trustee
By: /s/ Thomas E. Talen
--------------------------------
Name: Thomas E. Talen
Title: Assistant Vice President
LEASING COMPANY: PLD CAPITAL ASSETS (U.S.) INC.
By: /s/ E. Clive Anderson
--------------------------------
Name: E. Clive Anderson
Title: Vice President
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<PAGE> 19
EXHIBIT A
Form of Disbursement Request
(Letterhead of the Leasing Company]
[Date]
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Attention: Corporate Trust Department
Re: Disbursement Request No.
[indicate whether revised]
Ladies and Gentlemen:
We refer to the Leasing Company Escrow Agreement, dated as of June 15,
1998 (the "Leasing Company Escrow Agreement") among you (the "Escrow Agent"),
The Bank of New York as Senior Note Trustee, The Bank of New York as Convertible
Note Trustee, and PLD Capital Asset (U.S.) Inc. a Delaware corporation (the
"Leasing Company"). Capitalized terms used herein shall have the meaning given
in the Leasing Company Escrow Agreement.
This letter constitutes a Payment Notice and Disbursement Request under
the Leasing Company Escrow Agreement.
The undersigned hereby notifies you that the Leasing Company has
requested, and has satisfied the conditions contained in Section 11.4 of the
Senior Note Indenture for, the release of $ , from the Leasing Company
Escrow Account of PLD Capital Asset (U.S.) Inc. which was deposited on
as a result of [specify source of deposit, e.g., asset sale of specified assets]
for Net Cash. Proceeds of $ which amount will be invested or used as
follows: .
In connection with the requested disbursement, the undersigned hereby
notifies you that:
1. The Senior Notes have [not], as a result of an Event of Default (as
defined in the Senior Note Indenture), been accelerated and become due and
payable.
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<PAGE> 20
2. An Opinion of Counsel as required by the Senior Note Indenture is
delivered herewith.
3. The Collateral Documents have been delivered to the Trustee.
4. [add wire instructions].
The Escrow Agent is entitled to rely on the foregoing in disbursing
funds relating to this Disbursement Request.
PLD CAPITAL ASSET (U.S.) INC.
By:
--------------------------------
Name:
Title:
The Senior Note Trustee hereby certifies to the Escrow Agent that it
has received the applicable Officers' Certificate described in Section 11.4 of
the Senior Note Indenture for the release of the funds to be disbursed pursuant
to the foregoing Disbursement Request.
THE BANK OF NEW YORK, as Senior Note
Trustee
By:
--------------------------------
Name:
Title:
20
<PAGE> 21
If applicable:
The Convertible Note Trustee hereby certifies to the Escrow Agent that
it has received the applicable Officers' Certificate described in Section 11.4
of the Convertible Note Indenture for the release of the funds to be disbursed
pursuant to the foregoing Disbursement Request.
THE BANK OF NEW YORK, as Convertible
Note Trustee
By:
--------------------------------
Name:
Title:
21
<PAGE> 1
EXHIBIT 4.24
LEASING COMPANY SECURITY AND PLEDGE AGREEMENT
[PLD Capital Asset (U.S.) Inc.]
THIS LEASING COMPANY SECURITY AND PLEDGE AGREEMENT (the "Security
Agreement") is made and entered into as of June 15, 1998 by PLD Capital Asset
(U.S.) Inc., a Delaware corporation (the "Leasing Company"), in favor of THE
BANK OF NEW YORK, a New York banking corporation, as trustee (in such capacity,
the "Senior Note Trustee") under the Senior Note Indenture (as defined herein)
for the holders of the Senior Notes (as hereinafter defined), THE BANK OF NEW
YORK, a New York banking corporation, as trustee (in such capacity, the
"Convertible Note Trustee") under the Convertible Note Indenture (as defined
herein) for the holders of the Convertible Notes (as hereinafter defined) and
THE BANK OF NEW YORK as collateral agent (in such capacity, the "Collateral
Agent").
W I T N E S S E T H:
WHEREAS, Petersburg Long Distance Inc., an Ontario corporation (the
"Company"), as issuer, the Senior Note Trustee, and NWE Capital (Cyprus)
Limited, a Cypriot corporation ("NWE Cyprus"), the Leasing Company, PLD Asset
Leasing Limited, a Cypriot corporation ("PLD Asset Leasing"), and, together with
the Leasing Company, (the "Leasing Companies"), Wireless Technology Corporations
Limited, a British Virgin Islands Company ("WTC"), and Baltic Communications
Limited, a Russian joint stock company of the closed type ("BCL"), as guarantors
(the "Senior Note Guarantors"), have entered into an indenture dated as of May
31, 1996 (as amended, amended and restated, supplemented or otherwise modified
from time to time, the "Senior Note Indenture") pursuant to which the Company is
issuing $ 123,000,000 in aggregate principal amount at Stated Maturity of its
14% Senior Discount Notes due 2004 (the "Senior Notes");
WHEREAS, the Company, as issuer, the Convertible Note Trustee, and NWE
Cyprus, the Leasing Companies, WTC and BCL, as guarantors (the "Convertible
Note Guarantors") have entered into an indenture dated as of May 31, 1996 (as
amended, amended and restated, supplemented or otherwise modified from time to
time, the "Convertible Note Indenture") pursuant to which the Company is
issuing $26,500,000 in aggregate principal amount of its 9% Convertible
Subordinated Notes due 2006 (the "Convertible Notes"); and
WHEREAS, to secure its obligations under the Senior Note Indenture, its
Senior Note Guarantee and the other Collateral Documents (as defined in the
Senior Note Indenture) (together with the Company's obligations under the Senior
Note Indenture and the Senior Note Collateral Documents and the Senior Note
Guarantors' obligations under the Senior Note Indenture, the guarantees
contained therein (the "Senior Note Guarantees") and the Senior Note Collateral
<PAGE> 2
Documents, the "Senior Note Obligations") and to secure its obligations under
the Convertible Note Indenture and the Convertible Notes and the other
Convertible Note Collateral Documents (as defined in the Convertible Note
Indenture) (together with the Convertible Note Guarantors obligations under the
Convertible Note Indenture, the guarantees contained therein (the "Convertible
Note Guarantees") and the Convertible Note Collateral Documents, the
"Convertible Note Obligations"), the Leasing Company has agreed (i) to grant to
the Collateral Agent for the benefit of the Senior Note Trustee and the equal
and ratable benefit of the Holders of the Senior Notes and for the benefit of
the Convertible Note Trustee and for the equal and ratable benefit of the
Holders of the Convertible Notes, Liens and security interests in and to the
Collateral (as defined herein) and (ii) to execute and deliver this Security
Agreement in order to secure the payment and performance by the Leasing Company
and the Guarantors of the Senior Note Obligations and the Convertible Note
Obligations (collectively, the "Obligations").
AGREEMENT
NOW, THEREFORE, in consideration of the premises and in order to induce
the Holders of the Senior Notes to purchase the Senior Notes and the Holders of
the Convertible Notes to purchase the Convertible Notes, the Leasing Company
hereby agrees with the Collateral Agent, with the Senior Note Trustee for its
benefit and the equal and ratable benefit of the Holders of the Senior Notes and
for the Convertible Note Trustee for its benefit and the equal and ratable
benefit of the Holders of the Convertible Notes as follows:
SECTION 1. DEFINITIONS. Capitalized terms used herein and not otherwise
defined herein shall have the meaning given to such terms in the Senior Note
Indenture. In addition to any other defined terms used herein, the following
terms shall constitute defined terms for the purposes of this Security
Agreement:
"Default" means a "Default" as defined in Section 1.1 of the Senior Note
Indenture until the Senior Notes are no longer outstanding and the Senior Note
Indenture has been satisfied and discharged, in which case a "Default" means a
"Default" as defined in Section 1.1 of the Convertible Note Indenture.
"Permitted Liens" means "Permitted Liens" as defined in Section 1.1 of the
Senior Note Indenture until the Senior Notes are no longer outstanding and the
Senior Note Indenture has been satisfied and discharged, in which case
"Permittee Liens" means "Permitted Liens" as defined in Section 1.1 of the
Convertible Note Indenture.
"Event of Default" means an "Event of Default" as defined in Section 1.1
of the Senior Note Indenture until the Senior Notes are no longer outstanding
and the Senior Note Indenture and the Senior Note Collateral Documents have been
satisfied, discharged and released, in which case "Event of Default" means an
"Event of Default" as defined in Section 1.1 of the Convertible Note Indenture.
2
<PAGE> 3
"Trustees" means, collectively, the Senior Note Trustee and the
Convertible Note Trustee.
SECTION 2. CREATION OF SECURITY INTEREST. The Leasing Company hereby
grants to the Collateral Agent for the benefit of the Senior Note Trustee and
for the equal and ratable benefit of the Holders of the Senior Notes and for the
benefit of the Convertible Note Trustee and for the equal and ratable benefit of
the Holders of the Convertible Notes, Liens and a continuing security interest
in and to the collateral described in Section 3 hereof (the "Collateral") in
order to secure the payment and performance of all Obligations.
SECTION 3. COLLATERAL, The Collateral is:
(a) Qualified Investments. All Qualified Investments, whether now or
hereafter acquired by the Leasing Company, including those Qualified Investments
listed on Schedule A attached hereto (or substitutions, replacements and
proceeds thereof) but excluding any Qualified Investments made with the
dividends, distributions, payments and products and proceeds of Technocom
Preferred Stock (as defined in the Company Convertible Note Security Agreement)
and the funds and Eligible Cash Equivalents in the Company Convertible Note
Escrow Account (collectively, the "Excluded Qualified Investments"), and the
certificates, agreements, documents, notes, collateral documents and instruments
representing or relating to such Qualified Investments, all contract rights,
instruments, general intangibles and other obligations or other receivables of
any kind relating to such Qualified Investments, all Liens relating to or
securing such Qualified Investments and the related collateral documents which
grant such Liens and all products and proceeds of the Qualified Investments,
including, without limitation, all dividends, options, warrants, rights,
subscriptions, all interest and principal payments, and other property or
proceeds from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the Qualified Investments;
(b) Telecommunications Asset Agreements. All Telecommunications Asset
Agreements of the Leasing Company, whether now existing or hereinafter acquired
and entered into, including those Telecommunications Asset Agreements listed on
Schedule B attached hereto, and all proceeds and products relating thereto or
therefrom, including all payments (including all time payments and rental
payments) and all other payments thereunder, all cash, property or proceeds from
time to time received, receivable or otherwise distributed or paid in connection
therewith, and all documents, documents of title, certificates of title, letters
of credit, letters of credit proceeds, collateral and liens securing or relating
to such Telecommunications Asset Agreements and all books, records, ledger
sheets and files of the Leasing Company relating to any of the foregoing;
(c) Asset Sale Proceeds of Telecommunications Assets. All proceeds or
products of an Asset Sale of Telecommunications Assets subject to a
Telecommunications Asset Agreement, whether now existing or hereafter acquired,
including all Cash Proceeds, Eligible Cash Equivalents, Investments and
Property;
3
<PAGE> 4
(d) Leasing Company Escrow Account. The Leasing Company Escrow Account and
all funds contained therein and all Investments made by the Escrow Agent (as
defined in the Leasing Company Escrow Account Agreement) therewith (whether or
not constituting Eligible Cash Equivalents) and all proceeds thereto and
including income therefrom;
(e) Intercompany Notes. All Intercompany Notes, whether executed on the
Issue Date or thereafter, from any Restricted Subsidiary, excluding, however,
any Intercompany Notes (or substitutes, replacements and proceeds thereof,
including the funds and Eligible Cash Equivalents in the Company Convertible
Note Escrow Account) evidencing loans or advances made by the Leasing Company
with dividends, distributions, payments and products or proceeds of Technocom
Preferred Stock or otherwise constituting Collateral under the Company
Convertible Note Security Agreement (as defined therein) (collectively, the
"Excluded Intercompany Notes"), all Liens securing such Intercompany Notes and
the related collateral documents, and the instruments representing such
Intercompany Notes, and, except as otherwise provided elsewhere herein, all
products and proceeds of such Intercompany Notes, including, without limitation,
all interest and principal payments, instruments, and other property from time
to time received, receivable or otherwise distributed in respect of or in
exchange for such Intercompany Notes; and
(f) After-acquired Collateral and Proceeds. All items described in this
Section 3 (other than those items specifically excluded), whether now owned or
hereafter, at any time acquired by the Leasing Company and wherever located,
including (except as otherwise provided herein) all replacements, additions,
accessions, substitutions, repairs, proceeds and products relating thereto or
therefrom, and all documents, ledger sheets, files, books and records of the
Leasing Company relating thereto. Proceeds hereunder include (i) whatever is now
or hereafter received by the Leasing Company upon the sale, exchange, collection
or other disposition of any item of Collateral; (ii) any property of the type or
types described in subsections (a), (b), (c) or (e) now or hereafter acquired by
the Leasing Company with any proceeds of Collateral hereunder, and (iii) any
payments under any insurance or any indemnity, warranty or guaranty, payable by
reason of loss or damage to or otherwise with respect to any of the foregoing
Collateral.
SECTION 4. DELIVERY OF COLLATERAL. All certificates or instruments
representing or evidencing the Collateral shall be delivered to and held by or
on behalf of the Collateral Agent pursuant hereto and shall be in suitable form
for transfer by delivery, or shall be accompanied by duly executed instruments
of transfer or assignment in blank, all in form and substance satisfactory to
the Collateral Agent, and shall be accompanied by any required transfer tax
stamps. Upon the occurrence and during the continuance of an Event of Default,
the Collateral Agent shall have the right, at any time in its discretion and
without notice to the Leasing Company, but subject to its compliance with the
requirements of applicable law, to transfer to or to register in the name of the
Collateral Agent or any of its nominees any or all of the Collateral. In
addition, upon the occurrence and during the continuance of an Event of Default,
but subject to its compliance with the requirements of applicable law, the
Collateral
4
<PAGE> 5
Agent shall have the right at any time to exchange certificates or instruments
representing or evidencing Qualified Investments constituting Collateral for
certificates or instruments of smaller or larger denominations.
SECTION 5. REPRESENTATIONS AND WARRANTIES. The Leasing Company hereby
represents and warrants to the Collateral Agent and the Trustees that, except as
specified in Schedule C attached hereto:
(a) Legal Power. The execution, delivery and performance by the Leasing
Company of this Security Agreement are within the Leasing Company's legal
powers, have been duly authorized by all necessary corporate action, require no
action by or in respect of, or filing with (except for any filings provided for
hereunder), any governmental authority, require no consent of any other Person
and do not contravene, or constitute a default under, any provision of
applicable law or regulation or of the articles of incorporation or bylaws, or
comparable organizational documents of, the Leasing Company or of any agreement
(after giving effect to the use of proceeds of the issuance of the Senior
Notes), judgment, injunction, order, decree or other instrument binding upon the
Leasing Company or result in the creation or imposition of any Lien on any asset
of the Leasing Company (other than the Liens created by this Security Agreement,
the Leasing Company Escrow Account Agreement and the other Senior Note
Collateral Documents to which the Leasing Company is a party) and the Liens
created by the Convertible Note Indenture and the Convertible Note Collateral
Documents;
(b) Title to Collateral. The Leasing Company is the legal, record and
beneficial owner of the Collateral existing on the Issue Date (the "Existing
Collateral"), free and clear of any Lien or claims of any person except for the
Liens listed on Schedule D attached hereto and the Liens created by this
Security Agreement, the Leasing Company Escrow Account Agreement and any of the
other Senior Note Collateral Documents.
(c) Enforceability. This Security Agreement has been duly executed and
delivered by the Leasing Company and constitutes a legal, valid and binding
obligation of the Leasing Company, enforceable against the Leasing Company in
accordance with its terms, except as such enforceability may be limited by the
effect of any applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting creditors' rights generally or general principles
of equity and commercial reasonableness.
(d) Perfection: Priority. Upon the execution and delivery of the Leasing
Company Escrow Account Agreement, which is being done contemporaneously with the
execution and delivery of this Security Agreement, the delivery to the
Collateral Agent of the Collateral and the filing of the Senior Note Collateral
Documents relating to the Existing Collateral and the documents listed on
Schedule E attached hereto, to the extent such security interest is created
under applicable federal and New York laws, the security interest and Liens in
the Collateral created pursuant to this Security Agreement and the Leasing
Company Escrow Account Agreement create a valid and perfected first priority
security interest, subject to the
5
<PAGE> 6
Liens listed on Schedule D attached hereto in the Existing Collateral, securing
the payment of the Obligations for the benefit of the Senior Note Trustee and
the Holders of the Senior Notes and the Convertible Note Trustee and the Holders
of the Convertible Notes, and enforceable as such against all creditors of the
Leasing Company and any Persons purporting to purchase any of the Existing
Collateral from the Leasing Company other than as permitted by the Senior Note
Indenture; as of the date hereof (and after giving effect to the use of proceeds
of the issuance of the Senior Notes), there are no other security interests in
or Liens on the Existing Collateral or any portion thereof, and no financing
statement pledge, notice of Lien, assignment or collateral assignment, mortgage
or deed of trust covering the Existing Collateral or any portion thereof ("Lien
Notice") exists or is on file in any public office, except with respect to Liens
listed on Schedule E attached hereto, the Liens created by this Security
Agreement and the other Senior Note Collateral Documents and any junior Liens on
Telecommunications Asset Agreements or Qualified Investments constituting
Collateral securing Intercompany Notes evidencing loans or advances made by the
Company to the Leasing Company.
(e) Offices. The Leasing Company's chief executive office is located at
the address shown as the chief executive office in Schedule F attached hereto
("Chief Executive Office"), and the Leasing Company has no places of business
other than as set forth in such Schedule F, except as permitted hereafter by
Section 6(c) hereof.
(f) Business Names. The Leasing Company has not conducted its businesses
under any corporate, partnership or fictitious name during the five (5) years
preceding the date hereof, other than those names set forth on Schedule G
attached hereto.
(g) No Consents. No consent of any other person and no consent,
authorization, approval, or other action by, and no notice to or filing with,
any governmental authority or regulatory body is required either (i) for the
granting of the Liens by the Leasing Company on the Collateral pursuant to this
Security Agreement or for the execution, delivery or performance of this
Security Agreement by the Leasing Company (except for filings listed on Schedule
D attached hereto, the filings and/or other actions necessary to maintain the
perfection of the Liens on the Collateral and perfect Liens on after-acquired
Collateral or the proceeds of the Collateral) or (ii) for the exercise by the
Collateral Agent of the voting or other rights provided for in this Security
Agreement or the remedies in respect of the Collateral pursuant to this Security
Agreement, except, in each case, as may be required in connection with any such
disposition by laws affecting the offering and sale of the Qualified
Investments constituting Collateral.
(h) Litigation. No litigation, investigation or proceeding of or before
any arbitrator or governmental authority is pending or, to the knowledge of the
Leasing Company, threatened by or against the Leasing Company with respect to
this Security Agreement or any of the transactions contemplated hereby.
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<PAGE> 7
(i) Accurate Information. As of the date hereof, all information set forth
herein relating to the Collateral is accurate and complete in all respects.
SECTION 6. COVENANTS.
(a) Lien Notices. The Leasing Company will defend its interest in the
Collateral against all claims and demands of all persons at any time claiming
the same or any interest therein and the Leasing Company will not permit any
Lien Notices with respect to the Collateral or any portion thereof to exist or
be on file in any public office for more than 30 days after the Leasing Company
shall have notice thereof, except with respect to Permitted Liens or Liens
otherwise permitted by Section 4.11 of the Senior Note Indenture. The Leasing
Company will advise the Collateral Agent and the Trustees promptly, in
reasonable detail, at the addresses as specified in Section 17(a) of this
Agreement, of any Lien (other than Permitted Liens) on, or claim asserted
against, any of the Collateral.
(b) Location of Collateral. The Leasing Company will keep all of its
Collateral now held or subsequently acquired by it at the locations specified on
Schedule H hereto, or at locations hereafter established in compliance with
Section 6(c) hereof (except for Collateral held by the Collateral Agent, a
Trustee or the Escrow Agent), unless the Leasing Company shall have given the
Collateral Agent and the Trustees prior written notice thereof and shall have in
advance executed and caused to be filed and/or delivered to the Collateral Agent
and the Trustees any financing or other documents required by the Trustees or
the Collateral Agent in order to perfect, protect and preserve the Liens and
security interest created hereby, all in form and substance satisfactory to the
Collateral Agent and the Trustees.
(c) Location of Offices: Corporation Name: Legal Structure. The Leasing
Company will not change the location of its chief executive office or establish
any place of business other than those set forth on Schedule F attached hereto,
or voluntarily or involuntarily change its name, identity or legal structure,
including without limitation any continuance, amalgamation, merger,
consolidation or sale of substantially all of its assets, unless the Leasing
Company shall have given the Collateral Agent and the Trustees at least 30 days
prior written notice thereof and shall have in advance executed and caused to be
filed and or delivered to the Collateral Agent and the Trustees any financing
Statements or other Senior Note Collateral Documents required by the Collateral
Agent and the Trustees in order to perfect, protect and preserve the Liens and
security interest created hereby, all in form and substance satisfactory to the
Trustees and the Collateral Agent.
(d) Additional Collateral: Further Assurances. The Leasing Company agrees
that immediately upon becoming the beneficial owner of any additional
Telecommunications Asset Agreement and proceeds of Asset Sales of
Telecommunications Assets subject to a Telecommunications Asset Agreement, any
Qualified Investments constituting Collateral or Intercompany Notes constituting
Collateral, it will pledge and deliver to the Collateral Agent for the benefit
of the Senior Note Trustee and the equal and ratable benefit of the Holders of
the
7
<PAGE> 8
Senior Notes and for the benefit of the Convertible Note Trustee and the equal
and ratable benefit of the Holders of the Convertible Notes, the certificates,
instruments and documents representing such proceeds of Asset Sales of
Telecommunications Assets subject to a Telecommunications Asset Agreement, such
Qualified Investments and such Intercompany Notes (as well as duly executed
instruments of transfer or assignment in blank), and grant to the Collateral
Agent for the benefit of the Senior Note Trustee and the equal and ratable
benefit of the Holders of the Senior Notes and for the benefit of the
Convertible Note Trustee and for the equal and ratable benefit of the Holders of
the Convertible Notes pursuant to appropriate and necessary Senior Note
Collateral Documents, a continuing first priority security interest in and Liens
on such proceeds of Telecommunications Assets, such Qualified Investments or
such Intercompany Notes, all in form and substance satisfactory to the
Collateral Agent and the Trustees. The Leasing Company shall also promptly (and
in any event within five (5) Business Days after receipt thereof), subject to
its compliance with the requirements of applicable law, deliver to the
Collateral Agent any other documents of title, promissory notes, certificates or
instruments representing Collateral which it holds. The Leasing Company further
agrees that it will promptly (and in any event within 5 Business Days after such
acquisition) deliver to the Collateral Agent and the Trustees an amendment, duly
executed by the Leasing Company, in substantially the form of Schedule I hereto
(an "Additional Collateral Amendment"), with respect to the additional
Collateral that is to be pledged pursuant to this Security Agreement. The
Leasing Company hereby authorizes the Collateral Agent and the Trustees to
attach each Additional Collateral Amendment to this Security Agreement and
agrees that any stock, notes or other forms of Investment listed on any
Additional Collateral Amendment delivered to the Collateral Agent or the
Trustees shall for all purposes hereunder be considered Collateral. The Leasing
Company will, promptly upon request by the Trustee, (i) execute and deliver,
cause to be executed and filed, or use its best efforts to give any notices, in
all appropriate jurisdictions (including Canada, Cyprus, the Russian Federation
and Kazakstan) or procure any financing statements, assignments, pledges or
other documents, all in form and substance satisfactory to the Collateral Agent
and the Trustee, (ii) mark any chattel paper constituting Collateral, and
deliver any certificates, chattel paper or instruments constituting Collateral
to the Collateral Agent or the Trustees, (iii) execute and deliver or cause to
be executed and delivered all stock powers, proxies, assignments, instruments
and other documents, all in form and substance satisfactory to the Collateral
Agent and the Trustee, and (iv) take any other actions that are necessary or, in
the reasonable opinion of the Collateral Agent and the Trustees, desirable to
perfect or continue the perfection and the priority of the Collateral Agent's
security interest and Liens in the Collateral, to protect the Collateral against
the rights, claims, or interests of third Persons other than holders of
Permitted Liens or Liens otherwise permitted by Section 4.11 of the Senior Note
Indenture or to effect the purposes of this Security Agreement. The Leasing
Company also hereby authorizes the Collateral Agent to file any financing or
continuation statements with respect to the Collateral without the signature of
the Leasing Company to the extent permitted by applicable law.
(e) Disposition of Collateral. The Leasing Company will not sell,
transfer, assign, pledge, collaterally assign, exchange or otherwise dispose of,
or grant any option or warrant with respect to, any of the Collateral or any
Telecommunications Assets subject to a
8
<PAGE> 9
Telecommunications Asset Agreement except as permitted by the Senior Note
Indenture and the Convertible Note Indenture. If the proceeds of any sale of any
Collateral are notes, instruments, documents of title, standby letters of credit
or chattel paper, such proceeds shall be promptly delivered to the Collateral
Agent to be held as Collateral hereunder. If the Collateral, or any part
thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in
violation of these provisions, the security interest and Liens of the Collateral
Agent shall continue in such Collateral or part thereof notwithstanding such
sale, transfer, assignment, exchange or other disposition, and the Leasing
Company will hold the proceeds thereof in an separate account for the benefit of
the Senior Note Trustee and for the equal and ratable benefit of the Holders of
the Senior Notes and the benefit of the Convertible Note Trustee and for the
equal and ratable benefit of the Holders of the Convertible Notes and transfer
such proceeds to the Collateral Agent or the applicable Trustee in kind to be
held as Collateral hereunder.
(f) Restrictive Agreements. The Leasing Company agrees that, except for
existing agreements set forth on Schedule J attached hereto, it will not (i)
enter into any agreement or understanding that purports to or may restrict or
inhibit the Collateral Agent's or the Trustees' rights or remedies hereunder,
including, without limitation, the Collateral Agent's or the Trustees' right to
sell or otherwise dispose of the Collateral or amend or modify in any manner
materially adverse to the Trustees the existing agreements set forth as Schedule
J attached hereto, (ii) permit any issuer to continue, merge, amalgamate or
consolidate, unless all outstanding Capital Stock owned by the Leasing Company
of the surviving corporation is, upon such continuation, merger, amalgamation or
consolidation, pledged hereunder to the Collateral Agent or (iii) fail to pay or
discharge any tax, assessment or levy of any nature not later than five days
prior to the date of any proposed sale under any judgment writ or warrant of
attachment with regard to the Collateral.
(g) Rights of Collateral Agent and Trustees. Upon the occurrence and
during the continuance of an Event of Default, the Collateral Agent and the
Trustees shall have the right at any time to make any payments and do any other
acts as the Collateral Agent or either Trustee may deem necessary to protect the
Liens and security interest of the Collateral Agent in the Collateral,
including, without limitation, the rights to pay, purchase, contest or
compromise any Lien which, in the judgment of the Collateral Agent or such
Trustee, appears to be prior to or superior to the Liens and security interest
granted hereunder, and challenge any action or proceeding purporting to affect
its Liens and security interest in the Collateral. The Leasing Company hereby
agrees to reimburse the Collateral Agent and the Trustees for all payments made
and expenses incurred under this Security Agreement including reasonable fees,
expenses and disbursements of attorneys and paralegals acting for the Trustees,
including any of the foregoing payments under or acts taken to perfect or
protect its Liens and security interest in the Collateral, which amounts shall
be secured under this Security Agreement, and agrees that it shall be bound by
any payment made or act taken by the Collateral Agent or the Trustees hereunder.
Neither the Collateral Agent nor the Trustees shall have any obligation to make
any of the foregoing payments or perform any of the foregoing acts.
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<PAGE> 10
(h) Records. The Leasing Company will keep and maintain at its own cost
and expense satisfactory and complete records of the Collateral.
(i) Access. On reasonable notice to the Leasing Company, except at any
time during the continuation of Default or an Event of Default, both the
Collateral Agent and the Trustees shall at all times have full and free access
during normal business hours to all the books, correspondence and records of the
Leasing Company relating to the Collateral, and the Collateral Agent and its
representatives, and the Trustees and their respective representatives, may
examine the same, take extracts therefrom and make photocopies thereof, and the
Leasing Company agrees to render to the Collateral Agent and/or the applicable
Trustee, at the Leasing Company's cost and expense, such clerical and other
assistance, at all times and in such manner as may be requested with regard
thereto. On reasonable notice to the Leasing Company, except at any time during
the continuation of a Default or an Event of Default, the Collateral Agent and
its representatives, and the Trustees and their respective representatives,
shall at all times also have the right to enter, during normal business hours,
into and upon any premises where any of the Collateral is located for the
purpose of inspecting the same, observing its use or otherwise protecting its
interests therein.
(j) Taxes. The Leasing Company shall pay all taxes, assessments and
government charges and all claims as and to the extent required by Section 4.6
of each of the Senior Note Indenture and the Convertible Note Indenture;
provided that the Leasing Company shall in any event pay such taxes, assessments
or levies not later than five days prior to the date of any proposed sale under
any judgment, writ or warrant of attachment with regard to any Collateral of the
Leasing Company entered or filed against the Leasing Company as a result of the
failure to make such payment.
(k) Demand Obligations. The Leasing Company agrees that it will cause each
of the Restricted Subsidiaries that is obligated on any Intercompany Note
constituting Collateral that constitutes a demand obligation, within the meaning
of Section 3-108 of the Uniform Commercial Code of the State of New York, to
execute and deliver to the Collateral Agent and/or the Trustees a new instrument
extending, renewing and replacing such demand obligation not later than the
second anniversary of the date of original issue thereon and on each succeeding
second anniversary thereof.
SECTION 7. VOTING RIGHTS: DIVIDENDS: ETC.
(a) So long as no Event of Default shall have occurred and be continuing,
the Leasing Company shall be entitled to exercise any and all voting and other
consensual rights pertaining to the Collateral, including amending, modifying,
supplementing or replacing any Telecommunications Asset Agreement, or any part
thereof for any purpose not inconsistent with the terms of this Security
Agreement, the Senior Note Indenture or any other Senior Note Collateral
Document or the Convertible Note Indenture or any Convertible Note Collateral
Documents; provided that the Leasing Company shall not exercise or shall refrain
from
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exercising any such right if such action would be inconsistent with or violate
any provisions of this Security Agreement, the Senior Note Indenture or any
other Senior Note Collateral Document or the Convertible Note Indenture or any
Convertible Note Collateral Documents.
(b) All payments made from time to time on, or with respect to Collateral,
whether interest, principal, dividends, distributions or otherwise, shall
constitute Collateral and shall be delivered to the applicable Trustee for
deposit in the Leasing Company Escrow Account.
(c) All payments made from time to time on, or with respect to a
Telecommunications Asset Agreement, Intercompany Notes, Qualified Investments
(other than Excluded Qualified Investments) constituting Collateral and
Intercompany Notes constituting a Loan or advance made by the Company from the
net proceeds of the Senior Notes and any other Intercompany Notes constituting
loans or advances to the Leasing Companies, whether lease payments and rents,
interest or principal payments, dividends, distributions or otherwise, shall be
delivered to the applicable Trustee for deposit in the Leasing Company Escrow
Account or the Convertible Note Escrow Account if the Company Senior Note Escrow
Account Agreement has been terminated.
(d) So long as no Event of Default shall have occurred and be continuing,
and subject to the other terms and conditions hereof and of the Senior Indenture
or of the Convertible Note Indenture if the Senior Notes are no longer
outstanding and the Senior Note Indenture has been satisfied and discharged, the
Leasing Company shall be entitled to receive, and to utilize free and clear of
the Liens of this Security Agreement, all payments ("Unrestricted Payments")
made from time to time with respect to Intercompany Notes not described in
Section 7(b) above ("Unrestricted Collateral"), whether interest, principal,
dividends, distributions or otherwise.
(e) The Collateral Agent and/or the Senior Note Trustee (or the
Convertible Note Trustee if the Senior Notes are no longer outstanding and the
Senior Note Indenture has been satisfied and discharged) shall execute and
deliver (or cause to be executed and delivered) to the Leasing Company all such
proxies and other instruments as the Leasing Company may reasonably request for
the purpose of enabling the Leasing Company to exercise the voting and other
rights that it is entitled to exercise pursuant to Section 7(a) above.
(f) Upon the occurrence and during the continuance of an Event of Default,
(i) all rights of the Leasing Company to exercise the voting and other
consensual rights that it would otherwise be entitled to exercise pursuant to
Section 7(a) shall cease, and all such rights shall thereupon become vested in
the Collateral Agent on behalf of, or if necessary, directly in, the Senior Note
Trustee (or the Convertible Note Trustee if the Senior Notes are no longer
outstanding and the Senior Note Indenture has been satisfied and discharged),
which shall thereupon have the sole right to exercise such voting and other
consensual rights, and (ii) all Unrestricted Payments shall constitute
Collateral and shall be paid directly to the Collateral Agent and the Leasing
Company's right to receive such payments pursuant to Section 7(c) hereof shall
immediately cease and all such Unrestricted Payments shall be deposited in the
Leasing
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Company Senior Note Escrow Account or the Leasing Company Convertible Note
Escrow Account, if the Leasing Company Senior Note Escrow Account has been
terminated.
(g) Upon the occurrence and during the continuance of an Event of Default,
the Leasing Company shall execute and deliver (or cause to be executed and
delivered) to the Collateral Agent and/or the Senior Note Trustee (or the
Convertible Note Trustee if the Senior Notes are no longer outstanding and the
Senior Note Indenture has been satisfied and discharged) all such proxies and
other instruments as the Collateral Agent and/or the applicable Trustee may
reasonably request for the purpose of enabling the Collateral Agent and/or the
applicable Trustee to exercise the voting and other rights that it is entitled
to exercise pursuant to Section 7(c) above.
(h) All lease payments and rents, all interest and principal payments, all
dividends and distributions and all other payments that are received by the
Leasing Company contrary to the provisions of this Section 7 shall be received
in trust for the Collateral Agent for the benefit of the Senior Note Trustee and
the equal and ratable benefit of the Holders of the Senior Notes and for the
benefit of the Convertible Note Trustee and the equal and ratable benefit of the
Holders of the Convertible Notes, shall be segregated from the other property or
funds of the Leasing Company and be forthwith delivered to the Collateral Agent
as Collateral in the same form as so received (with any necessary endorsements
or other instruments of transfer or assignment in blank), and all such payments
shall be deposited in the Leasing Company Escrow Account or the Company
Convertible Note Escrow Account if the Leasing Company Escrow Account Agreement
has been terminated.
(i) So long as no Event of Default shall have occurred and be continuing,
neither the Collateral Agent nor the Trustees shall be under any obligation to
collect, attempt to collect, protect or enforce the Collateral, which the
Leasing Company agrees and undertakes to do at the Leasing Company's expense;
provided that the Collateral Agent and the Trustees shall cooperate with the
Leasing Company and take all such action as the Leasing Company may reasonably
request to permit the Leasing Company to collect, protect or enforce the
Collateral. All reasonable expenses (including, without limitation, attorneys'
fees and legal expenses) actually incurred or paid by the Collateral Agent and
the Trustees in connection with or incident to any such collection or attempt to
collect, protect or enforce the Collateral shall be borne by the Leasing Company
or reimbursed by the Leasing Company to the Collateral Agent or the applicable
Trustee upon demand.
(j) At the Collateral Agent's or the applicable Trustee's option,
exercisable upon and during the continuance of any Event of Default, either the
Collateral Agent or the Senior Note Trustee (or the Convertible Note Trustee if
the Senior Notes are no longer outstanding and the Senior Note Indenture has
been satisfied and discharged) may notify the lessees and other obligors under
the Telecommunications Asset Agreements, the issuers or other obligors of the
Intercompany Notes constituting Collateral (including Unrestricted Collateral),
the Issuers and the obligors of the Qualified Investments constituting
Collateral that any and all
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payments and distributions to be made on such Telecommunications Asset
Agreements, such Intercompany Notes and such Qualified Investments, whether
consisting of Unrestricted Collateral or otherwise, shall be made directly to
the Collateral Agent or the applicable Trustee, and the Leasing Company hereby
directs the obligors and lessees of such Telecommunications Asset Agreements,
the obligors of such Intercompany Notes, the Issuers, and the issuers or other
obligors of such Qualified Investments to pay and deliver over to the Collateral
Agent or the Senior Note Trustee (or the Convertible Note Trustee if the Senior
Notes are no longer outstanding and the Senior Note Indenture has been satisfied
and discharged) all payments and distributions to be made on such Intercompany
Notes, and such Qualified Investments, until such obligors or issuers are
notified in writing by the applicable Trustee or the Collateral Agent to
discontinue making such payments to it; and such obligors and issuers shall not
be required to see to the application of said proceeds by the Trustee or the
Collateral Agents. All such payments shall be deposited by such Trustee or the
Collateral Agent into the Leasing Company Escrow Account (or the Convertible
Note Escrow Account if the Leasing Company Note Escrow Account Agreement has
been terminated) and held as additional Collateral for the Obligations. If at
any time the Collateral Agent or a Trustee shall have notified such lessees,
issuers and obligors to make all payments directly to the Collateral Agent and
if any at any time thereafter all Events of Default shall thereafter have been
cured or waived in accordance with the terms of the Senior Note Indenture (or
the Convertible Note Indenture if the Senior Notes are no longer outstanding and
the Senior Note Indenture has been satisfied and discharged), the Collateral
Agent or a Trustee may notify such lessees, issuers and obligors to make all
such payments directly to the Leasing Company or as the Leasing Company may
otherwise direct.
SECTION 8. POWER OF ATTORNEY. In addition to all of the powers granted to
the Senior Note Trustee pursuant to Article VI of the Senior Note Indenture and
the Convertible Note Trustee pursuant to Article VI of the Convertible Note
Indenture, the Leasing Company hereby appoints and constitutes the Collateral
Agent and the Trustees, whether acting separately or jointly, as the Leasing
Company's attorneys-in-fact to exercise all of the following powers upon and at
any time after the occurrence and during the continuance of an Event of Default:
(i) collection of proceeds of any Collateral; (ii) conveyance of any item of
Collateral to any purchaser thereof; (iii) giving of any notices or recording
of the security interest and the Liens under Section 6(d) hereof; (iv) making of
any payments or taking any acts under Section 9 hereof and (v) paying or
discharging taxes or Liens levied or placed upon the Collateral, the legality or
validity thereof and the amounts necessary to discharge the same to be
determined by the Collateral Agent in its sole discretion, and such payments
made by the Collateral Agent to become the Obligations of the Leasing Company to
the Collateral Agent, due and payable immediately upon demand. The Collateral
Agent's authority hereunder shall include, without limitation, the authority to
endorse and negotiate any checks or instruments representing proceeds of
Collateral in the name of the Leasing Company, to execute and give receipt for
any certificate of ownership or any document constituting Collateral, to
transfer title to any item of Collateral, to sign the Leasing Company's name on
all financing statements (to the extent permitted by applicable law) or any
other Senior Note Collateral Documents or other documents deemed necessary or
appropriate by the Collateral Agent to preserve, protect or perfect the Liens
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in the Collateral and to file the same, to prepare, file and sign the Leasing
Company's name on any notice of Lien, and to prepare, file and sign the Leasing
Company's name on a proof of claim in bankruptcy or similar document against any
customer of, or person obligated upon any Collateral to, the Leasing Company,
and to take any other actions arising from or incident to the powers granted to
the Collateral Agent in this Security Agreement. This power of attorney is
coupled with an interest in the Trustees and in the Collateral Agent as agent on
behalf of the Trustees and is irrevocable by the Leasing Company.
SECTION 9. COLLATERAL AGENT OR TRUSTEES MAY PERFORM. If the Leasing
Company fails to perform any covenant or agreement contained herein, the
Collateral Agent or either Trustee may, but shall not be obligated to, itself
perform, or cause performance of, such covenant or agreement, and the reasonable
expenses of the Collateral Agent or the Trustees incurred in connection
therewith shall be payable by the Leasing Company under Section 17(p) hereof.
SECTION 10. NO ASSUMPTION OF DUTIES; REASONABLE CARE. The rights and
powers granted to the Collateral Agent or the Trustees hereunder are being
granted in order to preserve and protect the Collateral Agent's Liens and
security interest in and to the Collateral granted hereby and shall not be
interpreted to, and shall not, impose any duties on the Collateral Agent or the
Trustees in connection therewith. Each of the Collateral Agent and the Trustees
shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral in its possession if the Collateral is accorded
treatment substantially equal to that which the Collateral Agent or such Trustee
accords similar property in similar situations, it being understood that the
Collateral Agent and the Trustees shall not have any responsibility for (i)
ascertaining or taking action with respect to calls, conversions, exchanges,
maturities, tenders or other matters relative to any Collateral, whether or not
the Collateral Agent or either Trustee has or is deemed to have knowledge of
such matters, (ii) taking any necessary steps to preserve rights against any
parties with respect to any Collateral, or (iii) inquiring into or verifying
that the Leasing Company has complied or will comply with its duty to furnish
additional items of Collateral to the Collateral Agent and/or the Trustees
pursuant to Section 6(d) hereof. Absent knowledge to the contrary, the
Collateral Agent and both Trustees may assume that the items of Collateral
actually delivered to it are all items required to be so delivered and may
assume that no other such items need be so delivered.
SECTION 11. SUBSEQUENT CHANGES AFFECTING COLLATERAL. The Leasing Company
represents to the Collateral Agent, the Senior Note Trustee and the Holders of
the Senior Notes, and the Convertible Note Trustee and the Holders of the
Convertible Notes that the Leasing Company has made its own arrangements for
keeping informed of changes or potential changes affecting the Collateral
(including but not limited to, compliance with the covenants and the
occurrence of events of default under Telecommunications Asset Agreements and
the status of the related Telecommunications Assets, rights to convert, rights
to subscribe, payment of dividends, payments of interest and/or principal,
reorganization or other exchanges, tender offers and voting rights), and the
Leasing Company agrees that the Collateral Agent, the Senior Note
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Trustee and the Holders of the Senior Notes, and the Convertible Note Trustee
and the Holders of the Convertible Notes shall have no responsibility or
liability for informing the Leasing Company of any such changes or potential
changes or for taking any action or omitting to take any action with respect
thereof. The Leasing Company will defend the right, title and interest of the
Collateral Agent, the Senior Note Trustee and the Holders of the Senior Notes,
and the Convertible Note Trustee and the Holders of the Convertible Notes in and
to the Collateral against the claims and demands of all persons.
SECTION 12. REMEDIES UPON AN EVENT OF DEFAULT.
(a) Upon the occurrence and during the continuance of an Event of Default,
the Collateral Agent may, subject to the provisions of the Senior Note Indenture
(or of the Convertible Note Indenture if the Senior Notes are no longer
outstanding and the Senior Note Indenture has been satisfied and discharged),
this Security Agreement, and the Collateral Agent's and the Trustees' compliance
with any requirements of law (including, without limitation, the applicable
Uniform Commercial Code and the Personal Property Security Act (Ontario))
applicable to the action to be taken, without notice to or demand upon the
Leasing Company except as required by the Senior Note Indenture, the Convertible
Note Indenture, this Agreement or applicable law, do any one or more of the
following:
(i) exercise any or all of the rights and remedies provided for by the
applicable Uniform Commercial Code and the Personal Property Security Act
(Ontario), specifically including, without limitation, the right to recover the
reasonable fees and expenses incurred by the Collateral Agent or the Trustees in
the enforcement of this Security Agreement or in connection with the Leasing
Company's redemption of the Collateral, including reasonable fees, expenses and
disbursements of attorneys, paralegals and agents;
(ii) at its option, transfer or register, and the Leasing Company
shall register or cause to be registered upon request therefor by the Collateral
Agent or the Trustees, the Collateral or any part thereof on the books of the
Restricted Subsidiary or Qualified Joint Venture which is a lessee or buyer in a
transaction in which the monetary consideration therefor is paid immediately or
is payable over time under a Telecommunications Asset Agreement, the Persons in
whom Qualified Investments are made or the Restricted Subsidiaries to which an
intercompany loan evidenced by an Intercompany Note has been made, into the name
of the Collateral Agent or the Collateral Agent's nominee(s);
(iii) personally, or by agents or attorneys, immediately retake
possession of the Collateral or the Telecommunications Assets subject to a
Telecommunications Asset Agreement, or any part thereof, from the Leasing
Company or any other Person who then has possession of any part thereof with or
without notice or process of law, and for that purpose may enter upon the
Leasing Company's premises where any of the Collateral is located and remove the
same and use in connection with such removal any and all services, supplies,
aids and other facilities of the Leasing Company;
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(iv) sell, assign or otherwise liquidate, or direct the Leasing Company to
sell, assign or otherwise liquidate, any or all of the Collateral or any part
thereof, and take possession of the proceeds of any such sale or liquidation;
(v) require the Leasing Company to assemble the Collateral or the
Telecommunications Assets subject to a Telecommunications Asset Agreement or any
part thereof and make it available at one or more places as the Collateral Agent
or the Trustees may designate and to deliver possession of the Collateral or any
part thereof to the Collateral Agent or the Trustees;
(vi) use, in connection with any assembly, use or disposition of the
Collateral, any intellectual property, intangibles or other technical knowledge
or process used or utilized from time to time by the Leasing Company;
(vii) sell or cause the same to be sold at any broker's board or at public
or private sale, in one or more sales or lots, at such price or prices as the
Collateral Agent may deem best, for cash or on credit or for future delivery,
without assumption of any credit; and the purchaser of any or all Collateral so
sold shall thereafter hold the same absolutely, free from any claim, encumbrance
or right of any kind whatsoever;
(viii) enforce one or more remedies hereunder, successively or
concurrently, and such action shall not operate to estop or prevent the
Collateral Agent from pursuing any other or further remedy which it may have,
and any repossession or retaking or sale of the Collateral pursuant to the terms
hereof shall not operate to release the Leasing Company until full and final
payment of any deficiency has been made in cash;
(ix) in connection with any public or private sale under the applicable
Uniform Commercial Code, the Personal Property Act (Ontario) or other
applicable legislation, the Collateral Agent shall give the Leasing Company at
least fifteen (15) Business Days' prior written notice of the time and place of
any public sale of its Collateral or of the time after which any private sale or
other intended disposition thereof may be made, which shall be deemed to be
reasonable notice of such sale or other disposition. Such notice may be given to
the Leasing Company in accordance with the provisions of Section 17(a) hereof;
(x) proceed by an action or actions at law or in equity to recover the
Obligations or to foreclose this Security Agreement and sell the Collateral, or
any portion thereof, pursuant to a judgment or decree of a court or courts of
competent jurisdiction;
(xi) exercise any other rights and remedies provided by applicable law and
the other Senior Note Collateral Documents; and
(xii) if the Collateral Agent recovers possession of all or any part of
the Collateral pursuant to a writ of possession or other judicial process,
whether prejudgment or
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otherwise, the Collateral Agent may thereafter retain, sell or otherwise dispose
of such Collateral in accordance with this Security Agreement or the applicable
Uniform Commercial Code, the Personal Property Act (Ontario) or other applicable
legislation, and following such retention, sale or other disposition, the
Collateral Agent may voluntarily dismiss without prejudice the judicial action
in which such writ of possession or other judicial process was issued. The
Leasing Company hereby consents to the voluntary dismissal by the Collateral
Agent of such judicial action, and the Leasing Company further consents to the
exoneration of any bond that the Collateral Agent files in such action.
(b) If the Collateral Agent shall determine, or shall be directed by the
Senior Note Trustee (or the Convertible Note Trustee if the Senior Notes are no
longer outstanding and the Senior Note Indenture has been satisfied and
discharged), to exercise its right to sell any or all of the Qualified
Investments pursuant to Section 12(a) above, and if in the opinion of counsel
for the Collateral Agent it is necessary, or if in the opinion of the Collateral
Agent or such Trustee it is advisable, after such consultation with investment
bank(s), broker-dealer(s) or other experts selected by them, as the Collateral
Agent or such Trustee deems advisable or appropriate, to have the Qualified
Investments constituting Collateral or that portion thereof to be sold,
registered under the provisions of the Securities Act of 1933, as amended (the
"Securities Act"), the Leasing Company will (i) use its best efforts to cause
the issuer or obligor to execute and deliver, and to cause such Person's
directors and officers to execute and deliver, all at the Leasing Company's own
expense, all such instruments and documents, and to do or cause to be done all
such other acts and things as may be necessary or, in the opinion of the
Collateral Agent or such Trustee, after such consultation with investment
bank(s), broker-dealer(s) or other experts selected by them, as the Collateral
Agent or such Trustee deems advisable or appropriate, advisable to register such
Qualified Investments constituting Collateral under the provisions of the
Securities Act, (ii) use its best efforts to cause the registration statement
relating thereto to become effective and to remain effective for a period of 180
days from the date of the first public offering of such Qualified Investments,
or that portion thereof to be sold and (iii) make all amendments thereto and/or
to the related prospectus that are necessary or, in the opinion of the
Collateral Agent or such Trustee, are advisable, all in conformity with the
requirements of the Securities Act and the rules and regulations of the
Securities and Exchange Commission applicable thereto. The Leasing Company
agrees to use its best efforts to cause the applicable issuer or obligor to
comply with the provisions of the securities or "Blue Sky" laws of any
jurisdiction that the Collateral Agent or the Senior Note Trustee (or the
Convertible Note Trustee if the Senior Notes are no longer outstanding and the
Senior Note Indenture has been satisfied and discharged) shall designate for the
sale of such Qualified Investments and to make available to the security holders
of such issuer or obligor, as the case may be, as soon as practicable, an
earnings statement (which need not be audited) that will satisfy the provisions
of Section 11(a) of the Securities Act. The Leasing Company will cause the
issuer or obligor, as the case may be, to furnish to the Collateral Agent and
the Trustees such number of copies as the Collateral Agent and the Trustees may
reasonably request of each preliminary prospectuses and prospectuses, to notify
promptly the Collateral Agent and the Trustees of the happening of any event as
a result of which any then effective prospectus includes an untrue statement of
any material fact or omits to
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state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of then existing circumstances
and cause the Collateral Agent and the Trustees to be furnished with such number
of copies as the Collateral Agent or the Trustees may request of such supplement
to or amendment of such prospectus as is necessary to eliminate such untrue
statement or supply such omission. The Leasing Company will cause the issuer or
obligor, as the case may be, to the extent permitted by law, to indemnity,
defend and hold harmless the Collateral Agent, the Senior Note Trustee and the
Holders of the Senior Notes, and the Convertible Note Trustee and the Holders of
the Convertible Notes from and against all losses, liabilities, expenses or
claims (including reasonable costs of investigation) that the Collateral Agent,
the Senior Note Trustee and the Holders of the Senior Notes, and the Convertible
Note Trustee and the Holders of the Convertible Notes may incur under the
Securities Act or otherwise, insofar as such losses, liabilities, expenses or
claims arise out of or are based upon any alleged untrue statement of a material
fact contained in such registration statement (or any amendment thereto) or in
any preliminary prospectus or prospectus (or any amendment or supplement
thereto), or arise out of or are based upon any alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except to the extent that any such losses, liabilities,
expenses or claims arise solely out of or are based solely upon any such alleged
untrue statement made or such alleged omission to state a material fact included
or excluded on the written direction of the Collateral Agent or such Trustee.
The Leasing Company will bear, or will cause the issuer or obligor, as the case
may be, to bear, all costs and expenses of carrying out its or their obligations
hereunder. The provisions of this Section 12(b) shall in no way impose upon
either Trustee or the Collateral Agent any duty to execute any registration
statement under the Securities Act with respect to any Qualified Investment.
(c) In view of the fact that federal, state and foreign securities laws
may impose certain restrictions on the method by which a sale of the Collateral
may be effected after an Event of Default, the Leasing Company agrees that upon
the occurrence and during the continuance of an Event of Default, the Collateral
Agent may, from time to time, attempt to sell all or any part of the Collateral
by means of a private placement, restricting the prospective purchasers to those
who will represent and agree that they are purchasing for investment only and
not for distribution. In so doing, the Collateral Agent may solicit, or may
cause an investment manager to solicit, offers to buy the Collateral, or any
part of it, for cash, from a limited number of investors who might be interested
in purchasing the Collateral. The Leasing Company acknowledges and agrees that
any such private sale may result in prices and terms less favorable than if such
sale were a public sale and, notwithstanding such circumstances, agrees that any
such private sale shall be deemed to have been made in a commercially reasonable
manner. The Collateral Agent shall be under no obligation to delay a sale of any
of the Collateral for the period of time necessary to permit the Leasing Company
to cause the issuer or obligor to register such securities for public sale under
the Securities Act, or under applicable state or foreign securities laws, even
if the Leasing Company could cause the issuer or obligor, as the case may be, to
do so.
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(d) The Leasing Company further agrees to use its best efforts to do or
cause to be done all such other acts as may be necessary to make such sale or
sales of all or any portion of the Collateral pursuant to this Section 12 valid
and binding and in compliance with any and all other applicable requirements of
applicable law. The Leasing Company further agrees that a breach of any of the
covenants contained in this Section 12 will cause irreparable injury to the
Senior Note Trustee and the Holders of the Senior Notes, and the Convertible
Note Trustee and the Holders of the Convertible Notes and that the Collateral
Agent, the Senior Note Trustee and the Holders of the Senior Notes and the
Convertible Note Trustee and the Holders of the Convertible Notes have no
adequate remedy at law in respect of such breach and, as a consequence, that
each and every covenant contained in this Section 12 shall be specifically
enforceable against the Leasing Company, and the Leasing Company hereby waives
and agrees not to assert any defenses against an action for specific performance
of such covenants except for a defense that no Event of Default has occurred and
is continuing.
(e) Any cash held by the Collateral Agent as Collateral and all cash
proceeds received by the Collateral Agent in respect of any sale of, collection
from, or other realization upon all or any part of the Collateral shall be
applied by the Collateral Agent:
First, to the payment of the costs and expenses of such sale,
including, without limitation, reasonable expenses of the Collateral Agent
and its agents including the fees and expenses of its counsel, and all
expenses, liabilities and advances made or incurred by the Collateral
Agent in connection therewith or pursuant to Section 17(p) hereof:
Next, to the Senior Note Trustee for the payment in full of all
amounts due under Section 7.7 of the Senior Note Indenture;
Next, to the Senior Note Trustee, for distribution to the Holders of
the Senior Notes for the payment in full of the remaining Senior Note
Obligations;
Next, to the Convertible Note Trustee for the payment in full of all
amounts due under Section 7.7 of the Convertible Note Indenture.
Next, to the Convertible Note Trustee, for distribution to the
Holders of the Convertible Notes, for the payment in full of the remaining
convertible Note Obligations; and
Finally, after payment in full of all of the Obligations, to the
Company, or its successors or assigns, or to whomsoever may be lawfully
entitled to receive the same as a court of competent jurisdiction may
direct.
(f) If any sale or other disposition of Collateral by the Collateral Agent
or any other action of the Collateral Agent or the Trustees hereunder results in
reduction of the
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Obligations, such action will not release the Leasing Company from its liability
for any unpaid Obligations, including costs, charges and expenses incurred in
the liquidation of Collateral, together with interest thereon, and the same
shall be immediately due and payable to the Collateral Agent, the Senior Note
Trustee and the Holders of the Senior Notes as provided for in the Senior Note
Indenture, or, if applicable, the Convertible Note Trustee and the Holders of
the Convertible Notes as provided for in the Convertible Note Indenture.
(g) The Collateral Agent may enforce its rights hereunder without prior
judicial process or judicial hearing, and to the extent permitted by law the
Leasing Company expressly waives any and all legal rights which might otherwise
require the Collateral Agent to enforce its right by judicial process.
(h) The existence and/or exercise of any or all of the rights and remedies
given to the Collateral Agent and/or either Trustee under this Section 12 shall
be subject in all cases to compliance with any mandatory requirements of
applicable law, particularly the laws of jurisdictions other than the United
States.
SECTION 13. IRREVOCABLE AUTHORIZATION AND INSTRUCTIONS TO THE APPLICABLE
ISSUER. The Leasing Company hereby authorizes and instructs the lessees, issuers
and obligors to comply with any instructions received by the Issuers or such
other issuer or obligor, as the case may be, from the Collateral Agent or the
Senior Note Trustee (or the Convertible Note Trustee if the Senior Notes are no
longer outstanding and the Senior Note Indenture has been satisfied and
discharged) that (i) states that an Event of Default has occurred and (ii) is
otherwise in accordance with the terms of this Security Agreement, without any
other or further instructions from the Leasing Company, and the Leasing Company
agrees that the lessees, issuers and obligors shall be fully protected in so
complying.
SECTION 14. ESCROW ACCOUNTS. All money received by the Leasing Company and
required to be deposited in the Leasing Company Escrow Account, or the
Convertible Note Escrow Account if the Leasing Company Escrow Account Agreement
has been terminated, shall be promptly and without commingling remitted to the
Collateral Agent or the Senior Note Trustee (or the Convertible Note Trustee if
the Senior Notes are no longer outstanding and the Senior Note Indenture has
been satisfied and discharged) for deposit therein. Amounts held in the Leasing
Company Escrow Account shall be applied or disposed of only in a manner not
prohibited by the Senior Note Indenture.
SECTION 15. SECURITY INTEREST ABSOLUTE. All rights of the Collateral
Agent, the Senior Note Trustee and the Holders of the Senior Notes, and the
Convertible Note Trustee and the Holders of the Convertible Notes and the Liens
or security interests hereunder, and all obligations of the Leasing Company
hereunder, shall be absolute and unconditional irrespective of:
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(a) any lack of validity or enforceability of the Senior Note
Indenture, any Senior Note Collateral Document, any Senior Note Guarantee, the
Convertible Note Indenture, any Convertible Note Collateral Document, any
Convertible Note Guarantee or any other agreement or instrument relating
thereto;
(b) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Obligations, or any other amendment or waiver
of or any consent to any departure from the Senior Note Indenture or the Senior
Note Collateral Documents or from the Convertible Note Indenture or the
Convertible Note Collateral Documents;
(c) any exchange, surrender, release or non-perfection of any Liens on
any other collateral, or any release or amendment or waiver of or consent to
departure from any Senior Note Guarantee, any Convertible Note Guarantee or
other guarantee, for all or any of the Obligations; or
(d) any other circumstance which might otherwise constitute a defense
available to, or a discharge of, the Leasing Company in respect of the
Obligations or of this Security Agreement.
SECTION 16. WAIVERS.
(a) Except as may be required under the provisions of the Senior Note
Indenture (or of the Convertible Note Indenture if the Senior Notes are no
longer outstanding and the Senior Note Indenture has been satisfied and
discharged) and to the fullest extent permitted under applicable law, neither
the Collateral Agent nor the Senior Note Trustee (or the Convertible Note
Trustee if the Senior Notes are no longer outstanding and the Senior Note
Indenture has been satisfied and discharged) shall be under any duty whatsoever
to make or give any presentment, notice of dishonor, protest, demand for
performance, notice of non-performance, notice of intent to accelerate, notice
of acceleration, or other notice or demand in connection with any Collateral or
the Obligations, or to take any steps reasonably necessary to preserve any
rights against any Obligor or other Person. The Leasing Company waives to the
fullest extent permitted under applicable law any right of marshalling in
respect of any and all Collateral, and waives to the fullest extent permitted
under applicable law any right to require the Collateral Agent or the applicable
Trustee to proceed against any Obligor or other Person, exhaust any Collateral
or enforce any other remedy which the Collateral Agent or the applicable Trustee
now has or may hereafter have against any Obligor or other Person.
(b) The Leasing Company waives to the fullest extent permitted under
applicable law (i) any and all notices of acceptance, creation, modification,
rearrangement, renewal or extension for any period of any instrument executed by
any obligor in connection with the Obligations and (ii) any defense of any
Obligor by reason of disability, lack of authorization, cessation of the
liability of any Obligor or for any other reason. The Leasing Company authorizes
the Collateral Agent to the fullest extent permitted under applicable law,
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without notice or demand and without any reservation of rights against the
Leasing Company and without affecting the Leasing Company's liability hereunder
or on the Obligations, from time to time to (w) take and hold other Property,
other than the Collateral, as security for the Obligations, and exchange,
enforce, waive and release any or all of the Collateral, (x) after the
occurrence and during the continuance of an Event of Default and the
acceleration of the Senior Notes, apply the Collateral in the manner permitted
by this Security Agreement or the Senior Note Indenture, (y) after the
occurrence and during the continuance of an Event of Default and the
acceleration of the Convertible Notes if the Senior Notes are no longer
outstanding and the Senior Note Indenture has been satisfied and discharged,
apply the Collateral in the manner permitted by this Security Agreement or the
Convertible Note Indenture and (z) after the occurrence and during the
continuance of an Event of Default renew, extend for any period, accelerate,
amend or modify, supplement, enforce, compromise, settle, waive or release the
obligations of any obligor on, or any instrument or agreement of such other
Person with respect to any or all of, the Collateral.
SECTION 17. MISCELLANEOUS PROVISIONS.
(a) Notices. All notices, approvals, consents or other communications
required or desired to be given hereunder shall be in the form and manner, and
delivered to the Leasing Company, at its address as set forth in Section 13.2 of
the Senior Note Indenture, to the Senior Note Trustee at its address as set
forth in Section 13.2 of the Senior Note Indenture, to the Convertible Note
Trustee at its address as set forth in Section 13.2 of the Convertible Note
Indenture and to the Collateral Agent at The Bank of New York, 101 Barclay
Street, Floor 21 West, New York, New York 10286.
(b) Sales of Collateral. No sales of Collateral may be made in
contravention of the terms of the Senior Note Indenture or the Convertible Note
Indenture and the cash proceeds of the sale of any Collateral shall be promptly
and without commingling remitted to the Collateral Agent or the Senior Note
Trustee for deposit in the Leasing Company Escrow Account, or to the Collateral
Agent or the Convertible Note Trustee for deposit in the Convertible Note Escrow
Account if the Leasing Company Escrow Account Agreement has been terminated.
(c) No Adverse Interpretation of Other Agreements. This Security
Agreement may not be used to interpret another pledge, security or debt
agreement of the Leasing Company or any Subsidiary of the Leasing Company. No
such pledge, security or debt agreement may be used to interpret this Security
Agreement.
(d) Severability. The provisions of this Security Agreement are
severable, and if any clause or provision shall be held invalid, illegal or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in
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any other jurisdiction or any other clause or provision of this Security
Agreement in any jurisdiction.
(e) Headings. The headings in this Security Agreement have been
inserted for convenience of reference only, are not to be considered a part
hereof and shall in no way modify or restrict any of the terms or provisions
hereof.
(f) Counterpart Originals. This Security Agreement may be signed in two
or more counterparts, each of which shall be deemed an original, but all of
which shall together constitute one and the same agreement.
(g) Benefits of Security Agreement. Nothing in this Security Agreement,
express or implied, shall give to any person, other than the parties hereto and
their successors hereunder and the Holders of the Senior Notes and the Senior
Note Guarantors and the Holders of the Convertible Notes and the Convertible
Note Guarantors, any benefit or any legal or equitable right, remedy or claim
under this Security Agreement.
(h) Amendments, Waivers and Consents. Any amendment or waiver of any
provision of this Security Agreement and any consent to any departure by the
Leasing Company from any provision of this Security Agreement shall be effective
only if made or given in compliance with all of the terms and provisions of the
Senior Note Indenture and the Convertible Note Indenture and neither the
Collateral Agent or the Senior Note Trustee nor any Holder of any Senior Note or
the Convertible Note Trustee or any Holder of any Convertible Note shall be
deemed, by any act, delay, indulgence, omission or otherwise, to have waived any
right or remedy hereunder or to have acquiesced in any Default or Event of
Default or in any breach of any of the terms and conditions hereof. Failure of
the Collateral Agent or the Trustees to exercise, or delay in exercising, any
right, power or privilege hereunder shall not operate as a waiver thereof. No
single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by the Collateral Agent, the Senior Note
Trustee or any Holder of any Senior Note or the Convertible Note Trustee or any
Holder of any Convertible Note of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy that the
Collateral Agent, either Trustee or any such Holder would otherwise have on any
future occasion. The right and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any rights or remedies
provided by law.
(i) Interpretation of Security Agreement. All terms not defined herein
or in the Senior Note Indenture shall have the meaning set forth in the
applicable Uniform Commercial Code of the State of New York, except where the
context otherwise requires. To the extent a term or provision of this Security
Agreement conflicts with the Senior Note Indenture, the Senior Note Indenture
shall control with respect to the subject matter of such term or provision.
Acceptance of or acquiescence in a course of performance rendered under this
Security Agreement shall not be relevant in determining the meaning of this
Security Agreement
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even though the accepting or acquiescing party had knowledge of the nature of
the performance and opportunity for objection.
(j) Continuing Security Interest; Transfer of Collateral. This Security
Agreement shall create a continuing Lien and security interest in the Collateral
and shall (i) unless otherwise provided in the Senior Note Indenture, the
Convertible Note Indenture or this Security Agreement, remain in full force and
effect until payment in full of (A) the Senior Notes under the terms of the
Senior Note Indenture, (B) all Obligations then due and owing under the Senior
Note Indenture, the Senior Note Guarantees and the Senior Note Collateral
Documents, (C) the Convertible Notes under the terms of the Convertible Note
Indenture and (D) all Obligations then due and owing under the Convertible Note
Indenture, the Convertible Note Guarantees and the Convertible Note Collateral
Documents; provided, however, that after receipt from the Leasing Company by the
Collateral Agent of a request for a release of any Collateral permitted under
the Senior Note Indenture and the Convertible Note Indenture upon the sale,
transfer, assignment, exchange or other disposition of such Collateral not
prohibited by the Senior Note Indenture and the Convertible Note Indenture and
upon receipt by the Collateral Agent of all proceeds of such sale, transfer,
assignment, exchange or other disposition required to be remitted to the
Collateral Agent or the Senior Note Trustee (or the Convertible Note Trustee if
the Senior Notes are no longer outstanding and the Senior Note Indenture has
been satisfied and discharged) or the Collateral constituting the proceeds of
such sale, transfer, assignment, exchange or other disposition is made subject
to a Lien and security interest in favor of the Collateral Agent for the benefit
of the Senior Note Trustee and the equal and ratable benefit of the Holders of
the Senior Notes and for the benefit of the Convertible Note Trustee and the
equal and ratable benefit of the Holders of the Convertible Notes, which Lien
has the same priority as had the Lien on the Collateral being sold, assigned or
otherwise disposed of, such Collateral shall be released from the Lien and
security interest created hereunder and no longer constitute Collateral. Upon
the payment in full of (A) the Senior Notes under the terms of the Senior Note
Indenture, (B) all Obligations then due and owing under the Senior Note
Indenture, the Senior Note Guarantees and the Senior Note Collateral Documents,
(C) the Convertible Notes under the terms of the Convertible Note Indenture and
(D) all Obligations then due and owing under the Convertible Note Indenture, the
Convertible Note Guarantees and the Convertible Note Collateral Documents, the
Leasing Company shall be entitled to the return, upon its request and at its
expense, of such of the Collateral pledged by it as shall not have been sold or
otherwise applied pursuant to the terms hereof. This Security Agreement shall be
binding upon the Leasing Company, its successors and assigns, and inure,
together with the rights and remedies of the Trustees hereunder, to the benefit
of the Collateral Agent, the Senior Note Trustee and the Holders of the Senior
Notes, and the Convertible Note Trustee and the Holders of the Convertible Notes
and their respective successors, transferees and assigns.
(k) Reinstatement. This Security Agreement shall continue to be
effective or be reinstated, as the case may be, if at any time any amount
received by the Collateral Agent, the Senior Note Trustee or any Holder of a
Senior Note or the Convertible Note Trustee or any Holder of a Convertible Note
in respect of the Obligations is rescinded or must otherwise be
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restored or returned by the Collateral Agent, the Senior Note Trustee or any
Holder of a Senior Note upon the insolvency, bankruptcy, dissolution,
liquidation or reorganization or the Leasing Company or upon the appointment of
any receiver, intervenor, conservator, trustee or similar official for the
Leasing Company or upon the appointment of any receiver, intervenor,
conservator, trustee or similar official for the Leasing Company or any
substantial part of its assets, or otherwise, all as though such payments had
not been made.
(1) Survival of Provisions. All representations, warranties and
covenants of the Leasing Company contained herein shall survive the execution
and delivery of this Security Agreement, and shall terminate only upon the full
and final payment and performance by the Leasing Company of the Obligations.
(m) Authority of Collateral Agent and Trustees. Both the Collateral
Agent and the Trustees shall have and be entitled to exercise all powers
hereunder that are specifically granted to the Collateral Agent and the Trustees
by the terms hereof, together with such powers as are reasonably incident
thereto. The Collateral Agent and the Trustees may perform any of their
respective duties hereunder or in connection with the Collateral by or through
agents or employees and shall be entitled to retain counsel and to act in
reliance upon the advice of counsel concerning all such matters. None of the
Collateral Agent, any director, officer, any attorney or agent of the Collateral
Agent, the Senior Note Trustee, any director, officer, employee, attorney or
agent of the Senior Note Trustee, the Holders of the Senior Notes, the
Convertible Note Trustee, any director, officer, employee, attorney or agent of
the Convertible Note Trustee and the Holders of the Convertible Notes shall be
liable to the Leasing Company for any action taken or omitted to be taken by it
or them hereunder, except for its or their own negligence or willful misconduct,
nor shall the Collateral Agent or the Trustees be responsible for the validity,
effectiveness or sufficiency hereof or of any document or security furnished
pursuant hereto. The Collateral Agent and its directors, officers, employees,
attorneys and agents, the Senior Note Trustee and its directors, officers,
employees, attorneys and agents the Convertible Note Trustee, any director,
officer, employee, attorney or agent of the Convertible Note Trustee and the
Holders of the Convertible Notes shall be entitled to rely on any communication,
instrument or document believed by it or them to be genuine and correct and to
have been signed or sent by the proper person or persons. Neither the Collateral
Agent nor the Trustees shall be required to, and shall not, expend or risk any
of its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder.
The Leasing Company acknowledges that the rights and responsibilities
of the Collateral Agent and the Trustees under this Security Agreement with
respect to any action taken by the Collateral Agent and the Trustees or the
exercise or non-exercise by the Collateral Agent and the Trustees of any option,
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Security Agreement shall, as among the
Collateral Agent, the Senior Note Trustee, the Holders of the Senior Notes, the
Convertible Note Trustee and the Holders of the Convertible Notes, be governed
by the Senior Note Indenture or the Convertible Note Indenture, as applicable
and by such other agreements with respect thereto as
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may exist from time to time among them, but, as among the Collateral Agent, the
Trustees and the Leasing Company, the Collateral Agent and the Trustees shall be
conclusively presumed to be acting as agent for the Holders of the Senior Notes
or Holders of the Convertible Notes, as the case may be, with full and valid
authority so to act or refrain from acting, and the Leasing Company shall not be
obligated or entitled to make any inquiry respecting such authority.
In any case in which the Collateral Agent shall be required or
permitted to make any determination as to the extent to which the security
interest or Liens under this Security Agreement secures any obligations, the
Collateral Agent is authorized, without any direction from, or requirement for
consent of or authorization by, the Senior Note Trustee (or the Convertible Note
Trustee if the Senior Notes are no longer outstanding and the Senior Note
Indenture has been satisfied and discharged), to institute proceedings in a
court of competent jurisdiction for the obtaining of any authoritative
determination of such matter. If the Collateral Agent institutes any such
proceeding, it shall give prompt written notice thereof to the Trustees and
shall afford each of them the opportunity to participate in such proceeding.
(n) Limitation by Law. All rights, remedies and powers provided herein
may be exercised only to the extent that they will not render this Security
Agreement not entitled to be recorded, registered or filed under provisions of
any applicable law.
(o) Release: Termination of Security Agreement.
(i) Subject to the provisions of Section 17(k) hereof, this
Security Agreement shall terminate upon payment in full of (A) the Senior Notes
under the terms of the Senior Note Indenture and (B) all Obligations then due
and owing under the Senior Note Indenture, the Senior Note Guarantees, and the
Senior Note Collateral Documents, (C) the Convertible Notes under the terms of
the Convertible Note Indenture and (D) all Obligations then due and owing under
the Convertible Note Indenture, the Convertible Note Guarantees and the
Convertible Note Collateral Documents, except that the provisions of Section
17(p) hereof shall survive.
(ii) The Leasing Company agrees that it will not sell or
dispose of any of the Collateral in violation of the Senior Note Indenture or
the Convertible Note Indenture; provided, however, that if the Leasing Company
shall sell or otherwise dispose of any of the Collateral in accordance with the
terms of the Senior Note Indenture and of the Convertible Note Indenture, the
Collateral Agent shall, and the Trustees shall cause, at the request of the
Leasing Company, release or cause to be released the Collateral subject to such
sale or disposition free and clear of the Liens and security interest under this
Security Agreement.
(iii) Upon any termination of this Security Agreement or
release of any Collateral as permitted by the Senior Note Indenture (or the
Convertible Note Indenture if the Senior Notes are no longer outstanding and the
Senior Note Indenture has been satisfied and discharged) the Collateral Agent
and the Trustees will, at the expense of the Leasing Company,
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execute and deliver to the Leasing Company such documents and take such other
actions as the Leasing Company shall reasonably request to evidence the
termination of this Security Agreement or the release of such Collateral, as the
case may be. Any such action taken by the Collateral Agent or the Trustees shall
be without warranty by or recourse to the Collateral Agent or the Trustees,
except as to the absence of any prior assignments by the Collateral Agent or the
Trustees of its interests in the Collateral, and shall be at the expense of the
Leasing Company. The Collateral Agent and the Trustees may conclusively rely on
any certificate delivered to it by the Leasing Company stating that the
execution of such documents and release of the Collateral is in accordance with
and permitted by the terms of this Security Agreement and the Senior Note
Indenture (or of the Convertible Note Indenture if the Senior Notes are no
longer outstanding and the Senior Note Indenture has been satisfied and
discharged).
(p) Payment of Fees and Expenses. The Leasing Company will upon demand
pay to the Collateral Agent and the Trustees, without duplication, the amount of
any and all expenses, including, without duplication, the fees and disbursements
of its counsel and of any experts and agents, that the Collateral Agent and the
Trustees may incur in connection with (i) administration of this Security
Agreement, (ii) the custody, preservation, use or operation of, or the sale of,
collection from, or other realization upon, any of the Collateral, (iii) the
exercise or enforcement of any of the rights of the Collateral Agent and the
Trustees hereunder or (iv) the failure by the Leasing Company to perform or
observe any of the provisions hereof. The Leasing Company shall be liable for
and shall reimburse and indemnify both Trustees and the Collateral Agent and
hold both Trustees and the Collateral Agent harmless from and against any and
all claims, losses, liabilities, costs, damages or expenses (including
reasonable attorneys' fees and expenses) (collectively, "Losses") arising from
or in connection with or related to this Agreement or being a Trustee or
Collateral Agent hereunder (including but not limited to Losses incurred by such
Trustee or Collateral Agent in connection with its successful defense, in whole
or in part, of any claim of negligence or willful misconduct in its part),
provided however that nothing contained herein shall require the Trustees and
the Collateral Agent to be indemnified for their respective negligence or
willful misconduct.
(q) Final Expression. This Security Agreement, together with the Senior
Note Indenture, the Convertible Note Indenture and any other agreement executed
in connection herewith or therewith, is intended by the parties as a final
expression of this Security Agreement and is intended as a complete and
exclusive statement of the terms and conditions hereof.
(r) Leasing Company Remain Liable. Anything herein to the contrary
notwithstanding, (a) the Leasing Company shall remain liable under any contracts
and agreements included in the Collateral, to the extent set forth therein, to
perform all of its duties and obligations thereunder to the same extent as if
this Security Agreement had not been executed, (b) the exercise by the
Collateral Agent or the Trustees of any of the rights hereunder shall not
release the Leasing Company from any of its duties or obligations under the
contracts and agreements included in the Collateral and (c) the Collateral Agent
and the Trustees shall not have any obligation or liability under any contracts
and agreements included in the Collateral by
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reason of this Security Agreement, nor shall the Collateral Agent or the
Trustees be obligated to perform any of the obligations or duties of the Leasing
Company thereunder or to take any action to collect or enforce any claim for
payment assigned hereunder.
(s) Indentures. This Security Agreement is subject to the terms,
conditions and provisions of the Senior Note Indenture, or of the Convertible
Note Indenture if the Senior Notes are no longer outstanding and the Senior Note
Indenture has been satisfied and discharged.
(t) Where there is a conflict between the provisions of this Security
Agreement and the Senior Note Indenture or the Convertible Note Indenture, as
the case may be, the provisions of the Senior Note Indenture or the Convertible
Note Indenture shall prevail.
(u) Rights of Holders. No Holder of a Senior Note or of a Convertible
Note shall have any independent rights hereunder other than those rights granted
to individual Holders pursuant to Section 6.7 of the Senior Note Indenture or
Section 6.7 of the Convertible Note Indenture, as the case may be; provided that
nothing in this subsection (t) shall limit any rights granted to the Senior Note
Trustee under the Senior Notes, the Senior Note Indenture or the Senior Note
Collateral Documents or the Convertible Note Trustee under the Convertible
Notes, the Convertible Note Indenture or the Convertible Note Collateral
Documents.
(v) No Personal Liability of Directors, Officers, Employees and
Stockholders. No past, present or future director, officer, employee,
incorporator or stockholder of the Leasing Company or of any subsidiary of the
Leasing Company, as such, shall have any liability for any obligations of the
Leasing Company under this Security Agreement or for any claim based on, in
respect of, or by reason of, such obligations or their creation.
(w) GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL;
WAIVER OF DAMAGES
(i) THIS SECURITY AGREEMENT SHALL BE GOVERNED BY AND
INTERPRETED UNDER THE LAWS OF THE STATE OF NEW YORK, AND ANY DISPUTE ARISING OUT
OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED
BETWEEN THE LEASING COMPANY, THE COLLATERAL AGENT, THE SENIOR NOTE TRUSTEE AND
THE HOLDERS OF THE SENIOR NOTES AND THE CONVERTIBLE NOTE TRUSTEE AND THE HOLDERS
OF THE CONVERTIBLE NOTES IN CONNECTION WITH THIS SECURITY AGREEMENT, AND WHETHER
ARISING IN CONTRACT, TORT, EQUITY OR OTHERWISE, SHALL BE RESOLVED IN ACCORDANCE
WITH THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICTS OF LAWS PROVISIONS) AND
DECISIONS OF THE STATE OF NEW YORK
(ii) THE LEASING COMPANY AGREES THAT THE COLLATERAL AGENT
SHALL, IN ITS CAPACITY AS COLLATERAL AGENT OR IN THE NAME AND ON BEHALF OF THE
SENIOR NOTE TRUSTEE AND ANY HOLDERS
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OF SENIOR NOTES AND THE CONVERTIBLE NOTE TRUSTEE AND ANY HOLDERS OF CONVERTIBLE
NOTES, AND THE SENIOR NOTE TRUSTEE SHALL, IN ITS CAPACITY AS SENIOR NOTE TRUSTEE
OR IN THE NAME AND ON BEHALF OF ANY HOLDERS OF SENIOR NOTES AND THE CONVERTIBLE
NOTE TRUSTEE SHALL, IN ITS CAPACITY AS CONVERTIBLE NOTE TRUSTEE OR IN THE NAME
AND ON BEHALF OF ANY HOLDERS OF CONVERTIBLE NOTES, HAVE THE RIGHT, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, TO PROCEED AGAINST THE LEASING COMPANY OR ITS
PROPERTY IN A COURT IN ANY LOCATION REASONABLY SELECTED IN GOOD FAITH TO ENABLE
THE COLLATERAL AGENT OR THE TRUSTEES TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE
A JUDGMENT OR OTHER COURT ORDER ENTERED IN FAVOR OF THE COLLATERAL AGENT OR
EITHER TRUSTEE. THE LEASING COMPANY AGREES THAT IT WILL NOT ASSERT ANY
COUNTERCLAIMS, SETOFFS OR CROSS-CLAIMS IN ANY PROCEEDING BROUGHT BY THE
COLLATERAL AGENT OR EITHER TRUSTEE TO REALIZE ON SUCH PROPERTY, OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE COLLATERAL AGENT OR SUCH TRUSTEE.
THE LEASING COMPANY WAIVES ANY OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE
COURT IN WHICH EITHER TRUSTEE HAS COMMENCED A PROCEEDING DESCRIBED IN THIS
PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR
BASED ON THE GROUNDS OF FORUM NON CONVENIENS.
(iii) TO, THE EXTENT PERMITTED BY APPLICABLE LAW, THE LEASING
COMPANY, THE COLLATERAL AGENT AND THE TRUSTEES EACH WAIVE ANY RIGHT TO HAVE A
JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT,
OR OTHERWISE ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS SECURITY AGREE-
MENT. INSTEAD, ANY DISPUTES RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL
WITHOUT A JURY.
(iv) THE LEASING COMPANY AGREES THAT NONE OF THE COLLATERAL
AGENT, THE SENIOR NOTE TRUSTEE, ANY HOLDER OF A SENIOR NOTE, THE CONVERTIBLE
NOTE TRUSTEE AND ANY HOLDER OF A CONVERTIBLE NOTE SHALL HAVE ANY LIABILITY TO
THE LEASING COMPANY (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) FOR LOSSES
SUFFERED BY THE LEASING COMPANY IN CONNECTION WITH, ARISING OUT OF, OR IN ANY
WAY RELATED TO, THE TRANSACTIONS CONTEMPLATED AND THE RELATIONSHIP ESTABLISHED
BY THIS SECURITY AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN
CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE
JUDGMENT OF A COURT THAT IS BINDING ON THE COLLATERAL AGENT, SUCH TRUSTEE OR
SUCH NOTEHOLDER, AS THE CASE MAY BE, THAT SUCH LOSSES WERE THE RESULT OF ACTS OR
OMISSIONS ON THE
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PART OF THE COLLATERAL AGENT, THE SENIOR NOTE TRUSTEE OR SUCH HOLDER OF A SENIOR
NOTE OR THE CONVERTIBLE NOTE TRUSTEE OR ANY HOLDER OF A CONVERTIBLE NOTE, AS THE
CASE MAY BE, CONSTITUTING NEGLIGENCE OR WILLFUL MISCONDUCT.
(v) THE LEASING COMPANY WAIVES ALL RIGHTS OF NOTICE AND
HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE SENIOR NOTE TRUSTEE OR ANY
HOLDER OF A SENIOR NOTE OF ITS RIGHTS DURING THE CONTINUANCE OF AN EVENT OF
DEFAULT TO REPOSSESS THE COLLATERAL WITH JUDICIAL PROCESS OR TO REPLEVY, ATTACH
OR LEVY UPON THE COLLATERAL OR OTHER SECURITY FOR THE OBLIGATIONS. THE LEASING
COMPANY WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE COLLATERAL
AGENT, THE SENIOR NOTE TRUSTEE OR ANY HOLDER OF A SENIOR NOTE OR THE CONVERTIBLE
NOTE TRUSTEE OR ANY HOLDER OF A CONVERTIBLE NOTE IN CONNECTION WITH ANY JUDICIAL
PROCESS OR PROCEEDING TO OBTAIN POSSESSION OF, REPLEVY, ATTACH OR LEVY UPON
COLLATERAL OR OTHER SECURITY FOR THE OBLIGATIONS, TO ENFORCE ANY JUDGMENT OR
OTHER COURT ORDER ENTERED IN FAVOR OF THE COLLATERAL AGENT, THE SENIOR NOTE
TRUSTEE OR ANY HOLDER OF A SENIOR NOTE OR THE CONVERTIBLE NOTE TRUSTEE OR ANY
HOLDER OF A CONVERTIBLE NOTE, OR TO ENFORCE BY SPECIFIC PERFORMANCE, TEMPORARY
RESTRAINING ORDER OR PRELIMINARY OR PERMANENT INJUNCTION THIS SECURITY AGREEMENT
OR ANY OTHER AGREEMENT OR DOCUMENT AMONG THE LEASING COMPANY ON THE ONE HAND AND
THE COLLATERAL AGENT, THE SENIOR NOTE TRUSTEE AND/OR THE HOLDERS OF THE SENIOR
NOTES ON THE OTHER HAND.
(x) Appointment of Collateral Agent. Pursuant to, and subject to the
provisions of, Section 7.12 of the Senior Note Indenture and of Section 7.12 of
the Convertible Note Indenture, the Trustees hereby appoint the Collateral
Agent, and the Collateral Agent accepts appointment, as collateral agent under
the terms of this Security Agreement. The Collateral Agent may resign at any
time by giving written notice thereof to the Trustees and may be removed at any
time with or without cause by the Trustees acting together. Prior to the
effectiveness of any such resignation or removal, the Trustees acting together
shall have the right to appoint a successor Collateral Agent which shall be a
commercial bank organized or chartered under the laws of the United States of
America or any state thereof having combined capital and surplus of at least
$50,000,000. If no successor Collateral Agent shall have been so appointed by
the Trustees acting together, and shall have accepted such appointment within 30
days after the retiring Collateral Agent's giving of notice of resignation or
the Trustee's removal of the retiring Collateral Agent, then the retiring
Collateral Agent shall, prior to the effectiveness of its resignation or
removal, on behalf of the Convertible Note Trustee, the Holders of the
Convertible Notes, the Senior Note Trustee and the Holders of the Senior Notes
appoint a successor Collateral Agent, which shall be a commercial bank organized
under the laws of the United States of America or any state thereof having a
combined capital and surplus of at least
30
<PAGE> 31
$50,000,000. Upon the acceptance of any appointment as Collateral Agent
hereunder by a successor Collateral Agent, such successor Collateral Agent shall
thereupon succeed to and become vested with all the rights, powers, privileges
and duties of the retiring Collateral Agent, and the retiring Collateral Agent
shall be discharged from its duties and obligations under this Security
Agreement. After any retiring Collateral Agent's resignation or removal
hereunder as Collateral Agent, the provisions of this Security Agreement shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Collateral Agent under this Security Agreement. Any corporation into
which the Collateral Agency may be merged, or with which it may be consolidated,
or any corporation resulting from any merger or consolidation to which the
Collateral Agent shall be a party, shall be Collateral Agent under this Security
Agreement without the execution or filing of any paper or any further act on the
part of the parties hereto.
[SIGNATURE PAGE FOLLOWS]
31
<PAGE> 32
IN WITNESS WHEREOF, the Leasing Company has caused this Security Agreement to be
duly executed and delivered as of the day and year first above written.
PLD CAPITAL ASSET (U.S.) INC.
By: /s/ E. Clive Anderson
------------------------------
Name: E. Clive Anderson
------------------------------
Title: Vice President
------------------------------
By its acceptance hereof, as of the day and year first above written, the
Collateral Agent, the Senior Note Trustee and the Convertible Note Trustee agree
to be bound by the provisions hereof.
THE BANK OF NEW YORK, as Collateral
Agent, Senior Note Trustee and
Convertible Note Trustee
By: /s/ Thomas E. Tabor
------------------------------
Name: Thomas E. Tabor
------------------------------
Title: Assistant Vice President
------------------------------
<PAGE> 33
SCHEDULE A
to Leasing Company
Security and
Pledge Agreement
QUALIFIED INVESTMENTS
None.
<PAGE> 34
SCHEDULE B
to Leasing Company
Security and
Pledge Agreement
TELECOMMUNICATIONS ASSET AGREEMENTS
None.
<PAGE> 35
SCHEDULE C
to Leasing Company
Security and
Pledge Agreement
EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES
None.
<PAGE> 36
SCHEDULE D
to Leasing Company
Security and
Pledge Agreement
LIENS ON EXISTING COLLATERAL
None.
<PAGE> 37
SCHEDULE E
to Leasing Company
Security and
Pledge Agreement
FILINGS
None.
<PAGE> 38
SCHEDULE F
to Leasing Company
Security and
Pledge Agreement
CHIEF EXECUTIVE OFFICE
c/o PLD Telekom Inc.
580 Fifth Avenue
New York, NY 10019
<PAGE> 39
SCHEDULE G
to Leasing Company
Security and
Pledge Agreement
BUSINESS NAMES
None.
<PAGE> 40
SCHEDULE H
to Leasing Company
Security and
Pledge Agreement
LOCATION OF COLLATERAL
The Company's chief executive offices (see Schedule F).
<PAGE> 41
SCHEDULE I
to Leasing Company
Security and
Pledge Agreement
FORM OF ADDITIONAL COLLATERAL AMENDMENT
This Additional Collateral Amendment, dated , 19_, is delivered
pursuant to Section 6(a) of the Security Agreement referred to below. The
undersigned hereby pledges to the Collateral Agent for the benefit of the Senior
Note Trustee and the equal and ratable benefit of the Holders of the Senior
Notes and for the benefit of the Convertible Note Trustee and the equal and
ratable benefit of the Holders of the Convertible Notes, and grants to the
Senior Note Trustee for its benefit and the equal and ratable benefit of the
Holders of the Senior Notes and for the benefit of the Convertible Note Trustee
and the equal and ratable benefit of the Holders of the Convertible Notes,
continuing Liens and security interest in all of its rights, title and interest
in the Collateral listed below.
The undersigned hereby agrees that this Additional Collateral Amendment
may be attached to the Leasing Company Security and Pledge Agreement [PLD
Capital Asset (U.S.) Inc.], dated as of June 15, 1998, between the undersigned
and The Bank of New York, as Senior Note Trustee, Convertible Note Trustee and
as Collateral Agent (the "Security Agreement"); capitalized terms used herein
and not otherwise defined herein shall have the meanings given to such terms in
the Security Agreement; and the Collateral listed on this Additional Collateral
Amendment shall be deemed to be part of the Collateral, and shall become part of
the Collateral and shall secure all Obligations.
PLD CAPITAL ASSET (U.S.) INC.
By:
---------------------------------
Name:
---------------------------------
Title:
---------------------------------
<PAGE> 42
INTERCOMPANY NOTES:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------
Description Name of Restricted Original
Item of Subsidiary Principal
Number Indebtedness (Obligor) Date Amount
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
</TABLE>
TELECOMMUNICATIONS ASSET AGREEMENTS:
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------
General
Description of Description of
Telecommunications Leased
Name of Asset Telecommunications
Lessee Lease Assets Date
- - ----------------------------------------------------------------------------
<S> <C> <C> <C>
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
- - ----------------------------------------------------------------------------
</TABLE>
<PAGE> 43
INTERCOMPANY NOTES:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------
Name of Restricted Original
Item Description of Subsidiary Principal
Number Indebtedness (Obligor) Date Amount
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
</TABLE>
OTHER COLLATERAL:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------
Description of
Qualified Investment
or other Collateral Evidenced By Obligor Date
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
</TABLE>
<PAGE> 44
SCHEDULE J
to Leasing Company
Security and
Pledge Agreement
RESTRICTIVE AGREEMENTS
None.
<PAGE> 1
Exhibit 4.36
REVOLVING CREDIT AGREEMENT
between
PLD TELEKOM INC.,
as Borrower,
and
NEWS AMERICA INCORPORATED,
as Lender
Dated as of September 30, 1998
$8,100,000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
SECTION 1. DEFINITIONS.................................................................... 2
Section 1.1 Definitions..................................................... 2
SECTION 2. AMOUNT AND TERMS OF CREDIT FACILITY............................................ 9
Section 2.1 Revolving Loans................................................. 9
Section 2.2 Reimbursement Obligations in Respect of
Guaranteed Borrower Indebtedness................................ 9
Section 2.3 Notice of Borrowing............................................. 11
Section 2.4 Disbursement of Funds........................................... 11
Section 2.5 The Notes....................................................... 11
Section 2.6 Interest........................................................ 11
Section 2.7 Voluntary Prepayments........................................... 12
Section 2.8 Reduction of Loan Commitment.................................... 13
Section 2.9 Method and Place of Payment..................................... 13
Section 2.10 Taxes........................................................... 14
SECTION 3. CONDITIONS PRECEDENT........................................................... 14
Section 3.1 Conditions Precedent to Initial Loans........................... 14
Section 3.2 Conditions Precedent to All Loans............................... 15
SECTION 4. REPRESENTATIONS AND WARRANTIES................................................. 16
Section 4.1 Organization; Qualification..................................... 17
Section 4.2 Capitalization of Borrower...................................... 17
Section 4.3 Authority Relative to this Agreement............................ 17
Section 4.4 Consents and Approvals; No Violation............................ 18
Section 4.5 Reports ....................................................... 18
Section 4.6 Financial Statements............................................ 18
Section 4.7 Undisclosed Liabilities......................................... 19
Section 4.8 Absence of Certain Changes or Events............................ 19
Section 4.9 Legal Proceedings, etc.......................................... 21
Section 4.10 Permits ....................................................... 21
Section 4.11 Margin Regulations.............................................. 21
SECTION 5. AFFIRMATIVE COVENANTS.......................................................... 22
Section 5.1 Information Covenants........................................... 22
</TABLE>
ii
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Section 5.2 Officer's Certificate........................................... 25
SECTION 6. NEGATIVE COVENANTS............................................................. 26
Section 6.1 Restriction on Fundamental Changes.............................. 26
Section 6.2 Limitation on Modifications of Certain Documents................ 27
Section 6.3 Changes in Business............................................. 27
SECTION 7. EVENTS OF DEFAULT.............................................................. 27
Section 7.1 Events of Default............................................... 27
Section 7.2 Rights and Remedies............................................. 29
SECTION 8. CONVERSION..................................................................... 30
Section 8.1 Conversion Privilege and Conversion Price....................... 30
Section 8.2 Exercise of Conversion Privileges............................... 30
Section 8.3 Fractions of Shares............................................. 31
Section 8.4 Adjustment of Conversion Price.................................. 31
Section 8.5 Notice of Adjustments of Conversion Price....................... 31
Section 8.6 Company to Reserve Common Stock................................. 31
Section 8.7 Taxes on Conversions............................................ 32
Section 8.8 Covenant as to Common Stock..................................... 32
Section 8.9 Special Conversion Provisions Relating to Potential
Changes in Control of the Borrower.............................. 32
Section 8.10 Investment Intent; Private Placement............................
SECTION 9. REGISTRATION RIGHTS............................................................ 33
SECTION 10. MISCELLANEOUS.................................................................. 34
Section 10.1 Payment of Expenses, Indemnity, etc............................. 34
Section 10.2 Right of Setoff................................................. 35
Section 10.3 Notices......................................................... 35
Section 10.4 Successors and Assigns; Assignments............................. 36
Section 10.5 Amendments and Waivers.......................................... 37
Section 10.6 No Waiver; Remedies Cumulative.................................. 37
Section 10.7 Governing Law; Submission to Jurisdiction....................... 37
Section 10.8 Counterparts.................................................... 38
Section 10.9 Effectiveness................................................... 38
Section 10.10 Headings Descriptive............................................ 38
</TABLE>
iii
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Section 10.11 Marshalling; Recapture.......................................... 38
Section 10.12 Severability.................................................... 39
Section 10.13 Survival........................................................ 39
Section 10.14 Limitation of Liability......................................... 39
Section 10.15 Calculations; Computations...................................... 39
Section 10.16 Waiver of Trial by Jury......................................... 40
Section 10.17 Interest Rate Limitation........................................ 40
Exhibit A - Form of Note
Exhibit B - Form of Notice of Conversion Election
</TABLE>
iv
<PAGE> 5
REVOLVING CREDIT AGREEMENT, dated as of September 30, 1998,
among PLD Telekom Inc., a Delaware corporation (the "Borrower"), and News
America Incorporated, a Delaware corporation (the "Lender").
WHEREAS, Lender owns, indirectly, approximately 38% of the
issued and outstanding capital stock of Borrower; and
WHEREAS, Borrower has requested that Lender make available to
it certain short term financing for working capital purposes; and
WHEREAS, Lender is willing to make loans to the Borrower upon
the terms and conditions set forth herein,
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements contained herein and intending to be legally
bound hereby, Borrower and Lender hereby agree as follows:
SECTION 1. DEFINITIONS.
Section 1.1 Definitions. As used herein, the following terms
shall have the meanings herein specified unless the context otherwise requires.
Defined terms in this Agreement shall include in the singular number the plural
and in the plural number the singular.
"Affiliate" shall mean, with respect to any Person, any other
Person directly or indirectly controlling (including but not limited to all
directors and officers of such Person), controlled by, or under direct or
indirect common control with such Person. A Person shall be deemed to control a
corporation if such Person possesses, directly or indirectly, the power to (i)
vote 10% or more of the securities having ordinary voting power for the election
of directors of such corporation or (ii) direct or cause the direction of the
management and policies of such corporation, whether through the ownership of
voting securities, by contract or otherwise. The term "Affiliate" shall not
include the Lender or any of its direct or indirect Subsidiaries or Affiliates.
"Agreement" shall mean this Credit Agreement as the same may
from time to time hereafter be modified, supplemented or amended.
"Assignee" shall have the meaning provided in Section 10.4(b).
<PAGE> 6
"Attributable Indebtedness" means, with respect to any Sale
and Leaseback Transaction of any Person, as at the time of determination, the
greater of (i) the capitalized amount in respect of such transaction that would
appear on the balance sheet of such Person in accordance with GAAP and (ii) the
present value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by such Person) of the payments during the remaining
term of the lease (including any period for which such lease has been extended
or may, at the option of the lessor, be extended) or until the earliest date on
which the lessee may terminate such lease without penalty or upon payment of a
penalty (in which case the rental payments shall include such penalty).
"Bankruptcy Code" shall mean Title 11 of the United States
Code entitled "Bankruptcy", as amended from time to time, and any successor
statute or statutes.
"Borrower" shall have the meaning provided in the first
paragraph of this Agreement.
"Borrowing" shall mean the incurrence of a Loan from the
Lender on a given date.
"Business Day" shall mean any day excluding Saturday, Sunday
and any day which shall be in New York City a legal holiday or a day on which
banking institutions are authorized or required by law or other government
actions to close.
"Capital Stock" shall mean any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in any Person and any rights (other than Indebtedness convertible into an equity
interest), warrants or options to acquire an equity interest in such Person.
"Capitalized Lease" shall mean (i) any lease of property, real
or personal, the obligations under which are capitalized on the consolidated
balance sheet of the Borrower and its Subsidiaries, and (ii) any other such
lease to the extent that the then present value of the minimum rental commitment
thereunder should, in accordance with GAAP, be capitalized on a balance sheet of
the lessee.
"Capitalized Lease Obligations" shall mean all obligations of
the Borrower and its Subsidiaries under or in respect of Capitalized Leases.
3
<PAGE> 7
"Closing Date" shall have the meaning provided in Section
2.1(a).
"Closing Price" on any Trading Day with respect to the per
share price of any shares of Capital Stock means the last reported sale price
regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on the New York Stock Exchange or, if such shares of Capital Stock are not
listed or admitted to trading on such exchange, on the principal national
securities exchange on which such shares are listed or admitted to trading or,
if not listed or admitted to trading on any national securities exchange, on The
Nasdaq National Market or, if such shares are not listed or admitted to trading
on any national securities exchange or quoted on such auto mated quotation
system but the issuer is a Foreign Issuer (as defined in Rule 3b-4(b) under the
Exchange Act) and the principal securities exchange on which such shares are
listed or admitted to trading is a Designated Offshore Securities Market (as
defined in Rule 902(a) under the Securities Act), the average of the reported
closing bid and asked prices regular way on such principal exchange, or, if such
shares are not listed or admitted to trading on any national securities exchange
or quoted on such automated quotation system and the issuer and principal
securities exchange do not meet such requirements, the average of the closing
bid and asked prices in the over-the-counter market as furnished by any New York
Stock Exchange member firm that is selected from time to time by the Borrower
for that purpose and is reasonably acceptable to the Lender.
"Common Stock" shall mean the Common Stock, par value $0.01
per share, of Borrower, and as the context shall require shall also include any
stock of any class of any other Person which has no preference in respect of
dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of such Person and which is not subject
to redemption by such Person.
"Default" shall mean any event, act or condition which with
notice or lapse of time, or both, would constitute an Event of Default.
"Default Rate" shall have the meaning provided in Section
2.6(b).
"Disqualified Stock" means any Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchange able), or upon the happening of any event, or otherwise, matures
or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, or is redeemable at
4
<PAGE> 8
the option of the holder thereof or is exchangeable for Indebtedness at any
time, in whole or in part, on or prior to the date on which the Loans mature.
"Event of Default" shall have the meaning provided in Section
7.
"Exchange Rate Obligations" means, with respect to any Person,
any currency swap agreements, forward exchange rate agreements, foreign currency
futures or options, exchange rate collar agreements, exchange rate insurance and
other agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Existing Convertible Note Indenture" means the Indenture,
dated as of May 31, 1996, among the Borrower, the Existing Convertible Note
Guarantors (as defined therein), Apropos Investments Ltd, Clayton A. Waite and
The Bank of New York, as trustee thereunder, relating to the Existing
Convertible Notes, as amended and supplemented from time to time.
"Existing Convertible Notes" means the 9% Convertible
Subordinated Notes due 2006 of the Borrower issued pursuant to the Existing
Convertible Note Indenture.
"Existing Debt Agreements" means the Existing Convertible Note
Indenture, the Existing Senior Note Indenture, the documentation related to the
Revolving Credit Notes, and all ancillary agreements related to any of the
foregoing.
"Existing Senior Note Indenture" means the Indenture, dated as
of May 31, 1996, among the Borrower, the Existing Senior Note Guarantors (as
defined therein), Apropos Investments Ltd, Clayton A. Waite and The Bank of New
York, as trustee thereunder, relating to the Existing Senior Notes, as amended
and supplemented from time to time.
"Existing Senior Notes" means the 14% Senior Discount Notes
due 2004 of the Borrower issued pursuant to the Existing Senior Note Indenture.
"Final Maturity Date" shall mean the earlier of (a) June 30,
1999 or (b) such time as the Loan Commitment is reduced to zero pursuant to the
terms hereof.
5
<PAGE> 9
"GAAP" shall mean United States generally accepted accounting
principles as in effect on the date hereof and consistent with those utilized in
the preparation of the financial statements referred to in Section 5.1.
"Governmental Authority" means (a) the government of the
United States of America or any State or other political subdivision thereof, or
any jurisdiction in which the Borrower or any Subsidiary conducts all or any
part of its business, or which asserts jurisdiction over any property of the
Borrower or any Subsidiary, or (b) any entity exercising executive, legislative,
judicial, regulatory or administrative functions of, or pertaining to, any such
government.
"Indebtedness" means at any time (without duplication), with
respect to any Person, whether recourse is to all or a portion of the assets of
such Person, and whether or not contingent, (i) any obligation of such Person
for money borrowed, (ii) any obligation of such Person evidenced by bonds,
debentures, notes, guarantees or other similar instruments, including, without
limitation, any such obligations incurred in connection with the acquisition of
Property, assets or businesses, excluding trade accounts payable made in the
ordinary course of business, (iii) any reimbursement obligation of such Person
with respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such Person, (iv) any obligation of such Person issued
or assumed as the deferred purchase price of Property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith) (v) any Capitalized Lease Obligations of such
Person, (vi) the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person and, to the extent held by other Persons, the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination, (vii) the notional amount of any
Interest Hedging Obligations or Exchange Rate Obligations of such Person at the
time of determination, (viii) any Attributable Indebtedness with respect to any
Sale and Leaseback Transaction to which such Person is a party and (ix) any
obligation of the type referred to in clauses (i) through (viii) of this
definition of another Person and all and all dividends and distributions of
another Person the payment of which, in either case, such Person has guaranteed
or is responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise. For the purposes of the preceding sentence, the maximum fixed
repurchase price of any Disqualified Stock that does not have a fixed repurchase
price shall be calculate din accordance with the terms of such Disqualified
Stock as if such Disqualified Stock were repurchased on any date on which
Indebtedness shall be required to be determined
6
<PAGE> 10
pursuant hereto; provided that if such Disqualified Stock is not then permitted
to be repurchased, the repurchase price shall be the book value of such
Disqualified Stock. The amount of Indebtedness of any Person at any date shall
be the outstanding balance at such date of all unconditional obligations as
described above and the maximum liability of any guarantees at such date.
"Interest" shall have the meaning given in Section 2.6 hereof.
"Interest Conversion Notice" shall have the meaning provided
in Section 8.2.
"Interest Hedging Obligation" means, with respect to any
Person, an obligation of such Person pursuant to any interest rate swap
agreement, interest rate cap, collar or floor agreement or other similar
agreement or arrangement designed to protect against or manage such Person's or
any of its Restricted Subsidiaries' exposure to fluctuations in interest rates.
"Investment" shall mean all investments in and all loans,
advances and extensions of credit to any Person, all stock, notes, bonds, leases
or other securities or evidences of indebtedness of or any capital contribution
to any corporation, partnership, firm, joint venture or other business entity.
"Loan Commitment" means the maximum aggregate amount of
$8,100,000 or such lesser amount to which the Loan Commitment may be reduced in
accordance with Section 2.8.
"Loan Documents" shall mean this Agreement and the Note or
Notes.
"Loan Party" shall mean and include the Borrower and its
Subsidiaries.
"Loans" shall have the meaning provided in 2.1(a).
"Material Adverse Change; Material Adverse Effect; Materially
Adverse" in, on or to, as appropriate, any Person, means a material adverse
change in such Person's business or condition, a material adverse effect on such
Person's business or condition or an event which is materially adverse to such
Person's business or condition; provided that (a) any such term, when used
without reference to a particular Person, shall mean such change in, effect on
or event materially
7
<PAGE> 11
adverse to the Borrower and (b) any material impairment of the ability of the
Borrower to pay the principal of or interest on the Note in accordance with the
terms thereof, any material impairment of the ability of the Borrower to perform
its other obligations under the Note or the Loan Documents, or any circumstance
or occurrence which would impair the enforceability as against the Borrower of
this Agreement or the Loan Documents shall in any case be deemed to have
resulted in a material adverse change in, to have a material adverse effect on,
and to be materially adverse to, the Borrower's business or condition.
"Note" and "Notes" shall have the meanings provided in Section
2.5.
"Notice of Borrowing" shall have the meaning provided in
Section 2.3.
"Obligations" shall mean all obligations, liabilities and
Indebtedness of every nature of the Borrower from time to time owing to the
Lender under or in connection with this Agreement or any other Loan Document.
"Payment Date" shall mean the last day of each month.
"Person" shall mean and include any individual, partnership,
joint venture, firm, corporation, association, trust, limited liability company
or other enterprise or any government or political subdivision or agency,
department or instrumentality thereof.
"Property" means, with respect to any Person, any interest of
such Person in any kind of property or asset, whether real, personal or mixed,
or tangible or intangible, excluding Capital Stock in any other Person.
"Restricted Subsidiary" means any Subsidiary of the Borrower
that has not been classified as an "Unrestricted Subsidiary."
"Revolving Credit Notes" shall mean the Borrower's 12% Series
A Senior Secured Revolving Credit Notes due 1998 and 12% Series B Revolving
Credit Notes due 1998.
"Sale and Leaseback Transaction" means, with respect to any
Person, any direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased
8
<PAGE> 12
back from the purchaser or transferee thereof by such Person or one of its
Restricted Subsidiaries.
"Subsidiary" of any Person shall mean and include (i) any
corporation 50% or more of whose stock of any class or classes having by the
terms thereof ordinary voting power to elect a majority of the directors of such
corporation (irrespective of whether or not at the time stock of any class or
classes of such corporation shall have or might have voting power by reason of
the happening of any contingency) is at the time owned by such Person directly
or indirectly through Subsidiaries and (ii) any partnership, association, joint
venture or other entity in which such Person, directly or indirectly through
Subsidiaries, is either a general partner or has a 50% or more equity interest
at the time.
"Trading Day" means, with respect to a securities exchange or
automated quotation system, a day on which such exchange or system is open for a
full day of trading.
"Transactions" shall mean each of the transactions
contemplated by the Loan Documents.
"Unrestricted Subsidiary" means any Subsidiary of the Borrower
that the Borrower has classified as an "Unrestricted Subsidiary," and that has
not been reclassified as a Restricted Subsidiary, pursuant to the terms of the
documentation pursuant to which the Revolving Credit Notes were issued.
SECTION 2. AMOUNT AND TERMS OF CREDIT FACILITY.
Section 2.1 Revolving Loans. (a) Subject to and upon the terms
and conditions herein set forth, the Lender agrees, at any time and from time to
time on and after the date hereof (the "Closing Date"), and prior to the Final
Maturity Date, to make revolving loans (collectively, "Loans") to the Borrower,
which Loans shall not at any time exceed in aggregate principal amount at any
time outstanding the Loan Commitment at such time.
(b) Loans may be voluntarily prepaid pursuant to
Section 2.7, and, subject to the other provisions of this Agreement; any amounts
so prepaid may be reborrowed. The Loan Commitment shall expire, and the Loan
shall mature on, the Final Maturity Date, without further action on the part of
the Lender.
9
<PAGE> 13
(c) Each Borrowing of Loans under this Section 2.1
shall be in the aggregate minimum amount of the lesser of (i) $1,000,000 or any
integral multiple of $100,000 in excess thereof or (ii) the remaining unborrowed
amount of the Loan Commitment.
Section 2.2 Reimbursement Obligations in Respect of Guaranteed
Borrower Indebtedness. (a) If the Lender or any of its Affiliates shall make,
execute or deliver any guarantee or similar accommodation to any Person in
respect of any Indebtedness of the Borrower ("Guaranteed Borrower
Indebtedness"), whether outstanding as of the Closing Date or thereafter
incurred, Borrower shall, upon the making, execution or delivery of any such
guarantee or similar accommodation, be immediately obligated to reimburse Lender
or any such Affiliate for the full amount of any payments made or other
liability incurred thereunder, which obligation shall be represented by a Note
issued pursuant hereto in the aggregate principal amount of such guarantee or
similar accommodation. If Lender or any such Affiliate shall make any payment or
other disbursement in respect of Guaranteed Borrower Indebtedness, Borrower
shall reimburse Lender or such Affiliate, as the case may be, an amount equal to
such disbursement not later than 12:00 Noon, New York City time, on the date of
such disbursement; provided, however, that Borrower may, subject to the
conditions to borrowing set forth herein, request in accordance with Section 2.3
hereof that such reimbursement be financed with a Loan hereunder in an
equivalent amount (which Loan may be represented by the same Note as represented
the reimbursement obligation under the guarantee or similar accommodation as set
forth above) and, to the extent so financed, the Borrower's obligation to make
such reimbursement shall be discharged and replaced with the resulting Loan. Any
guarantee or similar accommodation in respect of Guaranteed Borrower
Indebtedness shall be issued only to the extent that the sum of the amount of
such guarantee or similar accommodation plus the total amount of outstanding
Loans shall not exceed the aggregate Loan Commitment (it being understood that
(i) neither Lender nor any of its Affiliates shall have any obligation,
commitment, agreement, arrangement or understanding with respect to providing
any guarantee or similar accommodation in an amount in excess of the Loan
Commitment amount hereunder and (ii) the provision by Lender or any of its
Affiliates of any guarantee or similar accommodation shall be in any event
subject to all conditions precedent and other terms and conditions of this
Agreement).
(b) The Borrower's obligation to reimburse payments
and disbursements in respect of Guaranteed Borrower Indebtedness as provided in
this Section 2.2 shall be absolute, unconditional and irrevocable, and shall be
performed
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strictly in accordance with the terms of this Agreement under any and all
circumstances whatsoever and irrespective of (i) any lack of validity or
enforceability of any instrument of guarantee or other accommodation or this
Agreement, or any term or provision therein, (ii) any draft or other document
presented under any instrument of guarantee or other accommodation proving to be
forged, fraudulent or invalid in any respect or any statement therein being
untrue or inaccurate in any respect, (iii) payment by the Lender or an Affiliate
under any instrument of guarantee or other accommodation of a draft or other
document that does not comply with the terms of such instrument of guarantee or
other accommodation, or (iv) any other event or circumstance whatsoever, whether
or not similar to any of the foregoing, that might, but for the provisions of
this Section 2.2, constitute a legal or equitable discharge of, or provide a
right of setoff against, the Borrower's obligations hereunder. Neither the
Lender nor any of its Affiliates shall have any liability or responsibility by
reason of or in connection with the issuance or transfer of any instrument of
guarantee or other accommodation or any payment or failure to make any payment
thereunder (irrespective of any of the circumstances referred to in the
preceding sentence), or any error, omission, interruption, loss or delay in
transmission or delivery of any draft, notice or other communication under or
relating to any instrument of guarantee or other accommodation (including any
document required to make a drawing thereunder), any error in interpretation of
technical terms or any consequence arising from causes beyond the control of the
Lender. The parties hereto expressly agree that, in the absence of gross
negligence or wilful misconduct on the part of the Lender (as finally determined
by a court of competent jurisdiction), the Lender shall be deemed to have
exercised care in each such determination. In furtherance of the foregoing and
without limiting the generality thereof, the parties agree that, with respect to
documents presented which appear on their face to be in substantial compliance
with the terms of any such instrument of guarantee or other accommodation, the
Lender may, in its sole discretion, make payment upon such documents without
responsibility for further investigation, regardless of any notice or
information to the contrary, or refuse to make payment upon such documents if
such documents are not in strict compliance with the terms of such instrument of
guarantee or other accommodation.
Section 2.3 Notice of Borrowing. Whenever the Borrower desires
to borrow hereunder, the Borrower's Chief Financial Officer shall give the
Lender's Treasurer, at the Lender's Office, prior to 10:00 A.M., New York City
time, at least two Business Days' prior written notice (each such notice, a
"Notice of Borrowing") of each Loan. Each Notice of Borrowing shall specify (a)
the aggregate principal amount of the requested Loan and (b) the date of
Borrowing (which shall be a Business Day).
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Section 2.4 Disbursement of Funds. On the date specified in
each Notice of Borrowing, the Lender will make available the Loans requested to
be made on such date, in U.S. dollars by wire transfer in immediately available
funds to an account specified in a written instrument signed by the Chief
Financial Officer of Borrower and delivered to the Treasurer of the Lender
together with any Notice of Borrowing.
Section 2.5 The Notes. The Borrower's obligation to pay the
principal of, and interest on, each Loan made hereunder, shall be evidenced by a
promissory note (each a "Note", and collectively the "Notes"), duly executed and
delivered by the Borrower, substantially in the form of Exhibit A hereto in a
principal amount equal to the principal amount of the Loan represented thereby,
with blanks appropriately completed in conformity herewith. Each Note shall (x)
be payable to the order of the Lender, (y) be dated the date of the Loan, and
(z) mature on the Final Maturity Date.
Section 2.6 Interest. (a) The Borrower agrees to pay interest
in respect of the unpaid principal amount of each Loan ("Interest") from the
date of the making of such Loan until such Loan shall be paid in full at a rate
per annum which shall be equal to twenty percent (20%) per annum, such Interest
to be computed on the basis of a 360-day year and the actual number of days
elapsed.
(b) In the event that, and for so long as, any Event
of Default shall have occurred and be continuing, the outstanding principal
amount of all Loans and, to the extent permitted by law, overdue interest in
respect of all Loans, shall bear interest at a rate per annum (the "Default
Rate") equal to twenty-two percent (22%) per annum, computed on the basis of a
360-day year and the actual number of days elapsed; provided that nothing in any
Loan Document shall permit the Lender to receive interest in excess of the
maximum rate of interest permitted by law.
(c) Interest on each Loan shall accrue from and
including the date of the Borrowing thereof to but excluding the date of any
repayment thereof (provided that any Loan borrowed and repaid on the same day
shall accrue one day's interest) and shall be payable on the last Business Day
of each calendar month while any Loan is outstanding unless otherwise specified
in the Note relating to such Loan. Any accrued but otherwise unpaid interest
shall also be payable on the Final Maturity
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<PAGE> 16
Date and concurrently with the amount of each voluntary or mandatory prepayment,
as provided in Sections 2.7 and 2.8 hereof.
(d) In the event that on or after any interest
payment date the Lender elects to convert any accrued and unpaid amount of
interest on any Loan into Common Stock in accordance with the provisions of
Section 8 hereof, the Borrower's obligation to pay Interest on such Loan,
pursuant to this Section 2.6, shall be deemed satisfied by the delivery of
Common Stock upon conversion of such accrued and unpaid interest as therein
provided, to the extent of such conversion. Lender agrees to give Borrower at
least one Business Day's notice of its intent to convert any interest otherwise
due and payable, or to become due and payable, into Common Stock in accordance
with this Agreement.
Section 2.7 Voluntary Prepayments. The Borrower shall have the
right to prepay the Loan represented by each Note in whole or in part from time
to time on the following terms and conditions: (i) the Borrower shall give the
Lender written notice (or telephonic notice promptly confirmed in writing),
which notice shall be irrevocable, of its intent to prepay the Loan, at least 5
Business Days prior to a prepayment, which notice shall specify the date (which
shall be a Business Day) and the amount of such prepayment and (ii) each
prepayment shall be in an aggregate principal amount of $1,000,000 or any
integral multiple of $100,000 in excess thereof.
Section 2.8 Reduction of Loan Commitment. (a) The Borrower
shall have the right at any time to permanently reduce the Loan Commitment
amount by giving written notice to the Lender of the reduced amount (the "New
Loan Commitment"); provided, however that the Borrower shall not reduce the
Loan Commitment below the amount of any Guaranteed Borrower Indebtedness unless
the Borrower makes provision satisfactory to the Lender to unconditionally
release Lender or any of its Affiliates from all liabilities or obligations of
the Lender or any of its Affiliates under such Guaranteed Borrower Indebtedness.
If the Borrower reduces the Loan Commitment amount under this Section 2.8(a),
Borrower shall be immediately obligated to prepay all outstanding Loans in
excess of the New Loan Commitment.
(b) The Lender shall have the right at any time and
from time to time to permanently reduce the Loan Commitment amount by giving
written notice to the Borrower of the New Loan Commitment. If the Lender reduces
the Loan Commitment amount under this Section 2.8(b), Borrower shall be
immediately obligated to prepay all outstanding Loans in excess of the New Loan
Commitment.
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Section 2.9 Method and Place of Payment. (a) Except as
otherwise specifically provided herein, all payments and prepayments under this
Agreement and the Notes shall be made to the Lender not later than 12:00 noon,
New York City time, on the date when due and shall be made in lawful money of
the United States of America by wire transfer in immediately available funds to
ABA No. 021000089 at Citibank, N.A., New York, in favor of News America
Incorporated, Account No. 30241112 or such other account as specified in a
written instrument signed by the Treasurer or a senior vice president of the
Lender and delivered to the Chief Financial Officer of Borrower, and any funds
received by the Lender after such time shall, for all purposes hereof, be deemed
to have been paid on the next succeeding Business Day.
(b) Whenever any payment to be made hereunder or
under the Notes shall be stated to be due on a day which is not a Business Day,
the due date thereof shall be extended to the next succeeding Business Day and,
with respect to payments of principal, interest shall be payable at the
applicable rate during such extension.
(c) All payments made by the Borrower hereunder and
under any Note shall be made irrespective of, and without any reduction for, any
setoff or counterclaims, including, without limitation, any setoff or
counterclaims arising due to a breach or alleged breach by the Lender or any of
its Subsidiaries or Affiliates of any other agreement to which the Lender or any
of its Subsidiaries or Affiliates and any of the Loan Parties are parties.
Section 2.10 Taxes. All payments made by the Borrower under
this Agreement shall be made free and clear of, and without reduction or
withholding for or on account of, any present or future income, stamp or other
taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now
or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority excluding, in the case of the Lender, net income and
franchise taxes imposed on the Lender by the jurisdiction under the laws of
which the Lender is organized or any political subdivision or taxing authority
thereof or therein (all such non-excluded taxes, levies, imposts, deductions,
charges or withholdings being hereinafter called "Taxes"). If any Taxes are
required to be withheld from any amounts payable to the Lender hereunder or
under any Note, the amounts so payable to the Lender shall be in creased to the
extent necessary to yield to the Lender (after payment of all Taxes) interest or
any such other amounts payable hereunder at the rates or in the amounts
specified in this Agreement and the specific Note. Whenever any Taxes are
payable
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<PAGE> 18
by the Borrower, as promptly as possible thereafter, the Borrower shall send to
the Lender a certified copy of an original official receipt received by the
Borrower showing payment thereof. If the Borrower fails to pay any Taxes when
due to the appropriate taxing authority or fails to remit to the Lender the
required receipts or other required documentary evidence, the Borrower shall
indemnify the Lender for any incremental taxes, interest or penalties that may
become payable by the Lender as a result of any such failure. The agreements in
this Section 2.10 shall survive the termination of this Agreement and the
payment of the Notes and all other Obligations.
SECTION 3. CONDITIONS PRECEDENT.
Section 3.1 Conditions Precedent to Initial Loans. The
obligation of the Lender to make its initial Loans is subject to the
satisfaction on the Closing Date of the following conditions precedent:
(a) Loan Documents.
(i) Credit Agreement. The Borrower shall
have executed and delivered this Agreement to the Lender.
(ii) Note. The Borrower shall have executed
and delivered to the Lender the Note in the amount of the initial Loan,
maturity and as otherwise provided herein.
(b) Opinion of Counsel. The Lender shall have
received a legal opinion, dated the Closing Date, from Clive Anderson, Esq.,
Senior Vice President, General Counsel and Secretary of the Borrower, in form
reasonably satisfactory to Lender.
(c) Corporate Documents. The Lender shall have
received the Certificate of Incorporation of the Borrower as in effect on the
Closing Date, certified to be true, correct and complete by the Secretary of
State of the State of Delaware.
(d) Certified Resolutions, etc. The Lender shall have
received a certificate of the Secretary or Assistant Secretary of the Borrower
dated the Closing Date certifying (i) the names and true signatures of the
incumbent officers of such Person authorized to sign the applicable Loan
Documents, (ii) the
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By-Laws of such Person as in effect on the Closing Date, (iii) the resolutions
of such Person's Board of Directors approving and authorizing the execution,
delivery and performance of the Loan Documents executed by such Person, and (iv)
that there have been no changes in the Certificate of Incorporation of such
Person since the date of the most recent certification thereof by the
appropriate Secretary of State.
(e) Additional Matters. The Lender shall have
received such other certificates, opinions, documents and instruments relating
to the Transactions as may have been reasonably requested by the Lender, and
all corporate and other proceedings and all other documents (including, without
limitation, all documents referred to herein and not appearing as exhibits
hereto) and all legal matters in connection with the Transactions shall be
satisfactory in form and substance to the Lender.
Section 3.2 Conditions Precedent to All Loans. The obligation
of the Lender to make any Loan (including any initial Loan made on the Closing
Date) is subject to the satisfaction on the date such Loan is made of the
following conditions precedent:
(a) Notes. The Borrower shall have executed and
delivered to the Lender a Note in the amount of the principal amount of the Loan
represented thereby, maturity and as otherwise provided herein.
(b) No Default or Event of Default. No Default or
Event of Default shall have occurred and be continuing on such date either
before or after giving effect to the making of such Loans.
(c) No Material Adverse Change. No event, act or
condition shall have occurred which, in the judgment of the Lender, has had or
could have a Material Adverse Effect, nor shall there have occurred a Material
Adverse Change relating to general business and economic conditions in the
Russian Federation, nor there shall exist in the Russian Federation economic
conditions or regulatory sanctions the effect of which could reasonably be
expected to have a Material Adverse Effect on the ability of the Borrower or any
of its Subsidiaries to exchange the Russian rouble for US dollars, German marks,
French francs, British pounds or Japanese yen.
(d) No Injunction. No law or regulation shall have
been adopted, no order, judgment or decree of any Governmental Authority shall
have
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been issued, and no litigation shall be pending or threatened, which in the
judgment of the Lender would enjoin, prohibit or restrain, or impose or result
in the imposition of any material adverse condition upon, the making or
repayment of the Loans.
(e) No Change in Credit Status. There shall not have
occurred any event or condition (nor shall any such event or condition be likely
to occur) which, in the reasonable opinion of Lender, shall have resulted in, or
shall be likely to result in, (i) a deterioration in the creditworthiness of the
Borrower or any of its Subsidiaries, or (ii) any adverse change in the business,
condition (financial or otherwise), prospects, results of operations, assets or
properties of the Borrower or any of its Subsidiaries.
The acceptance of the proceeds of each Loan shall constitute a
representation and warranty by the Borrower to the Lender that all of the
conditions required to be satisfied under this Section 3 in connection with the
making of such Loan have been satisfied.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
In order to induce the Lender to enter into this Agreement and
to make the Loans, the Borrower makes the following representations and
warranties, which shall survive the execution and delivery of this Agreement and
the Notes and the making of the Loans:
Section 4.1 Qualification. Borrower is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to own, lease, and
operate its proper ties and to carry on its business as now being conducted.
Borrower is duly qualified or licensed to do business as a foreign corporation
and is in good standing in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification necessary. Schedule 4.1 sets forth, as of the date of this
Agreement, each jurisdiction in which Borrower is qualified to do business as a
foreign corporation. Borrower has heretofore delivered to Lender complete and
correct copies of its Certificate of Incorporation and Bylaws as currently in
effect.
Section 4.2 Capitalization of Borrower. Set forth on Schedule
4.2 is the number of shares in the Capital Stock or other equity interests of
Borrower which are issued and outstanding as of the date of this Agreement. All
such shares are
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validly issued, fully paid and nonassessable. Other than this Agreement, or as
set forth in Schedule 4.2, there is no subscription, option, warrant, call,
right, agreement or commitment relating to the issuance, sale, delivery or
transfer by Borrower of any shares of Capital Stock or other equity interest
(including any right of conversion or exchange under any outstanding security or
other instrument). There are no out standing contractual obligations of Borrower
to repurchase, redeem or otherwise acquire any outstanding shares of Capital
Stock or other equity interest of Borrower. There are no restrictions or
limitations contained in the organizational documents of Borrower or in any
contract, agreement, document or other instrument to which Borrower or any
direct or indirect subsidiary is a party or of which Borrower or any direct or
indirect subsidiary is aware that restricts, or purports to restrict, the
ability of Borrower or any of its direct or indirect subsidiaries to enter into
and perform its obligations under the Loan Documents.
Section 4.3 Authority Relative to this Agreement. Borrower has
full corporate power and authority to execute, deliver and perform its
obligations under this Agreement and all ancillary agreements to which it is a
party and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and all ancillary agreements to which
it is a party and the consummation of the transactions contemplated hereby and
thereby have been duly and validly authorized by all corporate and shareholder
action, and no other corporate proceedings on the part of Borrower are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby and thereby. The Loan Documents have been duly and validly
executed and delivered by Borrower, and assuming that this Agreement constitutes
a valid and binding agreement of Lender, constitute valid and binding agreements
of Borrower, enforceable against Borrower in accordance with its terms, except
that such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally or general principles of equity.
Section 4.4 Consents and Approvals; No Violation. Except as
set forth in Schedule 4.4, the execution and delivery by Borrower of this
Agreement and each other Loan Document will not (i) conflict with or result in
any breach of any provision of the Certificate of Incorporation or Bylaws, or
similar charter documents, of Borrower, (ii) require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority, (iii) result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, agreement or other
instrument or obligation to which Borrower is a party or
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<PAGE> 22
by which Borrower or any of its assets may be bound, except for such defaults
(or rights of termination, cancellation or acceleration) as to which requisite
waivers or consents have been obtained, or (iv) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Borrower or any of
its assets.
(b) Except for any registration statement filed with
the United States Securities and Exchange Commission (the "SEC") pursuant to
Section 9 hereof, no declaration, filing or registration with, or notice to, or
authorization, consent or approval of any governmental or regulatory body or
authority is necessary for the consummation by Borrower of the transactions
contemplated hereby.
Section 4.5 Reports. Since January 1, 1997, Borrower has,
pursuant to the Securities Act of 1933, as amended (the "Securities Act",) and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), filed or
caused to be filed with the SEC all material forms, statements, reports and
documents (including all exhibits, amendments and supplements thereto) required
to be filed by it with respect to the business and operations of Borrower under
each of the Securities Act and the Exchange Act and the respective rules and
regulations thereunder, all of which complied in all material respects with all
applicable requirements of the appropriate act and the rules and regulations
thereunder in effect on the date each such report was filed. True and complete
copies of each of such forms, statements, reports and documents, and such
exhibits, have been delivered to Lender.
Section 4.6 Financial Statements. Borrower has previously
furnished to Lender copies of (a) Borrower's audited (i) consolidated balance
sheets as of December 31, in each of the years 1997, 1996 and 1995 and (ii)
related consolidated statements of income and retained earnings and consolidated
changes in financial position of Borrower for the fiscal years then ended,
together with the respective reports thereon of KPMG Peat Marwick LLP and KPMG,
as independent auditors of Borrower for 1997, and 1996 and 1995, respectively;
and (b) Borrower's unaudited (i) consolidated balance sheet as of September 30,
1998 and (ii) related consolidated statements of income and retained earnings
and consolidated changes in financial position. Each of the balance sheets
included in the financial statements referred to in this Section 4.6 (including
the related notes thereto) present fairly the financial information purported to
be set therein as of the dates thereof, and the other related statements
included therein (including the related notes thereto) present fairly the
results of operations and changes in financial position for the periods then
ended, all in conformity with GAAP applied on a consistent basis, except as
otherwise noted therein. For purposes of this Agreement, the audited
consolidated balance sheet of
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Borrower as of December 31, 1997 are hereinafter referred to as the "Borrower's
Balance Sheet".
Section 4.7 Undisclosed Liabilities. Except as set forth in
Schedule 4.7 or in the unaudited balance sheet or the notes thereto as of
September 30, 1998, Borrower does not have any material liability or obligation,
secured or unsecured (whether absolute, accrued, contingent or otherwise, and
whether due or to become due), of a nature required by generally accepted
accounting principles to be reflected in a corporate balance sheet or disclosed
in the notes thereto, which is not accrued or reserved against in the Borrower's
Balance Sheet or disclosed in the notes thereto in accordance with GAAP.
Section 4.8 Absence of Certain Changes or Events. Except as
set forth in Schedule 4.8 or in Borrower's Annual Report on Form 10-K for the
year ended December 31, 1997, or the Borrower's Quarterly Report on Form 10-Q
for the quarterly periods ended March 31, 1998, June 30, 1998 or September 30,
1998, since the date of the Borrower's Balance Sheet there has not been:
(a) any material adverse change in the business,
prospects, operations, properties, assets, liabilities, competition, earnings,
or condition (financial or otherwise) of Borrower, or any failure by Borrower
to pay its debts when due;
(b) any event or condition of any character which
either individually or in the aggregate, might reasonably be expected to have a
material adverse effect on the business, prospects, operations, properties,
assets, liabilities, competition, earnings or condition (financial or
otherwise), of Borrower;
(c) any damage, destruction or loss (regardless of
whether covered by insurance) that might reasonably be expected to have a
material adverse effect on the business, prospects, operation, properties,
assets, liabilities, competition, earnings, or condition (financial or
otherwise), of Borrower;
(d) any declaration, setting aside or payment of any
dividend or other distribution (whether in cash, stock, property, or any
combination of the foregoing) with respect to the capital stock or other equity
interest of Borrower except as specifically provided for in this Agreement;
(e) any increase in the compensation paid, payable or
to become payable by Borrower to its officers, directors or employees (other
than
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increases for employees in the ordinary course of business and consistent with
past practice), any hiring of new officers, directors or employees (other than
hiring of new employees in the ordinary course of business consistent with past
practice) or any increase in any bonus, insurance, pension or other employee
benefit plan, payments or arrangement (including loans) made to, for or with any
officers, directors, or employees (other than increases for employees in the
ordinary course of business and consistent with past practice or other increases
pursuant to written employee benefit plans);
(f) any entry into, material amendment of, or
termination of, any material agreement, material commitment or material
transaction by Borrower, including, without limitation, any (i) merger,
consolidation, share exchange, acquisition or disposition of assets or stock or
any financing transaction or capital expenditure, (ii) indenture, mortgage,
note, agreement or other instrument relating to the borrowing of money (other
than intercompany accounts), (iii) partnership or joint venture agreement, (iv)
material license agreement relating to intellectual property (other than
off-the-shelf software licenses), or (v) agreement to amend its charter or other
organizational documents or any other document, contract, agreement,
arrangement, undertaking or instrument relating to any of the foregoing;
(g) any entry into, material change to the terms or
conditions of termination of, any license, permit, franchise, governmental
approval or decree pursuant to which Borrower provides telephony, data
transmission or other telecommunications services;
(h) any notes or accounts receivable or portions of
notes or accounts receivable written off by Borrower as uncollectible, other
than in the ordinary course of business and consistent with past practice;
(i) any material obligation or material liability
paid (whether absolute, accrued, contingent or otherwise), or any lien or
encumbrance in connection therewith discharged, by Borrower, other than (i) in
the ordinary course of business and consistent with past practice, or (ii)
current liabilities shown on the financial statements and current liabilities
incurred since their date;
(j) any properties or assets, real, personal or
mixed, tangible or intangible, of Borrower mortgaged, pledged or subjected to
any security interest, lien or encumbrance;
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(k) except as specifically provided for in this
Agreement, any sale, assignment, transfer, lease, dividend, distribution or
other disposition of any of property or assets by Borrower, other than sales of
products in the ordinary course of business; or
(l) any agreement, understanding or undertaking to do
any of the foregoing by Borrower.
Section 4.9 Legal Proceedings, etc. Except as set forth in
Schedule 4.9, there are no claims, actions, or proceedings pending or
investigation pending or, to Borrower's knowledge, threatened against or
relating to Borrower before any court, governmental or regulatory authority or
body acting in an adjudicative capacity. Except as set forth in Schedule 4.9,
Borrower is not subject to any out standing judgment, rule, order, writ,
injunction or decree of any court, governmental or regulatory authority.
Section 4.10 Permits. Borrower has all material permits,
licenses, franchises and other governmental authorizations, consents and
approvals (collectively, "Permits") necessary to conduct its business as
presently conducted. Except as set forth in Schedule 4.10, Borrower has not
received any written notification that it is in violation of any of such
Permits, or any law, statute, order, rule, regulation, ordinance or judgment of
any governmental or regulatory body or authority applicable to it. Borrower is
in compliance with all material Permits, laws, statutes, orders, rules,
regulations, ordinances, or judgments of any governmental or regulatory body or
authority applicable to it.
Section 4.11 Margin Regulations. No part of the proceeds of
any Loan will be used by the Borrower to purchase or carry any Margin Stock or
to extend credit to others for the purpose of purchasing or carrying any Margin
Stock. Neither the making of any Loan nor the use of the proceeds thereof will
violate or be inconsistent with the provisions of Regulations T, U or X of the
Federal Reserve Board.
SECTION 5. AFFIRMATIVE COVENANTS.
The Borrower covenants and agrees that on and after the
Closing Date and until the Loan Commitment has terminated and the Obligations
are paid in full:
Section 5.1 Information Covenants. The Borrower will furnish
to the
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Lender:
(a) Quarterly Statements - within 45 days after the
end of each quarterly fiscal period in each fiscal year of the Borrower (other
than the last quarterly fiscal period of each such fiscal year), duplicate
copies of
(i) a consolidated balance sheet of the
Borrower and its Subsidiaries as at the end of such quarter, and
(ii) consolidated statement of operations,
shareholders equity and changes in financial position of the Borrower
and its Subsidiaries for such quarter and (in the case of the second
and third quarters) for the portion of the fiscal year ending with such
quarter, in each case setting forth in comparative form the figures for
the corresponding periods in the previous fiscal year, prepared in
accordance with GAAP applicable to quarterly financial statements
generally, and certified by the Chief Financial Officer of the Borrower
as fairly presenting, in all material respects, the financial position
of the companies being reported on and their results of operations and
cash flows, except for the absence of footnotes and changes resulting
from year-end adjustments, provided that delivery within the time
period specified above of the Borrower's Quarterly Report on Form 10-Q
prepared in compliance with the requirements therefor and filed with
the SEC shall be deemed to satisfy the requirements of this Section
5.1;
(b) Annual Statements - within 90 days after the end
of each fiscal year of the Borrower, duplicate copies of
(i) a consolidated balance sheet of the
Borrower and its Subsidiaries as at the end of such year, and
(ii) consolidated statements of operations,
shareholders' equity and changes in financial position of the Borrower
and its Subsidiaries for such year, setting forth in each case in
comparative form the figures for the previous fiscal year, prepared in
accordance with GAAP, and accompanied by
(A) an opinion thereon of independent certified
public
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accountants of recognized national standing, which opinion shall state that such
financial statements present fairly, in all material respects, the financial
position of the companies being reported upon and their results of operations
and cash flows and have been prepared in conformity with GAAP, and that the
examination of such accountants in connection with such financial statements has
been made in accordance with generally accepted auditing standards, and that
such audit provides a reasonable basis for such opinion in the circumstances,
and
(B) a certificate of such accountants stating that in
making the examination necessary for certification of such financial statements
pursuant to the preceding subclause (A), such accountants have obtained no
knowledge of any Default or Event of Default or, if in the opinion of such
accountants such a Default or Event of Default has occurred and is continuing, a
statement as to the nature thereof;
provided that the delivery within the time period specified above of the
Borrower's Annual Report on Form 10-K for such fiscal year (together with the
Borrowers annual report to shareholders, if any, prepared pursuant to Rule 14a-3
under the Exchange Act) prepared in accordance with the requirements therefor
and filed with the SEC, together with the accountant's certificate described in
subclause (B) above, shall be deemed to satisfy the requirements of this Section
5.1(c);
(c) Audit Reports, etc. - promptly (and in any event
within five Business Days) after receipt thereof, copies of all management
letters and reports submitted to the Borrower or any of its Subsidiaries by
independent certified public accountants in connection with any annual, interim
or special audit of the Borrower or any Subsidiary made by such accountants;
(d) SEC and Other Reports - promptly upon their
becoming available, one copy of (i) each financial statement, report, notice or
proxy statement sent by the Borrower or any Subsidiary to public securities
holders generally, and (ii) each regular or periodic report, each registration
statement (without exhibits except as expressly requested by the Lender), and
each prospectus and all amendments thereto filed by the Borrower or any
Subsidiary with the SEC and of all press releases and other statements made
available generally by the Borrower or any Subsidiary to the public concerning
developments that are material;
(e) Notice of Default or Event of Default -
immediately (and in any event within 2 Business Days) after the President, Chief
Financial Officer, General Counsel or other senior officer of the Borrower
becomes aware of
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the existence of any Default or Event of Default or that any Person has given
any notice or taken any action with respect to a claimed Default hereunder or
that any Person has given any notice or taken any action with respect to a
claimed default of the type referred to in Section 7.1(c), a written notice
specifying the nature and period of existence thereof and what action the
Borrower is taking or proposes to take with respect thereto;
(f) Notices with Respect to Existing Senior Note
Indenture, Existing Convertible Note Indenture and Revolving Credit Notes -
promptly upon the delivery thereof to the holders of the Existing Senior Notes,
the Existing Convertible Notes, and the Revolving Credit Notes, respectively, or
a trustee or other representative on their behalf, copies of all notices
delivered by the Borrower to such holders, trustee or other representative; and
promptly upon the execution and delivery thereof, true, complete and correct
copies of all amendments and modifications to and waivers under the Existing
Senior Note Indenture, the Existing Convertible Note Indenture, and the
Revolving Credit Notes respectively;
(g) Notices from Governmental Authority - promptly,
and in any event within 5 days of receipt thereof, copies of any notice to the
Borrower or any Subsidiary from any federal, state or foreign Governmental
Authority relating to any order, ruling, statute or other law or regulation that
could reasonably be expected to have a Material Adverse Effect; and
(h) Requested Information - with reasonable
promptness, such other data and information relating to the business,
operations, affairs, financial condition, assets or property of the Borrower or
any of its Subsidiaries or relating to the ability of the Borrower to perform
its obligations hereunder and under the Note as from time to time may be
reasonably requested by Lender.
Section 5.2 Officer's Certificate. Each set of financial
statements delivered to the Lender pursuant to Section 5.1(a), Section 5.1(b) or
Section 5.1(c) hereof shall be accompanied by a certificate of the Chief
Financial Officer containing a statement that such officer has reviewed the
relevant terms hereof and has made, or caused to be made, under his or her
supervision, a review of the transactions and conditions of the Borrower and its
Subsidiaries from the beginning of the quarterly or annual period covered by the
statements then being furnished to the date of the certificate and that such
review shall not have disclosed the existence during such period of any
condition or event that constitutes a Default or an Event of Default or, if any
such condition or event existed or exists, specifying the nature and period of
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existence thereof and what action the Borrower shall have taken or proposes to
take with respect thereto.
SECTION 6. NEGATIVE COVENANTS.
The Borrower covenants and agrees that on and after the
Closing Date until the Loan Commitment has terminated, and the Obligations are
paid in full, without the prior written consent of Lender:
Section 6.1 Restriction on Fundamental Changes.
(a) The Borrower shall not, and shall not permit any
of its Subsidiaries to, enter into any merger or consolidation, or liquidate,
wind-up or dissolve (or suffer any liquidation or dissolution), discontinue its
business or convey, lease, sell, transfer or otherwise dispose of, in one
transaction or series of transactions, all or any material part of its business
or property, whether now or hereafter acquired, except as otherwise permitted
under the Existing Senior Notes, the Existing Convertible Notes, and the
Revolving Credit Notes in the forms thereof in effect on the Closing Date;
provided that the Borrower shall not, and shall not permit any of its
Subsidiaries to, take any action pursuant to this Section 6.1(a) without the
prior written consent of Lender.
(b) The Borrower shall not, and shall not permit any
of its Subsidiaries to, (i) acquire by purchase or otherwise any property or
assets of, or stock or other evidence of beneficial ownership of, any Person,
except purchases of inventory, equipment, materials and supplies in the ordinary
course of Borrower's or such Subsidiary's business, (ii) create any Subsidiary
without the written consent of Lender; provided that such consent shall not be
unreasonably withheld, and provided further that such consent, or refusal to
grant such consent, as the case may be, must be communicated to Borrower within
five Business Days of the relevant request by Borrower, or (iii) enter into any
partnership or joint venture.
(c) The Borrower shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly, (i) make any dividend or other
distribution of any kind whatsoever on the Common Stock of the Borrower
(including without limitation any distribution paid exclusively in Common
Stock), or make any Restricted Payment (as such term is defined in the Existing
Senior Note Indenture) except as permitted by Section 4.13 of the Existing
Senior Note Indenture, (ii) issue to any holders of its Common Stock any rights,
options or warrants entitling the
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holders thereof to subscribe for or purchase any shares of Common Stock or
securities convertible into or exchangeable for Common Stock, other than
pursuant to the Equity Compensation Plan, (iii) reclassify, subdivide or combine
its outstanding shares of Common Stock, (iv) distribute to holders of its Common
Stock evidences of its indebtedness, shares of any class of its Capital Stock,
cash or other assets, or any securities or other instruments representing the
right to buy, or convertible into or exchangeable for, evidences of its
indebtedness, shares of any class of its Capital Stock or cash or any other
assets, (v) issue shares of its Common Stock other than pursuant to the terms of
the Existing Convertible Notes or options or warrants existing as at the date of
this agreement, or (vi) purchase, in the open market or in any
privately-negotiated transaction or otherwise, or make any tender or exchange
offer for, all or any portion of the Common Stock of the Borrower; provided that
the Borrower shall not, and shall not permit any of its Subsidiaries to, take
any action pursuant to paragraphs (i) or (ii) of this Section 6.1(c) without the
prior written consent of Lender.
(d) The Borrower shall not and shall not permit any
of its Subsidiaries to, amend its certificate of incorporation or by-laws or its
accounting policies or reporting practices.
Section 6.2 Limitation on Modifications of Certain Documents.
The Borrower shall not, and shall not permit any of its Subsidiaries to, amend,
modify or waive, or permit the amendment, modification or waiver of, any
provision of any material contracts (including, without limitation, any of the
documentation pursuant to which the Existing Senior Notes, the Existing
Convertible Notes and the Revolving Credit Notes were issued, and any of the
documents ancillary thereto).
Section 6.3 Changes in Business. The Borrower shall not, and
shall not permit any of its Subsidiaries to, enter into any business which is
substantially different from that conducted by the Borrower or such Loan Party,
as the case may be, on the Closing Date.
SECTION 7. EVENTS OF DEFAULT.
Section 7.1 Events of Default. Each of the following events,
acts, occurrences or conditions shall constitute an Event of Default under this
Agreement, regardless of whether such event, act, occurrence or condition is
voluntary or involuntary or results from the operation of law or pursuant to or
as a result of compliance by any Person with any judgment, decree, order, rule
or regulation of any
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court or administrative or governmental body:
(a) Failure to Make Payments. The Borrower shall (i)
default in the payment when due of any principal of the Loans or (ii) default in
the payment when due of any interest on the Loans or in the payment when due of
any other amounts owing hereunder, and in the case of the circumstances
described in this clause (ii), such default shall continue unremedied for three
or more Business Days; provided, however, that in the event that the Lender
elects to convert any amount of principal or interest otherwise due under any of
the Notes into Common Stock in accordance with the provisions of Section 8
hereof, the amount so converted shall be deemed to have been timely paid and the
failure to pay cash in respect thereof shall not constitute a Default or event
of Default hereunder.
(b) Breach of Covenants.
(i) The Borrower shall fail to perform or
observe any agreement, covenant or obligation arising under Sections 5
or 6.
(ii) The Borrower shall fail to perform or
observe any agreement, covenant or obligation arising under this
Agreement (except those described in subsections (a), (b) and (c)(i)
above), and such failure shall continue for 30 days.
(c) Default Under Other Agreements. Any Loan Party
shall default in the payment when due (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) of any amount owing in respect of
any Indebtedness (other than the Obligations) in the aggregate principal amount
of $5,000,000 or more; or any Loan Party shall default in the performance or
observance of any obligation or condition with respect to any such Indebtedness
or any other event shall occur or condition exist, if the effect of such
default, event or condition is to accelerate the maturity of any such
Indebtedness or to permit (without regard to any required notice or lapse of
time) the holder or holders thereof, or any trustee or agent for such holders,
to accelerate the maturity of any such Indebtedness, or any such Indebtedness
shall become or be declared to be due and payable prior to its stated maturity
other than as a result of a regularly scheduled payment.
(d) Bankruptcy, etc. (i) Any Loan Party shall
commence a voluntary case concerning itself under the Bankruptcy Code; or (ii)
an involuntary
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case is commenced against any Loan Party and the petition is not controverted
within 10 days, or is not dismissed within 60 days, after commencement of the
case; or (iii) a custodian (as defined in the Bankruptcy Code) is appointed for,
or takes charge of, all or substantially all of the property of any Loan Party
or any Loan Party commences any other proceedings under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to any Loan Party or there is commenced against any Loan Party
any such proceeding which remains undismissed for a period of 60 days; or (iv)
any order of relief or other order approving any such case or proceeding is
entered; or (v) any Loan Party is adjudicated insolvent or bankrupt; or (vi) any
Loan Party suffers any appointment of any custodian or the like for it or any
substantial part of its property to continue undischarged or unstayed for a
period of 60 days; or (vii) any Loan Party makes a general assignment for the
benefit of creditors; or (viii) any Loan Party shall fail to pay, or shall state
that it is unable to pay, or shall be unable to pay, its debts generally as they
become due; or (ix) any Loan Party shall call a meeting of its creditors with a
view to arranging a composition or adjustment of its debts; or (x) any Loan
Party shall by any act or failure to act consent to, approve of or acquiesce in
any of the foregoing; or (xi) any corporate action is taken by any Loan Party
for the purpose of effecting any of the foregoing.
(e) Judgments. One or more judgments or decrees in an
aggregate amount of $5,000,000 or more shall be entered by a court or courts of
competent jurisdiction against the Loan Parties (other than any judgment as to
which, and only to the extent, a reputable insurance company has acknowledged
coverage of such claim in writing) and (i) any such judgments or decrees shall
not be stayed, discharged, paid, bonded or vacated within 60 days or (ii)
enforcement proceedings shall be commenced by any creditor on any such judgments
or decrees.
Section 7.2 Rights and Remedies. Upon the occurrence of any
Event of Default described in Section 7.1(d), the Loan Commitment shall
automatically and immediately terminate and the unpaid principal amount of and
any and all accrued interest on the Loan and any and all other Obligations shall
automatically become immediately due and payable, with all additional interest
from time to time accrued thereon and without presentation, demand, or protest
or other requirements of any kind (including, without limitation, valuation and
appraisement, diligence, presentment, notice of intent to demand or accelerate
and notice of acceleration), all of which are hereby expressly waived by the
Borrower, and the obligation of the Lender to make any Loan hereunder shall
thereupon terminate; and upon the occurrence and
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during the continuance of any other Event of Default, the Lender may, by written
notice to the Borrower, (i) declare that the Loan Commitment is terminated,
where upon the Loan Commitment and the obligation of the Lender to make any Loan
hereunder shall immediately terminate, and (ii) declare the unpaid principal
amount of and any and all accrued and unpaid interest on the Loans and any and
all other Obligations to be, and the same shall thereupon be, immediately due
and payable with all additional interest from time to time accrued thereon and
without presentation, demand, or protest or other requirements of any kind
(including, without limitation, valuation and appraisement, diligence,
presentment, notice of intent to demand or accelerate and notice of
acceleration), all of which are hereby expressly waived by Borrower.
SECTION 8. CONVERSION.
Section 8.1 Conversion Privilege and Conversion Price. Subject
to and upon compliance with the provisions of this Section 8, the Lender, at its
sole option, may, at any time and from time to time, convert (a) each Note or
any portion of the principal amount thereof which equals $1,000 or any integral
multiple thereof, and (b) the amount of accrued and unpaid Interest on the Loan
represented by such Note (including without limitation any overdue Interest
accruing at the Default Rate), into fully paid and nonassessable shares
(calculated as to each conversion to the nearest 1/100 of a share) of Common
Stock, at the Conversion Price, determined as hereinafter provided, in effect at
the time of conversion.
The price at which Common Stock of the Borrower shall be
delivered upon conversion of any Note, or any accrued and unpaid Interest
thereon, (herein called the "Conversion Price"), shall be as specified in such
Note, which Conversion Price shall be subject to adjustment as hereinafter set
forth.
Any certificates evidencing Common Stock issued upon the
conversion of the Note shall bear such legends, including legends reflecting
restrictions on transfer required in order to maintain compliance with the
provisions of the Securities Act, as Borrower shall deem to be necessary or
appropriate.
Section 8.2 Exercise of Conversion Privileges. In order to
exercise the conversion privilege with respect to any amount of principal of any
Note, Lender shall surrender such Note, duly endorsed or assigned to the
Borrower or in blank, at the principal executive offices of the Borrower,
accompanied by written notice to the Borrower in the form provided in the Note
(or such other notice as is reasonably
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acceptable to the Borrower) that the Lender elects to convert such Note or, if
less than the entire principal amount thereof is to be converted, the portion
thereof to be converted. In order to exercise the conversion privilege with
respect to any amount of Interest payable on a Note (including without
limitation any defaulted Interest), the Lender shall give written notice thereof
to the Borrower (an "Interest Conversion Notice"), at the principal executive
offices, that the Lender elects to convert such Interest amount.
Any amount of principal of a Note shall be deemed to have been
converted immediately prior to the close of business on the day of surrender of
such Note for conversion (or, in the case of the conversion of any Interest due
thereon, upon delivery of the relevant Interest Conversion Notice) in accordance
with the foregoing provisions, and at such time the rights of the Lender as a
holder of the Note (or, in the case of conversion of any interest payable on the
Note, the right of Lender to be paid such interest in cash) shall cease, and the
Person or Persons entitled to receive the Common Stock of the Borrower issuable
upon conversion shall be treated for all purposes as the record holder or
holders of such Common Stock as and after such time. As promptly as practicable
on or after conversion date, the Borrower shall issue and shall deliver to the
Lender, at the address specified by the Lender in writing, a certificate or
certificates for the number of full shares of Common Stock of the Borrower
issuable upon conversion, together with payment in lieu of any fraction of a
share, as provided in Section 8.3.
If the principal amount of a Note is converted in part only,
upon such conversion the Borrower shall execute and deliver to the Lender, at
the expense of the Borrower, a new Note or Notes in aggregate principal amount
equal to the unconverted portion of the principal amount of such Note.
Section 8.3 Fractions of Shares. No fractional share of Common
Stock of the Borrower shall be issued upon conversion of a Note. Instead of any
fractional share of such Common Stock which would otherwise be issuable upon
conversion of such Note (or a portion thereof), or upon the conversion of any
Interest (including defaulted Interest) payable with respect to such Note, the
Borrower shall pay a cash adjustment in respect of such fractional share in an
amount equal to such fraction multiplied by the Closing Price of the Common
Stock at the close of business on the day of conversion (or, if such day is not
a Trading Day, on the Trading Day immediately preceding such day).
Section 8.4 Adjustment of Conversion Price. In the event that
the
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Borrower, with the consent of the Lender, shall take any action of the nature
specified in Section 6.1(c) hereof, the Conversion Price then applicable to any
Note shall be appropriately adjusted in accordance with customary anti-dilution
provisions at least as favorable to the Lender as those set forth in the
Existing Convertible Notes Indenture.
Section 8.5 Notice of Adjustments of Conversion Price.
Whenever the Conversion Price of any Note is adjusted, the Borrower shall
compute the adjusted Conversion Price in accordance with Section 8.4 and shall
prepare a certificate signed by the Chief Financial Officer of the Borrower
setting forth the adjusted Conversion Price and showing in reasonable detail the
facts upon which such adjustment is based, and such certificate shall be mailed
to the Lender.
Section 8.6 Company to Reserve Common Stock. The Borrower
shall at all times reserve and keep available, free from preemptive rights, out
of its authorized but unissued Common Stock or out of its Common Stock held in
treasury, for the purpose of effecting the conversion of Notes and any accrued
and unpaid Interest thereon, the full number of shares of its Common Stock then
issuable upon the conversion of the entire principal amount of the aggregate
Loan Commitment and all interest that would accrue on such aggregate amount up
to and including the Final Maturity Date.
Section 8.7 Taxes on Conversions. The Borrower will pay any
and all original issuance, transfer, stamp and other similar taxes that may be
payable in respect of the issue or delivery of shares of its Common Stock on
conversion of Notes and any accrued and unpaid Interest thereon pursuant hereto.
The Borrower shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares of its
Common Stock in a name other than that of the Lender or other holder of the
Note, portion thereof or interest thereon to be converted, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the Borrower the amount of any such tax, or has established to the
satisfaction of the Borrower that such tax has been paid.
Section 8.8 Covenant as to Common Stock.
(a) The Borrower covenants that all shares of its
Common Stock which may be issued upon conversion of Notes or any Interest
Payment in respect thereof will upon issue be validly issued, fully paid and
nonassessable.
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(b) The Borrower shall from time to time take all
action necessary so that the Common Stock which may be issued upon conversion of
Notes or any Interest Payment in respect thereof, immediately upon their
issuance (or, if such Common Stock is subject to restrictions on transfer under
the Securities Act, upon their resale pursuant to an effective registration
statement under the Securities Act), will be listed on the principal securities
exchanges, interdealer quotation systems and markets, if any, on which other
shares of Common Stock of the Borrower are then listed or quoted.
Section 8.9 Special Conversion Provisions Relating to
Potential Changes in Control of the Borrower. Notwithstanding any provision of
this Agreement or any of the other Loan Documents to the contrary, in the event
that upon any conversion of any Note, or any portion hereof, or any accrued and
unpaid Interest payable thereon, the issuance of Common Stock of Borrower
pursuant thereto would result in a Change of Control (as such term is defined
pursuant to the Existing Senior Notes Indenture) of Borrower, then Lender shall
have the right to exercise the conversion rights granted hereunder in respect of
such Note or Interest, as the case may be, only with respect to such principal
or Interest amount, as the case may be, as, when converted into Common Stock in
accordance with the provisions hereof at the then current Conversion Price,
would result in the issuance to Lender of the maximum number of shares of Common
Stock as could be issued without such issuance resulting in a Change of Control
(as so defined), and the remainder of the principal or Interest amount otherwise
sought to be converted shall be paid by the Borrower in cash at the Conversion
Price plus the Differential Value Amount (as defined below) per share of Common
Stock into which such remaining principal or Interest amount, as the case may
be, would otherwise then be convertible in accordance with the terms hereof. As
used herein, the term "Differential Value Amount" shall mean the difference (if
positive) between the Conversion Price then in effect and the Closing Price of
the Common Stock on the date specified for such conversion.
Section 8.10 Investment Intent; Private Placement.
(a) The Lender is knowledgeable, sophisticated and
experienced in making, and is qualified to make, decisions with respect to
investments in equity securities presenting an investment decision like that
involved in the acquisition of Common Stock upon the conversion of Notes and any
accrued and unpaid Interest thereon pursuant to this Section 8.
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(b) Upon the conversion of any Notes or any Interest
Payment in respect thereof, the Lender will be acquiring Common Stock issued
upon such conversion for investment for its own account only and not with a view
to, or for resale in connection with, any "distribution" thereof within the
meaning of the Securities Act. The Lender has no present intention of selling,
granting any participation in, or otherwise distributing the Common Stock,
except in compliance with the Securities Act or pursuant to an available
exemption thereunder.
(c) The Lender understands that the Common Stock has
not been registered under the Securities Act or registered or qualified under
any state securities law in reliance on specific exemptions therefrom, which
exemptions may depend upon, among other things, the bona fide nature of the
Lender's investment intent as expressed herein. The Lender is familiar with Rule
144 under the Securities Act, as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act. The Lender further
understands that the certificate(s) representing the Common Stock shall bear the
following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY APPLICABLE STATE
SECURITIES LAWS. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
SECTION 9. REGISTRATION RIGHTS.
Lender and Borrower agree that, with respect to any and all
shares of Common Stock of the Borrower issued upon conversion of any Note or any
portion thereof, or any Interest payable with respect thereto, Lender shall have
the registration rights provided for in Article VII of that certain Asset
Exchange Agreement, dated April 19, 1998, as subsequently amended, by and
between News America Incorporated, News PLD LLC and PLD Telekom Inc. (the "Asset
Exchange Agreement"), and any and all shares of Common Stock of the Borrower
issued upon conversion of the Notes or any portion thereof, or any interest
payable with respect thereto, shall constitute "Registrable Securities" as
defined therein; provided, however, that for all purposes of such registration
rights (including those arising
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solely under the Asset Exchange Agreement), Section 7.1(a) of the Asset Exchange
Agreement is hereby amended to be and read in its entirety as follows:
"Expenses. PLD shall pay all Registration Expenses in connection with
only two (2) registrations effected in accordance with this Section
7.1; provided, however, that if at or prior to the fifth anniversary of
the date of this Agreement News America, its affiliates and
subsidiaries, and any permitted successors and assigns, collectively
own more than 50% of the aggregate Registrable Securities subject to
this Agreement (such number to take account of any stock splits,
dividends, combinations or other adjustments affecting any of the
Registrable Securities), then the holders of Registrable Securities
shall be entitled to one (1) additional registration effected in
accordance with this Section 7.1 in respect of which PLD shall pay all
Registration Expenses."
SECTION 10. MISCELLANEOUS.
Section 10.1 Payment of Expenses, Indemnity, etc. The Borrower
shall:
(a) pay all reasonable out-of-pocket costs and
expenses of the Lender in connection with the negotiation, preparation,
execution and delivery of the Loan Documents and the documents and instruments
referred to therein (including without limitation the fees, charges and
disbursements of counsel to Lender) and any amendment, waiver or consent
relating to any of the Loan Documents, which costs and expenses shall accrue as
of the Closing Date but shall be payable at such time, if any, as the first Loan
is made;
(b) pay all reasonable out-of-pocket costs and
expenses of the Lender in connection with the preservation of rights under, and
enforcement of, the Loan Documents and the documents and instruments referred to
therein or in connection with any restructuring or rescheduling of the
Obligations (including, without limitation, the reasonable fees and
disbursements of counsel for the Lender);
(c) pay, and hold the Lender harmless from and
against, any and all present and future stamp, excise and other similar taxes
with respect to the foregoing matters and hold the Lender harmless from and
against any and all
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liabilities with respect to or resulting from any delay or omission (other than
to the extent attributable to the Lender) to pay such taxes; and
(d) indemnify the Lender, its officers, directors,
employees, representatives and agents (each an "Indemnitee") from, and hold
each of them harmless against, any and all losses, liabilities, claims, damages,
expenses, obligations, penalties, actions, judgments, suits, costs or
disbursements of any kind or nature whatsoever (including, without limitation,
the fees and disbursements of counsel for such Indemnitee in connection with any
investigative, administrative or judicial proceeding commenced or threatened,
whether or not such Indemnitee shall be designated a party thereto) that may at
any time (including, without limitation, at any time following the payment of
the Obligations) be imposed on, asserted against or incurred by any Indemnitee
as a result of, or arising out of, or in any way related to or by reason of, any
of the Transactions or the execution, delivery or performance of any Loan
Document.
Section 10.2 Right of Setoff. In addition to any rights now or
hereafter granted under applicable law or otherwise, and not by way of
limitation of any such rights, upon the occurrence and during the continuance of
any Event of Default, the Lender is hereby authorized at any time or from time
to time, without presentment, demand, protest or other notice of any kind to any
Loan Party or to any other Person, any such notice being hereby expressly
waived, to set off any other indebtedness or other obligation at any time held
or owing by the Lender to or for the credit or the account of any Loan Party
against and on account of the Obligations of the Loan Parties to the Lender
under this Agreement or under any of the other Loan Documents, and all other
claims of any nature or description arising out of or connected with this
Agreement or any other Loan Document, irrespective of whether or not the Lender
shall have made any demand hereunder and although said Obligations, liabilities
or claims, or any of them, shall be contingent or unmatured.
Section 10.3 Notices. All notices and other communications
hereunder shall be in writing and shall be deemed effectively given upon
personal delivery to the party to be notified, on the next Business Day after
delivery to a recognized overnight courier service, upon confirmation of receipt
of a facsimile transmission, or five days after deposit with the United States
Post Office, by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the following addresses (or at such other address for
a party as shall be specified by like notice; provided that notices of a change
of address shall be effective only upon receipt thereof):
36
<PAGE> 40
If to Borrower, to:
PLD Telekom Inc.
505 Park Avenue
21st Floor
New York, New York 10022
Facsimile: (212) 262-8870
Attention: James Hatt
If to Lender, to:
News America Incorporated
1211 Avenue of the Americas
New York, New York 10036
Facsimile: (212) 768-2029
Attention: Arthur M. Siskind, Esq., General Counsel
(with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Facsimile: (212) 735-2000
Attention: Alan G. Straus, Esq.)
Section 10.4 Successors and Assigns; Assignments.
(a) Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the Borrower, the Lender, all future
holders of the Notes and their respective successors and assigns, except that
the Borrower may not assign or transfer any of its rights or obligations under
this Agreement without the prior written consent of the Lender.
(b) Assignments. The Lender may, in accordance with
applicable law, at any time assign to any other Person (each an "Assignee") all
or any part of its rights and obligations under this Agreement, the Notes and
any other Loan Documents. The Borrower and the Lender agree that to the extent
of any assignment the Assignee shall be deemed to have the same rights and
benefits under the Loan
37
<PAGE> 41
Documents as the Lender hereunder; provided that if the Assignee is an Affiliate
of the Lender, the Borrower shall be entitled to continue to deal solely and
directly with the Lender in connection with the interests so assigned to the
Assignee.
(c) Disclosure of Information. The Borrower
authorizes the Lender to disclose to any Participant or Assignee (each, a
"Transferee") and any prospective Transferee any and all financial and other
information in the Lender's possession concerning the Borrower which has been
delivered to the Lender by the Borrower pursuant to this Agreement or which has
been delivered to the Lender by the Borrower in connection with the Lender's
credit evaluation of the Borrower prior to entering into this Agreement.
Section 10.5 Amendments and Waivers. Neither this Agreement,
any other Loan Document to which the Borrower is a party nor any terms hereof or
thereof may be amended, supplemented, modified or waived except in accordance
with the provisions of this Section. The Lender and the Borrower may, from time
to time, enter into written amendments, supplements, modifications or waivers
for the purpose of adding, deleting, changing or waiving any provisions to this
Agreement or any Note. Any such amendment, supplement, modification or waiver
shall apply to and shall be binding upon the Borrower, the Lender and all future
holders of such Note or any portion thereof or participation therein. In the
case of any waiver, the Borrower and the Lender shall be restored to their
former position and rights hereunder and under the outstanding Notes, and any
Default or Event of Default waived shall be deemed to be cured and not
continuing, but no such waiver shall extend to any subsequent or other Default
or Event of Default, or impair any right consequent thereon.
Section 10.6 No Waiver; Remedies Cumulative. No failure or
delay on the part of the Lender or any subsequent holder of a Note in exercising
any right, power or privilege hereunder or under any other Loan Document and no
course of dealing between any Loan Party and the Lender or the subsequent holder
of any Note shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or under any other Loan
Document preclude any other or further exercise thereof of the exercise of any
other right, power or privilege hereunder or thereunder. The rights and remedies
herein expressly provided are cumulative and not exclusive of any rights or
remedies which the Lender or the subsequent holder of any Note would otherwise
have. No notice to or demand on any Loan Party in any case shall entitle any
Loan Party to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the rights of the
38
<PAGE> 42
Lender or the subsequent holder of any Note to any other or further action in
any circumstances without notice or demand.
Section 10.7 Governing Law; Submission to Jurisdiction. (a)
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE
PRINCIPLES THEREOF RELATING TO CONFLICTS OF LAW).
(b) Any legal action or proceeding with respect to
this Agreement or any other Loan Document and any action for enforcement of any
judgment in respect thereof may be brought in the courts of the State of New
York or of the United States of America for the District of New York, and, by
execution and delivery of this Agreement, the Borrower hereby accepts for itself
and in respect of its property, generally and unconditionally, the non-exclusive
jurisdiction of the aforesaid courts and appellate courts from any thereof. The
Borrower irrevocably consents to the service of process out of any of the
aforementioned courts in any such action or proceeding by the mailing of copies
thereof by registered or certified mail, postage prepaid, the Borrower at its
address set forth opposite its signature below. The Borrower hereby irrevocably
waives any objection which it may now or hereafter have to the laying of venue
of any of the aforesaid actions or proceedings arising out of or in connection
with this Agreement or any other Loan Document brought in the courts referred to
above and hereby further irrevocably waives and agrees not to plead or claim in
any such court that any such action or proceeding brought in any such court has
been brought in an inconvenient forum. Nothing herein shall affect the right of
the Lender or any holder of a Note to serve process in any other manner
permitted by law or to commence legal proceedings or otherwise proceed against
the Borrower in any other jurisdiction.
Section 10.8 Counterparts. This Agreement may be executed in
any number of counterparts and by the different parties hereto on separate
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall together constitute one and the same instrument.
Section 10.9 Effectiveness. This Agreement shall become
effective on the date on which the Lender and the Borrower shall have each
signed a counter part hereof and the Borrower shall have delivered the same to
the Lender.
39
<PAGE> 43
Section 10.10 Headings Descriptive. The headings of the
several Sections and subsections of this Agreement are inserted for convenience
only and shall not in any way affect the meaning or construction of any
provision of this Agreement.
Section 10.11 Marshalling; Recapture. The Lender shall be
under no obligation to marshall any assets in favor of any Loan Party or any
other party or against or in payment of any or all of the Obligations. To the
extent the Lender receives any payment by or on behalf of any Loan Party, which
payment or any part thereof is subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to such Loan
Party or its estate, trustee, receiver, custodian or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such payment or repayment, the obligation or part thereof which has
been paid, reduced or satisfied by the amount so repaid shall be reinstated by
the amount so repaid and shall be included within the liabilities of such Loan
Party to the Lender as of the date such initial payment, reduction or
satisfaction occurred.
Section 10.12 Severability. In case any provision in or
obligation under this Agreement or any Note shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining provisions or obligations, or of such provision or obligation in
any other jurisdiction, shall not in any way be affected or impaired thereby.
Section 10.13 Survival. All indemnities set forth herein shall
survive the execution and delivery of this Agreement and the Notes and the
making and repayment of the Loans hereunder.
Section 10.14 Limitation of Liability. No claim may be made by
any Loan Party or any other Person against the Lender or any of its Affiliates,
directors, officers, employees, attorneys or agents for any special, indirect,
consequential or punitive damages in respect of any claim for breach of contract
or any other theory of liability arising out of or related to the transactions
contemplated by this Agreement or any act, omission or event occurring in
connection herewith; and each Loan Party hereby waives, releases and agrees not
to sue upon any claim for any such damages, whether or not accrued and whether
or not known or suspected to exist in its favor.
Section 10.15 Calculations; Computations. The financial
statements to be furnished to the Lender pursuant hereto shall be made and
prepared in accor-
40
<PAGE> 44
dance with GAAP consistently applied throughout the periods involved and
consistent with GAAP as used in the preparation of the financial statements
referred to in Section 6.1
Section 10.16 Waiver of Trial by Jury. TO THE EXTENT
PERMITTED BY APPLICABLE LAW, EACH OF THE BORROWER AND THE LENDER HEREBY
IRREVOCABLY WAIVES ALL RIGHT OF TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT OR ANY MATTER ARISING HEREUNDER OR THEREUNDER.
Section 10.17 Interest Rate Limitation. Notwithstanding
anything herein to the contrary, if at any time the Interest rate applicable to
any Loan, together with all fees, charges and other amounts which are treated as
interest on such Loan under applicable law (collectively the "Charges"), shall
exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for,
charged, taken, received or reserved by the Lender holding such Loan in
accordance with applicable law, the rate of interest payable in respect of such
Loan hereunder, together with all Charges payable in respect thereof, shall be
limited to the Maximum Rate and, to the extent lawful, the Interest and Charges
that would have been payable in respect of such Loan but were not payable as a
result of the operation of this Section 10.17 shall be cumulated and the
Interest and Charges payable to such Lender in respect of other Loans or periods
shall be increased (but not above the Maximum Rate therefor) until such
cumulated amount shall have been received by Lender.
41
<PAGE> 45
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
PLD TELEKOM INC.
By: /s/ E. CLIVE ANDERSON
----------------------------
Name: E. Clive Anderson
Title: S.V.P.
NEWS AMERICA INCORPORATED
By:
----------------------------
Name:
Title:
42
<PAGE> 46
EXHIBIT A
[FORM OF PROMISSORY NOTE]
PLD TELEKOM INC.
PROMISSORY NOTE
$[ ] New York, New York
No.: [Date]
FOR VALUE RECEIVED, the undersigned, PLD TELEKOM INC., a
Delaware corporation (the "Borrower"), hereby unconditionally promises to pay to
News America Incorporated, or registered assigns (the "Lender"), on
[_______________ ], in lawful money of the United States of America and in
immediately available funds, the principal amount of [ ] or,
if less, the aggregate amount outstanding of the Loans (as defined in the Credit
Agreement referred to below). The Borrower hereby unconditionally further agrees
to pay interest in like money on the unpaid principal amount hereof from time to
time from the date hereof at the rates and on the dates specified in Section 2.6
of the Revolving Credit Agreement dated as of September 30, 1998 between the
Borrower and the Lender (as amended, modified or supplemented from time to time,
the "Credit Agreement").
This Note is one of the Notes referred to in Section [ ] of the Credit Agreement
and is entitled to the benefits thereof. All of the terms, conditions, and
covenants of the Credit Agreement are expressly made a part of this Note by
reference in the same manner and with the same effect as if set forth herein.
This Note is a registered Note and, as provided in the Credit Agreement, upon
surrender of this Note for registration of transfer, duly endorsed, or
accompanied by a written instrument of transfer duly executed, by the registered
holder hereof or such holder's attorney duly authorized in writing, a new Note
for like principal amount will be issued to, and registered in the name of, the
transferee. Prior to due presentment for registration of transfer, the Borrower
may treat the person in whose name this Note is registered as the owner hereof
for the purpose of receiving payment and for all other purposes, and the
Borrower will not be affected by any notice to the contrary. Any transferee of
this Note, by its acceptance hereof, agrees to be bound by all the terms,
conditions and covenants of the Credit Agreement applicable to the holder of a
Note.
<PAGE> 47
The principal amount of this Note, together with all accrued and unpaid interest
thereon, is convertible into Common Stock of the Borrower at any time and from
time to time, as, and subject to the conditions and limitations, specified in
the Credit Agreement. The Conversion Price applicable to this Note and any
accrued and unpaid Interest hereon shall be $[ ], which Conversion Price shall
be subject to adjustment as set forth in the Credit Agreement.
As provided in the Credit Agreement, the Loans evidenced by this Note are
subject to optional and mandatory repayments, in whole and in part, all as
specified in the Credit Agreement.
If an Event of Default, as defined in the Credit Agreement, occurs and is
continuing, all amounts remaining unpaid on this Note shall become, or may be
declared to be, immediately due and payable, all as provided therein.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE PRINCIPLES
THEREOF RELATING TO CONFLICTS OF LAW).
PLD TELEKOM INC.
By: ___________________________
Name:
Title:
2
<PAGE> 48
SCHEDULE OF PRINCIPAL ADVANCES, CONVERSIONS AND REPAYMENTS
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------
Principal
Amount of Amount of Amount Interest
Amount of Interest Principal Converted into Converted into
Date Principal Advance Payment Repayment Common Stock Common Stock
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 49
EXHIBIT B
To: PLD TELEKOM INC.
680 Fifth Avenue
New York, New York 10019
NOTICE OF CONVERSION ELECTION
Reference is hereby made to that certain Credit Agreement,
dated as of September 30, 1998, by and between News America Incorporated and PLD
Telekom Inc.
The undersigned hereby exercises its rights to convert the
Note, or a portion thereof, or interest payable with respect thereto, into
Common Stock of PLD Telekom Inc., as provided in the Credit Agreement, and
requests that certificates representing shares of PLD Telekom Inc. Common Stock
issuable upon such conversion be issued in the name of, and delivered to:
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
(Print Name, Address, and Social Security Number)
and, if conversion shall not be with respect to the entire principal amount of
the Note, that a new Note for the principal balance remaining of the Note issued
and registered in the name of, and delivered to, the undersigned at the address
stated below.
Principal Amount To Be Converted $
Interest Amount To Be Converted $
Date: Name
----------------------------
(Print)
Address:
------------------------------------------------------------------------
----------------------------
(Signature)
<PAGE> 1
EXHIBIT 4.37
NEWS CONVERTIBLE NOTES
<TABLE>
<CAPTION>
Note no. Principal amount Conversion Price No. of shares
- - -------- ---------------- ---------------- -------------
<S> <C> <C> <C>
1 1,100,000* 1.120 982,143
2 1,000,000* 1.300 769,231
3 1,000,000* 1.945 514,139
4 1,000,000 1.945 514,139
5 2,500,000 1.459 1,713,502
6 1,500,000 1.544 971,503
Total 5,464,657
</TABLE>
<PAGE> 1
EXHIBIT 10.39
LEASE BETWEEN
G.S. 505 PARK, LLC
and
PLD TELEKOM INC.
PREMISES: Entire Twenty-First and
Twenty-Second (21st and 22nd) Floors
505 Park Avenue
New York, New York
<PAGE> 2
TABLE OF CONTENTS
LEASE
Article Page No.
1. COMMENCEMENT OF TERM.................................................... 1
2. OCCUPANCY............................................................... 1
3. RENT.................................................................... 2
4. DEFINITIONS............................................................. 3
5. ADJUSTMENTS OF RENT..................................................... 4
6. LATE PAYMENT CHARGE..................................................... 9
7. ALTERATIONS............................................................. 9
8. SERVICES PROVIDED BY LANDLORD - REPAIRS, WATER,
9. ELEVATORS, HEAT, CLEANING, AIR CONDITIONING............................. 11
10. WINDOW CLEANING......................................................... 14
11. REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS........................ 14
12. SUBORDINATION........................................................... 15
13. PROPERTY -- LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY...................... 16
14. DESTRUCTION, FIRE AND OTHER CASUALTY.................................... 17
15. EMINENT DOMAIN.......................................................... 19
16. ASSIGNMENT, MORTGAGE, ETC............................................... 19
17. ELECTRIC CURRENT........................................................ 24
18. ACCESS TO PREMISES...................................................... 26
19. VAULT, VAULT SPACE, AREA................................................ 26
20. BANKRUPTCY.............................................................. 27
21. DEFAULT................................................................. 27
22. REMEDIES OF LANDLORD AND WAIVER OF REDEMPTION........................... 28
23. FEES AND EXPENSES....................................................... 30
24. NO REPRESENTATIONS BY LANDLORD.......................................... 30
25. END OF TERM............................................................. 30
26. QUIET ENJOYMENT......................................................... 31
27. FAILURE TO GIVE POSSESSION.............................................. 31
28. NO WAIVER............................................................... 31
29. WAIVER OF TRIAL BY JURY................................................. 32
30. INABILITY TO PERFORM.................................................... 32
31. CAPTIONS................................................................ 32
32. ADJACENT EXCAVATION -- SHORING.......................................... 32
33. RULES AND REGULATIONS................................................... 33
34. SECURITY................................................................ 33
35. SUCCESSORS AND ASSIGNS.................................................. 34
36. INSURANCE............................................................... 35
37. BROKERAGE............................................................... 35
38. ESTOPPEL CERTIFICATE.................................................... 35
39. HOLDING OVER............................................................ 36
40. NOTICES................................................................. 36
41. INTENTIONALLY OMITTED................................................... 37
42. INTENTIONALLY OMITTED................................................... 37
43. CERTAIN RIGHTS RESERVED TO LANDLORD..................................... 37
44. HAZARDOUS MATERIALS..................................................... 37
45. MISCELLANEOUS........................................................... 37
EXHIBIT A - LEASED PREMISES
EXHIBIT B - RULES AND REGULATIONS
EXHIBIT C - CLEANING SPECIFICATIONS
EXHIBIT D - ENGINEER'S REPORT
EXHIBIT E - NONDISTURBANCE AGREEMENT
- i -
<PAGE> 3
AGREEMENT OF LEASE, made as of this 15th day of October, 1998,
between G.S. 505 PARK, LLC having an address c/o Glorious Sun (New York) Inc.,
70 West 40th Street, 3rd Floor, New York, New York 10018, party of the first
part (hereinafter referred to as "Landlord" or as "Owner"), and PLD TELEKOM
INC., a Delaware corporation, having an address at 505 Park Avenue, New York,
New York, party of the second part (hereinafter referred to as "Tenant"),
WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires
from Landlord the entire twenty-first and twenty-second (21st and 22nd) floors
substantially as shown on the floor plan annexed hereto as Exhibit A and made a
part hereof (the "Premises," "premises" or "demised premises") in the building
known as 505 Park Avenue, New York, New York (the "Building" or "building"; said
Building together with the land on which it is located (the "Land") and all
other improvements thereon being called the "Property"), on the terms and
conditions hereinafter set forth.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns, hereby
covenant as follows:
COMMENCEMENT OF TERM:
1. (A) The Term shall commence on the later of (i) date hereof or
(ii) the date upon which Landlord shall give notice to Tenant that Landlord has
received its mortgagee's approval of this Lease pursuant to Section 11(B) below,
(such later date shall be referred to herein as the "Commencement Date"), and
shall end on the last day of the month in which occurs the eighty-sixth (86th)
monthly anniversary of the Commencement Date (the "Expiration Date") or until
such term shall sooner cease and terminate as herein provided.
(B) Except as expressly set forth herein, Tenant shall accept
possession of the Premises in its "as is" condition, and Landlord shall be under
no obligation to make any changes, improvements, or alterations to the Premises.
The taking of occupancy of the whole or any part of the Premises by Tenant shall
be conclusive evidence as against Tenant that Tenant shall have accepted
possession of the Premises and that the Premises shall be in good and
satisfactory condition at the time such occupancy shall be so taken.
OCCUPANCY:
2. (A) Tenant shall use and occupy the demised premises for
executive and general offices and for no other purpose whatsoever. Tenant shall
not use the Premises or any part thereof for:
(i) sale at retail of any products or materials;
(ii) the conduct of a public auction of any kind;
(iii) the conduct of a bank, trust company, savings bank,
safe deposit, savings and loan association or bank or
any branches of any of the foregoing or a loan
company business;
(iv) the issuance and sale of traveler's checks, foreign
drafts, letters of credit, foreign exchange or
domestic money order or the receipt of money for
transmission;
(v) an employment agency;
<PAGE> 4
(vi) product display activities (such as those of a
manufacturers' representative);
(vii) offices or agencies of a foreign government or
political subdivisions thereof;
(viii) offices of any governmental bureau or agency of the
United States or any state or political subdivision
thereof;
(ix) offices of any public utility company, other than
corporate, executive or legal staff offices;
(x) data processing services rendered primarily to others
than Tenant and which are not strictly ancillary to
Tenant's business;
(xi) health care professionals;
(xii) schools or other training or educational uses (other
than those which are strictly ancillary to Tenant's
business, such as training of Tenant's personnel);
(xiii) clerical support concerns rendering clerical support
services primarily to others than Tenant or
performing functions other than those which are
strictly ancillary to Tenant's business;
(xiv) reservation centers for airlines or for travel
agencies;
(xv) broadcasting centers for communications firms, such
as radio and television stations; and
(xvi) any other use or purpose which, in the reasonable
judgment of Landlord, is not in keeping with the
character and dignity of the Property.
(B) Tenant will not make or permit to be made any use of the
Premises or any part thereof which would violate any of the covenants,
agreements, terms, provisions and conditions of this Lease or which directly or
indirectly is forbidden by public law, ordinance or governmental regulations or
which may be dangerous to life, limb, or property, or which may invalidate or
increase the premium cost of any policy of insurance carried on the Property or
concerning its operation, or which will suffer or permit the Premises or any
part thereof to be used in any manner, or anything to be brought into or kept
therein, which, in the reasonable judgment of Landlord, shall in any way impair
or tend to impair the character, reputation or appearance of the Property as a
high quality office building, or which will impair or interfere or tend to
impair or interfere with any of the services performed by Landlord for the
Property. In any event, Landlord makes no representation as to the condition of
the Premises and Tenant agrees to accept the same subject to violations whether
or not of record.
RENT:
3. (A) Tenant shall pay Minimum Rent (as hereinafter defined) at
an annual rental rate as hereinafter provided, together with all other sums of
money as shall become due and payable by Tenant under this Lease (hereinafter
called
- 2 -
<PAGE> 5
"additional rent" or "Additional Rent") which Tenant agrees to pay in lawful
money of the United States which shall be legal tender in payment of all debts
and dues, public and private, at the time of payment, in equal monthly
installments in advance on the first day of each month during said term, at the
office of Landlord or such other place as Landlord may designate, without any
set off or deduction whatsoever, except that Tenant shall pay the first monthly
installment(s) on the execution hereof (unless this Lease be a renewal). The
Minimum Rent and Additional Rent are collectively referred to herein as the
"rent".
(B) Tenant shall pay minimum annual rent, inclusive of any
payment for electricity pursuant to Article 16 hereof (the "Minimum Rent"), as
follows:
(i) Four Hundred Ninety-One Thousand Twenty-Nine Dollars
($491,029) per annum for the period beginning on the Commencement
Date and ending on the last day of the month in which occurs the
forty-fourth (44th) monthly anniversary of the Commencement Date
payable in advance in equal monthly installments of $40,919.08; and
(ii) Five Hundred Eleven Thousand Seventy-One Dollars
($511,071) per annum for the period beginning on the first day of
the month in which occurs the forty-fifth (45th) monthly anniversary
of the Commencement Date and ending on the Expiration Date, payable
in advance in equal monthly installments of $42,589.25.
(C) If the Minimum Rent hereunder shall commence on any day
other than the first day of a calendar month, the Minimum Rent for such calendar
month shall be prorated.
(D) Notwithstanding the foregoing, the Minimum Rent payable by
Tenant in an amount equal to $38,413.83 per month (the "Abatement Amount") shall
be abated for a period of two months from the Commencement Date (hereinafter
called the "Abatement Period"). Tenant acknowledges, however, that if this Lease
shall terminate due to a default by Tenant hereunder or if this Lease shall be
rejected in the case of a bankruptcy, the Minimum Rent otherwise abated pursuant
to this paragraph shall be immediately due and payable.
DEFINITIONS:
4. The following definitions shall have the meanings set forth
below:
(A) The term "office", or "offices", wherever used in this
Lease, shall not be construed to mean premises used as a store or stores, for
the sale or display, at any time, of goods, wares or merchandise, of any kind,
or as a restaurant, shop, booth, bootblack or other stand, barber shop, or for
other similar purposes or for manufacturing. The term "Landlord" as used in this
Lease means only the owner, or the mortgagee in possession, for the time being
of the land and building (or the owner of a lease of the building or of the land
and building) of which the demised premises form a part, so that in the event of
a lease of said building, or of the land and building, the said Landlord shall
be and hereby is entirely freed and relieved of all covenants and obligations of
Landlord hereunder, and it shall be deemed and construed without further
agreement between the parties or their successors in interest, or between the
parties and the purchaser, at any such sale, or the said lessee of the building,
or of the land and building, that the purchaser or the lessee of the building
has assumed and agreed to carry out any
- 3 -
<PAGE> 6
and all covenants and obligations of Landlord, hereunder. The words "re-enter"
and "re-entry" as used in this Lease are not restricted to their technical legal
meaning. The term "business days" as used in this Lease shall exclude Saturdays
(except such portion thereof, if any, as is covered by specific hours in Article
8 hereof), Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service.
(B) "Brokers" shall mean Cushman & Wakefield, Inc.
(C) "Legal Requirements" shall mean all laws, codes, statutes
and ordinances and the orders, rules, regulations, directives and requirements
of all federal, state, county, city and borough departments, bureaus, boards,
agencies, offices, commissions and other subdivisions thereof, or of any
official thereof, or of any other governmental public or quasi-public authority,
whether now or hereafter in force.
ADJUSTMENTS OF RENT:
5. (A) Definitions as used herein:
(i) "Taxes" shall mean (1) all real estate taxes or
other tax imposed in substitution thereof, assessments
(including for any Business Improvement District), and other
governmental impositions and charges of every kind whatsoever,
nonrecurring as well as recurring, special or extraordinary as
well as ordinary, foreseen and unforeseen, and each and every
installment thereof, which shall be levied, assessed or
imposed, or become due and payable or become liens upon, or
arise in connection with the use, occupancy or possession of,
the Property or any part thereof or interest therein during
the term of this Lease, and (2) all costs and expenses
(including reasonable attorneys' fees and disbursements)
incurred by Landlord in contesting the assessment of the
Property for real estate tax purposes or in otherwise
contesting the amount of any of the real estate taxes or other
governmental charges described above, but "Taxes" shall not
include any franchise, profit, estate, inheritance or income
tax imposed on Landlord. If, due to a change in the method of
taxation of any tax which would otherwise constitute Taxes, a
new or additional tax, however designated, shall be levied
against Landlord, and/or the Property, in addition to or in
substitution, in whole or in part, for any tax which would
otherwise constitute "Taxes", or in lieu of additional Taxes,
such tax or imposition shall be deemed for the purposes hereof
to be included within the term "Taxes".
(ii) "Tax Base" shall mean the Taxes, as finally
determined, for the July 1, 1998 to June 30, 1999 Tax Year.
(iii) "Base Operating Expenses" shall mean Operating
Expenses for calendar year 1998.
(iv) "Tenant's Proportionate Share" shall mean 5.01%.
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(v) "Tax Year" shall mean each period of twelve months,
commencing on the first day of July, in which occurs any part
of the Term or such other period as may hereafter be adopted
as the fiscal year for real estate tax purposes of The City of
New York.
(vi) "Landlord's Tax Statement" shall mean an annual
statement setting forth the amount payable by Tenant for a
specified Tax Year pursuant to this Article 5.
(B) PAYMENTS - TAX ESCALATIONS.
(i) If Taxes payable in any Tax Year shall exceed the
Tax Base, Tenant shall pay as additional rent a sum
(hereinafter referred to as "Tenant's Tax Payment") equal to
Tenant's Proportionate Share of the amount by which the Taxes
for such Tax Year exceed the Tax Base.
(ii) Landlord may bill Tenant monthly for one-twelfth
(1/12th) of the estimated increases in the current year in
Taxes over the Tax Base. Any refund due Tenant resulting from
over-estimates of actual Taxes shall be made within 45 days of
receipt of actual tax amounts. Landlord shall have the sole
right to institute tax reduction proceedings.
(iii) If the Tax Year shall be changed during the Term,
any Taxes for such fiscal year, a part of which is included
within a particular Tax Year and a part of which is not so
included, shall be equitably apportioned.
(C) PAYMENTS - OPERATING EXPENSES.
(i) "Operating Expenses" shall mean the aggregate of all
costs and expenses (including taxes, if any, thereon) paid or
incurred by or on behalf of Landlord (whether directly or through
independent contractors) in connection with the operation and
maintenance of the Property, except as provided herein. Operating
Expenses shall be calculated on the accrual basis of accounting and
shall include, without limitation, the following expenses:
(a) salaries, wages, pension and welfare payments or
contributions and all medical, insurance and other
fringe benefits paid to, for or with respect to all
persons (whether they be employees of Landlord, its
managing agent or any independent contractor) for their
services in the operation (including, without
limitation, security services), maintenance, repair or
cleaning of the Property, and payroll taxes, workers'
compensation, uniforms and dry cleaning costs for such
persons;
(b) payments under service contracts with independent
contractors for operating (including, without
limitation, providing security services), maintaining,
repairs, or cleaning of the Property or any portion
thereof or any fixtures or equipment therein;
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(c) all costs or charges for steam, heat, ventilation, air
conditioning and water (including sewer rents) furnished
to the Property and/or used in the operation of the
Property and all costs or charges for electricity
furnished to the public and service areas of the
Property and/or used in the operation of the service
facilities of the Property, including any taxes on any
such utilities;
(d) repairs and replacements which are appropriate to the
continued operation of the Property as a first-class
Manhattan office building and are not capitalized (to
the extent the cost of any such repair and/or
replacement is capitalized, paragraph (j) below shall
apply);
(e) cost of lobby decoration, and painting and decoration of
non-tenant areas;
(f) cost of snow removal and landscaping in and about the
Property;
(g) cost of building and cleaning supplies and equipment,
cost of replacements for tools and equipment used in the
operation, maintenance and repair of the Property and
charges for telephone service for the Property;
(h) financial expenses incurred in connection with the
operation of the Property, such as insurance premiums,
including, without limitation, liability insurance, fire
and other casualty insurance, rent insurance and any
other insurance that is then generally carried by owners
of major first-class office buildings in Manhattan or
may be required by the holder of any mortgage on the
Property, attorneys' fees and disbursements (exclusive
of any such fees and disbursements incurred in
connection with the leasing of space in the Property or
any "landlord-tenant" matters), auditing and other
professional fees and expenses, association dues and
other ordinary and customary financial expenses incurred
in connection with the operation of the Property;
(i) reasonable and customary management fees payable to a
management company (which may be owned or controlled by
Landlord or Landlord's principals);
(j) the cost of capital improvements made by Landlord either
(1) to reduce Operating Expenses, but only to the extent
of savings actually realized, or (2) pursuant to any
Legal Requirements enacted after the date hereof, which
cost shall be included in Operating Expenses for the
lease year in which such improvement is made, provided
that
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<PAGE> 9
to the extent the cost of such capital improvement is
capitalized, such cost shall be amortized on a
straight-line basis over the useful life thereof, and
the annual amortization of such capital improvement
shall be included in Operating Expenses;
(k) rental payments made for equipment used in the operation
and maintenance of the Property;
(l) the cost of governmental licenses and permits, or
renewals thereof, necessary for the operation of the
Property; and
(m) all other reasonable and necessary expenses paid in
connection with the operation, maintenance, repair and
cleaning of the Property which are properly chargeable
against income.
Landlord may use related or affiliated entities to provide services
or furnish material for the Property provided that the rates or fees
charged by such entities are reasonably competitive with those
charged by unrelated or unaffiliated entities in the Borough of
Manhattan for the same services or materials.
The following costs and expenses shall be excluded from Operating
Expenses: (1) real estate taxes; (2) debt service, amortization of
principal and penalties, refinancing costs, or ground rent under any
ground lease; (3) leasing commissions and expenses; (4) the cost of
electrical energy or other utilities furnished directly to the
tenants of the Property and the administrative costs in connection
therewith; (5) the cost of tenant installations and decorations
incurred in connection with preparing space for any tenant or any
other occupant (including the cost of removing tenant installation
or demolition of tenanted space); (6) salaries or fringe benefits of
personnel above the grade of building manager; (7) the cost of any
item to the extent to which such cost is reimbursed to Landlord by
tenants of the Property (other than pursuant to this Article) or
through insurance or condemnation proceeds, or third parties; (8)
depreciation of the Property, amortization (except as provided
above) and other non-cash charges; (9) repairs or other work due to
fire or other casualty; (10) legal fees related to "landlord-tenant"
matters, including lease negotiations and litigation; and (11)
advertising or promotional expenses.
(ii) For each calendar year during the term of this
Lease, Tenant shall pay to Landlord as Additional Rent for the
Premises an amount equal to Tenant's Proportionate Share of the
amount by which Operating Expenses for such calendar year exceed
Base Operating Expenses (such excess being referred to herein as the
"Operating Excess").
(iii) On account of its obligations in respect of
Operating Expenses, Tenant shall pay to Landlord, monthly, in
advance, together with each monthly installment of Minimum Rent, an
amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share
of the Operating Excess for the preceding lease year. Such amount
may be adjusted by Landlord not more than
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<PAGE> 10
once a year, at any time during the term hereof, on notice to
Tenant, to an amount equal to one-twelfth (1/12th) of Tenant's
Proportionate Share of the Operating Excess with respect to the
preceding lease year plus one-twelfth (1/12th) of Landlord's
good-faith estimate of the amount by which Tenant's Proportionate
Share of the Operating Excess will increase during the current lease
year.
(iv) Within one hundred eighty (180) days following the
end of each calendar year, Landlord shall furnish to Tenant a
written statement ("Landlord's Operating Statement") in reasonable
detail covering the calendar year just expired showing the total
Operating Expenses for such calendar year, the amount of Tenant's
Proportionate Share of the Operating Excess for such year, and
payments, if any, made by Tenant with respect thereto.
(D) In the event that the date of the expiration or other
termination of this Lease shall be a day other than the last day of a Tax Year
or a calendar year, then, in such event, in applying the provisions of this
Article with respect to any Tax Year (for the purpose of calculating Tenant's
share of Taxes) or calendar year (for the purpose of calculating Tenant's share
of Operating Expenses), appropriate adjustments shall be made to reflect the
occurrence of such event on a basis consistent with the principles underlying
the provisions of this Article taking into consideration that the lease
expiration date occurred during a partial lease year.
(E) In no event shall the Minimum Rent ever be reduced by
operation of this Article 5. Landlord's failure to render a Landlord's Tax
Statement with respect to any Tax Year or a Landlord's Operating Statement with
respect to any calendar year, respectively, shall not prejudice Landlord's right
to thereafter render a Landlord's Tax Statement or Landlord's Operating
Statement with respect thereto or with respect to any subsequent Tax Year or
calendar year.
(F) Each of Landlord's Tax Statements and Landlord's Operating
Statements shall be conclusive and binding upon Tenant unless (i) pending the
determination of such dispute by agreement or otherwise, Tenant shall pay
additional rent in accordance with the applicable Landlord's Tax Statement
and/or Landlord's Operating Statement, as the case may be, without prejudice to
Tenant's position, and (ii) within sixty (60) days after receipt of such
Landlord's Tax Statement and/or Landlord's Operating Statement, Tenant shall
notify Landlord in writing that it disputes the correctness thereof. In the
event of such a dispute, Tenant may, upon fourteen (14) days' prior notice,
elect to have Tenant's designated (in Tenant's dispute notice) certified public
accountant who is a member of a recognized firm of certified public accountants
examine during business hours, at Landlord's office or at such other location in
The City of New York as Landlord may designate, such of Landlord's books and
records Tenant as are directly relevant to the Landlord's Statement in question.
In connection with any examination by Tenant of Landlord's books and records,
Tenant agrees to treat, and to instruct its employees, accountants and agents to
treat, all information as confidential and not disclose it to any other person
except as may be required by law or in connection with any dispute with Landlord
under this Lease relating thereto. Each party shall be responsible for its own
fees in connection with such dispute, except that if it shall be finally
determined pursuant to this Section 5F that the Landlord's Tax Statement and/or
Landlord's Operating Statement (i) overstated Tenant's Operating Payment by more
than 5%, Landlord shall reimburse Tenant for the reasonable costs and expenses
incurred by Tenant
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<PAGE> 11
with respect to such dispute and (ii) overstated Tenant's Operating Payment by
less than 3%, Tenant shall reimburse Landlord for the reasonable costs and
expenses incurred by Landlord with respect to such dispute.
(G) Tenant's obligations under this Article shall survive the
expiration or earlier termination of the term of this Lease.
LATE PAYMENT CHARGE:
6. (A) If Tenant shall fail to make any payment of Minimum Rent
or Additional Rent for more than five (5) days after the same is due and
payable, Tenant shall pay a late payment charge of $.05 for each $1.00 which
remains unpaid to compensate Landlord for additional expenses in processing such
late payment. In addition, if Tenant fails to pay any Minimum Rent or Additional
Rent when due, Tenant shall pay interest thereon from the date due until the
date paid at an annual rate of 10%, and such interest shall be deemed to be
Additional Rent hereunder.
(B) If any check of Tenant shall be returned for insufficient
funds, there shall be an additional charge to Tenant of $50.00 and, thereafter,
at the request of Landlord, Tenant shall make all payments required hereunder by
certified or official bank check only.
ALTERATIONS:
7. (A) Tenant shall make no changes in or to the demised premises
of any nature without Landlord's prior written consent. Subject to the prior
written consent of Landlord, and to the provisions of this article, Tenant at
Tenant's expense, may make alterations, installations, additions or improvements
("Alterations") which are non-structural and which do not affect utility
services or plumbing and electrical lines, in or to the interior of the demised
premises by using contractors, mechanics, engineers and architects reasonably
acceptable to Landlord. Tenant agrees that all Alterations shall be performed by
Tenant in accordance with Landlord's Uniform Rules and Regulations for
Alterations. Tenant agrees to use Landlord's approved engineer for the Building
for the preparation of all construction documents and drawings pertaining to any
Alterations and to use Landlord's architect to file all plans with and obtain
all required permits from appropriate governmental authorities. All fixtures and
all paneling, partitions, railings and like installations, installed in the
premises at any time, either by Tenant or by Landlord in Tenant's behalf, shall,
upon installation, become the property of Landlord and shall remain upon and be
surrendered with the demised premises unless Landlord, by notice to Tenant no
later than twenty days prior to the date fixed as the termination of this Lease,
elects to relinquish Landlord's right thereto and to have them removed by
Tenant, in which event, the same shall be removed from the premises by Tenant
prior to the expiration of this Lease, at Tenant's expense. Nothing in this
article shall be construed to give Landlord title to or to prevent Tenant's
removal of trade fixtures, moveable office furniture and equipment, but upon
removal of any such from the premises or upon removal of other installations as
may be required by Landlord, Tenant shall immediately and at its expense, repair
and restore the premises to the condition existing prior to installation, other
than as a result of reasonable wear and tear and repair any damage to the
demised premises or the building due to such removal. All property permitted or
required to be removed by Tenant at the end of the term remaining in the
premises after Tenant's removal shall be deemed abandoned and may, at the
election of Landlord,
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<PAGE> 12
either be retained as Landlord's property or may be removed from the premises by
Landlord at Tenant's expense. Provided Tenant so requests in writing when
submitting its plans to Landlord for Landlord's approval, Landlord shall advise
Tenant as to whether Tenant will be required to remove the alterations set forth
in such plans at the end of the term. Tenant shall, before making any
alterations, additions, installations or improvements, at its expense, obtain
all permits, approvals and certificates required by any governmental or
quasi-governmental bodies and (upon completion) certificates of final approval
thereof and shall deliver promptly duplicates of all such permits, approvals and
certificates to Landlord and Tenant agrees to carry and will cause Tenant's
contractors and sub-contractors to carry such workman's compensation, general
liability, personal and property damage insurance as Landlord may require. If
any mechanic's lien is filed against the demised premises, or the building of
which the same forms a part, for work claimed to have been done for, or
materials furnished to, Tenant, whether or not pursuant to this article, the
same shall be discharged by Tenant within ten days thereafter, at Tenant's
expense, by filing the bond required by law.
(B) Tenant agrees that with respect to the performance by
Tenant of any Alterations costing in excess of $10,000, Tenant shall pay to
Landlord, as additional rent hereunder, promptly upon being billed therefor, a
sum equal to Landlord's actual out-of-pocket costs and expenses including,
without limitation, the fees of any architect or engineer employed by Landlord,
indirect costs, field supervision and coordination in connection therewith.
(C) (i) Before proceeding with any Alteration estimated to cost in
excess of $25,000.00, Tenant shall furnish to Landlord one of the following (as
selected by Landlord): (a) a cash deposit or (b) a performance bond and a labor
and materials payment bond (issued by a corporate surety licensed to do business
in New York reasonably satisfactory to Landlord), or (c) an irrevocable,
unconditional, negotiable letter of credit, issued by and drawn on a bank or
trust company which is a member of the New York Clearing House Association in a
form reasonably satisfactory to Landlord; each in an amount equal to one hundred
twenty (120%) percent of the estimated cost of the Alteration.
(ii) Upon (a) the completion of the Alteration in accordance
with the terms of this Article and (b) the submission to Landlord of proof
evidencing the payment in full for said Alteration including, but not limited
to, delivery of Waivers of Mechanic Liens (as defined below), the security
deposited with Landlord (or the balance of the proceeds thereof, if Tenant has
furnished cash or a letter of credit and if Landlord has drawn on the same)
shall be returned to Tenant.
(iii) Upon the Tenant's failure to properly perform, complete
and fully pay for the said Alteration, as reasonably determined by Landlord, for
ten (10) days after notice (except in the event of an emergency in which event
there shall be no notice), Landlord shall be entitled to draw on the security
deposited under this Article and Article 33 to the extent it deems necessary to
complete any incomplete or otherwise hazardous Alteration, to effect any
necessary restoration and/or protection of the Premises or the Real Property and
to apply such funds to the payment or satisfaction of any costs, damages or
expenses in connection with the foregoing and/or Tenant's obligations under this
Article and the Lease relating to Alterations and repairs, including the
satisfaction of any mechanic's lien.
(D) If in connection with any Alterations Tenant shall hire
the services of any contractor or construction manager, Tenant shall enter into
an agreement with such party which
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shall provide that such contractor or construction manager, as well as all
subcontractors, materialmen and suppliers hired in connection therewith (all of
the foregoing known collectively as the "Contractors"), shall upon receiving any
payment respecting such Alterations deliver to Tenant a duly executed Waiver of
Mechanic's Lien evidencing payment in full for the cost of work, labor and/or
services theretofore furnished. Said Waivers of Mechanic's Lien shall name the
Landlord and Tenant as the beneficiaries of such Waivers and shall be in a form
reasonably acceptable to Landlord. Prior to the commencement of any Alterations,
a form of the Waiver of Mechanic's Lien to be given by each such Contractor must
be approved by Landlord.
(E) All Alterations shall be performed by Tenant in compliance
with the Rules and Regulations, all applicable requirements of insurance bodies,
and with Legal Requirements and the same shall be diligently performed in a good
and workmanlike manner.
(F) Tenant agrees that Tenant will not at any time during the
term hereof, either directly or indirectly, use any contractors and/or labor
and/or materials if the use of such contractors and/or labor and/or materials
would or will create any difficulty with other contractors and/or labor engaged
by Tenant or Landlord or others in the maintenance and/or operations of the
Building or any part thereof.
SERVICES PROVIDED BY LANDLORD - REPAIRS, WATER,
ELEVATORS, HEAT, CLEANING, AIR CONDITIONING:
8. (A) Repairs. (i) Landlord shall maintain and promptly repair
the public portions of the building, both exterior and interior. Tenant shall,
throughout the term of this Lease, take good care of the demised premises and
the fixtures and appurtenances therein and at Tenant's sole cost and expense,
make all non-structural repairs thereto as and when needed to preserve them in
good working order and condition, reasonable wear and tear, obsolescence and
damage from the elements, fire or other casualty, excepted. Notwithstanding the
foregoing, all damage or injury to the demised premises or to any other part of
the building, or to its fixtures, equipment and appurtenances, whether requiring
structural or non-structural repairs, caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, Tenant's servants, employees,
invitees or licensees, shall be repaired promptly by Tenant at its sole cost and
expense, to the satisfaction of Landlord reasonably exercised. Tenant shall also
repair all damage to the building and the demised premises caused by the moving
of Tenant's fixtures, furniture or equipment. All the aforesaid repairs shall be
of quality or class equal to the original work or construction. If Tenant fails
after ten days' notice to proceed with due diligence to make repairs required to
be made by Tenant, the same may be made by the Landlord at the expense of Tenant
and the expenses thereof incurred by Landlord shall be collectible as additional
rent after rendition of a bill or statement therefor. Tenant shall give Landlord
prompt notice of any defective condition in any plumbing, heating system or
electrical lines located in, servicing or passing through the demised premises
and following such notice, Landlord shall remedy the condition with due
diligence but at the expense of Tenant if repairs are necessitated by damage or
injury attributable to Tenant, Tenant's servants, agents, employees, invitees or
licensees as aforesaid. Except as specifically provided in Article 13 or
elsewhere in this lease, there shall be no allowance to Tenant for a diminution
of rental value and no liability on the part of Landlord by reason of
inconvenience, annoyance or injury to business arising from Landlord, Tenant or
others making or failing to make any repairs, alterations, additions or
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improvements in or to any portion of the building or the demised premises or in
and to the fixtures, appurtenances or equipment thereof. The provisions of this
Article 8 with respect to the making of repairs shall not apply in the case of
fire or other casualty which are dealt with in Article 13 hereof.
(ii) Landlord reserves the right, upon reasonable prior notice
if reasonably practicable under the circumstances, to stop or reduce service of
any of the elevator, plumbing, heating, ventilating, air-conditioning, sanitary,
sprinkler, water, power or other Property systems or cleaning or other services,
if any, when necessary by reason of accident or for repairs, alterations,
replacements or improvements necessary or desirable in the judgment of Landlord
for as long as may be reasonably required by reason thereof or by reason of
strikes, accidents, laws, order or regulations or any other reason beyond the
control of Landlord.
(B) HVAC. (i) Landlord shall, subject to energy conservation
requirements of governmental authorities, supply heating, ventilation, and air
conditioning to the Premises from 8:00 AM to 6:00 PM on business days. Landlord
will, when and to the extent reasonably requested by Tenant, furnish additional
air conditioning and ventilation services and Tenant will pay Landlord's
Building standard charge therefor. The Building standard heating ventilation and
air conditioning system (the "HVAC system") is designed to meet the following
specifications:
Winter Design 72 degrees Fahrenheit
(ASHRAE (1985) - inside when no less than 11
degrees Fahrenheit outside;
humidity control so as not
to cause condensation on
the inside of the windows.
Summer Design 74 degrees Fahrenheit and
(ASHRAE (1985) - 50% relative humidity
inside when no more than 86
degrees Fahrenheit outside
air temperature.
During the hours set forth above on business days (and during any
other hours when the same is provided at Tenant's request and expense pursuant
to this Section 8(B)), the HVAC system will supply outside air at no less than
0.133 CFM per rentable square foot of space in the Premises.
Temperature performance measured 2 feet from inside mullion and 5
feet above floor.
Notwithstanding the foregoing provisions of this Section 8B,
Landlord shall not be responsible if the normal operation of the HVAC system
shall fail to provide air at reasonable temperatures, pressures or degrees of
humidity or in reasonable volumes or velocities in any portion of the Premises
(i) which shall have an electrical load in excess of 4.5 watts per usable square
foot of Premises area for all purposes (including lighting and power), or which
shall have a human occupancy factor in excess of one (1) person per one hundred
twenty-five (125) usable square feet of Premises area, or (ii) because of any
arrangement of partitioning or other improvements made or performed by or on
behalf of Tenant or any person claiming through or under Tenant. Whenever such
HVAC system is in operation, Tenant agrees to draw the blinds or other window
coverings. Tenant shall cooperate fully with Landlord at all times and abide by
all regulations and requirements which Landlord may reasonably prescribe for the
proper functioning and protection of the heating, air conditioning and
ventilation system. Landlord shall maintain in good working order the HVAC
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system serving the demised premises, provided the need for such maintenance does
not arise as a result of the negligence or misuse of Tenant. No representation
is made by Landlord with respect to the adequacy or fitness of such air
conditioning or ventilation to maintain temperatures as may be required for, or
because of, the operation of any computer, data processing or other equipment of
Tenant, and where air conditioning or ventilation is required for any such
purpose, Landlord assumes no responsibility, and shall have no liability, for
any loss or damage, however sustained, in connection therewith.
(ii) Landlord and Tenant acknowledge that there is a three (3) ton
supplemental HVAC unit located on the twenty-first (21st) floor which services a
portion of the 21st floor portion of the Premises. Tenant shall be obligated to
pay Landlord, as Additional Rent, for condenser water for such unit at the rate
of $500 per ton per year. Such payment shall be payable on an annual basis
within ten (10) days from written demand thereof. The above charges are subject
to increase from time to time during the term of the Lease in direct proportion
to increase(s) in costs incurred by Landlord attributable thereto. Landlord
represents and warrants that such unit shall be in good working order on the
Commencement Date. Tenant shall, at its sole cost and expense, maintain the unit
in good order and repair throughout the term of this Lease. Such maintenance
obligations shall be performed throughout the term of this Lease, on Tenant's
behalf by a reputable air conditioning maintenance company engaged by Tenant at
its expense, and first approved by Landlord. In the event Tenant shall fail to
engage an air conditioning maintenance company as aforesaid, Landlord may (but
shall not be obligated to) perform such maintenance and/or engage an air
conditioning maintenance company at Tenant's expense to perform the aforesaid
maintenance to the unit, and Tenant shall pay on demand as Additional Rent
hereunder all expenses incurred by Landlord in connection therewith.
Notwithstanding the foregoing, provided Tenant has fulfilled all of its
obligations with regard to obtaining a maintenance contract in connection with
the unit as set forth in this paragraph and to the extent the need for the same
shall not have resulted from Tenant's misuse of the unit or Tenant's negligence,
if it becomes necessary to replace the unit during the Term, Landlord shall be
responsible therefore and Tenant shall pay Landlord annually as additional rent
during the balance of the Term an amount equal to what the annual amortization
of such cost would be if it was capitalized and amortized on a straight-line
basis over the useful life of the unit; otherwise, Tenant shall be responsible
for such replacement at its expense. Tenant shall surrender the unit in good
working order on the expiration or sooner termination of this Lease.
(C) Water. Landlord shall furnish adequate hot and cold water
for drinking, lavatory and normal cleaning purposes. If Tenant uses water for
any other purpose, Landlord may install and maintain, at Tenant's expense,
meters to measure Tenant's consumption of cold water and/or hot water for such
other purpose. Tenant shall reimburse Landlord on demand for the cost of cold
water and hot water shown on such meters.
(D) Cleaning. Landlord shall cause the Premises, including the
exterior and interior of the exterior windows, to be cleaned in a manner
standard to the Property (which current standard is attached hereto as Exhibit C
and is subject to change). Landlord shall not be required to clean any portions
of the Premises used for the preparation, serving or consumption of food or
beverages, training rooms, data processing or reproducing operations or private
lavatories or toilets (i.e., other than core bathrooms). Tenant shall pay to
Landlord on demand the costs incurred by Landlord for (i) extra cleaning work in
the Premises required because of (1) the act, omission, misuse or neglect of or
by Tenant or any subtenant or licensee, or their
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respective employees, agents, contractors or invitees, (2) use of portions of
the Premises for special purposes requiring greater or more difficult cleaning
work than required in normal office areas, (3) interior glass partitions or
unusual quantity of interior glass surfaces, other than those in place as of the
date of this Lease, and (4) special materials or finishes on items installed by
Tenant or its subtenants, (ii) collection and removal from the Premises and the
Property of any refuse or rubbish of Tenant in excess of that ordinarily
accumulated in general office occupancy.
(E) Elevator. Landlord shall provide passenger elevator
service to the Premises during business hours, and Landlord shall have at least
one passenger elevator subject to call at all other times. If Tenant requires
freight elevator service at any time, or more than one passenger elevator at any
time other than during business hours, Landlord shall furnish such service upon
not less than 48 hours' advance notice from Tenant, and Tenant shall pay to
Landlord on demand Landlord's then established charges therefor. The use of the
elevators shall be subject to the Rules and Regulations. Tenant may request that
Landlord program the elevators servicing the demised premises so that the
elevators do not provide access to the demised premises before 8:00 a.m. and
after 6:00 p.m. on business days and at all times on non-business days. In such
event, Tenant, its employees, agents and invitees will be allowed access to the
demised premises during such periods provided they comply with Rule 18 of the
Rules and Regulations attached hereto as Exhibit B, as well as such other rules
or security requirements as Landlord may impose in its sole discretion.
WINDOW CLEANING:
9. Tenant will not clean, nor require, permit, suffer or allow any
window in the demised premises to be cleaned, from the outside in violation of
Section 202 of the Labor Law or any other applicable law or of the rules of the
Board of Standards and Appeals, or of any other board or body having or
asserting jurisdiction.
REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS:
10. Prior to the commencement of the Lease term, if Tenant is then
in possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire Underwriters
or any similar body which shall impose any violation, order or duty upon
Landlord or Tenant with respect to the demised premises whether or not arising
out of Tenant's use or manner of use thereof, or with respect to the building if
arising out of Tenant's use or manner of use of the premises or the building
(including the use permitted under this Lease). Nothing herein shall require
Tenant to make structural repairs or alterations unless Tenant has by its
particular manner of use of the demised premises or method of operation therein,
violated any such laws, ordinances, orders, rules, regulations or requirements
with respect thereto. Notwithstanding the foregoing, during the Term Landlord
shall, at Landlord's sole cost and expense and upon receipt of actual notice
thereof from any governmental authority having jurisdiction thereof, perform any
work necessary to cure any violations within the demised premises of the
Americans with Disabilities Act (42 U.S.C. Section 12101 et. seq.), as the same
may hereafter be amended ("ADA Violations"). Such obligation of Landlord to cure
ADA Violations is subject, however, to the following conditions: (a) Tenant
shall use reasonable efforts to prevent the occurrence of any ADA Violations and
(b) Tenant shall perform all work necessary to cure ADA Violations which arise
out of Tenant's particular manner of use of the demised premises or any
Alterations performed by or on behalf of Tenant and Landlord shall have no
responsibility with respect thereto. Tenant may, after securing Landlord to
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Landlord's satisfaction against all damages, interest, penalties and expenses,
including, but not limited to, reasonable attorneys' fees, by cash deposit or by
surety bond in an amount and in a company satisfactory to Landlord, contest and
appeal any such laws, ordinances, orders, rules, regulations or requirements
provided same is done with all reasonable promptness and provided such appeal
shall not subject Landlord to prosecution for a criminal offense or constitute a
default under any lease or mortgage under which Landlord may be obligated, or
cause the demised premises or any part thereof to be condemned or vacated.
Tenant shall not do or permit any act or thing to be done in or to the demised
premises which is contrary to law, or which will invalidate or be in conflict
with public liability, fire or other policies of insurance at any time carried
by or for the benefit of Landlord with respect to the demised premises or the
building of which the demised premises form a part, or which shall or might
subject Landlord to any liability or responsibility to any person or for
property damage, nor shall Tenant keep anything in the demised premises except
as now or hereafter permitted by the Fire Department, Board of Fire
Underwriters, Fire Insurance Rating Organization or other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties, or
damages, which may be imposed upon Landlord by reason of Tenant's failure to
comply with the provisions of this article and if by reason of such failure the
fire insurance rate shall, at the beginning of this Lease or at any time
thereafter, be higher than it otherwise would be, then Tenant shall reimburse
Landlord, as additional rent hereunder, for that portion of all fire insurance
premiums thereafter paid by Landlord which shall have been charged because of
such failure by Tenant, and shall make such reimbursement upon the first day of
the month following such outlay by Landlord. In any action or proceeding wherein
Landlord and Tenant are parties a schedule or "make-up" of rate for the building
or demised premises issued by the New York Fire Insurance Exchange, or other
body making fire insurance rates applicable to said premises shall be conclusive
evidence of the facts therein stated and of the several items and charges in the
fire insurance rate then applicable to said premises. Tenant shall not place a
load upon any floor of the demised premises exceeding the floor load per square
foot area which it was designed to carry and which is allowed by law. Landlord
reserves the right to prescribe the weight and position of all safes, business
machines and mechanical equipment. Such installation shall be placed and
maintained by Tenant, at Tenant's expense, in settings sufficient, in Landlord's
judgment, to absorb and prevent vibration, noise and annoyance.
SUBORDINATION:
11. The rights of Tenant under this Lease shall be and are subject
and subordinate at all times to all ground leases, and/or underlying leases, if
any, now or hereafter in force against the Property, and to each and every
mortgage or deed of trust which may now or hereafter be placed by Landlord on
its interest in the Property, and to all increases, renewals, modifications,
consolidations, replacements and extensions thereof. This Article is
self-operative and no further instrument of subordination shall be required. In
confirmation of such subordination Tenant shall promptly execute such further
instruments as may be requested by Landlord. Tenant hereby irrevocably appoints
Landlord as attorney-in-fact for Tenant with full power and authority to execute
and deliver in the name of Tenant any such instrument or instruments. To the
extent not so provided by applicable law, in the event of the enforcement by
such mortgagee of the remedies provided for by law or by the mortgage, if such
mortgagee or any successors or assigns of such mortgagee shall, at its or their
sole option, succeed to the interest of Landlord under this Lease, whether
through possessory or foreclosure action or a deed in lieu of foreclosure, and
this Lease shall not be terminated or affected by such foreclosure or
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any such proceedings, Tenant, at the election of such mortgagee or its
successors or assigns, shall attorn to and recognize such mortgagee (or its
successors or assigns) as its landlord upon the terms, covenants, conditions and
agreements contained in this Lease to the same extent and in the same manner as
if this Lease was a direct lease between such mortgagee (or its successors or
assigns) and Tenant, except that such mortgagee (or its successors or assigns),
whether or not it shall have succeeded to the interest of Landlord under this
Lease, shall not (a) have any liability for refusal or failure to perform or
complete any work required to be performed by Landlord under this Lease to
prepare the demised premises for occupancy in accordance with the provisions of
this Lease or otherwise, (b) be liable for any act, omission or default of any
prior landlord under this Lease, (c) be subject to any offsets, claims or
defenses which shall have heretofore accrued to Tenant against any prior
landlord under this Lease, (d) be bound by any rent or additional rent which
Tenant might have paid to any prior landlord for more than one (1) month in
advance, and/or (e) be bound by any cancellation, abridgement, surrender,
modification or amendment of this Lease, without the prior written consent of
such mortgagee or such successor in interest. Upon request by said successor in
interest, Tenant shall execute and deliver an instrument or instruments
confirming such attornment. Landlord shall deliver to Tenant a non-disturbance
agreement from the current mortgagee in the form of Exhibit E attached hereto
simultaneously with the execution and delivery of this Lease. Landlord shall
endeavor (without being obligated to commence any legal proceedings or otherwise
to incur any costs in connection therewith) to obtain for the benefit of Tenant
a non-disturbance agreement from any future mortgagee of Landlord's interest in
the Property, on such mortgagee's standard form.
PROPERTY -- LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY:
12. (A) Neither Landlord nor Landlord's agents, officers, directors,
shareholders, partners or principals (disclosed or undisclosed) shall be liable
to Tenant or Tenant's agents, employees, contractors, invitees or licensees or
any other occupant of the Premises for any damage to property of Tenant or of
others entrusted to employees of the Building, nor for any injury to Tenant or
to any other person or for any damage to, or theft or other loss of, any of
Tenant's property or of the property of any other person resulting from any
cause of whatsoever nature, unless due to the gross negligence of Landlord or
Landlord's agents provided, however, that even if due to any such gross
negligence of Landlord or Landlord's agents, Tenant waives, to the fullest
extent permitted by law, any claim for consequential damages in connection
therewith; nor shall Landlord or its agents be liable for any such damage caused
by other tenants or persons in, upon or about said building or caused by
operations in construction of any private, public or quasi public work. If at
any time any windows of the demised premises are temporarily closed, darkened or
bricked up (or permanently closed, darkened or bricked up, if required by law)
for any reason whatsoever including, but not limited to Landlord's own acts,
Landlord shall not be liable for any damage Tenant may sustain thereby and
Tenant shall not be entitled to any compensation therefor nor abatement or
diminution of rent nor shall the same release Tenant from its obligations
hereunder nor constitute an eviction. Tenant shall not move any safe, heavy
machinery, heavy equipment, bulky matter, or fixtures into or out of the
building without Landlord's prior written consent. If such safe, machinery,
equipment, bulky matter or fixtures requires special handling, all work in
connection therewith shall comply with the Administrative Code of the City of
New York and all other laws and regulations applicable thereto and shall be done
during such hours as Landlord may designate.
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(B) Tenant shall indemnify and save harmless Landlord against
and from all liabilities, obligations, damages, penalties, claims, costs and
expenses for which Landlord shall not be reimbursed by insurance, including
reasonable attorneys' fees, paid, suffered or incurred in connection with or
arising from (i) any breach by Tenant, Tenant's agents, contractors, employees,
invitees, or licensees, of any covenant or condition of this Lease, or (ii) the
carelessness, negligence or improper conduct of the Tenant, Tenant's agents,
contractors, employees, invitees or licensees, or (iii) the use or occupancy of
the Premises by Tenant or any person claiming under Tenant, or (iv) any acts,
omissions or negligence of Tenant or any such person, or the contractors,
agents, employees, invitees or licensees of Tenant or any such person, in or
about the Premises or the Real Property. Tenant shall pay to Landlord as
Additional Rent, within ten (10) days following rendition by Landlord to Tenant
of bills or statements therefor, sums equal to all losses, costs, liabilities,
claims, damages, fines, penalties and expenses referred to in this Section.
Tenant's liability under this Lease extends to the acts and omissions of any
sub-tenant, and any agent, contractor, employee, invitee or licensee of any
subtenant. In case any action or proceeding is brought against Landlord by
reason of any such claim, Tenant, upon written notice from Landlord, will, at
Tenant's expense, resist or defend such action or proceeding by counsel approved
by Landlord in writing, such approval not to be unreasonably withheld.
(C) Tenant shall look only to Landlord's estate and interest
in the Building for the satisfaction of Tenant's remedies or for the collection
of a judgment (or other judicial process) requiring the payment of money by
Landlord in the event of any default or liability by Landlord hereunder, and no
other property or assets of Landlord and no property of any officer, employee,
director, shareholder, partner or principal of Landlord shall be subject to
levy, execution or other enforcement procedure for the satisfaction of Tenant's
remedies under or with respect to this Lease, the relationship of Landlord and
Tenant hereunder or Tenant's use or occupancy of the demised premises.
(D) The provisions of this Article shall survive the
expiration or sooner termination of this Lease.
DESTRUCTION, FIRE AND OTHER CASUALTY:
13. (A) If the demised premises or any part thereof shall be
damaged by fire or other casualty, Tenant shall give immediate notice thereof to
Landlord and this Lease shall continue in full force and effect except as
hereinafter set forth.
(B) If the demised premises are partially damaged or rendered
partially unusable (including Tenant's inability to have reasonable access to
such unusable area, provided Tenant shall not occupy the unusable area) by fire
or other casualty, the damages thereto shall be repaired promptly after receipt
of insurance proceeds by and at the expense of Landlord and the rent, until such
repair shall be substantially completed, shall be apportioned from the day
following the casualty according to the part of the premises which is usable.
(C) If the demised premises are totally damaged or rendered
wholly unusable by fire or other casualty (including Tenant's inability to have
reasonable access to the demised premises, provided that Tenant shall not occupy
the demised premises), then the rent shall be proportionately paid up to the
time of the casualty and thenceforth shall cease until the date when the
premises shall have been repaired and restored by Landlord, or reasonable access
to the demised premises shall have
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then been restored, as the case may be, subject to Landlord's right to elect not
to restore the same as hereinafter provided.
(D) If the demised premises are rendered wholly unusable
(including Tenant's inability to have reasonable access to the demised premises)
or (whether or not the demised premises are damaged in whole or in part) if the
building shall be so damaged that Landlord shall decide to demolish it or to
rebuild it, then, in any of such events, Landlord may elect to terminate this
Lease by written notice to Tenant given within 90 days after such fire or
casualty specifying a date for the expiration of this Lease, which date shall
not be more than 60 days after the giving of such notice, and upon the date
specified in such notice the term of this Lease shall expire as fully and
completely as if such date were the date set forth above for the termination of
this Lease and Tenant shall forthwith quit, surrender and vacate the premises
without prejudice however, to Landlord's rights and remedies against Tenant
under the Lease provisions in effect prior to such termination, and any rent
owing shall be paid up to such date and any payments or rent made by Tenant
which were on account of any period subsequent to such date shall be returned to
Tenant.
(E) Unless Landlord shall serve a termination notice as
provided for herein, Landlord shall make the repairs and restorations under the
conditions of Sections 13(B) and (C) hereof, with all reasonable expedition
subject to delays due to adjustment of insurance claims, labor troubles and
causes beyond Landlord's control. After any such casualty, Tenant shall
cooperate with Landlord's restoration by removing from the premises as promptly
as reasonably possible, all of Tenant's salvageable inventory and movable
equipment, furniture, and other property. Tenant's liability for rent shall
resume five (5) days after written notice from Landlord that the premises are
substantially ready for Tenant's occupancy.
(F) Nothing contained hereinabove shall relieve Tenant from
liability that may exist as a result of damage from fire or other casualty.
Notwithstanding the foregoing, each party shall look first to any insurance in
its favor before making any claim against the other party for recovery for loss
or damage resulting from fire or other casualty, and to the extent that such
insurance is in force and collectible and to the extent permitted by law,
Landlord and Tenant each hereby releases and waives all right of recovery
against the other or any one claiming through or under each of them by way of
subrogation or otherwise. The foregoing release and waiver shall be in force
only if both releasors' insurance policies contain a clause providing that such
a release or waiver shall not invalidate the insurance and also, provided that
such a policy can be obtained without additional premiums. Tenant acknowledges
that Landlord will not carry insurance on Tenant's furniture and/or furnishings
or any fixtures or equipment, improvements, or appurtenances removable by Tenant
and agrees that Landlord will not be obligated to repair any damage thereto or
replace the same.
(G) Tenant hereby waives the provisions of Section 227 of the
Real Property Law and agrees that the provisions of this article shall govern
and control in lieu thereof.
(H) Notwithstanding anything herein to the contrary, if the
demised premises are totally or substantially damaged, then Landlord (if it has
not theretofore cancelled this Lease pursuant to the provisions of this Article)
shall within ninety (90) days after such fire or casualty obtain and deliver to
Tenant an estimate from a reliable contractor as to whether or not the demised
premises can be repaired and restored under a normal working schedule within
twelve (12) months from the date
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of such fire or casualty. If such estimate states that the demised premises
cannot be so restored, Tenant may, within thirty (30) days after receipt of the
estimate, upon thirty (30) days written notice to Landlord, elect to terminate
this Lease as of the date set forth in such notice. If within twelve (12) months
(such period to be extended (i) to the extent of delays caused by Tenant or (ii)
for a maximum of two (2) months due to force majeure) after the fire or
casualty, the demised premises have not been substantially restored by Landlord,
Tenant may, within thirty (30) days after the end of such period, upon thirty
(30) days written notice to Landlord, cancel and terminate this Lease as of the
date set forth in such notice. If Tenant exercises its right to terminate this
Lease pursuant to this paragraph, this Lease shall terminate as of the date set
forth in Tenant's notice as if such date were the stated Expiration Date of this
Lease and Landlord shall have no further duty to repair and/or restore the
demised premises. In addition, in the event such a casualty (i.e., total or
substantial damage to the Premises) shall occur during the final twelve (12)
months of the Term, and if Landlord's engineer estimates that it shall take more
than ninety (90) days after such casualty to perform Landlord's restoration
obligations under this Article 13, Tenant may, within thirty (30) days of such
estimate being delivered to both parties hereto (time being of the essence),
give written notice to Landlord of its intent to terminate this Lease, and if
such restoration work shall not be substantially completed within ninety (90)
days of the giving of such notice, this Lease shall terminate as of such
thirtieth (30th) day following the casualty as if it were the Expiration Date.
Also, in the event such a casualty shall occur during the final twelve (12)
months of the Term, and if Landlord's engineer estimates that it shall take more
than ninety (90) days after such casualty to perform Landlord's restoration
obligations under this Article 13, Landlord may, within thirty (30) days of such
estimate being delivered to both parties hereto (time being of the essence),
give written notice to Tenant of its intent to terminate this Lease, and in such
event, this Lease shall terminate as of such thirtieth (30th) day following the
casualty as if it were the Expiration Date.
EMINENT DOMAIN:
14. If the whole or any part of the demised premises shall be
acquired or condemned by Eminent Domain for any public or quasi public use or
purpose, then and in that event, the term of this lease shall cease and
terminate from the date of title vesting in such proceeding and Tenant shall
have no claim for the value of any unexpired term of this Lease.
ASSIGNMENT, MORTGAGE, ETC.:
15. (A) Except as otherwise provided in this Article, Tenant, for
itself, its heirs, distributees, executors, administrators, legal
representatives, successors and assigns, expressly covenants that it shall not
assign, mortgage or encumber this agreement, nor underlet, or suffer or permit
the demised premises or any part thereof to be used by others, without the prior
written consent of Landlord in each instance. If this Lease be assigned, or if
the demised premises or any part thereof be underlet or occupied by anybody
other than Tenant, Landlord may, after default by Tenant, collect rent from the
assignee, under-tenant or occupant, and apply the net amount collected to the
rent herein reserved, but no such assignment, underletting, occupancy or
collection shall be deemed a waiver of this covenant, or the acceptance of the
assignee, under-tenant or occupant as tenant, or a release of Tenant from the
further performance by Tenant of covenants on the part of Tenant herein
contained. The consent by Landlord to an assignment or
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underletting shall not in any wise be construed to relieve Tenant from obtaining
the express consent in writing of Landlord to any further assignment or
underletting.
(B) If Tenant shall, at any time or times during the term of
this Lease, desire to assign this Lease or sublet the demised premises in whole
or in part, Tenant shall submit a written request therefor to Landlord, which
request shall be accompanied by: (i) the material terms and conditions of the
proposed assignment or subletting (but shall not be required to identify any
proposed assignee or subtenant), (ii) a description of the proposed sublet
space, and (iii) any other information as Landlord shall reasonably request
(such information shall be referred to herein as the "Offer"). Such Offer shall
be deemed an offer from Tenant to Landlord whereby Landlord (or, at Landlord's
election, its designee) may terminate this Lease (but in the event of a proposed
sublease with respect only to the space proposed to be sublet, in which event
Landlord and Tenant shall enter into an agreement to account for the change in
the financial obligations hereunder and other appropriate modifications), and
Tenant shall vacate and surrender the demised premises (or the proposed space to
be sublet, as the case may be) in accordance with the terms hereof as of the
effective date of the proposed assignment or sublease (the "Termination Date")
and the term of this Lease shall end (as to the entire Premises or with respect
to the proposed sublet space, as the case may be) on the Termination Date as if
such date were the Expiration Date. The aforesaid option may be exercised by
Landlord by notice to Tenant at any time within thirty (30) days after such
notice has been given by Tenant to Landlord, and during such thirty (30) day
period, Tenant shall not assign this Lease or sublet the Premises to any person.
(C) In the event that Tenant complies with the provisions of
paragraph (B) of this Article 15 and Landlord does not exercise the option
provided to it hereunder within the time periods provided therefor, and provided
that Tenant is not in default of any of Tenant's obligations under this Lease,
Landlord's consent (which must be in writing and in form reasonably satisfactory
to Landlord) to the proposed assignment of this Lease or subletting of all or a
part of the demised premises shall not be unreasonably withheld, provided the
following conditions have been satisfied within one hundred eighty (180) days
(the "180 Day Period") from the earlier of (i) the expiration of such thirty
(30) day period described in Section (B) or the date Landlord delivers notice to
Tenant that Landlord elects not to exercise its option to lease the space:
(i) Tenant delivers to Landlord a conformed or
photostatic copy of the executed proposed assignment or sublease,
the effective or commencement date of which shall be not less than
forty-five (45) nor more than ninety (90) days after the date of
such delivery;
(ii) Tenant delivers to Landlord a statement setting
forth, in reasonable detail, the identity of the proposed assignee
or subtenant, the nature of its business and its proposed use of the
demised premises;
(iii) Tenant delivers to Landlord current financial
information with respect to the proposed assignee or subtenant,
including its most recent financial report;
(iv) the proposed assignee or subtenant is a reputable
person of good character and with sufficient financial worth
considering the responsibility
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<PAGE> 23
involved, and Landlord has been furnished with reasonable proof
thereof;
(v) neither (a) the proposed assignee or sublessee nor
(b) any person that, directly or indirectly controls, is controlled
by, or is under common control with, the proposed assignee or
sublessee, is then an occupant or tenant of any part of the Building
nor negotiating to lease space in the Building unless Landlord shall
not then have comparable space in the Building available for
leasing;
(vi) the proposed assignment or sublease shall be in
form reasonably satisfactory to Landlord and shall comply with the
applicable provisions of this Article 15;
(vii) the amount of the aggregate rent to be paid by the
proposed subtenant is the result of an arm's length negotiation and
the rental and other terms and conditions of the sublease are the
same as those contained in the proposed sublease furnished to
Landlord pursuant to paragraph (B) hereof;
(viii) Tenant shall reimburse Landlord on demand for all
reasonable costs incurred by Landlord in connection with said
assignment or sublease, including the costs of making investigations
as to the acceptability of the proposed assignee or subtenant and
legal costs incurred in connection with the granting of any
requested consent;
(ix) Tenant shall not have advertised or publicized in
any way the availability of the demised premises without prior
notice to, and approval by, Landlord, which approval Landlord agrees
not to unreasonably withhold, nor shall any advertisement state the
rental rate or the name (as distinguished from the address) of the
Building;
(x) any such subletting will result in there being no
more than two (2) subtenants at the Premises;
(xi) no sublease shall be valid, and no subtenant shall
take possession of the sublet premises until an executed counterpart
of such sublease has been delivered to Landlord; and
(xii) each sublease shall expressly provide that it is
subject and subordinate to this Lease and to the matters to which
this Lease is or shall be subordinate, and that, in the event of any
termination, re-entry, or dispossess by Landlord under this Lease,
Landlord may, at its option, take over all of the right, title and
interest of Tenant as sublandlord under such sublease, and such
subtenant shall, at Landlord's option, attorn to Landlord pursuant
to the then executory provisions of such sublease, except that
Landlord shall not (x) be liable for any previous act or omission of
Tenant under such sublease, (y) be subject to any offset, not
expressly provided in such sublease, that theretofore accrued to
such subtenant against Tenant or (z) be bound by any previous
modification of such sublease or by any prepayment of more than one
month's minimum rent or any additional rent then due.
In the event that (a) any of the material terms of the proposed
assignment or sublease document delivered to Landlord in
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<PAGE> 24
accordance with paragraph (C)(i) of this Article 15 differ from the Offer
previously delivered to Landlord, or (b) Tenant fails to submit the information
required to be submitted to Landlord pursuant to this Section (C) within the 180
Day Period, or (c) the proposed assignee or subtenant shall then be a tenant of
the Building, Tenant acknowledges and agrees such delivery of the assignment or
sublease document shall be deemed a new Offer entitling Landlord to all of its
rights pursuant to Section B of this Article 15.
(D) Any assignment or transfer shall be made only if, and
shall not be effective until, the assignee shall execute, acknowledge and
deliver to Landlord an agreement, in form and substance reasonably satisfactory
to Landlord, whereby the assignee shall assume all of the obligations of this
Lease on the part of Tenant to be performed or observed.
(E) If Landlord shall give its consent to any assignment of
this Lease or to any sublease of the demised premises, Tenant shall, in
consideration therefor, pay to Landlord, as additional rent:
(i) in the case of an assignment, an amount equal to
one-half of (i) all sums and other consideration paid to Tenant by
the assignee for, or by reason of, such assignment, including all
sums paid for the sale of Tenant's fixtures, leasehold improvements,
equipment, furniture, furnishings, or other property less (ii) the
reasonable expenses proven to have been incurred by Tenant in
effecting the assignment; and
(ii) in the case of a sublease, one-half of (i) any
rents, additional charges, or other consideration payable under the
sublease by the subtenant to Tenant that are in excess of the
Minimum Rent and additional rent accruing during the term of the
sublease in respect of the subleased space (at the rate per square
foot payable by Tenant hereunder) pursuant to the terms hereof,
including all sums paid for the sale or rental of Tenant's fixtures,
leasehold improvements, equipment, furniture or other personal
property, less (ii) the reasonable expenses proven to have been
incurred by Tenant in effecting the sublease, appropriately pro
rated over the term of the sublease. The sums payable under this
paragraph (E) shall be paid to Landlord as and when payable by the
subtenant to Tenant.
(F) A transfer of fifty (50%) percent or greater interest
(whether stock, partnership or otherwise) of Tenant, or any permitted subtenant
or assignee of this Lease shall be deemed to be an assignment of this Lease or
such sublease, however accomplished, and whether in a single transaction or in
any series of transactions, related or unrelated, to which the provisions this
Article 15 shall apply; provided, however, that any transfers of shares of
Tenant (if Tenant is a corporation) pursuant to a public offering or a public
sale of shares effected through the "over-the-counter" market or through any
recognized public stock exchange or a through tender offer (provided in the case
of a tender offer that (i) Tenant's shares shall, at the time such tender offer
is made, be traded through the "over-the-counter" market or through any
recognized public stock exchange and (ii) such tender offer is not being made in
order to circumvent the requirements of this Article 15) shall not be deemed to
be an assignment under this Lease.
(G) Notwithstanding anything herein to the contrary and
provided the same is not being done in order to circumvent the requirements of
this Article 15, Tenant may, upon
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not less than thirty (30) days' prior written notice but without Landlord's
consent:
(i) Assign this lease to a corporation or other
business entity then having a net worth at least equal to the greater of (x)
that of Tenant as of the date of this Lease and (y) that of Tenant twelve (12)
months prior to such merger or consolidation (herein called a "successor
corporation") into or with which, Tenant shall be merged or consolidated or to
which all or substantially all of Tenant's assets may be transferred, provided
that such successor corporation shall have effectively assumed all of Tenant's
obligations and liabilities, including those under this Lease, by operation of
law, or appropriate instrument of merger, consolidation or transfer;
(ii) Sublet the Premises to a corporation or
other business entity (herein called a "related corporation") which controls, is
controlled by, or is under common control with, Tenant, but only for so long as
said sublessee shall control, be controlled by, or be under the common control
with, the Tenant. Tenant hereby covenants that such sublessee shall at all times
remain a corporation or entity which shall control, be controlled by, or be
under common control with Tenant (or that, upon or before its ceasing to have
such status, the sublease will have been terminated and the subtenant shall have
vacated the Premises) and a breach of such covenant shall constitute a material
default under this Lease for which Tenant shall not be given any opportunity to
cure;
(iii) Permit any related corporation of Tenant to
use the Premises, or any part thereof, but only for so long as said occupant
continues to be a related corporation. Tenant hereby covenants that such use may
only continue for such period as such related corporation shall control, be
controlled by or be under common control with Tenant (or that, upon or before
its ceasing to have such status, the occupancy will have been terminated and the
occupant shall have vacated the Premises) and a breach of such covenant shall
constitute a material default under this Lease for which Tenant shall not be
given an opportunity to cure; and
(iv) Assign this Lease to a related corporation
of Tenant. Tenant hereby covenants that subsequent to such assignment the
assignee shall remain a corporation or entity which shall control, be controlled
by or under common control with Tenant (or that, upon or before its ceasing to
have such status, the assignment will have been terminated and the assignee
shall have vacated the Premises) and a breach of such covenant shall constitute
a material default under this Lease for which Tenant and such assignee shall not
be given an opportunity to cure.
(H) Concurrently with assigning this Lease to a successor
corporation, the making of a sublease to a related corporation, or permitting a
related corporation to occupy all or part of the Premises, or assigning this
Lease to a related corporation (all as set forth in Section (G) above, as the
case may be), Tenant shall be required to submit proof that the successor
corporation comes within the definition thereof, or that the sublessee, occupant
or assignee is a related corporation, all in form satisfactory to Landlord. As
used herein in defining related corporation, "control" must include over fifty
(50%) percent of the stock or other voting interest of the controlled
corporation or other business entity. Similar proof that such sublessee,
occupant or assignee continues to be a related corporation shall be furnished by
Tenant to Landlord within fifteen (15) days after written request therefor.
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ELECTRIC CURRENT:
16. (A) Electricity shall be provided to Tenant in the Premises on a
so-called "rent inclusion" basis. Tenant agrees that the portion of the Minimum
Rent set forth in Article 3 above presently attributed to the furnishing of
electric current is the annual sum of $30,063.00 and is subject to increase as
hereinafter provided. Landlord will furnish electricity to Tenant through
presently installed electrical facilities for Tenant's reasonable use of such
lighting, electrical appliances, air conditioning systems and equipment as
presently exist or as Tenant may be permitted to install in the Premises,
subject to Landlord's consent. Tenant agrees that an electrical engineer or
utility consultant, selected by Landlord, may, from time to time during the
Term, make a survey of the electric lighting and power load by metering or
otherwise to determine Tenant's average monthly electrical energy consumption in
the Premises ("Tenant's Electric Consumption") based upon (i) the connected load
rating of each item consuming electric energy, (ii) Tenant's usage which shall
be determined by multiplying the connected load rating of each item by the hours
of usage as determined by the consultant, and (iii) the electric rate charged
for such load in the service classification in effect on the Commencement Date
pursuant to which Landlord then purchased electric current for the entire
Property from the public utility corporation (or any successor thereto),
inclusive of all surcharges or taxes thereon including any sales tax as a result
of the resale of such energy to Tenant. The findings of such engineer or
consultant as to the proper Minimum Rent increase based on Tenant's Electric
Consumption shall be conclusive and binding upon the parties and the amount
thereof shall be added to the Minimum Rent payable monthly on the first day of
each and every month in advance for each month from the date the change in
electrical energy consumption occurred (as determined by Landlord's electrical
engineer or utility consultant). If the electric rates on which the initial
determination of said consultant were based shall be increased, then the Minimum
Rent attributable to electricity shall be increased in the same percentage,
retroactive if necessary to the date of such increase in such electric rates. In
no event shall the Minimum Rent or any portion of the Minimum Rent attributable
to the furnishing of electric current ever be reduced by operation of this
Article 16.
(B) In the event Tenant shall dispute any findings under this
Article of the engineer or consultant designated by Landlord, Tenant may, within
thirty (30) days of receiving notice of such findings, designate by notice to
Landlord an independent engineer or utility consultant to make, at Tenant's sole
cost and expense, another determination of the average monthly electrical
consumption or the value to Tenant of the potential additional energy to be made
available to Tenant, as the case may be. If the electrical engineer or utility
consultant selected by Tenant shall determine that such consumption or value, as
the case may be, of such electrical energy is less than as determined by
Landlord's engineer or consultant and the two are unable to adjust such
difference within twenty (20) days after the determination made by Tenant's
engineer or consultant is delivered to Landlord, the dispute shall be resolved
by arbitration in accordance with the rules of the American Arbitration
Association. Pending a final determination pursuant to such arbitration however,
Tenant shall pay to Landlord for such electrical energy based on the
determination of Landlord's engineer or consultants; and if it is determined
that Tenant has overpaid, Landlord shall reimburse Tenant for any overpayment at
the conclusion of such arbitration. In any such arbitration, the third
arbitrator to be appointed shall be an electrical engineer having at least five
years experience in similar matters in New York City. If Tenant shall not
dispute the findings as provided in this Section, the determination by
Landlord's engineer or
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consultants shall be deemed final and conclusive. In no event shall the Minimum
Rent or any portion thereof attributable to the furnishing of electrical energy
ever be reduced by operation of this Section 16B.
(C) Landlord shall not be liable in any way to Tenant for any
failure or defect in the supply or character of electric energy, or other
utilities furnished to the demised premises, except for any actual physical
damage to Tenant's property by reason of any such failure or defect which is
caused by Landlord's negligence and then only after actual notice, as provided
in Article 39. Tenant's use of electric energy in the demised premises shall not
at any time exceed that portion of the capacity allocable to Tenant of (i) the
existing feeders to the Building or the electricity available to Tenant through
then existing risers or wiring installations to the Premises or (ii) any of the
electrical conductors, machinery and equipment in or otherwise serving the
demised premises (in any event, giving due consideration to the needs of
existing and potential tenants using the same risers, wiring installations or
other equipment, as well as to Landlord's electrical needs in connection with
the operation of the Building and the provision of emergency services). In order
to ensure that such capacity is not exceeded, Tenant agrees not to connect any
additional electrical equipment, fixtures, machinery or appliances of any type
to the Building electric distribution system, other than lamps, typewriters,
personal computers, copy machines, fax machines, teleconferencing equipment and
other customary office machines which consume comparable amounts of electricity,
without Landlord's prior written consent. Any additional risers, feeders, or
other equipment proper or necessary to supply Tenant's electrical requirements,
upon written request of Tenant, will be installed by Landlord at the sole cost
and expense of Tenant, if, in Landlord's sole judgment, the same will not
interfere with Landlord's present or anticipated future electrical needs with
respect to the Building and/or existing or future tenants of the Building or
cause permanent damage or injury to the Building or entail excessive or
unreasonable alterations or interfere with or disturb other tenants.
(D) Landlord reserves the right to discontinue furnishing electric
energy to Tenant at any time upon not less than sixty (60) days' written notice
to Tenant, and from and after the effective date of such termination, Landlord
shall no longer be obligated to furnish Tenant with electric energy. If Landlord
exercises such right of termination, this Lease shall remain unaffected thereby
and shall continue in full force and effect, and thereafter Tenant shall
diligently arrange to obtain electric service directly from the public utility
company servicing the Building, and may utilize the then existing electric
feeders, risers and wiring serving the demised premises to the extent that they
are available and safely capable of being used for such purpose and only to the
extent of Tenant's then authorized connected load. Landlord shall not be
obligated to pay any part of the cost required for Tenant's direct electric
service. From and after the date of such discontinuance, the Minimum Rent
payable under this Lease shall be reduced to the amount which would then have
been payable as Minimum Rent as of such date, but for the adjustments for
electrical energy under this Article. Notwithstanding the foregoing, Landlord
shall continue to provide such service for so long as legally allowed provided
that Tenant is diligently trying to obtain such service directly from the
utility company servicing the Building.
(E) Tenant acknowledges that it shall, at its sole cost and expense,
furnish, install and replace all light bulbs, light fixtures, tubes, lamps,
starters and ballasts required in the Premises.
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ACCESS TO PREMISES:
17. Landlord or Landlord's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time, and, at
other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Landlord may deem necessary and reasonably
desirable to the demised premises or to any other portion of the building or
which Landlord may elect to perform following Tenant's failure to make repairs
or perform any work which Tenant is obligated to perform under this Lease, or
for the purpose of complying with laws, regulations and other directions of
governmental authorities. Tenant shall permit Landlord to use and maintain and
replace pipes and conduits in and through the demised premises and to erect new
pipes and conduits therein. Landlord may, during the progress of any work in the
demised premises, take all necessary materials and equipment into said premises
without the same constituting an eviction nor shall the Tenant be entitled to
any abatement of rent while such work is in progress nor to any damages by
reason of loss or interruption of business or otherwise. Landlord shall use
reasonable efforts to cause such work to be conducted in a manner so as not to
unreasonably interfere with Tenant's business (except that Landlord shall have
no obligation to employ overtime labor or to incur any extraordinary costs in
connection therewith). Throughout the term hereof Landlord shall have the right
to enter the demised premises at reasonable hours for the purpose of showing the
same to prospective purchasers or mortgagees of the building, and during the
last year of the term for the purpose of showing the same to prospective tenants
upon reasonable prior notice which may be telephonic. If Tenant is not present
to open and permit an entry into the premises, Landlord or Landlord's agents may
enter the same whenever such entry may be necessary or permissible by master key
or forcibly in the event of an emergency and provided reasonable care is
exercised to safeguard Tenant's property and such entry shall not render
Landlord or its agents liable therefor, nor in any event shall the obligations
of Tenant hereunder be affected. If during the last ninety (90) days of the term
Tenant shall have removed all or substantially all of Tenant's property
therefrom, Landlord may immediately enter, alter, renovate or redecorate the
demised premises without limitation or abatement of rent, or incurring liability
to Tenant for any compensation and such act shall have no effect on this Lease
or Tenant's obligations hereunder. Landlord shall have the right at any time,
without the same constituting an eviction and without incurring liability to
Tenant therefor to change the arrangement and/or location of public entrances,
passageways, doors, doorways, corridors, elevators, stairs, toilets, or other
public parts of the building and to change the name, number or designation by
which the building may be known.
VAULT, VAULT SPACE, AREA:
18. No vaults, vault space or area, whether or not enclosed or covered,
not within the property line of the building is leased hereunder, anything
contained in or indicated on any sketch, blue print or plan or anything
contained elsewhere in this Lease to the contrary notwithstanding. Landlord
makes no representation as to the location of the property line of the building.
All vaults and vault space and all such areas not within the property line of
the building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Landlord shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of
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rent, nor shall such revocation, diminution or requisition be deemed
constructive or actual eviction. Any tax, fee or charge of municipal authorities
for such vault or area shall be paid by Tenant.
BANKRUPTCY:
19. (A) Anything elsewhere in this Lease to the contrary notwithstanding,
this Lease may be cancelled by Landlord by the sending of a written notice to
Tenant within a reasonable time after the happening of any one or more of the
following events: (i) the commencement of a case in bankruptcy or under the laws
of any state naming Tenant as the debtor; or (ii) the making by Tenant of an
assignment or any other arrangement for the benefit of creditors under any state
statute. Neither Tenant nor any person claiming through or under Tenant, or by
reason of any statute or order of court, shall thereafter be entitled to
possession of the premises demised but shall forthwith quit and surrender the
premises. If this Lease shall be assigned in accordance with its terms, the
provisions of this Article 19 shall be applicable only to the party then owning
Tenant's interest in this Lease.
(B) It is stipulated and agreed that in the event of the termination of
this Lease pursuant to Section 19(A) hereof, Owner shall forthwith,
notwithstanding any other provisions of this Lease to the contrary, be entitled
to recover from Tenant as and for liquidated damages an amount equal to the
difference between the rent reserved hereunder for the unexpired portion of the
term demised for the same period. In the computation of such damages the
difference between any installment of rent becoming due hereunder after the date
of termination and the fair and reasonable rental value of the demised premises
for the period for which such installment was payable shall be discounted to the
date of termination at the rate of four percent (4%) per annum. If such premises
or any part thereof be re-let by Owner for unexpired term of this Lease, or any
part thereof, before presentation of proof of such liquidated damages to any
court, commission or tribunal, the amount of rent reserved upon such re-letting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice the right of Owner to prove for and
obtain as liquidated damages by reason of such termination, an amount equal to
the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amount of the
difference referred to above.
DEFAULT:
20. (A) If Tenant defaults in fulfilling any of the covenants of this
Lease other than the covenants for the payment of Minimum Rent or additional
rent; or if the demised premises become vacant or deserted; or if the demised
premises are damaged by reason of negligence of Tenant, its agents, employees or
invitees; or if any execution or attachment shall be issued against Tenant or
any of Tenant's property whereupon the demised premises shall be taken or
occupied by someone other than Tenant; or if Tenant shall make default with
respect to any other lease between Landlord and Tenant; or if Tenant shall fail
to move into or take possession of the premises within sixty (60) days after the
commencement of the term of this Lease, of which fact Landlord shall be the sole
judge; then, in any one or more of such events, upon Landlord serving a written
ten (10) days' notice upon Tenant specifying the nature of said default and upon
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the expiration of said ten (10) days, if Tenant shall have failed to comply with
or remedy such default, or if the said default or omission complained of shall
be of a nature that the same cannot be completely cured or remedied within said
ten (10) day period, and if Tenant shall not have diligently commenced curing
such default within such ten (10) day period, and shall not thereafter with
reasonable diligence and in good faith proceed to remedy or cure such default,
then Landlord may serve a written three (3) days' notice of cancellation of this
Lease upon Tenant and upon the expiration of said three (3) days, this Lease and
the term thereunder shall end and expire as fully and completely as if the
expiration of such three (3) day period were the day herein definitely fixed for
the end and expiration of this Lease and the term thereof and Tenant shall then
quit and surrender the demised premises to Landlord but Tenant shall remain
liable as hereinafter provided.
(B) If the notice provided for in Section 20(A) hereof shall have
been given, and the term shall expire as aforesaid; or if Tenant shall make
default in the payment of the Minimum Rent reserved herein or any item of
additional rent herein mentioned or any part of either or in making any other
payment herein required; then and in any of such events Landlord may without
notice, re-enter the demised premises either by force or otherwise, and
dispossess Tenant by summary proceedings or otherwise, and the legal
representative of Tenant or other occupant of demised premises and remove their
effects and hold the premises as if this Lease had not been made, and Tenant
hereby waives the service of notice of intention to re-enter or to institute
legal proceedings to that end. If Tenant shall make default hereunder prior to
the date fixed as the commencement of any renewal or extension of this Lease,
Landlord may cancel and terminate such renewal or extension agreement by written
notice.
REMEDIES OF LANDLORD AND WAIVER OF REDEMPTION:
21. (A) In case of any such default, re-entry, expiration and/or
dispossess by summary proceedings or otherwise, (i) the rent shall become due
thereupon and be paid up to the time of such re-entry, dispossess and/or
expiration, together with such expenses as Landlord may incur for legal
expenses, attorneys' fees, brokerage, and/or putting the demised premises in
good order, or for preparing the same for re-rental; (ii) Landlord may re-let
the premises or any part or parts thereof, either in the name of Landlord or
otherwise, for a term or terms, which may at Landlord's option be less than or
exceed the period which would otherwise have constituted the balance of the term
of this Lease and may grant concessions or free rent or charge a higher rental
than that in this Lease, and/or (iii) Tenant or the legal representatives of
Tenant shall also pay Landlord as liquidated damages for the failure of Tenant
to observe and perform said Tenant's covenants herein contained, any deficiency
between the rent hereby reserved and/or covenanted to be paid and the net
amount, if any, of the rents collected on account of the lease or leases of the
demised premises for each month of the period which would otherwise have
constituted the balance of the term of this Lease. The failure of Landlord to
re-let the premises or any part or parts thereof shall not release or affect
Tenant's liability for damages. In computing such liquidated damages there shall
be added to the said deficiency such expenses as Landlord may incur in
connection with re-letting, such as legal expenses, attorneys' fees, brokerage,
advertising and for keeping the demised premises in good order or for preparing
the same for re-letting. Any such liquidated damages shall be paid in monthly
installments by Tenant on the rent day specified in this Lease and any suit
brought to collect the amount of the deficiency for any month shall not
prejudice in any way the rights of Landlord to collect the deficiency for any
subsequent month by a similar
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proceeding. Landlord, in putting the demised premises in good order or preparing
the same for re-rental may, at Landlord's option, make such alterations,
repairs, replacements, and/or decorations in the demised premises as Landlord,
in Landlord's sole judgment, considers advisable and necessary for the purpose
of re-letting the demised premises, and the making of such alterations, repairs,
replacements, and/or decorations shall not operate or be construed to release
Tenant from liability hereunder as aforesaid. Landlord shall in no event be
liable in any way whatsoever for failure to re-let the demised premises, or in
the event that the demised premises are re-let, for failure to collect the rent
thereof under such re-letting, and in no event shall Tenant be entitled to
receive any excess, if any, or such net rent collected over the sums payable by
Tenant of any of the covenants or provisions hereof, Landlord shall have the
right of injunction and the right to invoke any remedy allowed at law or in
equity as if re-entry, summary proceedings and other remedies were not herein
provided for. Mention in this Lease of any particular remedy, shall not preclude
Landlord from any other remedy in law or in equity. Tenant hereby expressly
waives any and all rights of redemption granted by or under any present or
future laws in the event of Tenant being evicted or dispossessed for any cause,
or in the event of Landlord obtaining possession of demised premises, by reason
of the violation by Tenant of any of the covenants and conditions of this Lease,
or otherwise.
(B) In the event this Lease is terminated pursuant to the provisions
of Article 20 herein, then in addition to the remedies Landlord may have
pursuant to Section 21(A) herein, Landlord may elect, at its option, to recover
from Tenant, all damages it may incur by reason of such breach, including the
cost of recovering the Premises and reasonable attorneys' fees and expenses and
shall be entitled to recover as and for liquidated damages, and not as a
penalty, an amount equal to the difference between (1) the Minimum Rent,
Additional Rent and charges equivalent to rent payable hereunder for the
remainder of the stated term and (2) the reasonable rental value of the Premises
for the remainder of the stated term, all of which shall be immediately due and
payable by Tenant. In determining the rental value of the Premises for such
period, the rental realized by any reletting, if such reletting be accomplished
by Landlord within a reasonable period of time after the termination of this
Lease, shall be deemed prima facie to be the rental value. Landlord shall not be
liable in any way whatsoever for its failure or refusal to relet the Premises or
any part thereof, or if the Premises are so relet, for its failure to collect
the rent under such reletting, and no refusal or failure to relet or failure to
collect rent shall affect Tenant's liability for damages or otherwise hereunder.
Nothing herein contained shall limit or prejudice the right of Landlord to prove
and obtain as liquidated damages by reason of such termination an amount equal
to the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amounts referred to
herein.
(C) In the event Tenant remains in possession of the Premises after
the termination of this Lease without the execution of a new lease, Tenant, at
the option of Landlord, shall be deemed to be occupying the Premises as a tenant
from month-to-month, at a monthly rental equal to one and three-quarters times
the Minimum Rent and additional rent payable during the last month of the Term,
subject to all of the other terms of this Lease insofar as the same are
applicable to a month-to-month tenancy.
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FEES AND EXPENSES:
22. If Tenant shall default in the observance or performance of any term
or covenant on Tenant's part to be observed or performed under or by virtue of
any of the terms or provisions in any article of this Lease, then, unless
otherwise provided elsewhere in this Lease, Landlord may immediately or at any
time thereafter and without notice perform the obligation of Tenant thereunder,
and if Landlord, in connection therewith or in connection with any default by
tenant in the covenant to pay rent hereunder, makes any expenditures or incurs
any obligations for the payment of money, including but not limited to
attorneys' fees, in instituting, prosecuting or defending any action or
proceeding, such sums so paid or obligations incurred with interest and costs
shall be deemed to be additional rent hereunder and shall be paid by Tenant to
Landlord within ten (10) days of rendition of any bill or statement to Tenant
therefore, and if Tenant's Lease term shall have expired at the time of making
of such expenditures or incurring of such obligations, such sums shall be
recoverable by Landlord as damages.
NO REPRESENTATIONS BY LANDLORD:
23. Neither Landlord nor Landlord's agents have made any representations
or promises with respect to the physical condition of the building, the land
upon which it is erected or the demised premises, the rents, leases, expenses of
operation or any other matter or thing affecting or related to the premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
the provisions of this Lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition, and, except as
otherwise represented or covenanted by Landlord in this Lease or otherwise set
forth in this Lease, agrees to take the same "as is" and acknowledges that the
taking of possession of the demised premises by Tenant shall be conclusive
evidence that the said premises and the building of which the same form a part
were in good and satisfactory condition at the time such possession was so
taken, except as to latent defects. All understandings and agreements heretofore
made between the parties hereto are merged in this Lease, which alone fully and
completely expresses the agreement between Landlord and Tenant and any executory
agreement hereafter made shall be ineffective to change, modify, discharge or
effect an abandonment of it in whole or in part, unless such executory agreement
is in writing and signed by the party against whom enforcement of the change,
modification, discharge or abandonment is sought.
END OF TERM:
24. Upon the expiration or other termination of the term of this Lease,
Tenant shall quit and surrender to Landlord the demised premises, broom clean,
in good order and condition, ordinary wear excepted, and (except as stated in
Article 7) Tenant shall remove all its property. Tenant's obligation to observe
or perform this covenant shall survive the expiration or other termination of
this Lease. If the last day of the term of this Lease or any renewal thereof,
falls on Sunday, this Lease shall expire at noon on the preceding Saturday, or
if such last day be a legal holiday in which case it shall expire at midnight on
the preceding business day.
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QUIET ENJOYMENT:
25. Landlord covenants and agrees with Tenant that upon Tenant paying the
Minimum Rent and additional rent and observing and performing all the terms,
covenants and conditions, on Tenant's part to be observed and performed, Tenant
may peaceably and quietly enjoy the premises hereby demised, subject,
nevertheless, to the terms and conditions of this Lease including, but not
limited to, Article 32 hereof and to the ground leases, underlying leases and
mortgages hereinbefore mentioned.
FAILURE TO GIVE POSSESSION:
26. If Landlord is unable to give possession of the demised premises on
the date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants, or for any
other reason, Landlord shall not be subject to any liability for failure to give
possession on said date and the validity of this Lease shall not be impaired
under such circumstances, nor shall the same be construed in any wise to extend
the term of this Lease or of any rent abatement or free rent period provided
herein, if any, but the rent payable hereunder shall be abated (provided Tenant
is not responsible for the inability to obtain possession) until after Landlord
shall have given Tenant written notice that the premises are substantially ready
for Tenant's occupancy. If permission is given to Tenant to enter into the
possession of the demised premises prior to the date specified as the
commencement of the term of this Lease, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions and
provisions of this Lease, except as to the covenant to pay Minimum Rent and
Additional Rent pursuant to Articles 3 and 5, respectively. Notwithstanding the
foregoing, if Landlord is unable to give possession of the demised premises to
Tenant within sixty (60) days after the Commencement Date, Tenant may by notice
to Landlord, which must be given within seventy-five (75) days after the
Commencement Date (time being of the essence), terminate this Lease. If,
however, Landlord delivers possession of the Premises to Tenant on or before
such seventy-fifth (75th) day, Tenant's right to terminate this Lease shall be
of no further force or effect, and any termination notice given by Tenant
pursuant to this paragraph shall be null and void. If Tenant gives such notice
in a timely manner, this Lease shall be terminated as of the date of receipt of
such notice by Landlord and neither party shall have any further liability to
the other hereunder or otherwise with respect to this Lease, except pursuant to
those provisions which expressly survive the expiration or sooner termination of
this Lease. The provisions of this article are intended to constitute "an
express provision to the contrary" within the meaning of Section 223-a of the
New York Real Property Law.
NO WAIVER:
27. The failure of Landlord to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this Lease or of any
of the Rules or Regulations set forth in or hereafter adopted by Landlord, shall
not prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Landlord of rent with knowledge of the breach of any covenant of this Lease
shall not be deemed a waiver of such breach and no provision of this Lease shall
be deemed to have been waived by Landlord unless such waiver be in writing
signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser
amount than the monthly rent herein stipulated shall
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be deemed to be other than an account of the earliest stipulated rent, nor shall
any endorsement or statement of any check or any letter accompanying any check
or payment as rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent or pursue any other remedy in this Lease provided. No act
or thing done by Landlord or Landlord's agents during the term hereby demised
shall be deemed an acceptance of a surrender of said premises and no agreement
to accept such surrender shall be valid unless in writing signed by Landlord. No
employee of Landlord or Landlord's agent shall have any power to accept the keys
of said premises prior to the termination of this Lease and the delivery of keys
to any such agent or employee shall not operate as a termination of this Lease
or a surrender of the premises.
WAIVER OF TRIAL BY JURY:
28. It is mutually agreed by and between Landlord and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding (except for personal injury or property damage) on any
matters whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use of or occupancy of the
premises, and any emergency statutory or any other statutory remedy. It is
further mutually agreed that in the event Landlord commences any summary
proceeding for possession of the premises, Tenant will not interpose any
counterclaim of whatever nature or description in any such proceeding.
INABILITY TO PERFORM:
29. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Landlord
is unable to make any of its obligations under this Lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed from so doing by reason of
strike or labor troubles or any cause beyond Landlord's reasonable control
including, but not limited to, government preemption in connection with a
national emergency or by reason of any rule, order or regulation of any
department or subdivision thereof of any government agency or by reason of the
conditions of supply and demand which have been or are affected by war or other
emergency. If it is within Landlord's reasonable control to eliminate the cause
of its inability to perform any of its obligations under this Lease, then
Landlord shall use commercially reasonable efforts to eliminate such cause,
without being obligated to incur any extraordinary costs.
CAPTIONS:
30. The captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this Lease nor
the intent of any provision hereof.
ADJACENT EXCAVATION -- SHORING:
31. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such
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excavation, license to enter upon the demised premises for the purpose of doing
such work as said person shall deem necessary to preserve the wall or the
building of which demised premises form a part from injury or damage and to
support the same by proper foundations without any claim for damages or
indemnity against Landlord, or diminution or abatement of rent.
RULES AND REGULATIONS:
32. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations attached hereto as Exhibit B and such other and further reasonable
Rules and Regulations as Landlord or Landlord's agents may from time to time
adopt. Notice of any additional rules or regulations shall be given in such
manner as Landlord may elect. In case tenant disputes the reasonableness of any
additional Rule or Regulation hereafter made or adopted by Landlord or
Landlord's agents, the parties hereto agree to submit the question of the
reasonableness of such Rule or Regulation for decision to the New York office of
the American Arbitration Association, whose determination shall be final and
conclusive upon the parties hereto. The right to dispute the reasonableness of
any additional Rule or Regulation upon Tenant's part shall be deemed waived
unless the same shall be asserted by service of a notice, in writing upon
Landlord within ten (10) days after the giving of notice thereof. Nothing in
this Lease contained shall be construed to impose upon Landlord any duty or
obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease, as against any other tenant and Landlord shall
not be liable to Tenant for violation of the same by any other tenant, its
servants, employees, agents, visitors or licensees. Landlord shall not enforce
the Rules and Regulations against Tenant in a discriminatory manner.
SECURITY:
33. (A) Tenant has deposited with Landlord the sum of $230,483.00 as
security for the faithful performance and observance by Tenant of the terms,
provisions and conditions of this Lease; it is agreed that in the event Tenant
defaults beyond any applicable cure periods in respect of any of the terms,
provision and conditions of this Lease, including, but not limited to, the
payment of Minimum Rent and additional rent, Landlord may use, apply or retain
the whole or any part of the security so deposited to the extent required for
the payment of any Minimum Rent and additional rent or any other sum as to which
Tenant is in default or for any sum which Landlord may expend or may be required
to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this Lease, including but not limited to, any
damages or deficiency in the reletting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Landlord. In the event Landlord shall use, apply or retain the whole or any part
of the security deposited hereunder, Tenant shall immediately deliver to
Landlord an amount equal to the sum used, applied or retained by Landlord in
accordance therewith so that Landlord shall have as the security hereunder an
amount equal to $230,483.00. In the event that Tenant shall fully and faithfully
comply with all of the terms, provisions, covenants and conditions of this
Lease, the security shall be returned to Tenant after the date fixed as the end
of this Lease and after delivery of entire possession of the demised premises to
Landlord. In the event of a sale of the land and building or leasing of the
building, of which the demised premises form a part, Landlord shall have the
right to transfer the security to the vendee or lessee and Landlord shall
thereupon be released by
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Tenant from all liability for the return of such security; and Tenant agrees to
look to the new Landlord solely for the return of said security; and it is
agreed that the provisions hereof shall apply to every transfer or assignment
made of the security to a new Landlord. Tenant further covenants that it will
not assign or encumber or attempt to assign or encumber the monies deposited
herein as security and that neither Landlord nor its successors or assigns shall
be bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance. Tenant represents that its Federal I.D. number is 13-3950002.
(B) Tenant shall have the right, either (i) in lieu of the funds
required to be deposited with Landlord pursuant to Article 33A above or (ii) at
any time thereafter in substitution for such funds, to deposit and maintain with
Landlord as the security deposit referred to in Article 33A, an irrevocable
commercial letter of credit in the aggregate amount of $230,483.00 in form and
substance satisfactory to Landlord, and issued by a member bank of the New York
Clearing House Association, acceptable to Landlord, payable upon the
presentation by Landlord to such bank of a sight-draft, without presentation of
any other documents, statements or authorizations, which letter of credit shall
provide (a) for the continuance of such credit for the period of at least one
(1) year from the date hereof, (b) for the automatic extension of such letter of
credit for additional periods of one (1) year from the initial and each future
expiration date thereof (the last such extension to provide for the continuance
of such letter of credit for at least three (3) months beyond the Expiration
Date) unless such bank gives Landlord notice of its intention not to renew such
letter of credit, not less than seventy-five (75) days prior to the initial or
any future expiration date of such letter of credit and (c) that in the event
such notice is given by such bank, Landlord shall have the right to draw on such
bank at sight for the balance remaining in such letter of credit and hold and
apply the proceeds thereof in accordance with the provisions of Article 33A
above. Each letter of credit to be deposited and maintained with Landlord (or
the proceeds thereof) shall be held by Landlord as security for the faithful
performance and observance by Tenant of the terms, provisions and conditions of
this Lease, and in the event that (x) any default occurs under this Lease, or
(y) Landlord transfers its right, title and interest under this Lease to a third
party and the bank issuing such letter of credit does not consent to the
transfer of such letter of credit to such third party, or (z) notice is given by
the bank issuing such letter of credit that it does not intend to renew the
same, as above provided, then, in any such event, Landlord may draw on such
letter of credit, and the proceeds of such letter of credit shall then be held
and applied as security (and be replenished, if necessary) as provided in
Article 33A above and herein. In the event Landlord shall use, apply or retain
the whole or any part of the security deposited hereunder, Tenant shall
immediately deliver to Landlord an amount equal to the sum used, applied or
retained by Landlord in accordance therewith so that at all times during the
term hereof, Landlord shall have as the security hereunder an amount equal to
$230,483.00. Tenant shall pay Landlord's reasonable attorneys' fees in
connection with the replacement, substitution or amendment of the letter of
credit described herein or the drawing thereon by Landlord.
SUCCESSORS AND ASSIGNS:
34. The covenants, conditions and agreements contained in this Lease shall
bind and inure to the benefit of Landlord and Tenant and their respective heirs,
distributees, executors, administrators, successors, and except as otherwise
provided in this Lease, their assigns.
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<PAGE> 37
INSURANCE:
35. Tenant covenants and agrees to obtain on or before the Commencement
Date and to keep in force during the Term (a) "all risk" property insurance
covering all present and future property of Tenant and all improvements and
betterments located in the Premises and provided by or on behalf of Tenant, to a
limit of not less than the full replacement value thereof, such insurance to
include a replacement cost endorsement; and (b) a comprehensive general public
liability insurance policy protecting against any liability whatsoever,
occasioned by any occurrence on or about the demised premises or any
appurtenances thereto. As of the date of this Lease, Landlord requires limits of
liability thereunder of not less than the amount of Three Million ($3,000,000)
dollars per occurrence for bodily or personal injury (including death) and in
the amount of Five Hundred Thousand ($500,000) Dollars in respect of property
damage. The insurance policies required hereunder shall be written by good and
solvent insurance companies satisfactory to Landlord, and shall be in such
limits as Landlord may reasonably require. All insurance required hereunder
shall name Tenant as the insured and shall also name as additional insureds
Landlord and Tenant and such other parties as Landlord shall designate as
additional insureds. The insurance required hereby may be carried under a
blanket policy covering the demised premises and other locations of Tenant, if
any. Prior to the time such insurance is first required to be carried by Tenant
and thereafter, at least fifteen (15) days prior to the effective date of such
policy, Tenant agrees to deliver to Landlord either a duplicate original of the
aforesaid policies or a certificate evidencing such insurance, except that the
property insurance referred to above, however, must be evidenced by delivery by
Tenant to Landlord of the ACORD Form 27, Evidence of Property Insurance Form or
its equivalent. Said certificates (including ACORD Form 27 or its equivalent)
shall contain an endorsement that such insurance may not be cancelled except
upon thirty (30) days' prior notice to all insureds thereunder. Tenant's failure
to provide and keep in force the aforementioned insurance shall be regarded as a
material default hereunder entitling Landlord to exercise any or all of the
remedies as provided in this Lease in the event of Tenant's default. At the
option of Landlord, the originals of all policies or certificates of insurance
shall be held by Landlord.
BROKERAGE:
36. Tenant covenants, represents and warrants that Tenant has had no
dealings or communications with any broker or agent in connection with the
consummation of this Lease other than the Brokers, and Tenant covenants and
agrees to hold harmless and indemnify Landlord from and against any and all
cost, expense (including reasonable attorneys' fees) and liability arising out
of any inaccuracy or alleged inaccuracy of the above representation. Landlord
shall have no liability for any brokerage commissions arising out of a sublease
or assignment by Tenant. The provisions of this Article 36 shall survive the
expiration or sooner termination of this Lease.
ESTOPPEL CERTIFICATE:
37. Tenant shall, at any time and from time to time, as requested by
Landlord, upon ten (10) days' prior notice, execute and deliver to Landlord a
statement setting forth the Commencement Date, the Expiration Date, the Minimum
Rent and Additional Rent and certifying that this Lease is unmodified and in
full force and effect (or if there have been modifications,
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<PAGE> 38
that the same is in full force as modified and stating the modifications), the
dates to which the Minimum Rent and Additional Rent have been paid, whether or
not, to the best knowledge of Tenant, Landlord is in default in performance of
any of its obligations under this Lease, and, if so, specifying each such
default of which Tenant may have knowledge, and whether there exist any offsets
or defenses against enforcement of any of the terms of this Lease upon the part
of Tenant to be performed, and, if so, specifying the same, and any other
information Landlord may reasonably request, it being intended that any such
statement delivered pursuant hereto may be relied upon by others with whom
Landlord may be dealing.
HOLDING OVER:
38. If Tenant retains possession of the Premises or any part thereof after
the termination of the term of this Lease, Tenant shall pay Landlord Minimum
Rent at 175% of the monthly rate specified in Article 3 for the time Tenant thus
remains in possession, together with all Additional Rent payable hereunder (and
Landlord may accept such amounts without in any way waiving its rights to
require Tenant to vacate the Premises) and, in addition thereto, Tenant shall
pay Landlord for all damages, consequential as well as direct, sustained by
reason of Tenant's retention of possession.
If Tenant remains in possession of the Premises, or any part thereof,
after the termination of the term of this Lease, such holding over shall, at the
election of Landlord expressed in a written notice to Tenant and not otherwise,
constitute a tenancy from month-to-month. The provisions of this Article do not
imply any right in Tenant to remain in the Premises after the termination of
this Lease, or exclude Landlord's right of re-entry or any other right or remedy
hereunder or at law which Landlord may have against a holdover tenant. If Tenant
shall hold over, Tenant expressly waives any rights it may have under Section
2201 of the New York Civil Practice Law and Rules or any similar statute.
NOTICES:
39. Every notice, demand, consent, approval, request or other
communication (collectively, "notices") which may be or is required to be given
under this Lease or by law shall be in writing and shall be sent either (a) by
United States certified or registered mail, postage prepaid, return receipt
requested, or (b) by overnight courier or, (c) hand delivery (against
confirmation of delivery), and shall be addressed:
(i) if to Tenant, addressed to Tenant at the Property, or at such
other place as Tenant may from time to time designate by notice to
Landlord:
(ii) if to Landlord, addressed to the office of Landlord with a copy
to Landlord addressed to or at such other place as Landlord may from
time to time designate by notice to Tenant.
and the same shall be deemed delivered (A) the third business day after
deposited in the United States mail, (B) the business day following delivery to
an overnight courier or (C) when delivered by hand. A copy of any notice to
Landlord shall be sent in like manner to Landlord's counsel, Richards & O'Neil,
LLP, 885 Third Avenue, New York, New York 10022, Attention: Robert M. Safron
Esq. A notice given by counsel for Landlord or Tenant shall be deemed a valid
notice if addressed and sent in accordance with the provisions of this Article.
Either party may designate, by
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<PAGE> 39
similar written notice to the other party, any other address for such purposes.
Each of the parties hereto waives personal or any other service other than as
provided for in this Article. Notwithstanding the foregoing, either party hereto
may give the other party telegraphic notice of the need of emergency repairs.
Notices requesting after hours services may be given by delivery to the Building
Manager or any other person in the Building designated by Landlord to receive
such notices.
40. INTENTIONALLY OMITTED
41. INTENTIONALLY OMITTED
CERTAIN RIGHTS RESERVED TO LANDLORD:
42. Landlord reserves the following rights:
(A) To name the Property.
(B) To install and maintain a sign or signs on the Property.
(C) To constantly have pass keys to the Premises.
(D) To close the Building for Holidays which will generally conform with
paid union holidays for Building employees; provided that Tenant and its
employees, agents, and invitees shall have access thereto, provided they comply
with Rule 18 of the Rules and Regulations attached hereto as Exhibit B and such
other rules or security measures as Landlord may impose in its sole discretion.
HAZARDOUS MATERIALS:
43. (A) Tenant hereby represents, warrants and covenants that it shall not
install or permit any Hazardous Materials to be placed or stored in or about the
Premises, other than normal quantities of customary office and cleaning
supplies, provided that Tenant complies with all applicable Legal Requirements
in the storage, handling and disposal thereof. Tenant shall indemnify and hold
Landlord harmless from and against any claims, demands, losses, liabilities,
penalties and damages arising out of, or in any way connected with the
installation, placement, storage or release of Hazardous Materials used or
installed by Tenant, Tenant's employees, contractors or agents upon the
Premises. If it is determined that Tenant, or its employees, contractors or
agents installed, used, stored or placed Hazardous Materials in the Premises,
Tenant shall be obligated to remove and dispose of said Hazardous Materials in
compliance with all governmental requirements. This covenant shall survive the
expiration or earlier termination of this Lease.
(B) As used herein, the term "Hazardous Materials" shall be any petroleum
product, asbestos product, or any other material, substance or waste that is
now, or hereafter during the Term, recognized as being hazardous or dangerous to
health or the environment by any federal, state or local agency having
jurisdiction over the Building.
MISCELLANEOUS:
44. (A) If any of the provisions of this Lease, or the application thereof
to any person or circumstances, shall, to any extent, be invalid or
unenforceable, the remainder of this Lease,
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<PAGE> 40
or the application of such provision or provisions to persons or circumstances
other than those as to whom or which it is held invalid or unenforceable, shall
not be affected thereby, and every provision of this Lease shall be valid and
enforceable to the fullest extent permitted by law.
(B) This Lease shall be governed in all respects by the laws of the
State of New York.
(C) If, in connection with obtaining financing for the Building, a
bank, insurance company or other lending institution shall request reasonable
modifications to this Lease as a condition to such financing, Tenant will not
unreasonably withhold its consent thereto, provided that such modifications do
not materially and adversely affect Tenant's rights or obligations hereunder.
(D) Wherever it is specifically provided in this Lease that a
party's consent is not to be unreasonably withheld, a response to a request for
such consent shall also not be unreasonably delayed. If either Landlord or
Tenant considers that the other has unreasonably withheld or delayed a consent,
it shall so notify the other party within thirty (30) days after receipt of
notice of denial of the requested consent or, in case notice of denial is not
received within ten (10) days after making its request for the consent, within
ten (10) days thereafter. Tenant hereby waives any claim against Landlord which
it may have based upon any assertion that Landlord has unreasonably withheld or
unreasonably delayed any such consent, and Tenant agrees that its sole remedy
shall be an action or proceeding to enforce any such provision or for specific
performance, injunction or declaratory judgment. In the event of such a
determination, the requested consent shall be deemed to have been granted;
however, Landlord shall have no liability to Tenant for its refusal or failure
to give such consent. The sole remedy for Landlord's unreasonably withholding or
delaying of consent shall be as provided in this Section. Notwithstanding
anything to the contrary provided in this Lease, in any instance where the
consent of a ground lessor and/or a mortgagee is required, Landlord shall not be
required to give its consent until and unless such ground lessor and/or
mortgagee has given its consent. Landlord agrees to promptly seek such consent
if Landlord would otherwise consent in such instance.
(E) The persons executing this Lease on behalf of Tenant hereby
represent and warrant that they have been duly authorized to execute this Lease
for and on behalf of Tenant.
(F) Tenant may place signage on the entrance to the demised
premises, subject to Landlord's prior reasonable approval, at Tenant's cost and
expense. The listing of any name other than that of Tenant, whether on the doors
of the demised premises, on the Building directory, if any, or otherwise, shall
not operate to vest any right or interest in this Lease or in the demised
premises, nor shall it be deemed to be the consent of Landlord to any assignment
or transfer of this Lease, to any sublease of the demised premises, or to the
use or occupancy thereof by others.
(G) If Tenant is a partnership (which for purposes of this Section
44G shall be deemed to include a limited liability company or limited liability
partnership) (or is comprised of two (2) or more persons, individually, or as
joint venturers or as copartners of a partnership) or if Tenant's interest in
this Lease shall be assigned to a partnership (or to two (2) or more persons,
individually, or as joint venturers or as copartners or a partnership) (any such
partnership and such persons are referred to in this Section as "Partnership
Tenant"), the following provisions shall apply to such Partnership Tenant:
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<PAGE> 41
(i) the liability of each of the parties comprising Partnership Tenant shall be
joint and several, and (ii) each of the parties comprising Partnership Tenant
hereby consents in advance to and agrees to be bound by, any modifications,
termination, discharge or surrender of this Lease which may hereafter be made
and by any notices, demands, requests or other communications which may
hereafter be given, by Partnership Tenant, and (iii) any bills, statements,
notices, demands, requests or other communications given or rendered to
Partnership Tenant or to any of the parties comprising Partnership Tenant shall
be deemed given or rendered to Partnership Tenant or to any of the parties
comprising Partnership Tenant and shall be binding upon Partnership Tenant and
all parties, and (iv) if Partnership Tenant shall admit new partners, all such
new partners shall, by their admission to Partnership Tenant, be deemed to have
assumed performance of all of the terms, covenants and conditions of this Lease
on Tenant's part to be observed and performed and (v) Partnership Tenant shall
give prompt notice to Landlord of the admission of any such new partners.
(H) In the event that Landlord or Tenant places the enforcement of
this Lease or the collection of any Minimum Rent or additional rent due, or to
become due hereunder, or recovery of the possession of the Premises, in the
hands of an attorney, or files suit upon the same, Landlord shall recover its
attorneys' fees, disbursements and court costs from Tenant in connection with
such matter, unless Tenant shall obtain a judgment against Landlord in an action
thereon. The provisions of this paragraph shall survive the expiration or
earlier termination of this Lease.
(I) Landlord and Tenant understand, agree, and acknowledge that (i)
this Lease has been freely negotiated by both parties and (ii) in any
controversy, dispute, or contest over the meaning, interpretation, validity, or
enforceability of this Lease or any of its terms or conditions, there shall be
no inference, presumption, or conclusion drawn whatsoever against either party
by virtue of that party having drafted this Lease or any portion thereof.
(J) If at any time during the term of the Lease, space on the
twentieth (20th) floor of the Building shall become available for lease by
Landlord (such space shall be referred to herein as the "Offer Space"; it being
understood that the size and configuration of the Offer Space shall be
determined by Landlord in its sole discretion), then provided Tenant is not then
in default hereunder, Landlord shall deliver to Tenant a notice ("Offer Space
Notice") indicating that the Offer Space is available for leasing and such Offer
Space Notice shall indicate the principal business terms on which the Landlord
is willing to so lease the Offer Space. The preceding sentence is also subject
to the right of any tenant or subtenant of space in the Building that has been
granted an option or right to lease the Offer Space or any portion thereof, as
well as to any existing and future rights of the existing and future tenants or
subtenants thereof. Landlord agrees not to grant after the date hereof any
options or rights to lease the Offer Space to any third parties other than any
tenants thereof. For a period of fifteen (15) days following delivery of the
Offer Space Notice, Landlord agrees to negotiate in good faith with Tenant to
establish mutually agreeable business terms (the "Business Terms") for the lease
of the Offer Space, unless Tenant waives such requirement. In the event Landlord
and Tenant (i) fail to reach agreement on the Business Terms within such fifteen
(15) day period or (ii) reach agreement on the Business Terms within such
fifteen (15) day period but fail to enter into a written agreement to lease the
Offer Space within forty-five (45) days after delivery by Landlord of the Offer
Space Notice for any reason whatsoever, then, in either such event (i) or (ii),
Landlord shall be permitted to enter into
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<PAGE> 42
an agreement with any other party or parties for the leasing of the Offer Space,
and Landlord shall have no further obligations or liabilities to Tenant with
respect to the Offer Space. Tenant agrees to keep all information respecting
Landlord's intentions relating to the Offer Space in strict confidence.
(K) For so long as Tenant shall lease the entire twenty-second
(22nd) floor of the Building, Tenant shall have the exclusive use of the terrace
on the twenty-second (22nd) floor (the "Terrace"), subject to applicable Legal
Requirements, and Tenant acknowledges that Landlord makes no representations as
to whether such use is legally permitted. Tenant covenants that the Terrace
shall be used by Tenant only in a safe and sanitary manner and in a manner which
does not disturb the quiet enjoyment of the other tenants in the Building.
Tenant shall indemnify and hold Landlord harmless from and against any and all
claims, actions, damages, liability, cost and expenses (including attorneys'
fees and disbursements) which arise in connection with Tenant's use of the
Terrace, including without limitation damage from any leaks. Tenant shall not
(i) store or keep any equipment, supplies, refuse or merchandise on the Terrace;
(ii) enclose the Terrace or any portion thereof; (iii) permit any cooking; (iv)
lodge on the Terrace; or (v) place anything on the ledges or railings on the
perimeter of the Terrace. Subject to Landlord's prior reasonable approval,
Tenant may install tables, chairs, benches, landscaping and other items on the
Terrace; provided, however, that Tenant shall not place any unreasonable burden
on the structural integrity of the Terrace. Landlord shall not be obligated to
clean the Terrace and Tenant, at its sole cost and expense, shall remove from
and properly dispose of any debris from the Terrace whether or not generated by
Tenant. Tenant shall keep all drains reasonably free of debris. Tenant covenants
that Tenant shall be liable for any damage caused to the Terrace, the roof under
the Terrace and the Building which is due to the acts or omissions of Tenant, or
Tenant's agents, employees, invitees or contractors. Landlord covenants and
agrees prior to April 30, 1999, but not more than once, to (i) perform the
repairs recommended in that certain Engineering Report by Practical Design
Associates, Inc., dated September 18, 1998, a copy of which is attached hereto
as Exhibit D; (ii) relay the paving stones on the Terrace, if necessary, so as
to create a smooth and even surface; (iii) repair or replace any roofing
materials, as necessary, so as to ensure that the portion of the roof of the
twenty-first (21st) floor of the Building immediately below the Terrace is water
tight; and (iv) clear all drains serving the Terrace.
G.S. 505 PARK, LLC
By: GLORIOUS SUN 505 PARK INC.
By: /s/ Chun To Yeung
----------------------------------
Name: Chun To Yeung
Title: President
PLD TELEKOM INC.
By: /s/ Simon Edwards
----------------------------------
Name: Simon Edwards
Title: CFO
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<PAGE> 1
EXHIBIT 10.40
OFFICE LEASE
BETWEEN
67 BROAD STREET LLC
LANDLORD,
AND
PLD TELEKOM, INC.
TENANT.
PREMISES: PORTION OF SEVENTH (7TH) FLOOR
75 A/K/A 67 BROAD STREET
NEW YORK, NEW YORK
<PAGE> 2
STANDARD FORM OF OFFICE LEASE
AGREEMENT OF LEASE, made as of this 1st day of December, 1998
between 67 BROAD STREET LLC, a New York limited liability company, having an
office at 152 West 57th Street, 60th Floor, New York, New York, party of the
first part, hereinafter referred to as LANDLORD and PLD TELEKOM, INC., a
Delaware corporation having an office at 75/a/k/a 67 Broad Street, New York, New
York, party of the second part, hereinafter referred to as TENANT.
WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby
hires from Landlord, that portion of Seventh (7th) floor, as shown on the rental
plan annexed hereto and made a part hereof as Exhibit A (the "Demised Premises"
or "demised premises", whether capitalized or not) in the building known as 75
a/k/a 67 Broad Street in the Borough of Manhattan, City of New York (the
"Building" or "Building", whether capitalized or not), for the term of
approximately ten (10) years and six (6) months (or until such term shall sooner
cease and expire as hereinafter provided) to commence subject to Article 54
hereof on December 15, 1998 (the "Commencement Date") and shall expire on June
15, 2009 (the "Expiration Date"), both dates inclusive, at annual rental rates,
as provided in the Rent Schedule annexed hereto and made a part hereof as
Exhibit B (the "fixed rent" or "Fixed Rent" or "Fixed Annual Rent," whether
capitalized or not), which Tenant agrees to pay in lawful money of the United
States which shall be legal tender in payment of all debts and dues, public and
private, at the time of payment, in equal monthly installments in advance on the
first day of each month during said term, at the office of Landlord or such
other place as Landlord may designate, without any set off, counterclaim or
deduction whatsoever.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns, hereby
covenant as follows:
1. RENT. Tenant shall pay the rent as above and as hereinafter
provided.
2. OCCUPANCY. Tenant shall use and occupy the Demised Premises
for telecommunication switching equipment and sales and administrative offices
and for no other purpose.
3. ALTERATIONS: Tenant shall make no changes in or to the
Demised Premises of any nature without Landlord's prior written consent
provided, however, that Tenant may install its switching equipment and may make
purely decorative changes such as painting and installation of partitions and
carpeting without Landlord's consent, but upon notice to Landlord. Subject to
the prior written consent of Landlord, not to be unreasonably withheld or
delayed and to the provisions of this Article, Tenant at Tenant's expense, may
make non-structural alterations, installations, additions or improvements which
do not affect utility services or plumbing and electrical lines, in or to the
interior of the Demised Premises using licensed and reputable contractors or
mechanics first approved by Landlord. With respect to any work involving the
base building electrical service rooms, Tenant must utilize Landlord's
designated base building electrician for any and all such work. In accordance
with the provisions of this Article 3, Tenant shall have the right subject to
applicable legal requirements to install a gaseous fire retardant, either FM 200
or intergin. Tenant shall, at its expense, before making any alterations,
additions, installations or improvements obtain all permits, approval and
certificates required by any governmental or quasi-governmental bodies and (upon
completion) certificates of final approval thereof and shall deliver promptly
duplicates of all such permits, approvals and certificates to Landlord. Tenant
agrees to carry and will cause Tenant's contractors and sub-contractors to carry
such workman's compensation, general liability, personal and property damage
insurance in the amounts specified in Article 45 hereof. If any mechanic's lien
is filed against the Demised Premises or the Building for work claimed to have
been done for, or materials furnished to, Tenant, whether or not done pursuant
to this Article, the same shall be discharged by Tenant within thirty (30) days
after Tenant receives written notice thereof at Tenant's expense, by filing the
bond required by law or otherwise. All interior walls, doors, paneling,
partitions, railings and like installations, installed in the Demised Premises
at any time, either by Tenant or by Landlord on Tenant's behalf, shall, upon
installation, become the property of Landlord and shall remain upon and be
surrendered with the Demised Premises unless Landlord, by notice to Tenant at
the time Landlord approves Tenant's plans, elects to relinquish Landlord's right
to such installations and to have them removed by Tenant, in which event the
same shall be removed from the Demised Premises by Tenant prior to the
expiration of the lease, at Tenant's expense. Notwithstanding the foregoing,
Landlord hereby requires Tenant to remove all of its switching equipment, the
backup generator and other appurtenant
<PAGE> 3
equipment. Nothing in this Article shall be construed to give Landlord title to
or to prevent Tenant's removal of its switching equipment, backup generator,
trade fixtures and moveable office furniture and equipment, but upon removal of
any such items from the Demised Premises or upon removal of other installations
as may be permitted hereunder, Tenant shall immediately and at its expense,
repair and restore the Demised Premises to the condition existing prior to
installation, reasonable wear and tear excepted, and repair any damage to the
Demised Premises or the Building due to such removal. All property permitted to
be removed by Tenant at the end of the term remaining in the Demised Premises
after Tenant's removal (in the case of its backup generator, more than one month
following its removal) shall be deemed abandoned and may, at the election of
Landlord, either be retained as Landlord's property or removed from the Demised
Premises by Landlord, at Tenant's expense.
With respect to any request for Landlord's consent to any
alterations for which Landlord's consent is required, Landlord agrees to review
Tenant's plans within ten (10) business days after receipt thereof, failure by
Landlord to respond within said ten (10) business day period being deemed
Landlord's approval thereof.
4. REPAIRS: Landlord shall maintain in good working order and
repair the exterior of and the public portions of the Building and all Building
systems servicing the Demised Premises. Tenant shall, throughout the term of
this lease, take good care of the Demised Premises including the windows and
window frames and, the fixtures and appurtenances therein and at Tenant's sole
cost and expense promptly make all repairs thereto and to the Building, whether
structural or non-structural in nature, caused by or resulting from the
carelessness, omission, neglect or improper conduct of Tenant, Tenant's
servants, employees, invitees, or licensees. Tenant shall also repair all damage
to the Building and the Demised Premises caused by the moving of Tenant's
fixtures, furniture or equipment. All the aforesaid repairs shall be of quality
or class equal to the original work or construction. If Tenant fails, after ten
(10) days notice, to proceed with due diligence to make repairs required to be
made by Tenant, the same may be made by the Landlord at the expense of Tenant,
and the expenses thereof incurred by Landlord shall be collectible, as
additional rent, after rendition of a bill or statement therefor. If the Demised
Premises be or become infested with vermin, Tenant shall, at its expense, cause
the same to be exterminated. Tenant shall give Landlord prompt notice of any
defective condition in any plumbing, heating system or electrical lines located
in the Demised Premises and following such notice, Landlord shall remedy the
condition with due diligence, but at the expense of Tenant, if repairs are
necessitated by damage or injury attributable to Tenant, Tenant's servants,
agents, employees, invitees or licensees as aforesaid. There shall be no
allowance to the Tenant for a diminution of rental value and no liability on the
part of Landlord by reason of inconvenience, annoyance or injury to business
arising from Landlord, Tenant or others making or failing to make any repairs,
alterations, additions or improvements in or to any portion of the Building or
the Demised Premises or in and to the fixtures, appurtenances or equipment
thereof, except that the foregoing shall not apply to Landlord's failure to make
repairs which prevent the operation of Tenant's switching equipment or backup
generator. The provisions of this Article 4 with respect to the making of
repairs shall not apply in the case of fire or other casualty with regard to
which Article 9 shall apply.
5. WINDOW CLEANING: Tenant will not clean nor require, permit,
suffer or allow any window in the Demised Premises to be cleaned from the
outside in violation of Section 202 of the New York State Labor Law or any other
applicable law or of the Rules of the Board of Standards and Appeals, or of any
other Board or body having or asserting jurisdiction.
6. REQUIREMENTS OF LAW, FIRE INSURANCE, FLOOR LOADS: Prior to
the commencement of the lease term, if Tenant is then in possession, and at all
times thereafter, Tenant shall, at Tenant's sole cost and expense, promptly
comply with all present and future laws, orders and regulations of all state,
federal, municipal and local governments, departments, commissions and boards
and any direction of any public officer pursuant to law, and all orders, rules
and regulations of the New York Board of Fire Underwriters, or the Insurance
Services Office, or any similar body which shall impose any violation, order or
duty upon Landlord or Tenant with respect to the Demised Premises, solely when
arising out of Tenant's manner of use thereof, or, with respect to the Building,
if arising out of Tenant's use or manner of use of the Demised Premises or the
Building. Nothing herein shall require Tenant to make structural repairs or
alterations unless Tenant has, by its manner of use of the Demised Premises or
method of operation therein, violated any such laws, ordinances, orders, rules,
regulations or requirements with respect thereto. Tenant shall not do not permit
any act or thing to be done in or to the Demised Premises which is contrary to
law, or which will invalidate or be in conflict with public liability, fire or
other policies of insurance at any time carried by or for the benefit of
Landlord. Tenant shall not keep anything in the Demised Premises except as now
or hereafter permitted by the Fire Department, Board of Fire Underwriters, Fire
Insurance Rating Organization and other authority having jurisdiction, and then
only in such manner and such quantity so as not to increase the rate for fire
insurance applicable to the Building, nor use the Demised Premises in a manner
which will increase the insurance rate for the Building or any property located
therein over that in effect prior to the commencement of Tenant's occupancy. If
by reason of failure to comply with the foregoing the fire insurance rate shall,
at the beginning of this lease or at any time thereafter, be higher than it
otherwise would be, then Tenant shall reimburse Landlord, as additional rent
hereunder, for that portion of all fire insurance premiums thereafter paid by
Landlord which shall have been charged because of such failure by Tenant. In any
action or proceeding wherein Landlord and Tenant are parties, a schedule or
"make-up" or rate for the Building or
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<PAGE> 4
Demised Premises issued by a body making fire insurance rates applicable to said
Demised Premises, shall be conclusive evidence of the facts therein stated and
of the items and changes in the fire insurance rates applicable to the Demised
Premises. Tenant shall not place a load upon any floor of the Demised Premises
exceeding the floor load per square foot area which it was designed to carry and
which is allowed by law. Landlord reserves the right to prescribe the weight and
position of all safes, business machines and mechanical equipment. Such
installations shall be placed and maintained by Tenant, at Tenant's expense, in
settings sufficient, in Landlord's judgement, to absorb and prevent vibration,
noise and annoyance. Landlord represents and warrants that the floor load in the
Demised Premises is 100 pounds per square foot and Tenant acknowledges that the
switching equipment and backup generator which Tenant proposes to install do not
exceed this floor load.
7. SUBORDINATION: This lease is subject and subordinate to all
ground or underlying leases and to all mortgages which may now or hereafter
affect such leases or the real property of which the Demised Premises form a
part thereof, and to all renewals, modifications, consolidations, replacements
and extensions of any such underlying leases and mortgages. This clause shall be
self-operative and no further instrument or subordination shall be required by
any ground or underlying lessor or by any mortgagee, affecting any lease or the
real property of which the Demised Premises are a part. In confirmation of such
subordination, Tenant shall execute promptly any certificate that Landlord may
request.
Landlord agrees that it shall use all commercially best
efforts (at no cost or expense to Landlord) to obtain and deliver to Tenant, as
to the existing mortgage and mortgages hereafter made covering the real property
of which the Demised Premises form a part, and/or any renewal, modification,
consolidation, replacement and extension of the existing mortgage, or future
mortgages, non-disturbance agreements (the "NDA") in recordable form (or such
agreement shall be contained in such mortgage or any renewal, modification,
consolidation, extension or replacement thereof) from the holder of any such
mortgage, providing in substance that provided Tenant shall have entered into
possession and occupancy of the Demised Premises and commenced payment of fixed
rent and additional rent hereunder, and so long as Tenant is not in default in
its obligations for the payment of fixed rent and additional rent and in the
performance of the other terms, covenants and conditions to be performed on its
part under this Lease, its possession of the Demised Premises will not be
disturbed during the term hereof, notwithstanding the foreclosure of any such
mortgage, and Tenant will not be named as a party defendant in any foreclosure
proceedings brought for the recovery of possession, it being hereby covenanted
and agreed to by Tenant that the holder of any such mortgage, or anyone claiming
by, through or under said holder shall not be:
(a) liable for any act or omission for any prior landlord
(including Landlord), or
(b) subject to any offsets or defenses which Tenant might
have against any prior landlord (including Landlord),
or
(c) bound by any fixed rent or additional rent or other
charges which Tenant might have paid for more than the
current month to a prior landlord (including Landlord),
or
(d) bound by any modification of this Lease made without
the consent of such mortgagee. The inability of
Landlord to obtain such agreement shall not be deemed a
default on Landlord's part of its obligations
hereunder, or impose any claim in favor of Tenant
against Landlord by reason thereof, or affect the
validity of this Lease. Tenant agrees to (i) execute
and deliver to such mortgagee a nondisturbance and
attornment agreement in form and substance customarily
adopted by such mortgagee and (ii) reimburse Landlord
for all reasonable expenses incurred by Landlord in
connection therewith, including legal expenses.
Notwithstanding anything contained herein above to the
contrary, in the event that Landlord is unable to deliver the NDA within six (6)
months from the Commencement Date then, in such event, Tenant shall have a one
(1) time option to terminate this Lease by ten (10) days written notice given to
Landlord in which event this Lease shall expire ten (10) days after the date of
rendition note Tenant's notice of termination with the same force and effect as
said date were the Expiration Date.
8. PROPERTY - LOSS, DAMAGE, REIMBURSEMENT, INDEMNITY: Landlord
or its agents shall not be liable for any damage to property of Tenant or of
others entrusted to employees of the Building, nor for loss of or damage to any
property of Tenant by theft or otherwise, nor for any injury or damage to
persons or property resulting from any cause of whatsoever nature, unless caused
by or due to the negligence or wilful acts of Landlord, its agents, servants or
employees. Landlord or its agents shall not be liable for any damage caused by
other tenants or persons in, upon or about said Building or caused by operations
in connection of any private, public or quasi public work. If at any time any
windows of the Demised Premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law) for any
reason whatsoever including, but not limited to Landlord's own acts, Landlord
shall not be liable for any damage Tenant may sustain thereby and Tenant shall
not be entitled to any compensation therefor nor any abatement or diminution of
rent nor shall the same release Tenant from its obligations hereunder nor
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<PAGE> 5
constitute an actual or constructive eviction. Tenant shall indemnify and save
harmless Landlord against and from all liabilities, obligations, damages,
penalties, claims, costs and expenses for which Landlord shall not be reimbursed
by insurance, including reasonable attorney's fees, paid, suffered or incurred
as a result of any breach by Tenant, Tenant's agents, contractors, employees,
invitees, or licensees, of any covenant or condition of this lease, or the
carelessness, negligence or improper conduct of the Tenant, Tenant's agents,
contractors, employees, invitees or licensees. Tenant's liability under this
lease extends to the acts and omissions of any sub-tenant and any sub-tenant,
agent, contractor, employee, invitee or licensee of any subtenant. In case any
action or proceeding is brought against Landlord by reason of any such claim,
Tenant, upon written notice from Landlord, will, at Tenant's expense, resist or
defend such action or proceeding by counsel approved by Landlord in writing,
such approval not to be unreasonably withheld.
9. DESTRUCTION, FIRE AND OTHER CASUALTY: (a) If the Demised
Premises or any part thereof shall be damaged by fire or other casualty, Tenant
shall give immediate notice thereof to Landlord and this lease shall continue in
full force and effect except as hereinafter set forth. (b) If the Demised
Premises are partially damaged or rendered partially unusable by fire or other
casualty, the damages thereto shall be repaired by and at the expense of
Landlord and the rent, until such repair shall be substantially completed, shall
be apportioned from the day following the casualty according to the portion of
the Demised Premises which is usable. (c) If the Demised Premises are totally
damaged or rendered wholly unusable by fire or other casualty, then the rent
shall be proportionately paid up to the time of the casualty and thenceforth
shall cease until the date when the Demised Premises shall have been repaired
and restored by Landlord, subject to Landlord's right to elect not to restore
the same as hereinafter provided. (d) If the Demised Premises are rendered
wholly unusable or (whether or not the Demised Premises are damaged in whole or
in part) if the Building shall be so damaged that Landlord shall decide to
demolish it or to rebuild it, then, in any such events, Landlord may elect to
terminate this lease by written notice to Tenant, given within 90 days after
such fire or casualty, specifying a date for the expiration of the lease, which
date shall not be more than 60 days after the giving of such notice, and upon
the date specified in such notice the term of this lease shall expire as fully
and completely as if such date were the date set forth above for the termination
of this lease and Tenant shall forthwith quit, surrender and vacate the Demised
Premises without prejudice however, to Landlord's rights and remedies against
Tenant under the lease provisions in effect prior to such termination, and any
rent owing shall be paid up to such date and any payments of rent made by Tenant
which were on account of any period subsequent to such date shall be returned to
Tenant. Unless Landlord shall serve a termination notice as provided for herein,
Landlord shall make the repairs and restorations under the conditions of (b) and
(c) hereof, with all reasonable expedition, subject to delays due to adjustment
of insurance claims, labor troubles and causes beyond Landlord's control. After
any such casualty, Tenant shall cooperate with Landlord's restoration by
removing from the Demised Premises as promptly as reasonably possible, all of
Tenant's salvageable inventory and movable equipment, furniture, and other
property. Tenant's liability for rent shall resume thirty (30) days after
written notice from Landlord that the Demised Premises are substantially ready
for Tenant's occupancy. (e) Nothing contained hereinabove shall relieve Tenant
from liability that may exist as a result of damage from fire or other casualty.
Notwithstanding the foregoing, each party shall look first to any insurance in
its favor before making any claim against the other party for recovery for loss
or damage resulting from fire or other casualty, and to the extent that such
insurance is in force and collectible and to the extent permitted by law,
Landlord and Tenant each hereby releases and waives all right of recovery
against the other or any one claiming through or under each of them by way of
subrogation or otherwise. The foregoing release and waiver shall be in force
only if both releasors' insurance policies contain a clause providing that such
a release or waiver shall not invalidate the insurance. If, and to the extent,
that such waiver can be obtained only by the payment of additional premiums,
then the party benefitting from the waiver shall pay such premium within ten
(10) days after written demand or shall be deemed to have agreed that the party
obtaining insurance coverage shall be free of any further obligation under the
provisions hereof with respect to waiver of subrogation. Tenant acknowledges
that Landlord will not carry insurance on Tenant's furniture and or furnishing
or any fixtures or equipment, improvements, or appurtenances removable by Tenant
and agrees that Landlord will not be obligated to repair any damage thereto or
replace the same. (f) Tenant hereby waives the provisions of Section 227 of the
Real Property Law and agrees that the provisions of this Article shall govern
and control in lieu thereof.
If the Building or the Demised Premises shall be so damaged by
fire or other casualty so as to interfere substantially with the use of the
Demised Premises by Tenant, Landlord and its architect shall determine, no later
than thirty (30) days from the occurrence of the event, whether such damage can
be repaired within six (6) months from the date of the occurrence of the event.
If they determine that such damage cannot be repaired within six (6) months, or
if in fact such damage is not in fact repaired within six (6) months, then
Tenant shall have the right, by giving written notice to Landlord to such effect
within fifteen (15) days after it has been determined that the damage can not be
restored or repaired within the aforesaid period, or the expiration of such
6-month period, as the case may be, to terminate this Lease and its obligations
hereunder, in which event the fixed rent and additional rent shall be prorated
to the date of the occurrence of such damage. If Tenant shall fail to serve such
notice as aforesaid, then this Lease shall continue in full force and effect
subject, however, to Landlord's right of termination as set forth in Article 9.
If there be any dispute between Landlord and Tenant with respect to the
foregoing, the issue shall be expeditiously submitted to the American
Arbitration Association in New York City for determination and the decision of
the arbitrators appointed pursuant thereto shall be binding upon the parties,
and may be entered
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<PAGE> 6
as a judgment in any court having jurisdiction thereover. The arbitration fees
shall be borne equally by the parties.
10. EMINENT DOMAIN: If the whole or any part of the Demised
Premises shall be acquired or condemned by eminent domain for any public or
quasi public use or purpose, then and in that event, the term of this lease
shall cease and terminate from the date of title vesting in such proceeding and
Tenant shall have no claim for the value of any unexpired term of said lease.
Nothing contained in Article 10 hereof shall prohibit
Tenant from making a separate claim with the condemning authority for (a) the
value of property owned by Tenant, (b) any loss of profits, and any moving or
other expenses incurred by Tenant as a result of such condemnation and (c) any
other separate claim which Tenant may hereafter be permitted to make provided,
however, that such separate claim shall not reduce or adversely affect the
amount of Landlord's award.
11. ASSIGNMENT, MORTGAGE, ETC.: Tenant, for itself, its heirs,
distributees, executors, administrators, legal representatives, successors and
assigns, expressly covenants that it shall not assign, mortgage or encumber this
Lease, nor underlet, or suffer or permit the Demised Premises or any part
thereof to be used by others without the prior written consent of Landlord in
each instance. If this lease be assigned, or if the Demised Premises or any part
thereof be underlet or occupied by anybody other than Tenant, Landlord may,
after default by Tenant, collect rent from the assignee, under-tenant or
occupant, and apply the net amount collected to the rent herein reserved, but no
such assignment, underletting, occupancy or collection shall be deemed a waiver
of this covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained. The consent by Landlord to an
assignment or underletting shall not in anyway be constructed to relieve Tenant
from obtaining the express consent in writing of Landlord to any further
assignment or underletting.
12. ELECTRIC CURRENT: Tenant covenants and agrees that at all
times its use of electric current shall not exceed the capacity of existing
feeders to the Building (which feeders be in place and operable as of the
Commencement Date) or the risers or wiring installation and Tenant may not use
any electrical equipment which, in Landlord's opinion will overload such
installations or interfere with the use thereof by other tenants of the
Building. The change at any time of the character of electric service shall in
no manner make Landlord liable or responsible to Tenant, for any loss, damages
or expenses which Tenant may sustain.
13. ACCESS TO PREMISES: Landlord or Landlord's agents shall
have the right (but shall not be obligated) to enter the Demised Premises in any
emergency at any time, and, at other reasonable times, upon reasonable prior
notice to examine the same and to make such repairs, replacements and
improvements as Landlord may deem necessary and reasonably desirable to any
portion of the Building or which Landlord may elect to perform in the Demised
Premises after Tenant's failure to make repairs or perform any work which Tenant
is obligated to perform under this lease, or for the purpose of complying with
laws, regulations and other directions of governmental authorities. Landlord
shall perform any work using all reasonable efforts to minimize interference and
interruption with Tenant's occupancy and the conduct of its business in the
Demised Premises. Tenant shall permit Landlord to use and maintain and replace
pipes and conduits in and through the Demised Premises and to erect new pipes
and conduits therein. Landlord may, during the progress of any work in the
Demised Premises, take all necessary materials and equipment into the Demised
Premises without the same constituting an actual or constructive eviction nor
shall the Tenant be entitled to any abatement of rent while such work is in
progress nor to any damages by reason of loss or interruption of business or
otherwise. Throughout the term hereof, Landlord shall have the right to enter
the Demised Premises at reasonable hours for the purpose of showing the same to
prospective purchasers or mortgagees of the Building, and during the last six
(6) months of the term for the purpose of showing the same to prospective
tenants and may, during said six (6) months period, place upon the Building the
usual notices "To Let" and "For Sale" which notices Tenant shall permit to
remain thereon without molestation. If Tenant is not present to open and permit
an entry into the Demised Premises, Landlord or Landlord's agents may enter the
same whenever such entry may be necessary or permissible by master key (or in an
emergency only) forcibly and provided reasonable care is exercised to safeguard
Tenant's property, such entry shall not render Landlord or its agents liable
therefor, nor in any event shall the obligations of Tenant hereunder be
affected. If during the last month of the term Tenant shall have removed all or
substantially all of Tenant's property therefrom, Landlord may immediately
enter, alter, renovate or redecorate the Demised Premises without limitation or
abatement of rent, or incurring liability to Tenant for any compensation and
such act shall have no effect on this lease or Tenant's obligations hereunder.
14. VAULT, VAULT SPACE, AREA: No Vaults, vault space or area,
whether or not enclosed or covered, not within the property line of the Building
is leased hereunder, anything contained in or indicated on any sketch, blue
print or plan, or anything contained elsewhere in this lease to the contrary
notwithstanding. Landlord makes no representation as to the location of the
property line of the Building. All vaults and vault space and all such areas not
within the property line of the Building, which Tenant may be permitted to use
and/or occupy, is to be used and/or occupied under a revocable license, and if
any such license be revoked or if the amount of such space or area be diminished
or required by any federal, state or municipal authority
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<PAGE> 7
or public utility, Landlord shall not be subject to any liability nor shall
Tenant be entitled to any compensation or diminution or abatement of rent, nor
shall such revocation, diminution or requisition be deemed an actual or
constructive eviction. Any tax, fee or charge of municipal authorities for such
vault or area shall be paid Tenant, if used by Tenant, whether or not
specifically leased hereunder.
15. OCCUPANCY: Tenant will not at any time use or occupy the
Demised Premises in violation of the Certificate of Occupancy issued for the
Building. Tenant has inspected the Demised Premises and accepts them as is,
subject to any Riders annexed hereto with respect to Landlord's Work, if any. If
any event, Landlord makes no representation as to the condition of the Demised
Premises and Tenant agrees to accept the same subject to violations, whether or
not of record.
16. BANKRUPTCY: (a) Anything elsewhere in this lease to the
contrary notwithstanding, this lease may be cancelled by Landlord by sending of
a written notice to Tenant within a reasonable time after the happening of any
one or more of the following events: (1) the commencement of a case in
bankruptcy or under the laws of any state naming Tenant as the debtor, which, in
the case of an involuntary bankruptcy, is not dismissed within sixty (60) days
after the commencement thereof or (2) the making by Tenant of an assignment or
any other arrangement for the benefit of creditors under any state statute.
Neither Tenant nor any person claiming through or under Tenant, or by reason of
any statute or order of court, shall thereafter be entitled to possession of the
Demised Premises but shall forthwith quit and surrender the Demised Premises. If
this lease shall be assigned in accordance with its terms, the provisions of
this Article 16 shall be applicable only to the party then owning Tenant's
interest in this lease.
(b) It is stipulated and agreed that in the event
of the termination of this lease pursuant to (a) hereof, Landlord shall
forthwith, notwithstanding any other provisions of this lease to the contrary,
be entitled to recover from Tenant as and for liquidated damages an amount equal
to the difference between the rental reserved hereunder for the unexpired
portion of the term and the fair and reasonable rental value of the Demised
Premises for the same period. In the computation of such damages the difference
between any installment of rent becoming due hereunder after the date of
termination and the fair and reasonable rental value of the Demised Premises for
the period for which such installment was payable shall be discounted to the
date of termination at the rate of four percent (4%) per annum. If the Demised
Premises or any part thereof be relet by Landlord for the unexpired term of said
lease, or any part thereof, before presentation of proof of such liquidated
damages to any court, commission or tribunal, the amount of rent reserved upon
such reletting shall be deemed to be the fair and reasonable rental value for
the part or the whole of the Demised Premises so re-let during the term of the
re-letting. Nothing herein contained shall limit or prejudice the right of the
Landlord to prove for and obtain as liquidated damages by reason of such
termination, an amount equal to the maximum allowed by any statute or rule of
law in effect at the time when, and governing the proceedings in which, such
damages are to be proved, whether or not such amount be greater, equal to, or
less than the amount of the difference referred to above.
17. DEFAULT: A. If Tenant defaults in fulfilling any of the
covenants of this lease other than the covenants for the payment of rent or
additional rent; or if the Demised Premises becomes vacant or deserted; or if
any execution or attachment shall be issued against Tenant or any of Tenant's
property whereupon the Demised Premises shall be taken or occupied by someone
other than Tenant; or if this lease be rejected under Section 235 of Title 11 of
the U.S. Code (bankruptcy code); or if Tenant shall fail to move into or take
possession of the Demised Premises within thirty (30) days after the
commencement of the terms of this lease, then, in any one or more of such
events, upon Landlord serving a written ten (10) days notice upon Tenant
specifying the nature of said default and upon the expiration of said ten (10)
days if Tenant shall have failed to comply with or remedy such default, or if
the said default or omission complained of shall be of a nature that the same
cannot be completely cured or remedied within said ten (10) day period, and if
Tenant shall not have diligently commenced curing such default within such ten
(10) day period, and shall not thereafter with reasonable diligence and in good
faith, proceed to remedy or cure such default, then Landlord may serve a written
five (5) days' notice of cancellation of this lease upon Tenant, and upon the
expiration of said five (5) days this lease and the term thereunder shall end
and expire as fully and completely as if the expiration of such five (5) day
period were the day herein definitely fixed for the end and expiration of this
lease and the term thereof and Tenant shall then quit and surrender the Demised
Premises to Landlord but Tenant shall remain liable as hereinafter provided.
B. If the notice provided for in (1) hereof shall have been given and
the term shall expire as aforesaid; or if Tenant shall make default in the
payment of any item of rent reserved herein or any item of additional rent
herein mentioned or any part of either or in making any other payment herein
required: then and in any of such events, Landlord may dispossess Tenant by
summary proceedings or otherwise, and the legal representative of Tenant or
other occupant of the Demised Premises and remove their effects and hold the
Demised Premises as if this lease had not been made, and Tenant hereby waives
the service of notice of intention to re-enter or to institute legal proceedings
to that end. If Tenant shall make default hereunder prior to the date fixed as
the commencement of any renewal or extension of this lease, Landlord may cancel
and terminate such renewal or extension agreement by written notice.
18. REMEDIES OF LANDLORD AND WAIVER OF REDEMPTION: In case of
any such default, re-entry, expiration and/or dispossess by summary proceedings
or otherwise, (a) the rent, and additional rent,
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shall become due thereupon and be paid up to the time of such re-entry,
dispossess and/or expiration, (b) Landlord may re-let the Demised Premises or
any part or parts thereof, either in the name of Landlord or otherwise, for a
term or terms, which may at Landlord's option be less than or exceed the period
which would otherwise have constituted the balance of the term of this lease and
may grant concessions or free rent or charge a higher rental than that in this
lease, (c) Tenant or the legal representatives of Tenant shall also pay Landlord
as liquidated damages for the failure of Tenant to observe and perform said
Tenant's covenants herein contained, any deficiency between the rent hereby
reserved and or covenanted to be paid and the net amount, if any, of the rents
collected on account of the subsequent lease or leases of the Demised Premises
for each month of the period which would otherwise have constituted the balance
of the term of this lease. The failure of Landlord to re-let the Demised
Premises or any part or parts thereof shall not release or affect Tenant's
liability for damages hereunder. In computing such liquidated damages there
shall be added to the said deficiency such expenses as Landlord may incur in
connection with re-letting, such as legal expenses, attorneys' fees, brokerage,
advertising and for keeping the Demised Premises in good order or for preparing
the same for re-letting. Any such liquidated damages shall be paid in monthly
installments by Tenant on the rent day specified in this lease and any suit
brought to collect the amount of the deficiency for any month shall not
prejudice in any way the rights of Landlord to collect the deficiency for any
subsequent month by a similar proceeding. Landlord, in putting the Demised
Premises in good order or preparing the same for re-rental may, at Landlord's
option, make such alterations, repairs, replacements, and/or decorations in the
Demised Premises as Landlord, in Landlord's sole judgment, considers advisable
and necessary for the purpose of re-letting the Demised Premises, and the making
of such alterations, repairs, replacements, and/or decorations shall not operate
or be construed to release Tenant from liability hereunder as aforesaid.
Landlord shall in no event be liable in any way whatsoever for failure to re-let
the Demised Premises, or in the event that the Demised Premises are re-let, for
failure to collect the rent thereof under such re-letting, and in no event shall
Tenant be entitled to receive any excess, if any, of such net rents collected
over the sums payable by Tenant to Landlord hereunder. In the event of a breach
or threatened breach by Tenant of any of the covenants or provisions hereof,
Landlord shall have the right of injunction and the right to invoke any remedy
allowed at law or in equity as if re-entry, summary proceedings and other
remedies were not herein provided for. Mention in this lease of any particular
remedy, shall not preclude Landlord from any other remedy, in law or in equity.
Tenant hereby expressly waives any and all rights of redemption granted by or
under any present or future laws.
19. FEES AND EXPENSES: If Tenant shall default in the
observance or performance of any term or covenant on Tenant's part to be
observed or performed under or by virtue of any of the terms or provisions in
any Article of this lease, then, unless otherwise provided elsewhere in this
lease, Landlord may immediately or at any time thereafter and without notice
perform the obligations of Tenant hereunder. If Landlord, in connection with the
foregoing or in connection with any default by Tenant in the covenant to pay
rent hereunder, makes any expenditures or incurs any obligations for the payment
of money, including but not limited to attorney's fees, in instituting,
prosecuting or defending any action or proceedings, then Tenant will reimburse
Landlord for such sums so paid or obligations incurred with interest and costs.
The foregoing expenses incurred by reason of Tenant's default shall be deemed to
be additional rent hereunder and shall be paid by Tenant to Landlord within five
(5) days after rendition of any bill or statement to Tenant therefor. If
Tenant's lease term shall have expired at the time of making of such
expenditures or incurring of such obligations, such sums shall be recoverable by
Landlord as damages.
20. BUILDING ALTERATIONS AND MANAGEMENT: Landlord shall have
the right at any time without the same constituting an eviction and without
incurring liability to Tenant therefor to change the arrangement and or location
of public entrances, passageways, doors, doorways, corridors, elevators, stairs,
toilets or other public parts of the Building and to change the name, number or
designation by which the Building may be known. There shall be no allowance to
Tenant for diminution of rental value and no liability on the part of Landlord
by reason of inconvenience, annoyance or injury to business arising from
Landlord or other Tenant making any repairs in the Building or any such
alterations, additions and improvements. Furthermore, Tenant shall not have any
claim against Landlord by reason of Landlord's imposition of any controls on the
manner of access to the Building by Tenant's invitees as the Landlord may deem
necessary for the security of the Building and its occupants.
21. NO REPRESENTATIONS BY LANDLORD: Except as specifically
provided herein, neither Landlord nor Landlord's agents have made any
representations or promises with respect to the physical condition of the
Building, the land upon which it is erected or the Demised Premises, the rents,
leases, expenses of operation or any other matter or thing affecting or related
to the Demised Premises or the Building except as herein expressly set forth and
no rights, easements or licenses are acquired by Tenant by implication or
otherwise except as expressly set forth in the provisions of this lease. Tenant
has inspected the Building and the Demised Premises and is thoroughly acquainted
with their condition and, except as specifically provided herein, agrees to take
the same "as is" on the date possession is tendered and acknowledges that the
taking of possession of the Demised Premises by Tenant shall be conclusive
evidence that the said Demised Premises and the Building of which the same form
a part were in good and satisfactory condition at the time such possession was
so taken. All understandings and agreements heretofore made between the parties
hereto are merged in this contract, which alone fully and completely expresses
the agreement between Landlord and Tenant and any executory agreement hereafter
made shall be ineffective to change, modify, discharge or effect an abandonment
of it in whole or in part, unless such executory
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agreement is in writing and signed by the party against whom enforcement of the
change, modification, discharge or abandonment is sought.
22. END OF TERM: Upon the expiration or sooner termination of
the term of this lease, Tenant shall quit and surrender to Landlord the Demised
Premises, broom clean, in good order and condition, ordinary wear and damages
which Tenant is not required to repair as provided elsewhere in this lease
excepted, and Tenant shall remove all its property from the Demised Premises,
provided that Tenant shall have a period of up to one (1) month to remove its
backup generator. Tenant's obligation to observe or perform its covenant shall
survive the expiration or other termination of its lease. If the last day of the
term of this Lease or any renewal thereof, falls on Sunday, this lease shall
expire at noon on the preceding Saturday unless it be a legal holiday in which
case it shall expire at noon on the preceding business day.
23. QUIET ENJOYMENT: Landlord covenants and agrees with Tenant
that upon Tenant paying the rent and additional rent and observing and
performing all the terms, covenants and conditions, on Tenant's part to be
observed and performed, Tenant may peaceably and quietly enjoy the Demised
Premises hereby demised, subject, nevertheless, to the terms and conditions of
this lease.
24. FAILURE TO GIVE POSSESSION: If Landlord is unable to give
possession of the Demised Premises on the date of the commencement of the term
hereof, because of the holding-over or retention of possession of any tenant,
undertenant or occupants, or if Landlord has not completed any work required to
be performed by Landlord, or for any other reason, Landlord shall not be subject
to any liability for failure to give possession on said date and the validity of
the lease shall not be impaired under such circumstances, nor shall the same be
construed in any manner to extend the term of this lease, but the rent payable
hereunder shall be abated until after Landlord shall have given Tenant notice
that the Demised Premises are substantially ready for Tenant's occupancy, and
the period of free rent specified in Article 41 shall not commence until five
(5) business days after such notice is given. If permission is given to Tenant
to enter into the possession of the Demised Premises or to occupy any space in
the Building other than the Demised Premises prior to the date specified as the
commencement of the term of this lease, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions and
provisions of this lease, except as to the covenant to pay rent. The provisions
of this Article are intended to constitute "an express provision to the
contrary" within the meaning of Section 223-a of the New York Real Property Law.
Notwithstanding the foregoing provisions of this
Lease, in the event that Landlord fails to deliver possession of the Demised
Premises on or prior to December 31, 1998, Tenant shall have the right to
terminate this Lease within the following ten (10) days by giving notice thereof
to Landlord. Upon receipt of such notice by Landlord, all liability between the
parties hereto shall be extinguished, except that Landlord shall return to
Tenant any monies deposited with Landlord pursuant to this Lease. The foregoing
right of termination shall be Tenant's exclusive remedy with respect to the
failure to deliver possession, subject to the provisions of Article 54 hereof.
25. NO WAIVER: The failure of Landlord to seek redress for
violation of, or to insist upon the strict performance of any covenant or
condition of this lease or of any of the Rules or Regulations, set forth or
hereafter adopted by Landlord, shall not prevent a subsequent act which would
have originally constituted a violation from having all the force and effect of
an original violation. The receipt by Landlord of rent with knowledge of the
breach of any covenant of this lease shall not be deemed a waiver of such breach
and no provision of this lease shall be deemed to have been waived by Landlord
unless such waiver be in writing signed by Landlord. No payment by Tenant or
receipt by Landlord of a lesser amount than the monthly rent herein stipulated
shall be deemed to be other than on account of the earliest stipulated rent, nor
shall any endorsement or statement of any check, any letter accompanying any
check or payment of rent be deemed an accord and satisfaction and Landlord may
accept such check or payment without prejudice to Landlord's right to recover
the balance of such rent or pursue any other remedy in this lease provided. All
checks tendered to Landlord as and for the rent of the Demised Premises shall be
deemed payments for the account of Tenant. Acceptance by Landlord of rent from
anyone other than Tenant shall not be deemed to operate as an attornment to
Landlord by the payor of such rent or as a consent by Landlord to an assignment
or subletting by Tenant of the Demised Premises to such payor, or as a
modification of the provisions of this lease. No act or thing done by Landlord
or Landlord's agents during the term hereby demised shall be deemed an
acceptance of a surrender of said Demised Premises and no agreement to accept
such surrender shall be valid unless in writing signed by Landlord. No employee
of Landlord or Landlord's agent shall have any power to accept the keys of said
Demised Premises prior to termination of the lease and the delivery of keys to
any such agent or employee shall not operate as a termination of the lease or a
surrender of the Demised Premises.
26. WAIVER OF TRIAL BY JURY: It is mutually agreed by and
between Landlord and Tenant that the respective parties hereto shall and they
hereby do waive trial by jury in any action, proceeding or counterclaim brought
by either of the parties hereto against the other (except for personal injury or
property damage) on any matters whatsoever arising out of or in any way
connected with this lease, the relationship of Landlord and Tenant, Tenant's use
of or occupancy of the Demised Premises, and any emergency statutory or any
other statutory remedy. It is further mutually agreed that in the event Landlord
commences any
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summary proceeding for possession of the Demised Premises, Tenant will not
interpose any counterclaim of whatever nature or description in any such
proceeding.
27. INABILITY TO PERFORM: This Lease and the obligation of
Tenant to pay rent hereunder and perform all of the other covenants and
agreements hereunder on part of Tenant to be performed shall in no manner be
affected, impaired or excused because Landlord is unable to fulfill any of its
obligations under this lease or to supply or is delayed in supplying any service
expressly or impliedly to be supplied or is unable to make, or is delayed in
making any repair, additions, alterations or decorations or is unable to supply
or is delayed in supplying any equipment or fixtures if Landlord is prevented or
delayed from so doing by reason of strike or labor troubles or any cause
whatsoever beyond Landlord's sole control including, but not limited to,
government preemption in connection with a National Emergency or by reason of
any rule, order or regulation of any department or subdivision thereof of any
government agency or by reason of the condition of supply and demand which have
been or are affected by war or other emergency.
Notwithstanding any other provision of this lease, in the event
that substantially all of the Demised Premises shall become unusable or
untenantable by Tenant due to the performance by Landlord of repairs, additions,
alterations, replacements, decorations or improvements or due to interruption of
services provided by Landlord or Landlord's failure to provide access to the
Demised Premises required to be provided to Tenant under this lease and not due
to any act or omission of Tenant or Tenant's employees, agents, contractors or
licensees (the "Affected Space"), which condition (an "Interruption Condition")
shall continue for a period of ten (10) consecutive business days after Tenant
shall have notified Landlord of the same, and Tenant shall not actually use or
occupy the Affected Space during such period, then Tenant shall be entitled be
entitled to abate the payment of Basic Annual Rent and Additional Rent with
respect to the Affected Space to the extent not actually used or occupied by
Tenant, if applicable, due under this lease for the period commencing on the
eleventh (11th) business day of the existence of such condition and ending on
the date which condition no longer exists. Tenant agrees that other than as
specifically provided for in this paragraph, Tenant's sole remedy at law in
connection with an interruption of services to or access to the Demised Premises
shall be by way of an action for damages for breach of contract.
28. NOTICES: Except as otherwise expressly provided in this
Lease or by any Legal Requirement, every notice, demand, consent, approval,
request or other communication (collectively, "notices") which may be or is
required to be given under this Lease or by law shall be in writing and shall be
sent by United States certified or registered mail, postage prepaid, return
receipt requested and shall be addressed:
A. If to Landlord, to Landlord's address set forth on the
cover page hereof with a copy to Landlord's managing agent and attorney,
respectively;
Newmark & Company Real Estate Co., Inc.
125 Park Avenue
New York, New York 10017
and to: Robert J. Oppenheimer, P.C.
c/o Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
B. If to Tenant, to Tenant's address set forth on the
cover page hereto with a copy to Tenant's general counsel.
Notices shall be deemed delivered five (5) business
days after being deposited in the United States Mail. A notice given by counsel
for either party shall be deemed a valid notice if addressed and sent in
accordance with the provisions of this Paragraph. Either party may designate, by
similar written notice to the other party, any other address for such purposes.
Each of the parties hereto waives personal or any other service other than as
provided for in this Paragraph. Notwithstanding the foregoing, either party
hereto may give the other party telefax notice of the need of emergency repairs.
If there occurs any interruption of certified and registered mail service,
lasting more than five (5) consecutive business days, notices may be given by
telefax or personal delivery, but shall not be effective until personally
received by an executive officer of a party which is a corporation, or a member
of a party which is a partnership or joint venture, or a principal of any other
entity.
29. SERVICES PROVIDED BY LANDLORD: As long as Tenant is not in
default under any of the covenants of this lease, Landlord shall provide the
following services:
A. Elevator Service.
(i) Passenger Elevator Service. Landlord shall provide
necessary passenger elevator facilities twenty-four (24) hours a day, three
hundred, sixty five (365) days a year.
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(ii) Freight Elevator Service. Landlord shall provide freight
elevator service to the Demised Premises on a first-come, first-served basis
(i.e., no advance scheduling) on business days from 8:00 a.m. to 4:30 p.m.
Freight elevator service shall, provided same is available, be provided on a
reserved basis at all other times, upon the payment of Landlord's then
established charges therefor which shall constitute additional rent hereunder.
B. Cleaning Services.
(i) Provided Tenant shall keep the Demised Premises in good
order, Landlord, at Landlord's expense, shall cause the executive, sales and
administrative portions of the Demised Premises only to be cleaned, i.e. not any
telecommunications equipment portion of the Demised Premises. Tenant shall pay
to Landlord on demand Landlord's charges for cleaning work in the Demised
Premises or the Building required because of (i) misuse or neglect on the part
of Tenant or its employees or visitors, (ii) use of portions of the Demised
Premises for preparation, serving, or consumption of food or beverages,
reproducing operations, private lavatories or toilets or other special purposes
requiring greater or more difficult cleaning work than office areas, (iii)
interior partitioning glass surfaces, (iv) non-Building standard materials or
finishes installed by Tenant or at its request. Landlord and/or its cleaning
contractor and their employees shall have after hours access to the Demised
Premises and the use of Tenant's light, power and water in the Demised Premises
as may be reasonably required for the purpose of cleaning the Demised Premises.
(ii) Tenant, at Tenant's expense, shall cause all portions of
the Demised Premises used for the storage, preparation, service or consumption
of food or beverages to be cleaned daily in a manner satisfactory to Landlord,
and to be exterminated against infestation by vermin, roaches or rodents
regularly and, in addition, whenever there shall be evidence of any infestation.
(iii) Only Landlord or any one or more persons, firms or
corporations authorized in writing by Landlord shall be permitted to act as
maintenance contractor for any waxing, polishing, cleaning and maintenance work
in the Demised Premises. Nothing herein contained shall prohibit Tenant from
performing such work for itself by use of its regular employees. Landlord may
fix, in its absolute discretion, at any time and from time to time, the hours
during which and regulations under which such services are to be furnished.
Landlord expressly reserves the right to act as or to designate, at any time and
from time to time, an exclusive contractor for all or any one or more of such
services, provided that the quality thereof and the charges therefor are
reasonably comparable to that of other contractors, and Landlord expressly
reserves the right to exclude from the Building any person, firm or corporation
attempting to furnish any of such services.
C. Water. Landlord shall provide water for ordinary lavatory and
drinking purposes only, but if Tenant uses or consumes water for any other
purposes, Landlord may install a water meter at Tenant's expense which Tenant
shall thereafter maintain at Tenant's expense in good working order and repair
to register such water consumption and Tenant shall pay for water consumed as
shown on said meter as additional rent as and when bills are rendered.
D. HVAC. See Article 56.
E. Subject to the last paragraph of Article 27 hereof, Landlord
reserves the right, without same constituting an actual or constructive eviction
or entitling Tenant to any abatement and/or diminution of fixed rent and/or
additional rent, to stop services of the heating, elevators, plumbing,
air-conditioning, power systems or cleaning or other services, if any, when
necessary by reason of accident or for repairs, alterations, replacements or
improvements necessary or desirable in the judgment of Landlord for as long as
may be reasonably required by reason thereof. If the Building of which the
Demised Premises are a part supplies manually-operated elevator service,
Landlord at any time may substitute automatic-control elevator service and upon
ten days' written notice to Tenant, proceed with alterations necessary therefor
without in any manner affecting this lease or the obligation of Tenant
hereunder. The same shall be done with a minimum of inconvenience to Tenant and
Landlord shall pursue the alteration with due diligence.
30. CAPTIONS: The Captions are inserted only as a matter of
convenience and for reference and in no way define, limit or describe the scope
of this lease nor the intent of any provision thereof.
31. DEFINITIONS: The term "Landlord" as used in this lease
means only the Landlord of the fee or of the leasehold of the Building, or the
mortgagee in possession, for the time being of the land and Building (or the
Landlord of a lease of the Building or of the land and Building) of which the
Demised Premises form a part, so that in the event of any sale or sales of said
land and Building or of said lease, or in the event of a lease of said Building,
or of the land and Building, Landlord shall be and hereby is entirely freed and
relieved of all covenants and obligations of Landlord hereunder and it shall be
deemed and construed without further agreement between the parties or their
successors in interest, or between the parties and the purchaser, at any such
sale, or the said lessee of the Building, or of the land and Building, that the
purchaser or the lessee of the Building has assumed and agreed to carry out any
and all covenants and obligations of Landlord hereunder. Notwithstanding the
provisions of this Article 31 or of Article 34, no sale, assignment or transfer
by Landlord of Tenant's security deposit (in connection with the sale, transfer
or assignment by Landlord of its rights and obligations under this Lease and/or
in the Building) shall operate to release Landlord
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from its responsibility and liability to Tenant for said security deposit,
unless and until the party to whom such security deposit has been assigned or
transferred has acknowledged to Tenant its receipt of such security deposit, and
has assumed all of the obligations of Landlord with respect thereto. The words
"re-enter" and "re-entry" as used in this lease are not restricted to their
technical legal meaning. The term "business days" as used in this lease, shall
exclude Saturdays, Sundays and all days observed by the State or Federal
Government as legal holidays and those designated as holidays by the applicable
Building service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service.
32. ESTOPPEL CERTIFICATE: Tenant shall execute, acknowledge and
deliver to Landlord, within five (5) business days after Landlord's request, a
certificate stating: (a) that this lease is unmodified and in full force and
effect (or, if there have been modifications, that this lease is in full force
and effect, as modified, and identifying the modifications); (b) the
commencement and expiration dates of the term of this lease; (c) the dates
through which fixed rent and additional rent have been paid; (d) whether or not
there is any existing default by Landlord or Tenant with respect to which a
notice of default has been delivered, and if there is any such default,
specifying the nature and extent thereof; (e) that this lease is subordinate to
any existing or future mortgage placed by Landlord on the Building; and (f)
whether or not there are any setoffs, defenses or counterclaims against the
enforcement of any of the agreements, terms, covenants or conditions of this
lease to be paid, complied with or performed by Tenant. Any such certificate may
be relied upon by Landlord and any mortgagee, purchaser or other person with
whom Landlord may deal. Tenant's only liability under this Article 35 is to be
estopped from any claim contrary to the certificate executed therein.
33. RULES AND REGULATIONS: Tenant and Tenant's servants,
employees, agents, visitors, and licensees shall observe faithfully, and comply
strictly with, the Rules and Regulations annexed hereto and made a part hereof
as Exhibit C and such other and further reasonable Rules and Regulations as
Landlord or Landlord's agents may from time to time adopt. Notice of additional
rules or regulations shall be given in writing to Tenant in accordance with the
provisions of Article 28 of this Lease. In case Tenant disputes the
reasonableness of any additional Rule or Regulation hereafter made or adopted by
Landlord or Landlord's agents, the parties hereto agree to submit the question
of the reasonableness of such Rule or Regulation for decision to the New York
office of the American Arbitration Association, whose determination shall be
final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless the same shall be asserted by service of a notice, in
writing upon Landlord within ten (10) days after the giving of notice thereof.
34. SECURITY. Tenant shall, upon execution of this lease,
deposit with Landlord the sum of ONE HUNDRED THIRTEEN THOUSAND TWO HUNDRED
SEVENTY-ONE and 34/100 ($113,271.34) DOLLARS security for the faithful
performance and observance by Tenant of the terms, provisions and conditions of
this lease and provided that Tenant is not then in default under the terms of
this lease on the fifth (5th) anniversary of the Commencement Date then in such
event, Tenant shall be entitled to a return of SEVENTY-FIVE THOUSAND FIVE
HUNDRED FOURTEEN and 23/200 ($75,514.23) DOLLARS of the security. It is also
agreed that in the event Tenant defaults in respect of any of the terms,
provisions and conditions of this lease, including, but not limited to, the
payment of rent and additional rent, and fails to cure the same within any
applicable grace and/or notice periods, then, Landlord may use, apply or retain
the whole or any part of the security so deposited to the extent required for
the payment of any rent and additional rent or any other sum as to which tenant
is in default or for any sum which Landlord may expend or may be required to
expend by reason of Tenant's default in respect of any of the terms, covenants
and conditions of this lease, including but not limited to, any damages or
deficiency in the re-letting of the Demised Premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Landlord. In the event that Tenant shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this lease, the security
shall be promptly returned to Tenant. In the event of a sale of the land and
Building or leasing of the Building, of which the Demised Premises form a part,
Landlord shall have the right to transfer the security to the vendee or lessee
and Landlord shall thereupon be released by Tenant from all liability for the
return of such security for any claims accruing from and after the transfer
date; and Tenant agrees to look to the new Landlord solely for the return of
said security, and it is agreed that the provisions hereof shall apply to every
transfer or assignment made of the security to a new Landlord. Tenant further
covenants that it will not assign or encumber or attempt to assign or encumber
the monies deposited herein as security and that neither Landlord nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
In lieu of the cash security provided for in Article 34 hereof,
Tenant may deliver to Landlord, as security pursuant to said Article 34, an
irrevocable, clean, "Evergreen" commercial letter of credit in the amount of
$113,271.34 (the "Letter"), issued by a bank which is authorized by the State of
New York to conduct banking business in New York State and is a member of the
New York Clearing House Association, which shall permit Landlord (a) to draw
thereon up to the full amount of the credit evidenced thereby in the event of
any default by Tenant in the terms, provisions, covenants or conditions of this
Lease or (b) to draw the full amount thereof to be held as cash security
pursuant to Article 34 hereof if for any reason the Letter is not renewed within
sixty (60) days prior to its expiration date. The Letter (and each renewal
thereof) shall (i) be for a term of not less than one (1) year (except that the
last Letter shall be for a term expiring sixty (60) days after the Expiration
Date), (ii) expressly provide for the issuing bank to notify Landlord in writing
not less than sixty (60) days prior to its expiration as to its renewal or
non-renewal, as the case may be, and (iii) if not
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so renewed each year (or later period of expiration) shall be immediately
available for Landlord to draw up to the full amount of such credit (to be held
as cash security pursuant to said Article 34). Not less than forty-five (45)
days prior to the expiration date of each Letter (and every renewal thereof),
Tenant shall deliver to Landlord a renewal or new Letter subject to all of the
conditions aforesaid, all to the intent and purposes, that a Letter in the sum
of $113,271.34 shall be in effect during the first five (5) years of the term of
this lease and provided that Tenant is not then in default under the terms of
this lease, that a Letter in the sum of $37,757.08 shall be in effect for the
remainder of the term of this lease. Failure by Tenant to comply with the
provisions of this Article shall be deemed a material default hereunder
entitling Landlord to exercise any and all remedies as provided in this Lease
for default in the payment of fixed rent and, to draw on the existing Letter up
to its full amount.
35. ADJACENT EXCAVATION - SHORING: If an excavation shall be
made upon land adjacent to the Demised Premises, or shall be authorized to be
made, Tenant shall afford to the person causing or authorized to cause such
excavation, license to enter upon the demises Demised Premises for the purpose
of doing such work as said person shall deem necessary to preserve the wall or
the Building of which Demised Premises form a part from injury or damage and to
support the same by proper foundations without any claim for damages or
indemnity against Landlord, or diminution or abatement of rent.
36. SUCCESSORS AND ASSIGNS: The covenants, conditions and
agreements contained in this lease shall bind and inure to the benefit of
Landlord and Tenant and their respective heirs, distributees, executors,
administrators, successors, and except as otherwise provided in this lease,
their assigns.
SEE RIDER ANNEXED HERETO AND MADE A PART HEREOF.
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IN WITNESS WHEREOF, Landlord and Tenant have respectively
signed and sealed this lease as of the day and year first above written.
LANDLORD:
67 BROAD STREET LLC
By: /s/ [SIGNATURE TO COME]
------------------------
NAME:
TITLE: A MEMBER
TENANT:
PLD TELEKOM, INC.
By: /s/ E. Clive Anderson
------------------------
NAME: E. CLIVE ANDERSON
TITLE: Sr. V.P.
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RIDER ANNEXED TO
LEASE FOR 75 A/K/A 67 BROAD STREET, NEW YORK, NEW YORK
TENANT: PLD TELEKOM, INC.
SPACE: PORTION 7TH FLOOR
37. RIDER PROVISIONS PREVAIL:
If and to the extent that any of the provisions of this Rider conflict
or are otherwise inconsistent with any of the preceding printed provisions of
this Lease, or of the Rules and Regulations attached to this Lease, whether or
not such inconsistency is expressly noted in this Rider, the provisions of this
Rider shall prevail, and in case of inconsistency with said Rules and
Regulations, the Rider shall govern and control.
38. ADDITIONAL DEFINITIONS:
For the purposes of this Lease and all agreements supplemental to this
Lease, and all communications with respect thereto, unless the context otherwise
requires:
1. The term "fixed rent" or "Fixed Rent" shall mean rent at the annual
rental rate or rates provided for in Schedule B annexed hereto and made a part
hereof.
2. The term "additional rent" shall mean all sums of money, other than
fixed rent, and which become due and payable from Tenant to Landlord hereunder,
and Landlord shall have the same remedies therefor as for a default in payment
of fixed rent.
3. The term "rent" and "rents" shall mean and include fixed rent and/or
additional rent hereunder.
4. The terms "Commencement Date" and "Expiration Date" shall mean the
dates fixed in this Lease, or to be determined pursuant to the provisions of
this Lease, respectively, as the beginning and the end of the term for which the
Demised Premises are hereby leased.
5. The term "Lease Year" shall mean the twelve (12) month period
commencing on the Commencement Date and each successive twelve (12) month period
thereafter.
6. The term "Superior Lessee" or "Superior Mortgagee" shall mean any
party then holding a ground lease or mortgage encumbering the land and/or
Building.
39. ESCALATION FOR INCREASE IN REAL ESTATE TAXES:
A. As used herein:
1. "Taxes" shall mean real estate taxes payable (adjusted after
protest or litigation, if any) for any part of the term of this lease, on the
Building and/or the land (the "Land"), (i) any taxes which shall be levied in
lieu of any such taxes, including any taxes levied on the gross rentals of the
Building and/or the Land, (ii) any special assessments against the Building
and/or the Land which shall be required to be paid during the fiscal year in
respect to which taxes are being determined, and (iii) the expense of contesting
the amount or validity of any such taxes, charges or assessments, such expense
to be applicable to the period of the item contested.
2. "Tax Year" shall mean each period of twelve (12) months,
commencing on the first day of July of each such period, in which occurs any
part of the term of this Lease or such other period of twelve (12) months
occurring during the term of this Lease as hereafter may be duly adopted as the
fiscal year for real estate tax purposes of the City of New York.
3. "Base Tax" shall mean the Taxes for the fiscal tax year
commencing July 1, 1998 and ending June 30, 1999 (the "Base Tax Year").
4. "Tenant's Proportionate Share" shall mean ninety-two
hundredths (.92%) percent.
B. If the Taxes for any Tax Year shall be greater than the Base Tax,
then Tenant shall pay as additional rent for such Tax Year, a sum equal to
Tenant's Proportionate Share of the amount by which the Taxes for such Tax Year
are greater than the Base Tax (which amount is hereinafter called the "Tax
Payment"). Should this Lease commence or terminate prior to the expiration of a
Tax Year, such Tax
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Payment shall be prorated to, and shall be payable on, or as and when
ascertained after, the Commencement Date or the Expiration Date as the case may
be. Tenant's obligation to pay such additional rent and Landlord's obligation to
refund pursuant to Paragraph C below, as the case may be, shall survive the
termination of this Lease. If the Taxes for any Tax Year subsequent to the Base
Tax Year, or an installment thereof, shall be reduced before such Taxes or such
installment shall be paid, the amount of Landlord's reasonable costs and
expenses of obtaining such reduction (but not exceeding the amount of such
reduction) shall be added to and be deemed part of the Taxes for such Tax Year.
Payment of additional rent for any Tax Payment due from Tenant shall be made as
and subject to the conditions hereinafter provided in this Article.
C. Only Landlord shall be eligible to institute proceedings to contest
the Taxes or reduce the assessed valuation of the land and Building. Landlord
shall be under no obligation to contest the Taxes or the assessed valuation of
the Land and the Building for any Tax Year and may settle any such contest on
such terms as Landlord in its sole judgment considers proper. If Landlord shall
receive a refund for any Tax Year for which a Tax Payment shall have been made
by Tenant pursuant to Paragraph B above, Landlord shall repay to Tenant, with
reasonable promptness, Tenant's Proportionate Share of such refund, less the
costs (including experts' and attorneys' fees) of obtaining such refund. If the
assessment for the Base Tax Year shall be changed from the comparative statement
(as provided in Paragraph D below) to Tenant with respect to a Tax Year, the
amount of the Tax Payment shall be adjusted in accordance with such change.
D. Landlord shall furnish to Tenant, prior to the commencement of any
Tax Year, a written statement setting forth the Tax Payment for such Tax Year.
Tenant shall pay to Landlord on the first day of each month during such Tax Year
an amount equal to one-twelfth (1/12th) of the Tax Payment for such Tax Year.
If, however, Landlord shall furnish any such statement for a Tax Year subsequent
to the commencement thereof, then (i) until the first day of the month following
the month in which such statement is furnished to Tenant, Tenant shall pay to
Landlord on the first day of each month an amount equal to the monthly sum
payable by Tenant to Landlord under this Paragraph in respect of the last month
of the immediately preceding Tax Year; (ii) promptly after such statement is
furnished to Tenant, Landlord shall give notice to Tenant stating whether the
installments of the Tax Payment previously made for such Tax Year were greater
or less than the installments of the Tax Payment to be made for such Tax Year in
accordance with such statement, and (a) if there shall be a deficiency, Tenant
shall pay the amount thereof within ten (10) days after demand therefor, or (b)
if there shall have been an overpayment, Landlord shall promptly either refund
to Tenant the amount thereof or permit Tenant to credit the amount thereof
against subsequent payments under this Article; and (iii) on the first day of
the month following the month in which such statement is furnished to Tenant,
and monthly thereafter throughout the remainder of such Tax Year, Tenant shall
pay to Landlord an amount equal to one-twelfth (1/12th) of the Tax Payment shown
on such statement.
E. Landlord's failure during the lease term to prepare and deliver any
tax statements or bills, or Landlord's failure to make a demand under this
Article or under any other provision of this Lease shall not in any way waive
Landlord's right to collect any such amounts due hereunder. Tenant's liability
for the additional rent due under this Article shall survive the expiration or
sooner termination of this Lease.
F. In no event shall any adjustment of Tax Payments hereunder result in
a decrease in the fixed rent or additional rent payable pursuant to any other
provision of the lease, it being agreed that the payment of additional rent
under this Article 39 is an obligation supplemental to Tenant's obligation to
pay fixed rent.
40. INTENTIONALLY OMITTED.
41. FREE RENT:
Provided Tenant is not in default under the terms, covenants and
conditions of this lease, Tenant shall have the right to use and occupy the
Demised Premises free of fixed rent for the first six (6) months following the
Commencement Date i.e. all in Lease year one (1) (or, if Landlord shall not be
able to deliver possession on such date, following the date Landlord is actually
able to deliver possession), except that Tenant shall pay to Landlord all sums
due under Article 46 hereof representing reimbursement to Landlord for the
furnishing to Tenant of electric current during said period. Except for the free
fixed rent allowance as herein provided, Tenant shall use and occupy the Demised
Premises pursuant to all of the other terms, covenants and conditions of this
lease.
42. AMENDING ARTICLE 11:
Notwithstanding the provisions of Article 11, and in modification and
amplification thereof:
A. If Tenant shall desire to assign this Lease or to sublet all or a
portion of the Demised Premises, Tenant shall submit to Landlord a written
request for Landlord's consent to such assignment or subletting, which request
shall contain or be accompanied by the following information: (i) the name and
address of the proposed assignee or subtenant; (ii) a duplicate original or
photocopy of the proposed assignment agreement or sublease or a true and correct
photocopy of the offer from the proposed assignee or subtenant signed by such
proposed assignee or subtenant; (iii) the nature and character of the business
of the proposed assignee or subtenant and its proposed use of the Demised
Premises; and (iv) banking,
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financial and other credit information with respect to the proposed assignee or
subtenant reasonably sufficient to enable Landlord to determine the financial
responsibility of the proposed assignee or subtenant.
Landlord shall then have the option to be exercised by written
notice given to Tenant within thirty (30) days after receipt of Tenant's request
for consent to either (x) require a surrender of the Demised Premises or portion
thereof or (y) to obtain a sublet from Tenant of the Demised Premises or portion
thereof, upon the terms and conditions hereinafter provided.
B. If Landlord shall exercise its option to require a surrender of the
Demised Premises or portion thereof as provided in clause (x) of paragraph A
above, then upon the proposed commencement date of the subletting specified in
Tenant's notice to Landlord, the Demised Premises or portion intended to be
sublet, as the case may be, shall be surrendered to Landlord in accordance with
the provisions of the Lease pertinent to surrender, and this Lease shall cease
and terminate insofar as the Demised Premises or portion thereof, as the case
may be, with the same force and effect as though such proposed commencement date
were the Expiration Date. If only a portion of the Demised Premises is involved,
the terms and conditions of the Lease shall remain in full force and effect,
except that the Fixed Rent and additional rent shall be proportionately reduced
based upon the number of square feet of the portion of the Demised Premise
surrendered. In addition, in the event that less than all of the Demised
Premises is surrendered:
1. Landlord shall cause to be constructed, at Landlord's sole
cost and expense, such alterations and connections as may be required in order
to physically separate such surrendered the portion of the Demised Premises from
the balance of the Demised Premises; and
2. At least thirty (30) days prior to the proposed commencement
date specified above, Landlord shall have free access to enter to the Demised
Premises in order to complete the construction referred to in "1" above.
C. If Landlord shall exercise its option as provided in clause (y)
above to sublet from Tenant the Demised Premises or any portion thereof
("Leaseback Area"), Tenant automatically shall be deemed to have subleased the
Leaseback Area to Landlord for the term ("Backleasing" or "Backlease") for the
term ("Backlease Term") of the proposed sublease referred to in Tenant's notice
to Landlord, at a sublease rent equal to the lesser of (on a per square foot
basis) (a) the fixed rent payable under this lease or (b) rent specified in the
sublease proposed by Tenant. All other terms and conditions of this Lease shall
remain applicable to the Leaseback Area, except such as by their nature or
purport are inapplicable or inappropriate to such Backleasing, or are
inconsistent with the further provisions of the following subsections of this
paragraph, which further provisions shall be deemed to be part of the terms,
covenants, and conditions of such Backleasing.
In addition, the following provisions shall be applicable to
any Backleasing:
(i) Landlord shall have the unqualified and
unrestricted right, without Tenant's permission or consent, to underlet the
Leaseback Area in whole or in part to any person or entity, including Tenant's
proposed subtenant, for any period or periods of time not extending beyond one
(1) day before the expiration of the Backlease Term, at such rentals and on such
terms and conditions (including any alterations required to render the Leaseback
Area suitable for occupancy by an undertenant of Landlord) as Landlord shall
determine. Landlord may underlet the Leaseback Area or parts thereof separately
or in combinations, as Landlord deems appropriate. The Backlease may be assigned
by Landlord to any person, including Tenant's proposed subtenant, without
Tenant's consent but such assignment shall not be effective unless the
transferee executes and delivers to Tenant a written agreement assuming all of
Landlord's obligations under the Backlease, and in such event Landlord shall
continue to be fully responsible jointly and severally with such assignee for
all of Landlord's obligations under the Backlease. At the expiration or sooner
termination of the Backlease Term, Landlord shall have no obligations to restore
or alter or improve the Leaseback Area;
(ii) Tenant shall furnish to Landlord or its assignee
or subtenant under the Backlease any consents or approvals requested under the
Backlease so long as (a) Landlord furnishes such consents or approvals to Tenant
and, (b) Tenant incurs no expense by reason of any such consent or approval; and
(iii) Landlord and Tenant expressly negate any
intention that any estate created by or under the Backlease shall be merged with
any other estate held by either of them. At the request of either party,
Landlord and Tenant shall mutually execute, acknowledge, and deliver an
instrument or instruments of sublease and/or assignment to confirm and
separately set forth the rent, terms, conditions and other provisions of the
Backleasing or any Leaseback Area as may be appropriate.
D. If Landlord does not exercise either option specified in paragraphs
B and C above, then Landlord's consent to a subletting of all or a portion of
the Demised Premises or an assignment of Tenant's interest in this lease shall
not be unreasonably withheld or delayed on further condition that:
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1. The proposed subtenant or assignee shall not be a school of any
kind, or an employment or placement agency or governmental or quasi governmental
agency, medical office or executive recruitment office;
2. The subletting or assignment shall be to a tenant whose occupancy
will be in keeping with the dignity and character of the then use and occupancy
of the Building and whose occupancy will not be more objectionable or more
hazardous than that of Tenant herein or impose any additional burden upon
Landlord in the operation of the Building;
3. No space shall be advertised or openly promoted to the general
public utilizing the name of the Landlord or any principal or partner thereof,
or stating or otherwise characterizing a rental rate;
4. The proposed sublessee or assignee shall not be an occupant of any
space in the Building or a party who dealt with Landlord or Landlord's agent
(directly or through a broker) with respect to space in the Building during the
six (6) months immediately preceding Tenant's request for Landlord's consent;
5. Tenant shall reimburse Landlord on demand for any reasonable costs
that may be incurred in connection with any assignment or sublease, including,
without limitation, the reasonable costs of making investigations as to the
acceptability of the proposed assignee or subtenant, and reasonable legal costs
incurred in connection with the granting of any requested consent;
6. In case of a subletting, it shall be expressly subject to all of the
obligations of Tenant under this Lease and the further condition and restriction
that the subleased Demised Premises shall not be further sublet by the sublessee
in whole or in part, or any part thereof suffered or permitted by the sublessee
to be used or occupied by others, without the prior written consent of Landlord
in each instance;
7. Tenant, at Tenant's expense, shall provide and permit reasonably
appropriate means of ingress to and egress from the space sublet by Tenant; and
8. Tenant is not then in default under the terms, covenants and
conditions of this lease on Tenant's part to be observed and performed.
E. No permitted or consented to assignment or subletting shall be
effective or valid for any purpose whatsoever unless and until a counterpart of
the assignment or a counterpart or reproduced copy of the sublease shall have
been first delivered to the Landlord, and, in the event of an assignment, the
Tenant shall deliver to Landlord a written agreement executed and acknowledged
by the Tenant and such assignee in recordable form wherein such assignee shall
assume jointly and severally with Tenant the due performance of this Lease on
Tenant's part to be performed for the balance of the term of this Lease
notwithstanding any other or further assignment.
F. INTENTIONALLY OMITTED
G. Neither any assignment of Tenant's interest in this Lease nor any
subletting, occupancy or use of the Demised Premises or any part thereof by any
person other than Tenant, nor any collection of rent by Landlord from any person
other than Tenant as provided in Article 11 hereof, nor any application of any
such rent as provided in said Article 11 shall, in any circumstances, relieve
Tenant of its obligations fully to observe and perform the terms, covenants and
conditions of this Lease on Tenant's part to be observed and performed.
H. Notwithstanding anything to the contrary contained herein, if
Landlord shall consent to any assignment or subletting, then (i) in the case of
an assignment, if Tenant shall receive any consideration from its assignee in
connection with the assignment of this Lease, Tenant shall pay over to Landlord,
as additional rent, a sum equal to fifty (50%) percent of any such consideration
(excluding sums designated by the assignee as paid for the purpose of Tenant's
property in the Demised Premises), as shall exceed the brokerage commissions,
alterations expenses and attorneys' fees and disbursements reasonably incurred
by Tenant for such assignment or (ii) if Tenant shall sublet the Demised
Premises or any portion thereof to anyone for rents, additional charges or other
consideration (other than the price paid for the purchase of Tenant's property)
which for any period shall exceed the rents payable for the subleased space
under this Lease for the same period, Tenant shall pay Landlord, as additional
rent, a sum equal to fifty (50%) percent of any such excess less brokerage
commissions, and attorneys' fees and disbursements reasonably incurred by Tenant
for such subletting. All sums payable to Landlord pursuant to subdivision (i) of
this Paragraph H shall be paid on the effective date of such assignment and all
sums payable to Landlord pursuant to subdivision (ii) of this Paragraph H shall
be paid on the date or dates such sums are actually paid to Tenant by the
subtenant.
I. Tenant may, without Landlord's prior written consent, but upon prior
written notice to Landlord, permit any corporations or other business entities
which control, are controlled by, or are under common control with Tenant
(herein referred to as "related corporation") to sublet all or part of the
Demised Premises for any of the purposes permitted to Tenant, subject however to
compliance with Tenant's obligations under this Lease. Such subletting shall not
be deemed to vest in any such related corporation any right or interest
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in this Lease or the Demised Premises nor shall it relieve, release, impair or
discharge any of Tenant's obligations hereunder. For the purposes hereof,
"control" shall be deemed to mean ownership of not less than fifty (50%) percent
of all of the voting stock of such corporation or not less than fifty (50%)
percent of all of the legal and equitable interest in any other business
entities.
J. Tenant may, without Landlord's prior consent, but upon prior written
notice to Landlord, assign or transfer its entire interest in this Lease and the
leasehold estate hereby created or sublet the whole of the Demised Premises to a
successor corporation of Tenant (as hereinafter defined); provided, however,
that (i) Tenant shall not be in default in any of the terms of this Lease, (ii)
the proposed occupancy shall not increase the office cleaning requirements (if
any) or impose an extra burden upon the building equipment or building services
and (iii) the proposed subtenant or assignee shall not be entitled, directly or
indirectly, to diplomatic or sovereign immunity and shall be subject to the
service of process in, and the jurisdiction of the courts of, New York State. A
"successor corporation", as used in this Section shall mean (a) a corporation
into which or with which Tenant, its corporate successors or assigns, is merged
or consolidated, in accordance with applicable statutory provisions for the
merger or consolidation of corporations, provided that by operation of law or by
effective provisions contained in the instruments of merger or consolidation,
the liabilities of the corporations participating in such merger or
consolidation are assumed by the corporation surviving such merger or
consolidation, or (b) a corporation acquiring this lease and the term hereof and
the estate hereby granted, the goodwill and all or substantially all of the
other property and assets (other than capital stock of such acquiring
corporation) of Tenant, its corporate successors or assigns, and assuming all or
substantially all of the liabilities of Tenant, its corporate successors and
assigns, or (c) any corporate successor to a successor corporation becoming such
by either of the methods described in subdivisions (a) and (b) above; provided
that, immediately after giving effect to any such merger or consolidation, or
such acquisition and assumption, as the case may be, the corporation surviving
such merger or created by such consolidation or acquiring such assets and
assuming such liabilities, as the case may be, shall have assets, capitalization
and a net worth, as determined in accordance with generally accepted accounting
principles, at least equal to the assets, capitalization and net worth,
similarly determined, of Tenant, its corporate successors or assigns,
immediately prior to such merger or consolidation or such acquisition and
assumption, as the case may be.
43. ADDENDUM TO ARTICLE 3:
In connection with Landlord's agents' review, modification, approval,
supervisor and/or coordination of plans and specifications for any Tenant work,
Tenant shall, promptly upon demand, reimburse Landlord's agent for any
reasonable out-of-pocket fees, expenses and other charges incurred by Landlord
in connection with the review, modification and/or approval of such plans and
specifications. Landlord agrees at no charge to Tenant, to make Landlord's
structural engineer available and reasonable times and on reasonable prior
notice to meet with Tenant and its engineer regarding structural matters
including Tenant's proposed installation of batteries and generators.
In performing any alterations or installations Tenant shall be
responsible for the cost of compliance with all applicable governmental rules
and regulations including without limitation The Americans With Disabilities Act
of 1990, Public Law 101-336 42 U.S.C. Secs. 12101 et seq. together with all
amendments thereto which may be adopted from time to time, and all regulations
and rules promulgated thereunder.
44. LIMITATION OF LIABILITY:
Tenant agrees that the liability of Landlord under this Lease and all
matters pertaining to or arising out of the tenancy and the use and occupancy of
the Demised Premises, shall be limited to Landlord's interest in the Building.
In no event shall Tenant make any claim against or seek to impose any personal
liability upon any general or limited partner of Landlord, or any principal of
any firm or corporation that may hereafter be or become the Landlord.
45. INDEMNIFICATION AND INSURANCE:
A. Tenant shall indemnify and save harmless Landlord and its agents
against and from any and all claims arising from any work or thing whatsoever
done, or any condition created in or about the Demised Premises during the term
hereof or arising from any negligent or wrongful acts or omission of Tenant or
any of its subtenants or licensees or its or their employees, agents visitors,
invitees or contractors or subcontractors.
B. Tenant covenants to provide on or before the Commencement Date and
to keep in force during the term hereof the following insurance coverage:
(i) For the benefit of Landlord, Tenant, and all
Superior Mortgagees and Superior Lessees, a comprehensive policy of liability
insurance protecting and indemnifying Landlord, Tenant all Superior Mortgagees
and Superior Lessees against claims for personal injury, death or property
damage occurring upon, in or about the Demised Premises, and the public portions
of the Building used by Tenant, its employees, agents, con-tractors, customers,
invitees and visitors including, without limitation, personal injury, death or
property damage resulting from any work performed by or on behalf of Tenant,
with coverage
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of not less than Two Million ($2,000,000.00) Dollars combined single limit for
personal injury, death and property damage. The paid liability insurance shall
include a broad form contractual liability endorsement protecting Tenant against
loss arising out of liabilities assumed by Tenant by indemnity or otherwise.
(ii) Fire and extended coverage in an amount adequate
to cover the cost of replacement of all personal property, fixtures, furnishing
and equipment, including Tenant's work, located in the Demised Premises.
On or before the Commencement Date, Tenant
shall deliver to Landlord duplicate originals of the aforesaid policies or
certificates evidencing the aforesaid insurance coverage, and renewal policies
or certificates shall be delivered to Landlord at least thirty (30) days prior
to the expiration date of each policy with proof of payment of the premiums
thereof.
C. All policies of insurance procured by Tenant shall be issued in form
reasonably acceptable to Landlord by insurance companies with general policy
holder's ratings of not less than A and in a Financial Size Category of not less
than XII, as rated in the most current available "Best's" insurance reports, and
licensed to do business in the State of New York and authorized to issue such
policy or policies;
D. All insurance procured by Tenant shall be issued in the names and
for the benefit of Landlord (and each member thereof in the event Landlord is a
partnership or joint venture), Landlord's managing agent, Tenant, and, unless
Landlord otherwise requests, any Superior Lessee and the Superior Mortgagee, as
their respective interests may appear, and shall contain an endorsement that
each of Landlord, the Superior Lessee and Superior Mortgagee, although named as
an insured, nevertheless shall be entitled to recover under said policies for
any loss or damage occasioned to it, its agents, employees, contractors,
directors, shareholders, partners and principals (disclosed and undisclosed) by
reason of the negligence of Tenant, its servants, agents, employees, and
contractors. In the case of insurance against damage by fire or other casualty,
the policy or policies shall provide that loss shall be adjusted with Landlord,
and shall be payable to Landlord and/or the Superior Mortgagee and/or Superior
Lessee as directed by the Landlord, to be held and disbursed by Landlord and/or
the Superior Mortgagee under a standard mortgage clause;
E. All policies of insurance procured by Tenant shall contain
endorsements providing as follows: (i) that such policies may not be materially
changed, amended, reduced, canceled (including for non-payment of premium) or
allowed to lapse with respect to Landlord or the Superior Lessor or the Superior
Mortgagee except after thirty (30) days' prior notice from the insurance company
to each, sent by registered mail: and (ii) that Tenant shall be solely
responsible for the payment of all premiums under such policies and that
Landlord or any other party named therein shall have no obligation for the
payment thereof notwithstanding that Landlord or certain other parties may be
named as an insured.
46. ELECTRIC CURRENT:
Tenant agrees that Landlord shall furnish electricity to Tenant on a
"submetering" basis.
A. Submetering: Landlord shall, at Landlord's sole expense, install a
meter (as hereinafter defined) at a location designated by Landlord, connections
from the riser servicing the Demised Premises to said meter and perform all
other work necessary for the furnishing of electric current by Landlord in the
manner provided for in this Paragraph A. If and so long as electric current is
supplied by Landlord to the Demised Premises to service Tenant's office
equipment and the air conditioning units therein contained, if any, Tenant will
pay Landlord or Landlord's designated agent, as additional rent for such
service, the amounts, (hereinafter collectively called the "Electricity
Additional Rent"), as determined by a meter or submeter (the "Submeter")
installed, by Landlord at Landlord's cost, for the purpose of measuring such
consumption. The readings from the Submeter shall then be used to compute the
Electricity Additional Rent. Such service shall be computed at the rates at the
beginning of the scale for any given bill period specified in the same service
classification at which Landlord purchases electric current for the entire
Building, plus a fee (the "Overhead Charge") equal to eight (8%) percent of such
charge to Landlord, representing administrative/overhead costs to Landlord. The
Overhead Charge shall be payable as Electricity Additional Rent as herein
provided. Landlord, at its option, may from time to time, increase the
Electricity Additional Rent based upon among other things, increases in the
average cost per kilowatt hour and kilowatt demand to Landlord of purchasing
electricity for the Building, and such other factors, such as, without
limitation, fuel adjustment charges (as determined for each month of said period
and not averaged), rate adjustment charges, sales tax, and or any other factors,
used by the public utility company in computing its charges to Landlord; as
applied to kilowatts of demand purchased by Landlord during a given period. The
periods to be used for the aforesaid computation shall be the bill periods
ending in February and August immediately preceding such change, or such other
period or periods as Landlord, in its sole discretion, may from time to time
elect. Where more than one meter measures the electric service to Tenant, the
electric service rendered through each meter may be computed above set forth.
Bills for the Electricity Additional Rent (the "Bills") shall be rendered to
Tenant at such time as Landlord may elect and the amount, as computed from the
meter, together with the Overhead Charge, shall be the Electricity Additional
Rent.
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In the event that such Bills are not paid within ten (10) days
after the same are rendered, Landlord may, without further notice, discontinue
the service of electric current to the Demised Premises without releasing Tenant
from any liability under this Lease and without Landlord or Landlord's agent
incurring any liability for any damage or loss sustained by Tenant as the result
of such discontinuance. If any tax is imposed upon Land lord's receipts from the
sale or resale of electric current to Tenant by any Federal, state or municipal
authority, Tenant agrees that, unless prohibited by law, Tenant's proportionate
share of such taxes shall be passed on to, and included in the bill of, and paid
by Tenant to Landlord as additional rent.
B. Tenant agrees not to connect any additional electrical equipment of
any type to the Building electric distribution system, without Landlord's prior
written consent, which consent shall not be unreasonably withheld. Any
additional risers, feeders, or other equipment proper or necessary to supply
Tenant's electrical requirements, upon written request of Tenant, will be
installed by Landlord, at the sole cost and expense of Tenant, if, in Landlord's
sole judgment, the same are necessary and will not cause permanent damage or
injury to the Building or the Demised Premises, or cause or create a dangerous
or hazardous condition or entail excessive or unreasonable alterations, repair
or expense or interfere with or disturb other tenants or occupants.
C. Tenant's use of electric current in the Demised Premises shall not
at any time exceed the capacity of any of the electrical conductors and
equipment in or otherwise serving the Demised Premises which on the Commencement
Date will be 20 watts per useable square foot i.e. 300 amps of power at 208
volts three (3) phase. Tenant shall have the right at Tenant's sole election
exercisable at any time but at Tenant's sole cost and expense, to increase the
208 volts to 480 volts. Tenant shall not make or perform or permit the making or
performing of, any alterations to wiring, installations or other electrical
facilities in or serving the Demised Premises without the prior consent of
Landlord in each instance (which shall not be unreasonably withheld). Should
Landlord grant any such consent, all additional risers or other equipment
required therefor shall be installed by Landlord and the cost thereof shall be
paid by Tenant upon Landlord's demand. If Tenant requires amperage above the
amounts allotted on the Commencement Date pursuant to the foregoing, then solely
at Tenant's option, additional amperage may be installed at the then Building
standard charge (presently $250 per each additional amp).
D. Except when caused by Landlord's negligence. Landlord shall not be
liable in any way to Tenant for any failure or defect in the supply or character
of electric energy furnished to the Demised Premises by reason of any
requirement, act or omission of the public utility serving the Building with
electricity or for any other reason.
E. Solely if required by law, Landlord reserves the right to
discontinue furnishing electric energy to Tenant at any time upon sixty (60)
days' written notice to Tenant, and from and after the effective date of such
termination, Landlord shall no longer be obligated to furnish Tenant with
electric energy, provided, however, that such termination date may be extended
for a time reasonably necessary for Tenant to make arrangements to obtain
electric service directly from the public utility company servicing the
Building. If Landlord exercises such right of termination, this Lease shall
remain unaffected thereby and shall continue in full force and effect; and
thereafter Tenant shall diligently arrange to obtain electric service directly
from the public utility company servicing the Building, and may utilize the then
existing electric feeders, risers and wiring serving the Demised Premises to the
extent available and safely capable of being used for such purpose and only to
the extent of Tenant's then authorized connected load. Landlord shall be
obligated to pay no part of any cost required for Tenant's direct electric
service.
F. At Landlord's option, Tenant shall purchase all lighting tubes,
lamps, bulbs and ballasts used in the Demised Premises and Tenant shall pay
Landlord's reasonable charges for providing and installing same, on demand, as
additional rent.
G. Notwithstanding any provisions of this Article 46, in no event shall
(a) the Fixed Annual Rent under this Lease be reduced by virtue of this Article
46 and (b) the cost to Tenant for electric energy be less than 108% of the cost
incurred by Landlord to obtain electric energy from the public utility
furnishing same to the Building.
47. BROKER:
Landlord and Tenant represent and warrant to the other that neither
consulted nor negotiated with any broker or finder with regard to the rental of
the Demised Premises from Landlord other than Newmark & Company Real Estate,
Inc. and CB Richard Ellis, Inc. Landlord and Tenant agree to indemnify and hold
the other harmless from any claims, suits, damages, costs and expenses suffered
by the other by reason of any breach of the foregoing representation. Landlord
shall pay any commission due either broker in accordance with Landlord's
separate agreement with said brokers.
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<PAGE> 22
48. BINDING EFFECT:
It is specifically understood and agreed that this Lease may be offered
to Tenant for signature by the leasing or managing agent and is subject to
Landlord's acceptance and approval, and that Tenant shall have affixed its
signature hereto with the understanding that such act shall not, in any way,
bind Landlord or its agent until such time as this Lease shall have been
approved and executed by Landlord and delivered to Tenant.
49. MISCELLANEOUS:
A. Without incurring any liability to Tenant, Landlord may permit
access to the Demised Premises and open the same, whether or not Tenant shall be
present, upon demand of any receiver, trustee, assignee for the benefit of
creditors, sheriff, marshall or court officer entitled to, or reasonably
purporting to be entitled to, such access for the purpose of taking possession
of, or removing, Tenant's property or for any other lawful purpose (but this
provision and any action by Landlord hereunder shall not be deemed a recognition
by Landlord that the person or official making such demand has any right or
interest in or to this Lease, or in or to the Demised Premises), or upon demand
of any representative of the fire, police, Building, sanitation or other
department of the city, state or federal governments.
B. No receipt of monies by Landlord from Tenant, after any reentry or
after the cancellation or termination of this Lease in any lawful manner, shall
reinstate the lease; and after the service of notice to terminate this Lease, or
after the commencement of any action, proceeding or other remedy, Landlord may
demand, receive and collect any monies due, and apply them on account of
Tenant's obligations under this Lease but without in any respect affecting such
notice, action, proceeding or remedy, except that if a money judgment is being
sought in any such action or proceeding, the amount of such judgment shall be
reduced by such payment.
C. If Tenant is in arrears in the payment of fixed rent or additional
rent, Tenant waives its right, if any, to designate the items in arrears against
which any payments made by Tenant are to be credited and Landlord may apply any
of such payments to any such items in arrears as Landlord, in its sole
discretion, shall determine, irrespective of any designation or request by
Tenant as to the items against which any such payments shall be credited.
D. No payment by Tenant nor receipt by Landlord of a lesser amount than
may be required to be paid hereunder shall be deemed to be other than on account
of any such payment, nor shall any endorsement or statement on any check or any
letter accompanying any check tendered as payment be deemed an accord and
satisfaction and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such payment due or pursue any other
remedy in this Lease provided.
E. If in this Lease it is provided that Landlord's consent or approval
as to any matter will not be unreasonably withheld, and it is established by a
court or body having final jurisdiction thereover that Landlord has been
unreasonable the only effect of such finding shall be that Landlord shall be
deemed to have given its consent or approval; but Landlord shall not be liable
to Tenant in any respect for money damages by reason of withholding its consent.
F. If payment of any Fixed Rent or Additional Rent shall not have been
paid by the fifth day after the date on which such amount was due and payable,
then, in addition to and without waiving or releasing any other remedies of
Landlord, a late charge of four cents ($.04) for each dollar overdue shall be
payable on demand by Tenant to Landlord as damages for Tenant's failure to make
prompt payment. In default of payment of any late charges, Landlord shall have
(in addition to all other remedies) the same rights as provided in this Lease
for nonpayment of Fixed Rent. Nothing in this Section contained and no
acceptance of late charges by Landlord shall be deemed to extend or change the
time for payment of Fixed Rent or Additional Rent.
G. If the Expiration Date or the date of sooner termination of this
Lease shall fall on a day which is not a business day, then Tenant's obligations
pursuant to Article 22 hereof shall be performed on or prior to the next
succeeding business day. Tenant expressly waives, for itself and for any person
claiming through or under Tenant, any rights which Tenant or any such person may
have under the provisions of Section 2201 of the New York Civil Practice Law and
Rules and of any similar or successor law of same import then in force, in
connection with any holdover proceedings which Landlord may institute to enforce
the provisions of this Lease. If the Demised Premises are not surrendered upon
the termination of this Lease, Tenant hereby indemnifies Landlord against
liability resulting from delay by Tenant in so surrendering the Demised
Premises, including any claims made by any succeeding tenant or prospective
tenant founded upon such delay. In the event Tenant remains in possession of the
Demised Premises after the termination of this Lease without the execution of a
new lease, Tenant, at the option of Landlord, shall be deemed to be occupying
the Demised Premises as a tenant from month to month, at a monthly rental equal
to 150% times the fixed rent and additional rent payable during the last month
of the term, subject to all of the other terms of this Lease insofar
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<PAGE> 23
as the same are applicable to a month-to-month tenancy. Tenant's obligations
under this Paragraph shall survive the expiration or sooner termination of this
Lease.
H. This Lease shall be governed in all respects by the laws of the
State of New York. Tenant hereby specifically consents to jurisdiction in the
State of New York in any action or proceeding arising out of this Lease and/or
the use and occupation of the Demised Premises.
I. Tenant shall not cause or permit any Hazardous Materials
(hereinafter defined) to be used, stored, transported, released, handled,
produced or installed in, on or from the Demised Premises or the Building in
violation of applicable law. "Hazardous Materials", as used herein, shall mean
any flammables, explosives, radioactive materials, hazardous wastes, hazardous
and toxic substances or related materials, asbestos or any material containing
asbestos, or any other substance or material included in the definition of
"hazardous substances", hazardous wastes", "hazard materials", "toxic
substances", "contaminants" or any other pollutant, or otherwise regulated by
any Federal, state or local environmental laws, ordinance, rule or regulation
including, without limitation, the Comprehensive Environmental Response
Compensation and Liability Act of 1980, as amended, the Hazardous Materials
Transportation Act, as amended, the Resource Conservation and Recovery Act, as
amended, and in the regulations adopted and publications promulgated pursuant to
each of the foregoing, but shall not include normal office supplies and cleaning
materials. In the event of a violation of any of the foregoing provisions of
this Paragraph, Landlord may, without notice and without regard to any grace
period contained herein, take all remedial action deemed necessary by Landlord
to correct such condition and Tenant shall reimburse Landlord for the cost
thereof, upon demand, as additional rent.
J. The individual signatories to this lease each represent that they
are duly authorized to execute this document. Upon Landlord's request, Tenant
will execute and deliver to Landlord a Secretary's Certificate setting forth the
authority of the officer executing the lease by and on Tenant's behalf.
50. DOWNTOWN TAX APPLICATION:
Landlord and Tenant hereby acknowledge and agree that Tenant, at
Tenant's sole cost and expense, may make application (the "Application") after
the Commencement Date of this Lease to the appropriate governmental authority in
order to receive certain tax abatements (the "Tax Abatement") for the Building
pursuant to "The Lower Manhattan commercial Revitalization Program") (the
"Program") created by Title 4A of Article 4 of the real Property Tax Law,
Sections 499-a et. seq. (the "Law"); provided, however, Tenant shall not
make the Application (nor continue with its being processed) unless all of the
following are and remain true and correct, (and all of which are in any event
hereby agreed to and acknowledged by Tenant), (whereby, if all of the following
are and remain true and correct, Landlord shall cooperate with Tenant in
Tenant's attempt to obtain the Tax Abatement for the Building by joining in the
Application): (i) Tenant shall file the Application, and all related
documentation in accordance with all time frames and schedules as may be
required by the law (and all related rules and regulations) and the Program;
(ii) Tenant meets all eligibility requirements for the Program with respect to
the Premises (and, in this regard, upon request, Tenant shall deliver to
Landlord upon demand all information and documentation requested by Landlord
with respect to the Program, and Tenant's eligibility thereunder, with respect
to the Premises); (iii) Landlord shall incur no cost or expense in connection
with the Application or the Tax Abatement (as well as in connection with its
being obtained); (iv) Tenant shall reimburse Landlord for all of Landlord's
reasonable costs and expenses incurred in connection with the Application (and
related documentation) and the Tax Abatement and its being obtained) (including,
without limitation, all of Landlord's attorneys' and consultants' costs,
expenses and fees in connection with the review of any documentation concerning
the Application (and related documentation) and the Tax Abatement, the amount of
all administrative charges or fees which may be imposed by the Department of
Finance of the City of New York in connection with the Application (and all
related documentation), and in connection with ongoing compliance related to the
Program, as well as all such costs, expenses and fees which amy incurred in
attending any and all hearings and/or meetings), which reimbursement shall be
payable to Landlord by Tenant on demand, (v) Landlord has not made, nor will
Landlord be making, any representations or warranties whatsoever regarding the
feasibility of obtaining the Tax Abatement (or any facts or circumstances
related thereto), or whether any Tax Abatement which may be received will
subsequently be reduced or eliminated, or regarding Tenant's eligibility for
receiving the Tax Abatement, or whether this Lease properly conforms with
requirements imposed by the Program, or whether the appropriate expenditures as
may be imposed by the Program will be made at the Premises and the Building (and
Landlord is not required to perform any other work other than as may expressly
be set forth in this Lease; (vi) all information which may be or is set forth on
the Application as well as on all related documentation shall be true and
correct in all respects and, in this regard, Tenant shall indemnify and hold
Landlord harmless from any and all claims, losses, expenses or liabilities in
connection with any inaccuracy; (vii) Landlord shall incur no liability
whatsoever in connection with the Application, or any other related
documentation, the Program, or the Tax Abatement (or in connection with its
being obtained) and, in this regard, Tenant shall indemnify and hold Landlord
harmless from any and all claims, losses, expenses or liabilities in connection
therewith; and (viii) Tenant complies, and continues to comply, at all times
with all of the provisions and requirements of the Program, including without
limitation, all eligibility requirements, together with the rules promulgated
thereunder and, in this regard, Tenant shall indemnify and hold Landlord
harmless from any claims, losses, expenses or liabilities in connection with
Tenant's failure to so comply.
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<PAGE> 24
Notwithstanding the above, Landlord, upon written request made by
Tenant, agrees to join with Tenant in signing the Application (to the extent
Landlord is required by the Program to do so), provided, however, Landlord shall
not be required to join in if any of the terms or conditions set forth above are
untrue in any respect, or if Tenant is in default under this Lease (and, in this
regard, to the extent Landlord does so join in it shall not be deemed to be an
acknowledgment by Landlord that any of the applicable provisions or requirements
set forth above are necessarily true, nor shall the joining in ever be deemed to
be a waiver of any such provisions or requirements).
Provided all of the terms and conditions set forth above in this
Article are fully complied with by Tenant and Tenant is not otherwise in default
under this Lease (including, without limitation,as provided in this Paragraph
above), the, in such event, Landlord shall provide Tenant with a credit (the
"Tax Credit") against the Tax Amount payable by Tenant under this Lease in an
amount for any applicable Tax Year occurring during the Term which equals (but
does not exceed) the full amount of such particular Tax Year of the Tax
Abatement which is exclusively attributable to the Premises pursuant to the
Program and which is actually received by Landlord (with such amount being
called the "Actual Benefits").
Tenant shall pay to Landlord upon demand, as Additional Rent, the
amount of the Actual Benefits that have been credited against the Tax Amount
becoming due hereunder if such Tax Abatement related to the Actual Benefit is
thereafter revoked for any reason whatsoever (such as, for example, and without
otherwise limiting, as a result of the exercise by Tenant of a right to
terminate this Lease, or assignment of this Lease, or subleasing of the
Premises, or for Tenant's failure to meet and continue to meet any of the
eligibility requirements under the Program, or Tenant's breach under this
Lease), together with any interest at the highest rate allowed by law commencing
upon the date such payment is to be made, along with all penalties which may be
imposed against Landlord in connection with such Actual Benefits.
In addition, as set forth in the Law, all abatements granted under the
Program with respect to the Building pursuant to the Program will automatically
be revoked (without notice) if, during the benefit period, real estate taxes or
water or sewer charges or other lienable charges are unpaid for more than one
year, unless such delinquent amounts are paid as provided in the Law.
The provisions of this Article shall survive the expiration or earlier
termination of this Lease.
Pursuant to and in connection with the foregoing, Landlord and Tenant
agree to the following:
(1) Borough of Manhattan
Block 29
Lot 70
(2) Floor Number 7
(3) Lease execution date as of: ___________, 1998.
(4) Lease commencement date: December 15, 1998,
subject to Article 54.
(5) Rent commencement date: six (6) months after
Commencement Date.
(6) Lease expiration date: June 15, 2009
(7) Tenant's Proportionate Share: .92%
Landlord hereby informs the Tenant that:
(1) An application for abatement of real property
taxes will be made for the premises;
(2) The rent including amounts payable by the
Tenant for real property taxes will accurately reflect any abatement of real
property taxes;
(3) Certain stipulated sums must be spent on
improvements to the Demised Premises and the common areas, the amount being
dependent upon the length of the lease and whether it is a new, renewal or
expansion lease.
(4) All abatements granted will be revoked if,
during the benefit period, real estate taxes, water or sewer charges or other
lienable charges are unpaid for more than one (1 ) year, unless such delinquent
amounts are paid as provided in the relevant law.
Notwithstanding anything set forth herein to the contrary, nothing set
forth in this Article 50 shall impose any obligation on Landlord to make any
alterations or improvements to the Demised Premises, common areas, or any other
part of the Building.
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<PAGE> 25
51. LANDLORD'S CONTRIBUTION:
A. In consideration of Tenant performing all of the work (other than
Landlord's Work pursuant to Article 54) necessary for its occupancy of the
Demised Premises and for Tenant completing such work therein, Landlord agrees
that if Tenant, shall have submitted to Landlord (a) a detailed itemization of
the leasehold improvements installed by Tenant in the Demised Premises, i.e.,
exclusive of soft costs except as hereinafter provided, (b) together with
receipted paid bills therefor, (c) partial and final lien waivers to the effect
that there has not been filed with respect to the Building and/or the Demised
Premises or any part thereof or upon Tenant's leasehold interest therein any
vendor's, mechanic's, laborer's, materialman's or other lien which has not been
discharged of record, Landlord shall reimburse or cause to be reimbursed to
Tenant an amount equal to the lesser of (i) the actual cost of the leasehold
improvements performed by Tenant in the Demised Premises or (ii) ONE HUNDRED
FIFTY THOUSAND AND 00/100 ($150,000.00) Dollars, representing "Landlord's
Contribution" to such work, it being understood and agreed that Landlord's
Contribution shall not exceed the sum of ONE HUNDRED FIFTY THOUSAND AND 00/100
($150,000.00) Dollars, and that all costs and expenses in excess of said sum
shall be borne solely by Tenant.
C. Upon Tenant's request, Landlord's Contribution as provided in
Paragraph B hereof shall be paid in monthly progress payments upon submission by
Tenant of the following:
(a) A certificate signed by Tenant or Tenant's architect, dated not
more than ten (10) days prior to such request, setting forth the following:
(i) That the sum then requested is justly due to persons
who have rendered services or furnished materials for
the work therein specified, and giving a brief
description of such services and materials and the
several amounts due to each of said persons in respect
thereof, and stating that no part of such expenditure
is being made the basis, in any previous or then
pending prior request, for the receipt of Landlord's
Contribution or has been made out of the proceeds of
Landlord's Contribution received by Tenant, and that
the sum then requested does not exceed the value of the
services and materials described in the certificate;
(ii) That except for the amount, if any, stated pursuant to
the foregoing subdivision (a)(i) in such certificate to
be due for services or materials, there is no
outstanding indebtedness (except for withholding of ten
(10%) percent of such amount) known to the persons
signing such certificate, which is then due for labor,
wages, materials, supplies or services in connection
with such work which, if unpaid, might immediately
become the basis of a vendor's, mechanic's, laborer's
or material man's statutory or similar lien upon such
work or upon the land and building or any part thereof
or upon Tenant's leasehold interest.
Tenant shall deliver to Landlord together with any
plans for Tenant's Work, a load letter specifying
proposed floor loads and electrical outlays.
52. ROOF RIGHTS.
A. Tenant, at its sole cost and expense and subject to the provisions
of this Article 52, shall have the following rights: (i) Tenant may install upon
the roof of the Building, in a specific location designated by Landlord (the
"Roof Location") in its sole discretion, a single antenna or single satellite
dish ("Tenant's Telecommunications Equipment") and may connect the same to the
Demised Premises provided, however, that the type of the same to be installed
shall be satisfactory to Landlord in its sole discretion. The rights afforded
Tenant pursuant to the preceding sentence are subject to and are granted upon
the express condition that: (1) any such installations shall be deemed a
structural alteration within the meaning and subject to the provisions of
Article 3 hereof; (2) Tenant, at its sole cost and expense shall maintain the
Tenant's Telecommunications Equipment; (3) Tenant shall promptly repair any
damage caused to the Building (including, without limitation, the roof or any
exterior portions thereof) by reason of the installation, maintenance,
operation, removal and replacement of any of Tenant's Telecommunications
Equipment; (4) Tenant shall remove the applicable Tenant's Telecommunications
Equipment (other than connections to the Demised Premises) upon the expiration
or sooner termination of the term of this lease; and (5) Tenant shall repair any
resulting damage to the Building (including, without limitation, the roof or any
exterior portions thereof) and restore the Building (including, without
limitation, the roof or any exterior portions thereof) to the condition which
existed prior to any such installation, ordinary wear and tear excepted. The
parties agree that Tenant's use of the roof of the Building is a non-exclusive
use and Landlord may permit the use of any other portion of the roof by any
other person for any use, including installation of other antennae, dishes and
similar telecommunications equipment so long as any such equipment which is
installed after the date on which the applicable piece of Tenant's
Telecommunications Equipment is installed does not unreasonably interfere with
such piece of Tenant's Telecommunications Equipment.
B. Landlord shall have the right at Landlord's expense, on not less
than 20 days' prior written notice, to relocate any portion(s) of Tenant's
Telecommunications Equipment, such expense to include the
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<PAGE> 26
removal of the portion(s) to be relocated, the purchasing of materials and
equipment necessary for the relocation thereof and the reinstallation of the
applicable portion(s) at such other location as designated by Landlord on the
roof of the Building.
C. Tenant's Telecommunication Equipment is for the sole use of Tenant
and for no other parties. Tenant shall not resell in any form the use of the
Tenant's Telecommunications Equipment including, without limitation, the
granting of any licensing or other rights.
D. The rights granted in this Article 52 are given in connection with,
and as part of the rights created under, this lease and are not separately
transferable or assignable other than in connection with an assignment or
subletting as permitted by this lease.
E. Tenant's Telecommunications Equipment shall be considered Tenant's
property and Tenant shall maintain adequate insurance coverage as may from time
to time be reasonably required by Landlord.
53. INTENTIONALLY OMITTED.
54. LANDLORD'S WORK.
Tenant acknowledges and agrees that Landlord shall have no obligation
to prepare the Demised Premises for Tenant's occupancy except for those items
set forth below ("Landlord's Work").
1. Deliver the Premises demolished and in broom clean condition;
2. Provide connections to the Building sprinkler system;
3. Provide tie-ins to Building Class E system;
4. Deliver an ACP 5 Certificate;
5. Landlord shall provide Tenant with a credit of FORTY-TWO
THOUSAND AND 00/100 ($42,000.00) DOLLARS for the cost of an air-cooled package
unit sized to provide comfort cooling for the administrative areas of the
Demised Premises only. All maintenance, repair and replacement of said unit
shall be performed by Tenant at Tenant's sole cost and expense; and
6. Provide a clean floor and patch holes in ceiling and restore
fireproofing on beams.
It shall be a condition to all of Tenant's obligations under this Lease
that Landlord shall have completed all of the Landlord's Work.
If Landlord's Work is not substantially complete by December 15, 1998,
then, the Commencement Date shall be deemed to be the date fixed by Landlord in
a written notice to Tenant which notice shall state that on or prior to said
date, Landlord's Work shall have been substantially completed. The term of this
Lease shall expire nevertheless on June 15, 2009.
Notwithstanding anything contained hereinabove to the contrary, in the
event that Landlord's Work is not substantially completed sixty (60) days from
the date of execution of this Lease by Tenant and payment of the first month's
rent and security deposit then, in such event, in addition to Tenant's free
rent. set forth Article 41 hereof, Tenant shall be entitled to a day for day
additional abatement of fixed rent for each day past sixty (60) days that
Landlord Work is not substantially complete.
For purposes hereof, substantial completion of Landlord's Work shall
mean that Tenant can occupy the Demised Premises for purposes of performing all
of its initial work therein without material interference from Landlord or any
of Landlord's contractors.
With respect to certain common corridor work to be performed by
Landlord i.e. upgrade to Building standard of the common corridor including the
bathrooms. Landlord shall complete same within sixty (60) days after Tenant
completes all installations and actually takes occupancy of the Demised
Premises.
55. GENERATOR USE.
Landlord shall lease to Tenant at an annual license fee of based upon a
rental of $20 per square foot dependent on the size of the Generator, said
rental fee to increase by 3% on each anniversary of the Commencement Date)
coterminous with the term of this Lease, certain space on the seventeenth (17th)
floor set back of the Building or such other area of the Building designated by
Landlord, said location of any area designated by Landlord to be mutually
acceptable to Landlord and Tenant and their respective engineers (the
"Generator"). The Generator to be installed shall be installed by Tenant at
Tenant's sole cost and expense and may contain a weather enclosure and shall be
a 350 kw generator. No rental or other fee shall be payable by Tenant for either
the installation cost of the Generator. Until a fuel system is installed by
Landlord
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<PAGE> 27
(which Landlord anticipates without representation should be installed within
six (6) months from the Commencement Date), the Generator will be serviced with
a day fuel tank which shall be filled by Tenant and at Tenant's sole cost and
expense. In addition to the foregoing:
1. Landlord shall provide for sufficient area around the generator to
include code required and maintenance clearances around equipment, controls,
electrical boxes, conduit, piping, fuel system components, etc.;
2. Landlord shall provide sufficient area for installation of
structural supports spanning from base building structural members as necessary
to support the generator system;
3. Landlord to allow Tenant to install generator support steel as
required, fasten to structural members of roof and to perform necessary
waterproofing. Tenant not responsible for leaks in roof due to age of existing
roof and/or ability of existing roofing to accept new waterproofing repair;
4. Subject to force majeure events and legal requirements. Tenant to
have access to generator and fuel area on the roof at all times, 24 hours a day
365 days a year. Tenant shall have the right to run and operate the generator at
any and all times as is reasonably necessary for maintenance and in all power
outage conditions. Testing of the Generator however may be done only at times
reasonably designated by Landlord; and
5. Tenant will be utilizing fourteen (14) 4 inch conduits, the last
four will be free of charge and the first ten (10) at the following rates:
(a) 2 inch conduits - $2.00 per linear foot per annum;
(b) 4 inch conduits - $4.00 per linear foot per annum.
Solely with respect to any initial installations, Tenant shall
incur no additional charges to riser or conduit runs above the third (3rd) floor
i.e. by reason of the relocation of Tenant from the third (3rd) to the seventh
(7th) floor.
56. TENANT'S HVAC.
Subject to Article 3 hereof, Tenant shall install its own
internal HVAC system in the Demised Premises (i.e., not on any other portion of
the Building) it being agreed that Landlord shall have no responsibility to
furnish any HVAC to the Demised Premises. Furthermore, Landlord shall have no
responsibility regarding repair, maintenance or replacement of Tenant's internal
HVAC unit, all such repairs, maintenance and service being Tenant's sole
responsibility. At the Tenant's option, Tenant may have system fully enclosed by
partition walls.
LANDLORD:
67 BROAD STREET LLC
By: /s/ [SIGNATURE TO COME]
------------------------
Name:
Title: A Member
TENANT:
PLD TELEKOM, INC.
By: /s/ E. Clive Anderson
------------------------
NAME: E. CLIVE ANDERSON
TITLE: Sr. V.P.
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<PAGE> 28
EXHIBIT A
FLOOR PLAN
[FLOOR PLAN]
[DESCON LOGO]
DESCON INTERIORS INC. 148 MADISON AVE.
NEW YORK, NEW YORK 10016 / (212) 537-0750
The New York Technology Exchange
75 BROAD STREET
7TH FLOOR
[NEWMARK LOGO]
N E W M A R K
William G. Cohen
Executive Vice President
(212) 372-2233
Newmark & Company Real Estate, Inc. [LOGO]
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<PAGE> 29
EXHIBIT B
FIXED RENT SCHEDULE
Tenant shall pay Fixed Rent as follows:
All fixed rent shall be payable in equal monthly installments
as heretofore provided, without offset, deduction or counterclaim.
<TABLE>
<CAPTION>
RENT
LEASE YEAR PER ANNUM
---------- ---------
<S> <C>
1 ONE HUNDRED EIGHTY THOUSAND AND 00/100 DOLLARS
($180,000.00);
2 TWO HUNDRED THREE THOUSAND NINE HUNDRED FORTY AND
00/100 DOLLARS ($203,940.00);
3 TWO HUNDRED TEN THOUSAND FIFTY EIGHT AND
20/100 DOLLARS ($210,058.20);
4 TWO HUNDRED SIXTEEN THOUSAND THREE HUNDRED FIFTY NINE
AND 95/100 DOLLARS ($216,359.95);
5 TWO HUNDRED TWENTY TWO THOUSAND EIGHT HUNDRED FIFTY AND
74/100 DOLLARS ($222,850.74);
6 TWO HUNDRED FORTY ONE THOUSAND EIGHT HUNDRED NINETY SIX AND
27/100 DOLLARS ($241,896.27);
7 TWO HUNDRED FORTY NINE THOUSAND ONE HUNDRED FIFTY THREE AND
15/100 DOLLARS ($249,153.15);
8 TWO HUNDRED FIFTY SIX THOUSAND SIX HUNDRED TWENTY SEVEN AND
75/100 DOLLARS ($256,627.75);
9 TWO HUNDRED SIXTY FOUR THOUSAND THREE HUNDRED TWENTY SIX AND
58/100 DOLLARS ($264,326.58); and
10 TWO HUNDRED SEVENTY TWO THOUSAND TWO HUNDRED FIFTY SIX AND
38/100 DOLLARS ($272,256.38).
</TABLE>
-28-
<PAGE> 30
EXHIBIT C
RULES AND REGULATIONS
1. The sidewalks, entrances, driveways, passages, courts, elevators, vestibules,
stairways, corridors or halls shall not be obstructed or encumbered by any
Tenant or used for any purpose other than for ingress to and egress from the
Demised Premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Landlord. There shall not be used in any space, or in the public hall of the
Building, either by any tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks except those equipped with rubber tires
and sideguards. If the Demised Premises are situated on the ground floor of the
Building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk
and curb in front of said Demised Premises clean and free from ice, snow, dirt
and rubbish.
2. The water and wash closets and plumbing fixtures shall not be used for any
purposes other than those for which they were designed or constructed and no
sweepings, rubbish, rags, acids or other substances shall be deposited therein,
and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No carpet, rug or other article shall be hung or shaken out of any window of
the Building; and no tenant shall sweep or throw or permit to be swept or thrown
from the Demised Premises any dirt or other substances into any of the corridors
or halls, elevators, or out of the doors or windows or stairways of the Building
and Tenant shall not use, keep or permit to be used or kept any foul or noxious
gas or substance in the Demised Premises, or permit or suffer the Demised
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Building by reason of noise, odors, and/or
vibrations or interfere in any way with other tenants or those having business
therein, nor shall any animals or birds be kept in or about the Building.
Smoking or carrying lighted cigars or cigarettes in the elevators of the
Building is prohibited.
4. No awnings or other projections shall be attached to the outside walls of the
Building without the prior written consent of Landlord.
5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any tenant on any part of the outside of the
Demised Premises or the Building or on the inside of the Demised Premises if the
same is visible from the outside of the Demised Premises without the prior
written consent of Landlord, except that the name of Tenant and corporate
insignia may appear on the entrance door of the Demised Premises, Landlord shall
list Tenant in the lobby directory and Tenant may place directional signs to the
Demised Premises in the 7th floor elevator lobby. In the event of the violation
of the foregoing by any tenant, Landlord may remove same without any liability,
and may charge the expense incurred by such removal to Tenant or any other
tenants violating this rule. Interior signs on doors and directory tablet shall
be inscribed, painted or affixed for each tenant by Landlord at the expense of
such tenant, and shall be of a size, color and style reasonably acceptable to
Landlord.
6. Except pursuant to Article 3 of the lease, no tenant shall mark, paint, drill
into, or in any way deface any part of the Building of which they form a part
and no boring, cutting or stringing of wires shall be permitted, except with the
prior written consent of Landlord, and as Landlord may direct. No tenant shall
lay linoleum, or other similar floor covering, so that the same shall come in
direct contact with the floor of the Demised Premises, and, if linoleum or other
similar floor covering is desired to be used as interlining of builder's
deadening felt shall be first affixed to the floor, by a paste or other
material, soluble in water, the use of cement or other similar adhesive material
being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of the
doors or windows by any tenant, nor shall any changes be made in existing locks
or mechanism thereof. Each tenant must, upon the termination of his Tenancy,
restore to Landlord all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such tenant, and in the event of the
loss of any keys, so furnished, such tenant shall pay to Landlord the cost
thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter of any
description shall be delivered to and removed from the Demised Premises only on
the freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Landlord. Landlord reserves the right
to inspect all freight to be brought into the Building and to exclude from the
Building all freight which violates any of these Rules and Regulations.
9. Canvassing, soliciting and peddling in the Building is prohibited and each
tenant shall cooperate to prevent the same.
10. Landlord reserves the right to exclude from the Building between the hours
of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all persons
who do not present a pass to the Building. Landlord
-29-
<PAGE> 31
will furnish passes to persons for whom any tenant requests same in writing.
Each tenant shall be responsible for all persons for whom he requests such pass
and shall be liable to Landlord for all acts of such persons.
11. Landlord shall have the right to prohibit any advertising by any tenant
which in Landlord's opinion, tends to impair the reputation of the Building or
its desirability as a Building for offices, and upon written notice from
Landlord, tenant shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the Demised
Premises, any inflammable, combustible or explosive fluid, material, chemical or
substance, or cause or permit any odors of cooking or other processes, or any
unusual or other objectionable odors to permeate in or emanate from the Demised
Premises, other than normal office supplies and cleaning materials.
13. If the Building contains central air conditioning and ventilation, Tenant
agrees to keep all windows closed at all times and to abide by all rules and
regulations issued by the Landlord with respect to such services. If Tenant
requests air conditioning or ventilation after the usual hours, Tenant shall
give reasonable prior notice to the Building superintendent.
14. Tenant shall not move any safe, heavy machinery, heavy equipment, bulky
matter, or fixtures into or out of the Building without Landlord's prior written
consent. If such safe, machinery, equipment, bulky matter or fixtures requires
special handling, allow work in connection therewith shall comply with the
Administrative Code of the City of New York and all other laws and regulations
applicable thereto and shall be done during such hours as Landlord may
designate.
-30-
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
NAME JURISDICTION
---- ------------
AO PeterStar Company Limited Russia
Baltic Communications Limited Russia
JSC ALTEL Kazakhstan
NWE Capital (Cyprus) Ltd. Cyprus
Technocom Limited Ireland
Teleport-TP Russia
Wireless Technology Corporations Limited British Virgin Islands
<PAGE> 1
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
PLD Telekom Inc.:
We consent to incorporation by reference in the registration statement (no.
333-35139) on Form S-8, in the Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 (no. 333-18713), in the registration
statement (no. 333-5396) on Form S-3, and in the registration statement (no.
333-5400) on Form S-3 of PLD Telekom Inc. of our report dated March 30, 1999,
relating to the consolidated balance sheets of PLD Telekom Inc. and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years then ended, which
report appears in the Annual Report on Form 10-K for the year ended December 31,
1998 of PLD Telekom Inc.
Our report dated March 30, 1999 contains an explanatory paragraph that states
the Company has suffered recurring losses from operations, has a net capital
deficiency and a working capital deficiency, and does not presently have
sufficient funds on hand to meet its current debt service obligations. 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.
KPMG LLP
New York, New York
March 30, 1999
<PAGE> 1
EXHIBIT 23.2
Independent Auditors' Consent
The Board of Directors
PLD Telekom Inc.:
We consent to incorporation by reference in the registration statement (no.
333-35139) on Form S-8, in the Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 (no. 333-18713), in the registration
statement (no. 333-5396) on Form S-3, and in the registration statement (no.
333-5400) on Form S-3 of PLD Telekom Inc. of our report dated March 21, 1997,
related to the consolidated statements of operations, shareholders' equity, and
cash flows for PLD Telekom Inc. for the year ended December 31, 1996, which
report appears in the Annual Report on Form 10-K for the year ended December 31,
1998 of PLD Telekom Inc.
KPMG LLP
Chartered Accountants
Calgary, Canada
March 30, 1999
<PAGE> 1
EXHIBIT 23.3
Independent Auditors' Consent
The Board of Directors
Baltic Communications Limited:
We consent to incorporation by reference in the registration statement (no.
333-35139) on Form S-8, in the Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 (no. 333-18713), in the registration
statement (no. 333-5396) on Form S-3, and in the registration statement (no.
333-5400) on Form S-3 of PLD Telekom Inc. of our report dated March 30, 1999,
relating to the balance sheets of Baltic Communications Limited as of December
31, 1998 and 1997, and the related statements of operations, shareholder's
equity, and cash flows for each of the years in the three year period ended
December 31, 1998, which report appears in the Annual Report on Form 10-K for
the year ended December 31, 1998 of PLD Telekom Inc.
Our report dated March 30, 1999 contains an explanatory paragraph that states
that the Company's parent, PLD Telekom Inc. (PLD) does not presently have
sufficient funds on hand to meet its current debt obligations. The Company is a
guarantor of such obligations. PLD's failure to make payment in full when
required could result in a claim being made against the company under its
guaranty and a cross-default under and acceleration of other debt obligations
for which the Company is also a guarantor. 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.
KPMG
St. Petersburg, Russia
March 30, 1999
<PAGE> 1
EXHIBIT 23.4
Independent Auditors' Consent
The Board of Directors
NWE Capital (Cyprus) Ltd.:
We consent to incorporation by reference in the registration statement (no.
333-35139) on Form S-8, in the Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 (no. 333-18713), in the registration
statement (no. 333-5396) on Form S-3, and in the registration statement (no.
333-5400) on Form S-3 of PLD Telekom Inc. of our report dated March 30, 1999,
relating to the consolidated balance sheets of NWE Capital (Cyprus) Ltd. and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholder's equity, and cash flows for each of the
years in the three year period ended December 31, 1998, which report appears in
the Annual Report on Form 10-K for the year ended December 31, 1998 of PLD
Telekom Inc.
Our report dated March 30, 1999 contains an explanatory paragraph that states
that the Company's parent, PLD Telekom Inc. (PLD) does not presently have
sufficient funds on hand to meet its current debt obligations. PLD's failure to
make payment in full when required could result in a cross-default under and
acceleration of other debt obligations for which the Company is a guarantor.
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.
KPMG
St. Petersburg, Russia
March 30, 1999
<PAGE> 1
EXHIBIT 23.5
Independent Auditors' Consent
The Board of Directors
PLD Asset Leasing Ltd.:
We consent to incorporation by reference in the registration statement (no.
333-35139) on Form S-8, in the Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 (no. 333-18713), in the registration
statement (no. 333-5396) on Form S-3, and in the registration statement (no.
333-5400) on Form S-3 of PLD Telekom Inc. of our report dated May 20, 1998,
relating to the balance sheet of PLD Asset Leasing Ltd. as of December 31, 1997,
and the related statements of operations, shareholder's equity, and cash flows
for each of the years in the two year period ended December 31, 1997, which
report appears in the Annual Report on Form 10-K for the year ended December 31,
1998 of PLD Telekom Inc.
Moore Stephens
Chartered Accountants
Nicosia, Cyprus
March 30, 1999
<PAGE> 1
EXHIBIT 23.6
Independent Auditors' Consent
The Board of Directors
PLD Capital Asset (U.S.) Inc.:
We consent to incorporation by reference in the registration statement (no.
333-35139) on Form S-8, in the Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 (no. 333-18713), in the registration
statement (no. 333-5396) on Form S-3, and in the registration statement (no.
333-5400) on Form S-3 of PLD Telekom Inc. of our report dated March 30, 1999,
relating to the balance sheet of PLD Capital Asset (U.S.) Inc. as of December
31, 1998, and the related statements of operations, shareholder's equity, and
cash flows for the year then ended, which report appears in the Annual Report on
Form 10-K for the year ended December 31, 1998 of PLD Telekom Inc.
Our report dated March 30, 1999 contains an explanatory paragraph that states
that the Company's parent, PLD Telekom Inc. (PLD) does not presently have
sufficient funds on hand to meet its current debt obligations. PLD's failure to
make payment in full when required could result in a cross-default under and
acceleration of other debt obligations for which the Company is a guarantor.
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.
KPMG LLP
New York, New York
March 30, 1999
<PAGE> 1
EXHIBIT 23.7
Independent Auditors' Consent
The Board of Directors
Technocom Limited:
We consent to incorporation by reference in the registration statement (no.
333-35139) on Form S-8, in the Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 (no. 333-18713), in the registration
statement (no. 333-5396) on Form S-3, and in the registration statement (no.
333-5400) on Form S-3 of PLD Telekom Inc. of our report dated March 30, 1999,
relating to the consolidated balance sheets of Technocom Limited and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three year period ended December 31, 1998, which report appears in
the Annual Report on Form 10-K for the year ended December 31, 1998 of PLD
Telekom Inc.
Our report dated March 30, 1999 contains an explanatory paragraph that states
the Company has suffered recurring losses from operations, has a net capital
deficiency and a working capital deficiency, and does not presently have
sufficient funds on hand to meet its current obligations. 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.
KPMG
Chartered Accountants
Dublin, Ireland
March 30, 1999
<PAGE> 1
EXHIBIT 23.8
Independent Auditors' Consent
The Board of Directors
Wireless Technology Corporations Limited:
We consent to incorporation by reference in the registration statement (no.
333-35139) on Form S-8, in the Post-Effective Amendment No. 1 to Form S-4
Registration Statement on Form S-8 (no. 333-18713), in the registration
statement (no. 333-5396) on Form S-3, and in the registration statement (no.
333-5400) on Form S-3 of PLD Telekom Inc. of our report dated March 30, 1999,
relating to the consolidated balance sheet of Wireless Technology Corporations
Limited and subsidiary as of December 31, 1998, and the related consolidated
statements of operations, shareholder's equity, and cash flows for the year then
ended, which report appears in the Annual Report on Form 10-K for the year ended
December 31, 1998 of PLD Telekom Inc.
Our report dated February 17, 1999 contains an explanatory paragraph that states
that the Company's parent, PLD Telekom Inc. (PLD) does not presently have
sufficient funds on hand to meet its current debt obligations. The Company is a
guarantor of such obligations. PLD's failure to make payment in full when
required could result in a claim being made against the Company under its
guaranty and a cross-default under and acceleration of other debt obligations
for which the Company is also a guarantor. 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.
KPMG
Almaty, Kazakhstan
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLD TELEKOM
INC.'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BE REFERENCE TO SUCH FORM 10-K AND THE AUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR PLD TELEKOM INC. AT AND FOR THE YEAR ENDED DECEMBER 31, 1998
CONTAINED THEREIN.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 4,579
<SECURITIES> 0
<RECEIVABLES> 18,714
<ALLOWANCES> 3,809
<INVENTORY> 4,152
<CURRENT-ASSETS> 37,397
<PP&E> 210,847
<DEPRECIATION> 41,910
<TOTAL-ASSETS> 352,108
<CURRENT-LIABILITIES> 53,396
<BONDS> 139,397
0
4
<COMMON> 378
<OTHER-SE> 124,877
<TOTAL-LIABILITY-AND-EQUITY> 352,108
<SALES> 0
<TOTAL-REVENUES> 145,360
<CGS> 0
<TOTAL-COSTS> 45,348
<OTHER-EXPENSES> 90,064
<LOSS-PROVISION> 610
<INTEREST-EXPENSE> 21,953
<INCOME-PRETAX> (23,561)
<INCOME-TAX> 9,864
<INCOME-CONTINUING> (42,811)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,811)
<EPS-PRIMARY> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
