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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(AMENDMENT NO. 2)
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-20444
------------------------
PLD TELEKOM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3950002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
505 PARK AVENUE, 21ST FLOOR, NEW YORK, NEW YORK 10022
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(212) 527-3800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $.01 PAR VALUE -- 37,846,789 SHARES (APRIL 30, 1999)
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<PAGE> 2
PLD TELEKOM INC.
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PLD Telekom Inc.
Consolidated Condensed Balance Sheets as of March 31,
1999 (Unaudited) and December 31, 1998.............. 3
Consolidated Condensed Statements of Operations
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 4
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 5
Notes to Consolidated Condensed Financial Statements
(Unaudited) for the three months ended March 31,
1999................................................ 6
Baltic Communications Limited
Condensed Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998................... 13
Condensed Statements of Operations (Unaudited) for
the three months ended March 31, 1999 and 1998...... 14
Condensed Statements of Cash Flows (Unaudited) for
the three months ended March 31, 1999 and 1998...... 15
Notes to Condensed Financial Statements (Unaudited)
for the three months ended March 31, 1999........... 16
NWE Capital (Cyprus) Ltd.
Consolidated Condensed Balance Sheets as of March 31,
1999 (Unaudited) and December 31, 1998.............. 19
Consolidated Condensed Statements of Operations
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 20
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 21
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three months ended
March 31, 1999...................................... 22
PLD Capital Asset (U.S.) Inc.
Condensed Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998................... 25
Condensed Statements of Operations (Unaudited) for
the three months ended March 31, 1999 and 1998...... 26
Condensed Statements of Cash Flows (Unaudited) for
the three months ended March 31, 1999 and 1998...... 27
Notes to Condensed Financial Statements (Unaudited)
for the three months ended March 31, 1999........... 28
Technocom Limited and Subsidiaries
Consolidated Condensed Balance Sheets as of March 31,
1999 (Unaudited) and December 31, 1998.............. 31
Consolidated Condensed Statements of Operations
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 32
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 33
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three months ended
March 31, 1999...................................... 34
</TABLE>
1
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Wireless Technology Corporations Limited
Consolidated Condensed Balance Sheets as of March 31,
1999 (Unaudited) and December 31, 1998.............. 38
Consolidated Condensed Statements of Operations
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 39
Consolidated Condensed Statements of Cash Flows
(Unaudited) for the three months ended March 31,
1999 and 1998....................................... 40
Notes to the Consolidated Condensed Financial
Statements (Unaudited) for the three months ended
March 31, 1999...................................... 41
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 43
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......... 55
Item 6. Exhibits and Reports on Form 8-K.................. 55
</TABLE>
PLD TELEKOM INC. HEREBY AMENDS ITS QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1999 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON MAY 17, 1999, AS AMENDED BY THE QUARTERLY REPORT ON FORM 10-Q/A (AMENDMENT
NO. 1) FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1999.
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PLD TELEKOM INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
------------- ------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,683 $ 4,579
Trade receivables, net of allowances...................... 12,867 14,905
Other receivables and prepaids............................ 5,159 4,609
Inventory................................................. 4,113 4,152
Due from related parties.................................. 8,684 9,152
----------- ---------
Total current assets.............................. 36,506 37,397
Escrow funds................................................ 16,419 14,908
Property and equipment, net................................. 169,647 168,937
Telecommunications licenses, net............................ 74,606 77,359
Due from related parties.................................... -- 2,011
Other investments........................................... 8,361 5,183
Goodwill, net............................................... 35,866 36,368
Other assets................................................ 8,509 9,945
----------- ---------
Total assets...................................... $ 349,914 $ 352,108
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... 20,624 18,124
Accounts payable.......................................... 11,349 10,293
Accrued liabilities....................................... 5,701 3,996
Accrued interest.......................................... 7,676 467
Taxes payable............................................. 5,148 3,664
Due to related parties.................................... 4,172 4,639
Deferred revenues......................................... 2,422 2,869
Customer deposits......................................... 4,162 4,271
Current portion of long-term debt......................... 4,476 5,073
----------- ---------
Total current liabilities......................... 65,730 53,396
Long-term debt.............................................. 149,384 151,814
Minority interest........................................... 22,600 22,021
Shareholders' equity:
Preferred stock, par value $0.01 per share,
authorized -- 100,000,000, issued and
outstanding -- 446,884................................. 4 4
Common stock, par value $0.01 per share,
authorized -- 100,000,000, issued and
outstanding -- 37,846,789.............................. 378 378
Additional paid-in capital................................ 245,279 244,419
Accumulated deficit....................................... (133,461) (119,924)
----------- ---------
Total shareholders' equity........................ 112,200 124,877
----------- ---------
Total liabilities and shareholders' equity........ $ 349,914 $ 352,108
=========== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE> 5
PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Telecommunications........................................ $ 28,716 $ 34,719
Finance lease income...................................... 638 447
----------- -----------
29,354 35,166
Operating expenses:
Direct costs (excludes depreciation)...................... 8,403 10,796
General and administrative................................ 13,154 9,700
Depreciation.............................................. 4,829 3,099
Amortization.............................................. 3,319 2,692
Taxes other than income taxes............................. 1,525 1,680
----------- -----------
31,230 27,967
----------- -----------
Operating (loss)/income................................ (1,876) 7,199
Other income/(expense):
Share of loss from equity investments..................... (341) (210)
Interest and other income................................. 259 871
Interest expense.......................................... (6,971) (5,190)
Amortization of deferred financing costs.................. (299) (401)
Foreign exchange loss..................................... (454) (116)
Loss on disposal of investments and property and
equipment.............................................. (33) --
----------- -----------
(Loss)/earnings before income taxes and minority
interest.............................................. (9,715) 2,153
Income taxes.............................................. 2,643 2,997
----------- -----------
Loss before minority interest.......................... (12,358) (844)
Minority interest........................................... 1,179 3,665
----------- -----------
Net loss............................................... $ (13,537) $ (4,509)
=========== ===========
Net loss per common share:
Basic..................................................... $ (0.36) $ (0.14)
=========== ===========
Diluted................................................... $ (0.36) $ (0.14)
=========== ===========
Weighted average common shares outstanding.................. 37,846,789 33,324,290
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE> 6
PLD TELEKOM INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(13,537) $(4,509)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 8,447 6,192
Share of loss of equity investments.................... 341 210
Non-cash interest expense.............................. 5,555 3,964
Deferred revenues...................................... (447) (811)
Minority interest...................................... 1,179 3,665
Other.................................................. 118 --
Changes in operating assets and liabilities, net of
effects of acquisitions:
Decrease/(increase) in trade receivables, net of
allowances.......................................... 2,038 (96)
Increase in other receivables and prepaids........... (550) (1,556)
Decrease/(increase) in inventory..................... 39 (176)
Change in due from or to related parties............. 1 (720)
Increase/(decrease) in accounts payable, accrued
liabilities, customer deposits, taxes payable and
other current liabilities........................... 5,022 (668)
-------- -------
Net cash provided by operating activities......... 8,206 5,495
Cash flows from investing activities:
Capital expenditures...................................... (5,539) (5,894)
Escrow funds.............................................. (1,511) (449)
Investments and other assets.............................. (435) 1,164
-------- -------
Net cash used in investing activities............. (7,485) (5,179)
Cash flows from financing activities:
Loans from shareholders................................... 2,500 --
Long-term debt repayments................................. (1,517) (427)
Cash dividends paid to minority shareholders.............. (600) --
-------- -------
Net cash provided by/(used in) financing
activities...................................... 383 (427)
-------- -------
Increase/(decrease) in cash and cash equivalents............ 1,104 (111)
Cash and cash equivalents, beginning of period.............. 4,579 17,256
-------- -------
Cash and cash equivalents, end of period.................... $ 5,683 $17,145
======== =======
Supplemental disclosures:
Non-cash investing and financing activities:
Supplier financing................................... $ -- $ 1,363
======== =======
Interest paid............................................. $ 703 $ 532
======== =======
Income taxes paid......................................... $ 1,925 $ 2,885
======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE> 7
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation. The accompanying consolidated condensed
financial statements are unaudited and have been prepared by PLD Telekom Inc.
(the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). In the opinion of management, the consolidated
condensed financial statements include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation. Certain information and
footnote disclosures generally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. Results for
interim periods are not necessarily indicative of the results for a full year.
These consolidated condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
Going Concern
The Company has suffered recurring losses and has a working capital
deficiency. Additionally, the Company has $13.42 million of Series A and Series
B revolving credit notes (the "Revolving Credit Notes") due to The Travelers
Insurance Company and The Travelers Indemnity Company (hereinafter defined as
the "Travelers Parties") outstanding. $1.1 million of the Revolving Credit Notes
were due to have been repaid by September 30, 1998 and the remaining $12.32
million were due to have been repaid by December 31, 1998. The Travelers Parties
have given the Company a series of payment deferrals since December 31, 1998
with respect to the Revolving Credit Notes, the last of which was given on May
10, 1999 and defers payment of the notes to May 31, 1999. The Company does not
presently have sufficient funds on hand to make such payments and management is
actively engaged in pursuing ways to settle the Company's obligations to the
Travelers Parties. In this context, the Company is currently exploring a range
of financing alternatives. Historically, sources of financing have included
private placements of common and preferred shares and debt, asset and investment
sales, shareholder loans and bank lines of credit supported by shareholder
guarantees. While management believes that, as long as progress towards
settlement of such obligations is being made, the Travelers Parties will be
willing to agree to additional payment deferrals, there can be no assurance that
they will not demand payment in full of the Series A and Series B notes. The
Company's failure to make payment in full could result in a cross-default under
and acceleration of the Company's Senior Discount Notes and Convertible
Subordinated Notes, which have an aggregate principal amount of $149.5 million.
This in turn could require the Company to resort to extraordinary measures,
including making sales of assets under distressed conditions or ultimately
seeking the protection of the bankruptcy courts.
In addition, should the minority shareholders in Technocom Limited
("Technocom"), who have the right to put their Technocom shares to the Company
from mid-1999 onwards, elect to exercise these rights, then the Company's
inability to meet its obligations would be exacerbated. The Company is engaged
in efforts to address this issue, including through reaching some accommodation
with the minority shareholders regarding their put options. In the event that no
solution can be found, then this in turn could require the Company to resort to
extraordinary measures as outlined above.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated condensed financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
(b) Net loss per share. Basic EPS is computed by dividing income or loss
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock at the beginning of the period presented. Potentially dilutive common
stock equivalents totalling 19,701,527 and
6
<PAGE> 8
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
12,484,380 at March 31, 1999 and 1998, respectively, have not been included in
the computation of diluted net loss per common share because they were
antidilutive for the periods presented.
(c) Comprehensive income. For the three months ended March 31, 1999
comprehensive loss was equal to consolidated net loss reported on the
consolidated condensed statement of operations.
(d) New pronouncements. The American Institute of Certified Public
Accountants issued Statement of Position No. 98-1 (SOP 98-1) "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," and
Statement of Position No. 98-5 (SOP 98-5) "Reporting on the Costs of Start-Up
Activities" in 1998. SOP 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. The
Company was required to adopt both new statements in the first quarter of 1999.
The adoption of these statements did not have a material effect on the Company's
consolidated condensed financial statements.
(e) Reclassifications. Certain reclassifications have been made to the
prior year's consolidated condensed financial statements to conform to the
current year's presentation.
(2) FUTURE ACTIVITIES
The Company's telecommunications businesses are developing in an emerging
economy which, by its nature, has an uncertain economic, political and
regulatory environment. The general risks of operating businesses in the former
Soviet Union include the possibility for rapid change in government policies,
economic conditions, the tax regime and foreign currency regulations. In
addition, Teleport-TP's satellite-based long distance network is at an early
stage of its operations and is therefore subject not only to the general risks
and uncertainties of operating in Russia, but also those involved in the
launching of a new telecommunications service. In addition, this national
long-distance service is being developed in various regions of Russia and its
implementation and results of operations will therefore be affected by, among
other things, the often uncertain economic conditions and growth rates in such
regions.
Ultimate recoverability of the Company's investments in its operating
subsidiaries, PeterStar Company Limited ("PeterStar"), Baltic Communications
Limited ("BCL"), ALTEL, formerly known as BECET International ("ALTEL"), and
Teleport-TP and its investee companies, is dependent upon each of these
subsidiaries and investees achieving and maintaining profitability, which is
dependent to a certain extent on the stabilization of the economies of the
former Soviet Union, the ability to maintain the necessary telecommunications
licenses and the ability to obtain adequate financing to meet capital
commitments.
(3) RESTRICTED CASH
Pursuant to the terms of the Company's $149.5 million private placement
completed on June 12, 1996, $16.4 million remained in escrow on March 31, 1999.
These funds may only be used for certain specified purposes, principally for the
purchase of telecommunications equipment and the payment of interest on the
Company's Senior Discount Notes.
(4) LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Under the terms of the Company's $123.0 million Senior Discount Note
offering in June 1996, the Company was required to raise $20.0 million in an
equity financing by May 31, 1998. The Company did not do so, and as a result the
interest rate on the Senior Discount Notes increased from 14% to 14.5% as of
June 1, 1998, and will remain at 14.5% until the end of the semi-annual interest
period in which such an offering is completed. The first semi-annual cash
payment of interest on the Company's 14% Senior Discount Notes,
7
<PAGE> 9
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
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. As a result
of the Company's not raising such equity, the annual interest rate on the Series
A and B Notes increased from 12% to 15% as of June 1, 1998.
The Company was obliged to make required amortization payments in respect
of the Series B Notes of $1.0 million on each of July 31 and August 31, and a
final payment of $1.1 million on September 30, 1998. In relation to the Series A
Notes, the Company was obliged to make a required amortization payment of $1.0
million on October 31, a further payment of $1.0 million on November 30 and a
final payment of $10.32 million on December 31, 1998.
The Company made the required payments due with respect to the Series B
Notes on July 31 and August 31 and by agreement with the holders of the Series B
Notes, the final payment of $1.1 million due on September 30 was deferred to
December 31, 1998. Payment of this amount was guaranteed by News America Inc.
("News"), which owns approximately 38% of the Company's Common Stock.
By agreement with the holders of the Series A and Series B Notes, the $1.0
million required payments due on the Series A Notes on October 31 and November
30 were also deferred to December 31, 1998, and these amounts were also
guaranteed by News.
In addition to the required amortization payments called for under the
terms of the Revolving Credit Notes, the Company did not effect certain
voluntary amortization (or "targeted reduction in commitment") payments in
respect of the Revolving Credit Notes of $0.5 million on July 31, $0.5 million
on August 31, $1.0 million on September 30, $1.5 million on October 31 and $1.5
million on November 30, 1998, which resulted in the issuance of a total of
182,000 warrants to the Travelers Parties to acquire shares of Common Stock of
the Company at an exercise price of $8.625 per share (the "Additional
Warrants").
On December 31, 1998 the Series A Notes and the amounts deferred under the
Series B Notes would have matured and the balance due would have become payable
in full. Taking into account the amounts deferred, the total that would have
been due under the Series A and Series B Notes as of that date was $13.42
million, of which $3.1 million was guaranteed by News as described above.
Under the terms of the Revolving Credit Agreement, if the Series A and
Series B Notes were not repaid in full when due, the exercise price of all
warrants issued to the holders of the Series A and Series B Notes would have
been reset at $0.01 per share. In addition, in the event of such non-payment, on
December 31, 1998 and on the last day of each succeeding month until the
Revolving Credit Notes were repaid in full, the holders of the Series A Notes
would have been entitled to receive 70,000 additional warrants to purchase
shares of the Company's Common Stock and the holders of the Series B Notes would
have been entitled to receive 32,000 additional warrants to purchase shares of
the Company's Common Stock, in each case at a price of $0.01 per share. All such
warrants, referred to as "Default Warrants", would have had an expiration date
ten years after their respective dates of issue.
The Travelers Parties have given the Company a series of payment deferrals
since December 31, 1998 with respect to the amounts due under the Series A and
Series B Notes, the last of which was given on May 10, 1999 and defers payment
of the notes to May 31, 1999. At the same time, the Travelers Parties have
expressly reserved their rights to claim all of the Default Warrants to which
they would be entitled under the formula described above, and also to claim that
the exercise price of the initial 423,000 warrants issued to the
8
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PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Travelers Parties and the Additional Warrants has been reset at $0.01 per share.
Management of the Company believes that the Travelers Parties have no basis for
such claims and, if asserted, they will not be successful.
(5) CONTINGENCIES
(a) Under applicable Russian currency control regulations, the Company's
Russian subsidiaries are required to have certain licenses from the Central Bank
of Russia to enable them to make payments of and accept receipts of hard
currency. While PeterStar, BCL and Teleport-TP have or have applied for all the
necessary licenses, failure to receive the remaining licenses could result in
fines and penalties. Management does not believe that such fines and penalties
would be material.
(b) Certain of the Company's subsidiaries have accrued profits and other
taxes based on interpretations of the law which may ultimately be disputed by
the local taxation authorities. The exposure to additional profits and other
taxes, fines and penalties is not determinable, although the Company believes
such amounts will not be material.
(c) At March 31, 1999, PeterStar had commitments of approximately $1.5
million related to the acquisition of telecommunications equipment. The
PeterStar supply contracts provide for financing of these amounts over
approximately five years.
(d) Teleport-TP currently utilizes capacity on three Intelsat satellites
for the provision of its international and domestic long distance services,
pursuant to rolling fifteen year contracts with Intelsat. These agreements
require quarterly payments of $1.3 million for the remainder of their terms.
(e) The Company periodically guarantees certain obligations of its
subsidiaries. As of March 31, 1999, the only guarantee that is currently
outstanding is to Siemens in the amount of $1.5 million relating to equipment
purchased by Technocom.
(6) OPERATIONS BY GEOGRAPHIC AREA AND INDUSTRY SEGMENT
The Company is a major provider of local, long distance and international
telecommunications services in the Russian Federation and the former Soviet
Union. The activities of the Company are primarily segmented by reference to the
businesses of its principal operating subsidiaries.
PeterStar provides integrated local, long distance and international
telecommunications services in St. Petersburg, Russia, through a fully digital
fiber optic network.
Technocom, through Teleport-TP, provides dedicated international
telecommunications services to customers in Moscow and operates a satellite
based pan-Russian long-distance network.
ALTEL is currently the major provider of national cellular service in
Kazakhstan.
BCL provides dedicated international telecommunications services in St.
Petersburg, Russia.
Other activities of the Company relate principally to its corporate head
office in New York, its operations center in London, and to smaller, less
significant businesses primarily in their start-up phase.
The Company's main financial criteria for assessing the importance and
performance of its segments are by reference to revenues, earnings/(loss) before
income taxes and minority interest, and total assets.
9
<PAGE> 11
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's operations by segment is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
PeterStar................................................. $ 13,905 $17,469
Technocom................................................. 4,384 5,824
ALTEL..................................................... 7,921 9,549
BCL....................................................... 2,421 2,324
Other..................................................... 723 --
-------- -------
Total revenues.................................... $ 29,354 $35,166
======== =======
Earnings/(loss) before income taxes and minority interest:
PeterStar................................................. $ 3,599 $ 7,358
Technocom................................................. (4,273) 25
ALTEL..................................................... 1,526 3,346
BCL....................................................... 173 244
Corporate................................................. (11,085) (9,008)
Other..................................................... 345 188
-------- -------
Total earnings/(loss) before income taxes and
minority interest............................... $ (9,715) $ 2,153
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Total assets:
PeterStar................................................. $132,587 $132,814
Technocom................................................. 104,280 106,055
ALTEL..................................................... 58,769 59,008
BCL....................................................... 7,162 6,883
Corporate................................................. 35,297 36,491
Other..................................................... 11,819 10,857
-------- --------
Total assets...................................... $349,914 $352,108
======== ========
</TABLE>
10
<PAGE> 12
PLD TELEKOM INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's operations by geographic region is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Russia.................................................... $20,794 $25,617
Kazakhstan................................................ 7,921 9,549
Other..................................................... 639 --
------- -------
Total revenues.................................... $29,354 $35,166
======= =======
Earnings/(loss) before income taxes and minority interest:
Russia.................................................... $ (597) $ 7,627
Kazakhstan................................................ 1,526 3,346
North America............................................. (10,344) (8,820)
Other..................................................... (300) --
------- -------
Total earnings/(loss) before income taxes and
minority interest............................... $(9,715) $ 2,153
======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Total assets:
Russia.................................................... $246,526 $249,658
Kazakhstan................................................ 58,769 59,008
North America............................................. 40,213 38,793
Other..................................................... 4,406 4,649
-------- --------
Total assets...................................... $349,914 $352,108
======== ========
</TABLE>
(7) RESTATEMENT
The Company has restated its consolidated interest expense for the three
months ended March 31, 1999, in order to reflect additional interest of $0.7
million related to the beneficial conversion feature of two notes issued to News
America Inc. during the quarter. The effect of this restatement has been to
increase consolidated interest expense from $6.2 million to $7.0 million and net
loss per share from $0.34 to $0.36.
11
<PAGE> 13
BALTIC COMMUNICATIONS LIMITED
CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
12
<PAGE> 14
BALTIC COMMUNICATIONS LIMITED
CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 210,412 $ 266,076
Trade receivables, net of allowance....................... 1,195,590 995,919
Due from related parties.................................. 726,715 531,998
Prepayments............................................... 82,088 80,800
Prepaid taxes............................................. 99,375 171,759
Inventory................................................. 93,351 76,025
---------- ----------
Total current assets.............................. 2,407,531 2,122,577
Property and equipment, net................................. 4,659,983 4,668,005
Investments................................................. 8,000 8,000
Intangible assets, net...................................... 86,849 84,052
---------- ----------
Total assets...................................... $7,162,363 $6,882,634
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... 1,710,345 1,510,134
Accrued liabilities....................................... 131,549 87,177
Deferred revenues......................................... 3,841 4,019
Taxes payable............................................. 78,115 100,211
Deferred income tax liability............................. -- 30,706
Due to related parties.................................... 940,826 932,646
Customer deposits......................................... 26,234 26,234
---------- ----------
Total current liabilities......................... 2,890,910 2,691,127
---------- ----------
Shareholder's equity:
Common stock.............................................. 2,183,000 2,183,000
Retained earnings......................................... 2,088,453 2,008,507
---------- ----------
Total shareholder's equity........................ 4,271,453 4,191,507
---------- ----------
Total liabilities and shareholder's equity........ $7,162,363 $6,882,634
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
13
<PAGE> 15
BALTIC COMMUNICATIONS LIMITED
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Telecommunications revenues............................... $2,375,629 $2,317,186
Other non-telecommunications revenues..................... 45,531 7,237
---------- ----------
Total revenues............................................ 2,421,160 2,324,423
Operating expenses:
Direct costs (excludes depreciation)...................... 1,353,933 1,144,386
General and administrative................................ 603,988 721,468
Depreciation.............................................. 149,840 143,927
Amortization.............................................. 7,895 3,275
Taxes other than income taxes............................. 51,382 118,071
---------- ----------
Total operating expenses.......................... 2,167,038 2,131,127
---------- ----------
Operating income.................................. 254,122 193,296
Other income/(expense):
Interest income........................................... 586 528
Foreign exchange (loss)/gain.............................. (82,044) 50,072
---------- ----------
Income before income taxes........................ 172,664 243,896
Income taxes................................................ 92,718 62,561
---------- ----------
Net income........................................ $ 79,946 $ 181,335
========== ==========
</TABLE>
See accompanying notes to condensed financial statements.
14
<PAGE> 16
BALTIC COMMUNICATIONS LIMITED
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 79,946 $ 181,335
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 149,840 143,927
Amortization.............................................. 7,895 3,275
Loss on disposal of property and equipment................ 56 18
Changes in operating assets and liabilities:
Increase in trade receivables............................. (199,671) (242,603)
(Increase)/decrease in prepayments........................ (1,288) 8,133
Increase in inventory..................................... (17,326) (45,692)
Decrease/(increase) in prepaid taxes...................... 72,384 (88,264)
Change in due from/to related parties..................... (186,537) (254,288)
Decrease in deferred revenues............................. (178) (119)
Decrease in customer deposits............................. -- (500)
Decrease in taxes payable................................. (22,096) (20,558)
Increase in accrued liabilities........................... 44,372 19,794
Decrease in deferred income tax liability................. (30,706) --
Increase in accounts payable.............................. 200,211 412,268
--------- ---------
Net cash provided by operating activities.............. 96,902 116,726
--------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (152,566) (97,528)
--------- ---------
Net cash used in investing activities.................. (152,566) (97,528)
--------- ---------
(Decrease)/increase in cash............................ (55,664) 19,198
Cash at beginning of period................................. 266,076 241,949
--------- ---------
Cash at end of period....................................... $ 210,412 $ 261,147
========= =========
Supplementary disclosures:
Income taxes paid........................................... $ 13,740 $ 177,575
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
15
<PAGE> 17
BALTIC COMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed financial statements are unaudited and have been
prepared by Baltic Communications Limited ("BCL" or the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of management, the condensed financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation. Certain information and footnote disclosures generally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. Results for interim periods are not necessarily indicative of the
results for a full year. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto for the fiscal year
ended December 31, 1998.
Certain reclassifications have been made to the prior year's condensed
financial statements to conform to the current year's presentation.
The Company's parent is PLD Telekom Inc. ("PLD"). The parent's investment
in the Company has been pushed down into the Company's financial statements and
allocated to fixed assets. The Company's balance sheets at December 31, 1998 and
at March 31, 1999 reflect the effect of this push down accounting treatment.
(2) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
BCL was formed to provide international direct dial, international payphone
and leased line services to business customers in St. Petersburg and the
Leningrad Oblast. The Company was incorporated on September 3, 1991 under the
laws of the Russian Federation as a closed joint stock company.
The Company's principal telecommunications license allows it to operate an
international, national and local telecommunications system in St. Petersburg;
this expires in 2003. Other licenses, all of which expire in 2001, are for
telematic services, rent of circuits, data services and the operation of a
dedicated national/international overlay network.
The Company operates in an emerging economy which, by its nature, has an
uncertain economic, political, and regulatory environment. The general risks of
operating businesses in the former Soviet Union include the possibilities of
rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations.
Ultimate recoverability of the Company's investments is dependent upon it
achieving and maintaining profitability, which is dependent to a certain extent
on the stabilization of the economy of the Russian Federation, the Company's
ability to maintain the necessary telecommunications licenses and its ability to
obtain adequate financing to meet capital commitments.
(3) COMMITMENTS AND CONTINGENCIES
(a) Taxation
Russia currently has a number of laws related to various taxes imposed by
both federal and regional governmental authorities. Applicable taxes include
value added tax, corporation tax ("profit tax"), a number of turnover based
taxes, and payroll (social) taxes, together with others.
Laws related to these taxes have not been in force for significant periods,
in contrast to more developed market economies. Therefore, regulations are often
unclear, open to wide interpretation, and in some instances conflicting.
Accordingly few precedents with regard to issues have been established. Often,
differing opinions
16
<PAGE> 18
BALTIC COMMUNICATIONS LIMITED
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
regarding legal interpretation exist both among and within government ministries
and organisations (like the State Tax Service and its various inspectorates),
thus creating uncertainties and areas of conflict.
Tax declarations, together with other legal compliance areas (such as
customs and currency control matters) are subject to review and investigation by
a number of authorities, which are enabled by law to impose extremely severe
fines, penalties and interest charges. These facts create tax risks in Russia
substantially more significant than typically found in countries with more
developed tax systems.
The Company has had extensive tax inspections in the past, which have
resulted in minimal penalties. These inspections have covered most of the taxes
applicable to the Company.
Management believes that it has adequately provided for tax liabilities in
the accompanying condensed financial statements. However, the risk remains that
the relevant authorities could take differing positions with regard to
interpretative issues and the effect could be significant.
(b) Guarantees
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of this debt under the terms of the related indentures. The Company is
also a guarantor of other indebtedness of PLD to The Travelers Insurance Company
and The Travelers Indemnity Company (the "Travelers Parties").
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to pay the indebtedness to the Travelers Parties which
is currently due on May 31, 1999. While management of PLD believes that, as long
as progress towards settlement of such obligations is being made, the holders of
such debt will agree to payment deferrals beyond the present due date of May 31,
1999, there can be no assurance that the Travelers Parties will grant such
deferrals or that they will not demand payment in full of the obligations. PLD's
failure to make payment in full could result in a claim being made against the
Company under its guarantee and a cross-default under and acceleration of the
senior discount notes and convertible subordinated notes for which the Company
also serves as a guarantor. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
(4) COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive income
was equal to net income reported on the condensed statement of operations.
(5) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's condensed financial statements.
17
<PAGE> 19
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
18
<PAGE> 20
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------------- -------------
(THOUSANDS OF U.S. DOLLARS
EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,913 $ 2,816
Trade receivables, net of allowances...................... 9,354 11,260
Other receivables and prepaids............................ 1,540 2,024
Inventory................................................. 4,019 4,076
-------- --------
Total current assets.............................. 18,826 20,176
Property and equipment, net................................. 108,075 106,542
Telecommunications licenses, net............................ 36,390 37,663
Other receivables........................................... -- 2,012
Goodwill, net............................................... 1,311 1,365
Other assets and investments................................ 3,439 410
-------- --------
Total assets...................................... $168,041 $168,168
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... 1,819 1,980
Accrued liabilities....................................... 4,834 2,640
Advances from other group companies....................... 33,058 33,988
Due to related parties.................................... 386 462
Customer deposits and advances............................ 6,550 7,109
Current portion of long term debt......................... 2,556 3,479
-------- --------
Total current liabilities......................... 49,203 49,658
-------- --------
Long-term debt.............................................. 6,831 7,165
Due to related parties...................................... 3,910 4,669
Minority interest........................................... 28,959 28,113
Commitments and contingencies
Shareholder's equity:
Common stock, par value CYL1 per share. Authorized
3,246,174 shares in 1999 and 1998; issued and
outstanding 3,246,174 shares in 1999 and 1998.......... 7,082 7,082
Contributed surplus....................................... 63,723 63,723
Accumulated surplus....................................... 8,333 7,758
-------- --------
Total shareholder's equity........................ 79,138 78,563
-------- --------
Total liabilities and shareholder's equity........ $168,041 $168,168
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
19
<PAGE> 21
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Telecommunications revenues................................. $21,909 $27,100
Operating expenses:
Direct costs (excludes depreciation)...................... 4,165 7,445
General and administrative................................ 7,034 5,246
Management fees........................................... 344 400
Depreciation.............................................. 3,334 2,075
Amortization.............................................. 1,326 1,234
Taxes other than income taxes............................. 730 925
------- -------
Total operating expenses.......................... 16,933 17,325
------- -------
Operating income.................................. 4,976 9,775
Other income/(expense):
Interest and other income................................. 54 536
Interest on long-term debt................................ (220) (229)
Foreign exchange loss..................................... (395) (110)
------- -------
Income before income taxes and minority
interest......................................... 4,415 9,972
Income taxes................................................ 2,394 2,510
------- -------
Income before minority interest................... 2,021 7,462
Minority interest........................................... 1,446 3,735
------- -------
Net income........................................ $ 575 $ 3,727
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
20
<PAGE> 22
NWE CAPITAL (CYPRUS) LTD.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 575 $ 3,727
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 4,660 3,309
Minority interest...................................... 1,446 3,735
Changes in operating assets and liabilities:
Decrease in accounts receivable...................... 1,906 709
Decrease/(increase) in other receivables and
prepaids............................................ 484 (2,437)
Decrease/(increase) in inventory..................... 57 (105)
Change in amounts due from and to related parties.... (76) 203
Decrease in customer deposits and advances........... (559) (632)
Increase in accounts payable and accrued
liabilities......................................... 2,033 2,272
Decrease in intercompany advances.................... (78) --
------- -------
Net cash provided by operating activities......... 10,448 10,781
Cash flows from investing activities:
Capital expenditures...................................... (4,867) (4,459)
Other investments and assets.............................. (1,016) (109)
------- -------
Net cash used in investing activities............. (5,883) (4,568)
Cash flows from financing activities:
Long-term debt............................................ (1,257) (2,111)
Dividends................................................. (600) --
Advances from group companies............................. (1,611) (1,461)
------- -------
Net cash used in financing activities............. (3,468) (3,572)
------- -------
Increase in cash and cash equivalents............. 1,097 2,641
Cash and cash equivalents at beginning of period............ 2,816 7,849
------- -------
Cash and cash equivalents at end of period.................. $ 3,913 $10,490
======= =======
Supplemental Disclosures:
Non-cash investing and financing activities:
Purchase of equipment with advances from PLD Telekom
Inc. and under long-term contracts.................... $ -- $ 1,363
======= =======
Interest paid............................................. $ 421 $ 19
======= =======
Income taxes paid......................................... $ 1,911 $ 2,784
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
21
<PAGE> 23
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements are unaudited
and have been prepared by NWE Capital (Cyprus) Ltd. (the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of management, the consolidated condensed financial statements
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation. Certain information and footnote disclosures generally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such SEC rules and regulations. Results for interim periods are not
necessarily indicative of the results for a full year. These consolidated
condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
December 31, 1998.
The Company's parent is PLD Telekom Inc. ("PLD"). The parent's investment
in the Company has been pushed down into the Company's consolidated financial
statements and allocated to the cost of the telecommunications licenses and
goodwill. The Company's consolidated balance sheets at December 31, 1998 and at
March 31, 1999 reflect the effect of this push down accounting treatment. The
costs of the telecommunications licenses are amortized on a straight line basis
over the terms of the related licenses. Goodwill is amortized on a straight line
basis over 20 years.
(2) FUTURE ACTIVITIES
The Company's telecommunications businesses are developing in an emerging
economy which, by its nature, has an uncertain economic, political and
regulatory environment. The general risks of operating businesses in the former
Soviet Union include the possibility for rapid change in government policies,
economic conditions, the tax regime and foreign currency regulations.
Ultimate recoverability of the Company's investments in its subsidiaries,
PeterStar Company Limited ("PeterStar"), Wireless Technology Corporations
Limited ("WTC") and C.P.Y. Yellow Pages Limited ("Yellow Pages"), is dependent
upon each of these subsidiaries achieving and maintaining profitability, which
is dependent to a certain extent on the stabilization of the economies of the
former Soviet Union, the ability to maintain the necessary telecommunications
licenses and the ability to obtain adequate financing to meet capital
commitments.
(3) RECENT DEVELOPMENTS
On August 14, 1998, PLD acquired an additional 11% of PeterStar through its
acquisition of 100% of the outstanding stock of PLD Holdings Ltd., a Bermudan
company, from Cable and Wireless plc.
(4) COMMITMENTS AND CONTINGENCIES
(a) Taxation
PeterStar and ALTEL (an operating subsidiary of WTC formerly known as BECET
International) have accrued profit and other taxes based on interpretations of
the law which may ultimately be disputed by the local taxation authorities.
Management believes that the exposure to additional profit and other taxes,
fines and penalties will not have a material adverse effect on the financial
position or results of operations of the Company.
22
<PAGE> 24
NWE CAPITAL (CYPRUS) LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(b) Purchase Commitments
At March 31, 1999, PeterStar had commitments of approximately $1,500,000
related to the acquisition of telecommunications equipment. The PeterStar supply
contracts provide for financing of these amounts over approximately five years.
(c) Management Services
On January 1, 1998, PLD entered into an agreement with ALTEL, under which
PLD would provide certain consulting, informational services, management support
services and personnel expertise. The agreement provides for a fee of $25,000
per month plus 3.4% of monthly gross revenues and was for a one year term,
automatically renewable for successive one year periods unless terminated by
either party.
ALTEL has negotiated an agreement with its other shareholder effective
January 1, 1998, under which the shareholder will provide certain consulting
services, management support services and personnel expertise. Payments under
this agreement are 300,000 tenge per month (U.S. dollar equivalent as of March
31, 1999 approximates $3,429) plus 1.0% of monthly gross revenues. The agreement
was for a one year term, automatically renewable for successive one year periods
unless terminated by either party.
(d) 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 this debt under the terms of the related indentures. A wholly owned
subsidiary of the Company is also a guarantor of this debt, as well as other
indebtedness of PLD to The Travelers Insurance Company and The Travelers
Indemnity Company (the "Travelers Parties").
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to meet its current debt obligations. While management
of PLD believes that, as long as progress towards settlement of such obligations
is being made, the holders of such debt will agree to payment deferrals beyond
the present due date of May 31, 1999, there can be no assurance that the holders
will grant such deferrals or that they will not demand payment in full of the
obligations. PLD's failure to make payment in full could result in a claim being
made against the Company's subsidiary under its guarantee, as well as resulting
in a cross-default under and acceleration of the senior discount notes and
convertible subordinated notes for which the Company serves as a guarantor.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
(5) COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive income
was equal to consolidated net income reported on the consolidated condensed
statement of operations.
(6) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's consolidated condensed financial
statements.
23
<PAGE> 25
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
</TABLE>
24
<PAGE> 26
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
Assets:
Current:
Cash and cash equivalents.............................. $ 10 $ 10
Other receivables and prepaids......................... 228 228
Assets held for resale................................. 3,949 3,949
Due from related parties -- installment sales
contracts............................................. 4,875 6,408
------- -------
Total current assets.............................. 9,062 10,595
Escrow funds.............................................. 1,872 528
Due from related parties -- installment sales contracts... 3,948 3,806
------- -------
Total assets...................................... $14,882 $14,929
======= =======
Liabilities and Shareholder's Equity:
Current liabilities:
Accounts payable and accrued liabilities............... 1,831 1,977
Due to related parties................................. 4,989 5,035
------- -------
Total current liabilities......................... 6,820 7,012
Shareholder's equity:
Capital stock:
Additional paid-in capital................................ 6,641 6,641
Retained earnings......................................... 1,421 1,276
------- -------
Total shareholder's equity........................ 8,062 7,917
------- -------
Total liabilities and shareholder's equity........ $14,882 $14,929
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
25
<PAGE> 27
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues:
Interest income........................................... $223 $210
Operating expenses:
General and administrative................................ -- --
---- ----
Income before taxes......................................... 223 210
Income taxes................................................ 78 9
---- ----
Net income.................................................. $145 $201
==== ====
</TABLE>
See accompanying notes to condensed financial statements.
26
<PAGE> 28
PLD CAPITAL ASSET (U.S.) INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------- -----
<S> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 145 $ 201
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in operating assets and liabilities:
Change in due from or due to related parties,
net.............................................. 1,345 (209)
(Decrease)/increase in accounts payable and
accrued liabilities.............................. (146) 8
------- -----
Net cash provided by operating activities.... 1,344 --
Cash flows from investing activities:
Escrow................................................. (1,344) --
------- -----
Net cash used in investing activities........ (1,344) --
------- -----
Increase/(decrease) in cash and cash equivalents............ -- --
Cash and cash equivalents, beginning of period.............. 10 10
------- -----
Cash and cash equivalents, end of period.................... $ 10 $ 10
======= =====
</TABLE>
See accompanying notes to condensed financial statements.
27
<PAGE> 29
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(1) BASIS OF PRESENTATION
The accompanying condensed financial statements are unaudited and have been
prepared by PLD Capital Asset (U.S.) Inc. ("PLDCA" or the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of management, the condensed financial statements include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation. Certain information and footnote disclosures generally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. Results for interim periods are not necessarily indicative of the
results for a full year. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto for the fiscal year
ended December 31, 1998.
(2) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
PLDCA was incorporated on March 24, 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 Russia and Kazakhstan. On
June 30, 1998, PLDCA assumed the assets, liabilities and business of PLD Asset
Leasing Limited ("PLDAL"). PLDCA recorded such assets and liabilities at the
historical cost of PLDAL, since the entities were under common control. Amounts
presented for the three months ended March 31, 1998 reflect the results of
operations and cash flows of PLDAL. PLDAL is a Cypriot company wholly owned by
the Parent, which existed to enter into lease agreements with related companies.
PLDAL is presently inactive and it is the intention of the Parent to liquidate
PLDAL.
Ultimate recoverability of the Company's investments is dependent upon each
of PLD's subsidiaries and affiliates with which it has entered into installment
sales contracts, achieving and maintaining profitability, which is dependent to
a certain extent on a stabilization of the economies of the former Soviet Union,
the ability of these companies to maintain their telecommunications licenses and
their ability to obtain adequate financing to meet capital commitments.
(3) COMMITMENTS AND CONTINGENCIES
(a) Guarantees
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of this debt under the terms of the related indentures.
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to meet its current debt obligations. While management
of PLD believes that, as long as progress towards settlement of such obligations
is being made, the holders of such debt will agree to payment deferrals beyond
the present due date of May 31, 1999, there can be no assurance that the holders
will grant such deferrals or that they will not demand payment in full of the
obligations. PLD's failure to make payment in full could result in a
cross-default under and acceleration of the senior discount notes and
convertible subordinated notes for which the Company serves as a guarantor.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
(b) Purchase Commitments
As of March 31, 1999, the Company had entered into purchase commitments
with unaffiliated companies relating to telecommunications equipment amounting
to $2,051,000.
28
<PAGE> 30
PLD CAPITAL ASSET (U.S.) INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(4) RESTRICTED CASH
Pursuant to the terms of PLD's $149.5 million private placement completed
on June 12, 1996, $1.9 million was in the Company's escrow account on March 31,
1999. These funds may only be used for certain specified purposes, principally
for the purchase of telecommunications equipment and the payment of interest on
PLD's senior discount notes.
(5) COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive income
was equal to net income reported on the condensed statement of operations.
(6) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's condensed financial statements.
29
<PAGE> 31
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
30
<PAGE> 32
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- -------------
(THOUSANDS OF U.S. DOLLARS,
EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 409 $ 390
Trade receivables, net of allowances...................... 2,317 2,394
Other receivables......................................... 2,028 1,880
Due from related parties.................................. 8,256 8,162
-------- --------
TOTAL CURRENT ASSETS.............................. 13,010 12,826
Property and equipment, net................................. 47,553 48,408
Telecommunications licenses, net............................ 30,558 31,904
Due from related parties.................................... 2,135 1,752
Goodwill, net............................................... 10,433 10,572
Other investments and assets, net........................... 591 593
-------- --------
TOTAL ASSETS...................................... $104,280 $106,055
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... 2,977 2,915
Accrued liabilities....................................... 1,177 757
Taxes payable............................................. 4,551 3,571
Due to related parties.................................... 22,897 21,621
Supplier finance -- current portion....................... 777 759
-------- --------
TOTAL CURRENT LIABILITIES......................... 32,379 29,623
Due to related parties...................................... 8,000 8,000
Supplier finance -- long-term portion....................... 1,819 2,068
SHAREHOLDERS' EQUITY
Capital stock............................................... 1 1
Preference shares, par value $1.00 per share, authorized,
issued and fully paid -- 1,000 shares
Ordinary shares, par value IR Pound Sterling 1 per share,
authorized -- 1,000 shares, issued and fully
paid -- 199 shares
Share premium............................................. 40,390 40,390
Additional Capital........................................ 46,439 46,439
Accumulated deficit....................................... (24,748) (20,466)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 62,082 66,364
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $104,280 $106,055
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
31
<PAGE> 33
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1999 1998
------- ------
<S> <C> <C>
REVENUES:
Telecommunications........................................ $ 3,958 $5,377
Finance lease income...................................... 426 447
------- ------
TOTAL REVENUES.................................... 4,384 5,824
OPERATING EXPENSES:
Direct costs (excludes depreciation)...................... 2,520 2,178
General and administrative................................ 2,441 1,996
Depreciation.............................................. 1,114 854
Amortization.............................................. 1,486 65
Taxes other than income taxes............................. 663 434
------- ------
TOTAL OPERATING EXPENSES.......................... 8,224 5,527
OPERATING LOSS.............................................. (3,840) 297
OTHER INCOME/(EXPENSE):
Share of loss from equity investments..................... (137) (210)
Interest income........................................... -- 81
Interest expense.......................................... (362) (143)
Foreign exchange gain..................................... 66 --
------- ------
LOSS BEFORE TAXATION AND MINORITY INTEREST.................. (4,273) 25
Income taxes................................................ (9) (377)
------- ------
LOSS BEFORE MINORITY INTEREST..................... (4,282) (352)
Minority interest........................................... -- --
------- ------
NET LOSS.................................................... $(4,282) $ (352)
======= ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
32
<PAGE> 34
TECHNOCOM LIMITED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(4,282) $ (352)
Adjustments to reconcile net loss to net cash (used
in)/provided by operating activities:
Depreciation and amortization............................. 2,600 919
Share of loss of equity investments....................... 137 210
Changes in operating assets and liabilities:
Decrease/(increase) in trade receivables.................. 77 (735)
(Increase)/decrease in other receivables.................. (148) 772
Changes in due from/to related parties.................... (58) 1,813
Increase/(decrease) in accounts payable and deferred
taxes.................................................. 62 (797)
Increase/(decrease) in accrued liabilities................ 420 (711)
Increase/(decrease) in other liabilities.................. 749 (48)
------- ------
CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES:............ (443) 1,071
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (251) (782)
Other investments and assets................................ (7) (148)
------- ------
CASH USED IN INVESTING ACTIVITIES........................... (258) (930)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on long-term indebtedness........................... 720 (427)
------- ------
CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES............. 720 (427)
Increase/(decrease) in cash and cash equivalents............ 19 (286)
Cash and cash equivalents at beginning of period............ 390 4,671
------- ------
CASH AT END OF PERIOD....................................... $ 409 $4,385
======= ======
Supplemental disclosures:
Interest paid............................................... $ -- $ 50
======= ======
Income taxes paid........................................... $ -- $ --
======= ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
33
<PAGE> 35
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(1) BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements are unaudited
and have been prepared by Technocom Limited (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission (the "SEC"). In
the opinion of management, the consolidated condensed financial statements
include all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation. Certain information and footnote disclosures generally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules
and regulations. Results for interim periods are not necessarily indicative of
the results for a full year. These consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto for the fiscal year ended December 31, 1998.
Certain reclassifications have been made to the prior year's consolidated
condensed financial statements to conform to the current year's presentation.
The Company's parent is PLD Telekom Inc. ("PLD" or the "Parent"). The
Parent's investment in the Company has been pushed down into the Company's
consolidated financial statements and allocated to the cost of the
telecommunications licenses and goodwill. The Company's consolidated balance
sheets at December 31, 1998 and at March 31, 1999 reflect the effect of this
push down accounting treatment. The costs of the telecommunications licenses are
amortised on a straight line basis over the terms of the related licenses.
Goodwill is amortised on a straight line basis over 20 years.
(2) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES
The Company was incorporated under the laws of the Republic of Ireland in
January 1992. The Company's principal activity is the provision of
telecommunications services in Russia. The Company conducts its business
activities directly and through a number of subsidiaries and other affiliates,
most of which are incorporated in Russia. The Company established a registered
foreign representative office in Russia in October 1995.
The Company operates in an emerging economy which, by its nature, has an
uncertain economic, political, and regulatory environment. The general risks of
operating businesses in the former Soviet Union include the possibilities of
rapid change in government policies, economic conditions, the tax regime and
foreign currency regulations. In addition, its satellite-based long distance
network is at an early stage of its operations.
Ultimate recoverability of the Company's investments is dependent upon each
of the subsidiaries and affiliates achieving and maintaining profitability,
which is dependent to a certain extent on a stabilization of the economies of
the former Soviet Union, the ability to maintain the necessary
telecommunications licenses and the ability to obtain adequate financing to meet
capital commitments.
(3) COMMITMENTS AND CONTINGENCIES
(a) Pledge Arrangements
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. PLD is the holder of
all of the preference shares in the Company and those shares, together with 17
ordinary shares of the Company owned by PLD (representing approximately 8.5% of
all such ordinary shares outstanding), have been pledged by PLD as collateral.
In November 1997, an additional 28 ordinary shares of the Company owned by PLD
(representing approximately 14% of all such ordinary shares outstanding) were
pledged as collateral to The Travelers Insurance Company and The
34
<PAGE> 36
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
Travelers Indemnity Company (the "Travelers Parties") in relation to certain
other indebtedness of PLD to such parties.
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to pay its indebtedness to the Travelers Parties. While
management of PLD believes that, as long as progress towards settlement of such
obligations is being made, the Travelers Parties will agree to payment deferrals
beyond the present due date of May 31, 1999, there can be no assurance that
these parties will grant such deferrals or that they will not demand payment in
full of the obligations. PLD's failure to make payment in full could result in a
cross-default under and acceleration of the senior discount notes and
convertible subordinated notes. These factors raise substantial doubt about
PLD's ability to continue as a going concern. Because the Company is dependent
on the continued financial support of PLD to finance its ongoing operations, any
such events would have a material adverse effect on the Company and raise
substantial doubt about the Company's ability to continue as a going concern.
Should PLD cease to trade as a going concern, the Company may have to resort to
extraordinary measures, including making sales of assets under distressed
conditions or ultimately seeking the protection of the bankruptcy courts. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
(b) Commitments
Teleport-TP, a subsidiary of the Company in Russia, currently utilizes
capacity on three Intelsat satellites for the provision of its international and
domestic long distance services, pursuant to rolling fifteen year contracts with
Intelsat. These agreements require quarterly payments of $1.3 million for the
remainder of their terms.
As of March 31, 1999, the Company has a commitment to pay PLD $8,000,000 on
April 20, 2001 in accordance with the terms of an agreement dated April 21, 1998
between the Company and PLD. In addition, according to the terms of the
agreement interest accrues at the rate of 14% p.a. and will be payable annually
in arrears on the anniversary of the agreement date.
(c) Taxation
The Company and certain of its Russian subsidiaries have accrued profits
and other taxes based on interpretations of the law which may ultimately be
disputed by the Russian taxation authorities. The exposure to additional profits
and other taxes, fines and penalties will not, in the opinion of the Company's
directors, have a material adverse effect on the financial position or results
of operations of the Company.
(d) Legal Proceedings
There are no material pending legal proceedings to which the Company or any
of its property is subject.
(4) COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive loss was
equal to consolidated net loss reported on the consolidated condensed statement
of operations.
(5) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
35
<PAGE> 37
TECHNOCOM LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's consolidated condensed financial
statements.
36
<PAGE> 38
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
37
<PAGE> 39
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ---------------
(THOUSANDS OF U.S. DOLLARS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,965 $ 1,642
Trade receivables, net of allowance....................... 3,017 3,811
Due from related parties.................................. -- 20
Inventory................................................. 1,641 1,495
Prepaid expenses and other current assets................. 1,567 713
------- -------
Total current assets.............................. 8,190 7,681
Property and equipment, net................................. 29,617 29,746
Telecommunications license, net............................. 20,962 21,581
------- -------
Total assets...................................... $58,769 $59,008
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. 1,686 939
Due to related parties.................................... 487 602
Customer deposits and advances............................ 4,136 4,244
------- -------
Total current liabilities......................... 6,309 5,785
------- -------
Commitments and contingencies
Minority interest........................................... 5,977 6,102
Shareholder's equity:
Common stock, par value of $1 per share,
authorized -- 20,001,000 shares, issued and
outstanding -- 20,000,002 shares....................... 20,000 20,000
Contributed capital....................................... 30,803 30,803
Reserve capital........................................... 100 100
Accumulated deficit....................................... (4,420) (3,782)
------- -------
Total shareholder's equity........................ 46,483 47,121
------- -------
Total liabilities and shareholder's equity........ $58,769 $59,008
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
38
<PAGE> 40
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Telecommunications revenues................................. $7,921 $9,549
Operating expenses:
Direct costs (excludes depreciation)...................... 1,667 1,948
General and administrative................................ 2,313 2,313
Management fees........................................... 344 400
Depreciation and amortization............................. 1,870 1,388
Taxes other than income tax............................... 84 135
------ ------
Total operating expenses.......................... 6,278 6,184
------ ------
Operating income............................................ 1,643 3,365
Other income/(expense):
Interest and other income................................. 37 91
Foreign exchange loss..................................... (154) (110)
------ ------
Net income before income taxes and minority interest... 1,526 3,346
Income taxes................................................ 1,089 1,346
------ ------
Net income before minority interest............... 437 2,000
Minority interest........................................... 475 1,257
------ ------
Net (loss)/income........................................... $ (38) $ 743
====== ======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
39
<PAGE> 41
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows provided by operating activities:
Net (loss)/income......................................... $ (38) $ 743
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,870 1,388
Gain on disposal....................................... -- (15)
Bad debt expense....................................... 137 180
Minority interest...................................... 475 1,257
Changes in operating assets and liabilities:
Decrease/(increase) in trade receivables............. 657 (472)
(Increase)/decrease in inventory..................... (146) 167
(Increase)/decrease in prepaid expenses and other
current assets...................................... (803) 311
Increase in accounts payable and accrued
liabilities......................................... 748 155
Decrease in due to related parties................... (95) (385)
(Decrease)/increase in customer deposits and
advances............................................ (108) 253
Decrease in income tax payable....................... (51) (24)
------- -------
Net cash provided by operating activities......... 2,646 3,558
------- -------
Cash flows used in investing activities -- purchase of
property and equipment.................................... (1,123) (960)
------- -------
Cash flows used in financing activities -- dividend
payments.................................................. (1,200) --
------- -------
Increase in cash and cash equivalents............. 323 2,598
Cash and cash equivalents at beginning of period............ 1,642 5,294
------- -------
Cash and cash equivalents at end of period.................. $ 1,965 $ 7,892
======= =======
Supplemental disclosures:
Interest paid............................................. $ -- $ --
======= =======
Income taxes paid......................................... $ 1,126 $ 1,361
======= =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
40
<PAGE> 42
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(1) BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements are unaudited
and have been prepared by Wireless Technology Corporations Limited ("WTC" or
"the Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). In the opinion of management, the consolidated
condensed financial statements include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation. Certain information and
footnote disclosures generally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules and regulations. Results for interim periods
are not necessarily indicative of the results for a full year. These
consolidated condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the fiscal year
ended December 31, 1998.
The Company's ultimate parent is PLD Telekom Inc. ("PLD"). The parent's
investment in the Company has been pushed down into the Company's consolidated
financial statements and allocated to the cost of the telecommunications
license. The Company's consolidated balance sheets at December 31, 1998 and at
March 31, 1999 reflect the effect of this push down accounting treatment. The
cost of the telecommunications license is amortized on a straight line basis
over the term of the license.
(2) FUTURE ACTIVITIES
The Company's results are dependent upon the ability of its subsidiary,
ALTEL, formerly known as BECET International ("ALTEL"), to retain existing
subscribers, to attract new subscribers, and to control operating expenses.
ALTEL's cellular telecommunications system in Kazakhstan is operating in an
emerging economy which, by its nature, has an uncertain economic, political, and
regulatory environment. The general risks of operating businesses in Kazakhstan
include the possibility for rapid changes in government policies, economic
conditions, the tax regime, and foreign currency regulations.
Ultimate recoverability of the Company's investment in ALTEL is dependent
upon ALTEL maintaining profitability, which is dependent on the stability of the
economy of Kazakhstan, the ability to maintain the necessary telecommunications
licenses, and the ability to obtain adequate financing to meet capital
requirements.
(3) COMMITMENTS AND CONTINGENCIES
(a) Guarantees
In June 1996, PLD issued senior discount notes and convertible subordinated
notes with an aggregate principal amount of $149.5 million. The Company is a
guarantor of this debt under the terms of the related indentures. The Company is
also a guarantor of other indebtedness of PLD to The Travelers Insurance Company
and The Travelers Indemnity Company (the "Travelers Parties").
As noted in its annual report on Form 10-K, PLD does not presently have
sufficient funds on hand to pay the indebtedness to the Travelers Parties which
is currently due on May 31, 1999. While management of PLD believes that, as long
as progress towards settlement of such obligations is being made, the holders of
such debt will agree to payment deferrals beyond the present due date of May 31,
1999, there can be no assurance that the Travelers Parties will grant such
deferrals or that they will not demand payment in full of the obligations. PLD's
failure to make payment in full could result in a claim being made against the
Company under its guarantee and a cross-default under and acceleration of the
senior discount notes and convertible subordinated notes for which the Company
also serves as a guarantor. These factors raise substantial doubt about the
Company's ability to continue as a going concern.
41
<PAGE> 43
WIRELESS TECHNOLOGY CORPORATIONS LIMITED
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(b) Management Services
On January 1, 1998, PLD entered into an agreement with ALTEL, under which
PLD would provide certain consulting, informational services, management support
services and personnel expertise. The agreement provides for a fee of $25,000
per month plus 3.4% of monthly gross revenues and was for a one year term,
automatically renewable for successive one year periods unless terminated by
either party.
ALTEL has negotiated an agreement with its other shareholder effective
January 1, 1998, under which the shareholder will provide certain consulting
services, management support services and personnel expertise. Payments under
this agreement are 300,000 tenge per month (U.S. dollar equivalent as of March
31, 1999 approximates $3,429) plus 1.0% of monthly gross revenues. The agreement
was for a one year term, automatically renewable for successive one year periods
unless terminated by either party.
(c) Taxation
ALTEL has accrued profit and other taxes based on interpretations of the
law which may ultimately be disputed by the local taxation authorities.
Management believes that the exposure to additional profit and other taxes,
fines and penalties will not have material effect on the financial position or
results of operations of the Company.
(4) COMPREHENSIVE INCOME
For the three months ended March 31, 1999 and 1998, comprehensive
(loss)/income was equal to consolidated net (loss)/income reported on the
consolidated condensed statement of operations.
(5) ACCOUNTING PRONOUNCEMENTS
The American Institute of Certified Public Accountants issued Statement of
Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP
98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires
that certain costs related to the development or purchase of internal-use
software be capitalized and amortized over the estimated useful life of the
software. SOP 98-5 requires costs of start-up activities and organization costs
to be expensed as incurred. The Company was required to adopt both new
statements in the first quarter of 1999. The adoption of these statements did
not have a material effect on the Company's consolidated condensed financial
statements.
(6) DIVIDEND PAYMENTS
Total dividends declared and paid were $1.2 million and $0 for the three
months ended March 31, 1999 and 1998, respectively.
42
<PAGE> 44
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This document contains certain forward-looking statements that are subject
to risks and uncertainties. Forward-looking statements include certain
information relating to political, social and economic conditions in the
countries of the former Soviet Union and the Commonwealth of Independent States,
the commencement of certain programs and the proposed offering of certain
services by the Company's operating subsidiaries, proposed changes in the
Company's corporate structure and centers of operations, the impact of Year 2000
issues on the Company's operations and interpretations and actions of certain
regulatory authorities, including in the United States, Canada, Russia,
Kazakhstan and Belarus, as well as information contained elsewhere in this
report where statements are preceded by, followed by, or include the words
"believes," "expects," "anticipates," and similar expressions. For such
statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including without
limitation, those discussed elsewhere in the Report. Furthermore, this document
constitutes a Year 2000 Readiness Statement, and the statements herein are
subject to the Year 2000 Information and Readiness Disclosure Act, and the
Company hereby claims the protection of such Act for this document and all
information contained herein.
BASIS OF PRESENTATION
The Company's key interests at March 31, 1999 include a 71% equity interest
in PeterStar, which provides telecommunications services in St. Petersburg,
Russia; a 50% equity interest in ALTEL, which provides cellular services in
Kazakhstan; a 50% interest in BELCEL, which provides cellular services in
Belarus; and an 80.4% equity interest in Technocom which, through its 49.3%
equity interest in Teleport-TP, operates an international teleport in Moscow,
fiber optic networks in Moscow and its environs and a satellite-based long
distance network across Russia.
EBITDA is used as a measure of operating performance and is defined as
earnings (or loss) from continuing operations before income taxes and minority
interest plus net interest (interest expense less interest and other income)
plus depreciation and amortization. It is presented as supplemental disclosure
because it assists in understanding the Company's operating results. EBITDA,
however, may not be comparable to similarly titled measures of other companies
and should not be considered in isolation or as a substitute for net income,
cash flow provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
Certain of the Company's subsidiaries pay management fees to their
shareholders, including the Company. The figures presented for the subsidiaries
reflect all payments of such fees (i.e. management fees are included in
operating expenses in the same way as other expenses of the subsidiary).
Profitability measures -- EBITDA, operating profit and net income -- are
therefore quoted after accounting for such payments.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Versus Three Months Ended March 31, 1998
Overview. The definition of EBITDA is given in the previous section. It is
commonly used as an indicator of the ability of a business to generate cash
flows from its operating activities. Management therefore considers it to be a
relevant and useful measure for investors. The Company reported a net loss of
$13.5 million ($0.36 per share) and an operating loss of $1.9 million on
revenues of $29.4 million for the three months ended March 31, 1999, compared to
a net loss of $4.5 million ($0.14 per share) and operating income of $7.2
million on operating revenues of $35.2 million reported in the first quarter of
1998. EBITDA of $5.4 million reported in the first quarter of 1999 compares with
$12.7 million in the first quarter of 1998. In the first three months of 1999
net cash provided by operating and financing activities amounted to $8.2 million
and $0.4 million, respectively, with net cash used in investing activities
amounting to $7.5 million. This compares to the first three months of 1998 when
net cash provided by operating activities amounted to $5.5 million, and net cash
used in investing activities and financing activities amounted to $0.4 million
and $5.2 million,
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<PAGE> 45
respectively. Cash flows generated by operating subsidiaries are generally
retained by those businesses to finance capital expenditures, service long-term
debt and provide working capital. Funds in excess of subsidiaries' requirements
are distributed to shareholders.
The following table shows the Company's consolidated revenues by principal
operating subsidiary for the three months ended March 31, 1999 and 1998 and the
percentage change in revenues between the periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998 %
-------------------- -------------------- CHANGE OVER
($ MILLION) % ($ MILLION) % PRIOR PERIOD
----------- ----- ----------- ----- ------------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C>
PeterStar............................... 13.9 47.2% 17.5 49.7% (20.6)%
ALTEL................................... 7.9 26.9% 9.6 27.3% (17.7)%
Technocom............................... 4.4 15.0% 5.8 16.5% (24.1)%
BCL..................................... 2.4 8.2% 2.3 6.5% 4.3%
Other................................... 0.8 2.7% 0.0 0.0% n/a
---- ----- ---- ----- -----
29.4 100.0% 35.2 100.0% (16.5)%
</TABLE>
Revenues. Revenues decreased 16.5% from $35.2 million in the first quarter
of 1998 to $29.4 million in the first quarter of 1999, as the Company's Russian
businesses continued to feel the effects of the economic crisis which commenced
in the third quarter of 1998 and ALTEL began to be affected by the onset of
economic problems in Kazakhstan. These economic problems have resulted in the
loss of some customers as well as reduced calling activity among those who have
remained customers.
PeterStar and ALTEL continue to account for 74.1% of the Company's
consolidated revenues. Although subscriber numbers have increased for both these
entities over the comparable periods, revenues per subscriber or line have
fallen.
In the case of Teleport-TP, where tariffs to certain customers are quoted
in roubles, revenues have been adversely affected by the rouble devaluation. In
addition, collections have slowed and the Company's businesses are having to
devote more resources to the process of collecting receivables.
While increased competition has not been an issue for either PeterStar or
Teleport-TP, ALTEL has been experiencing downward pressure on tariffs as a
result of other cellular licensees commencing operations in Kazakhstan.
The Company's new international carrier services business (the "Carrier
Services Business") contributed revenues of $610,000 in the first quarter of
1999, up from $255,000 in the fourth quarter of 1998 when it commenced
operations. This business is expected to be an increasingly important
contributor to PLD's consolidated revenues in 1999 and subsequent years as this
business is developed.
Overall, management believes that based upon the current economic
circumstances in Russia and Kazakhstan, revenues in the short-term are unlikely
to grow at the same rate as they have in recent years. Given the many
uncertainties in the Russian political and economic situations at the present
time, exacerbated by the absence of strong leadership or effective economic
planning, it is extremely difficult to make any accurate assessment of the
prospects for the Company's businesses in 1999. It is not possible to rule out
further deterioration in the Russian and Kazakh economic situation which would
be likely to impact the Company's businesses adversely. See "Recent
Developments." While management believes that it is taking all available
measures to protect the Company and its businesses from the negative effects of
any further problems in Russia and Kazakhstan, there can be no assurance that
those measures will be successful.
Direct costs (excludes depreciation). A portion of the loss in revenues
discussed above was offset by a reduction in the Company's direct costs which
decreased 22.2% to $8.4 million in 1999 from $10.8 million in 1998. As a
percentage of revenues, direct costs decreased from 30.7% to 28.6%. Given the
continuing effects of the Russian economic crisis however, it is difficult to
determine whether the Company will be able to maintain these margin levels for
the balance of 1999.
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<PAGE> 46
General and administrative expenses. General and administrative expenses,
which include salaries and sales and marketing expenses in all of the Company's
operating subsidiaries, together with corporate office overhead, increased 36.1%
to $13.2 million for the three months ended March 31, 1999 from $9.7 million
recorded in the first quarter of 1998. As a percentage of revenues, general and
administrative expenses for the three months ended March 31, 1999 increased to
44.9% from 27.6% in 1998, which was attributable in part to additional costs
relating to a number of new projects aimed at developing alternative revenue
streams for the Company including the Carrier Services Business and Cardlink,
which is in the process of implementing wireless card validation systems using
proprietary technology.
Depreciation. Depreciation increased 54.8% to $4.8 million in the first
quarter of 1999 compared to $3.1 million incurred in the first quarter of 1998
reflecting the investment of over $44.8 million in property and equipment over
the past 12 months. Depreciation will likely continue to grow as capital
expenditures are expected to continue, albeit at a slower pace, in 1999.
Depreciation represented 16.3% of revenues for the three months ended March 31,
1999 compared to 8.8% a year earlier, largely as a result of the Company's
comparatively lower revenues in the first quarter of 1999 compared to 1998.
Amortization expense. For the three months ended March 31, 1999, the
Company incurred total amortization charges of $3.6 million compared to $3.1
million a year earlier. Of the 1999 year to date charges, $3.3 million related
primarily to the amortization of telecommunications licenses held by PeterStar,
ALTEL and Teleport-TP and $0.3 million related to the amortization of deferred
financing costs. Deferred financing costs relating to the June 1996 high yield
offering are amortized over eight years, the term of the Senior Notes.
The increase in amortization expense in the three months ended March 31,
1999 was primarily due to the acquisition by the Company, effective September
30, 1998, of an additional 11% interest in PeterStar for consideration of $33.9
million. The excess of the purchase price over identifiable, tangible assets of
$28.1 million arising on the acquisition was allocated to goodwill and
telecommunications licenses. The value allocated to goodwill ($24.7 million) is
being amortized over 20 years and the value allocated to PeterStar's licenses
($3.4 million) is being amortized over its remaining term which expires in 2004.
This acquisition has resulted in additional quarterly amortization charges of
$0.5 million which commenced in the fourth quarter of 1998.
ALTEL's telecommunications license, which expires in 2009, is also
amortized over its remaining term and resulted in an amortization charge of $0.5
million for the three months ended March 31, 1999, unchanged from a year ago.
The Company does not anticipate any problems renewing the
telecommunications licenses currently held by any of its subsidiaries upon their
expiry.
Share of income/(loss) from equity investments. The Company's share in
losses from equity investments, primarily BELCEL, Rosh Telecom and MTR-Sviaz,
increased from $0.2 million in the first quarter of 1998 to $0.3 million in the
first quarter of 1999. The 1999 first quarter loss consisted of a 50% share of
BELCEL's three month loss of $0.4 million and a 50% share of MTR-Sviaz's three
month loss of $0.3 million.
Interest and other income. Interest and other income of $0.3 million in
the first quarter of 1999 compared with $0.9 million earned in the first quarter
of 1998 and reflects the draw down of escrow cash and other cash resources of
the Company and its subsidiaries over the past 12 months. Interest earned on the
Company's escrow account totaled $0.2 million in the first quarter of 1999
compared with $0.4 million earned in the first quarter of 1998. The Company's
escrow account totaled $16.4 million as of March 31, 1999 compared to $34.3
million a year earlier.
Interest expense. Interest expense of $7.0 million in the first quarter of
1999 compared with $5.2 million incurred in the first quarter of 1998 and
consisted of interest on bank indebtedness and short-term borrowings of $1.6
million, interest accrued on the Senior Notes of $4.8 million and interest
expense related to the Convertible Notes of $0.6 million. Interest on the Senior
Notes becomes payable in cash semi-annually commencing June 1999, while interest
on the Convertible Notes is currently paid in cash semi-annually. The increase
in interest expense between the comparative three month periods reflects
increased expense on the
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<PAGE> 47
Senior Notes of $0.8 million, and interest on notes issued to News America of
$0.9 million, including interest expense related to the convertibility feature
of these notes. See "Liquidity and Capital Resources."
Foreign exchange loss. For the three months ended March 31, 1999, the
Company incurred foreign exchange losses of $0.5 million as compared to $0.1
million a year ago. The comparatively higher 1999 first quarter loss relates to
the continuing problems associated with the substantial devaluation of the
rouble which commenced in late 1998. The Company has sought, and will continue
to seek, to limit the effects of such 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. The Company does not hedge or
otherwise insure against its exchange risks as it has determined that it is
neither practical nor economical to do so.
Income taxes. The income tax charge for the three months ended March 31,
1999 was $2.6 million compared with $3.0 million in 1998. The provision for
income taxes relates substantially to current income taxes in the Company's
Russian and Kazakh businesses and its decrease reflects the overall decreased
profitability of these subsidiaries over the prior year.
Minority interest. Minority interest relates principally to the minority
shareholdings held in three of the Company's subsidiaries -- PeterStar (29%),
ALTEL (50%) and Technocom (19.6%). Minority interest of $1.2 million for the
three months ended March 31, 1999 compared with $3.7 million recorded in 1997
and reflects the weaker results experienced in the first quarter of 1999
compared to 1998. In addition, effective September 30, 1998, the Company
acquired an additional 11% of PeterStar. Accordingly, PeterStar's minority
interest percentage in the first quarter of 1999 was reduced to 29% from 40% a
year ago.
The following table compares the results of operations of the Company's
principal operating subsidiaries for the three months ended March 31, 1999 with
the three months ended March 31, 1998:
<TABLE>
<CAPTION>
PETERSTAR ALTEL TECHNOCOM BCL
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31 MARCH 31 MARCH 31 MARCH 31
------------ ------------ ------------- --------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ----- ---- ----- -----
(UNAUDITED, MILLIONS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................. 13.9 17.5 7.9 9.6 4.4 5.8 2.4 2.3
Operating income/(loss) -- $............. 4.0 7.1 2.2 3.9 (3.8) 0.3 0.3 0.2
Operating income/(loss) -- %............. 28.8% 40.6% 27.8% 40.6% (86.4)% 5.2% 12.5% 8.7%
Net income/(loss) -- $................... 2.4 6.2 1.0 2.5 (4.3) (0.4) 0.1 0.2
Net income/(loss) -- %................... 17.3% 35.4% 12.7% 26.0% (97.7)% (6.9)% 4.2% 8.7%
EBITDA -- $.............................. 5.9 8.8 3.4 4.6 (1.3) 1.0 0.3 0.4
EBITDA -- %.............................. 42.4% 50.3% 43.0% 47.9% (29.5)% 17.2% 12.5% 17.4%
% PLD ownership.......................... 71.0% 60.0% 50.0% 50.0% 80.4% 80.4% 100.0% 100.0%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Factors discussed below in the section encaptioned "Commitments and Sources
of Funds for 1999" raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated condensed financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
General
For the three months ended March 31, 1999, a total of $8.2 million in cash
was generated from operations (1998 -- $5.5 million), $7.5 million was used in
net investing activities (1998 -- $5.2 million) and $0.4 million was provided by
financing activities (1998 -- $0.4 million used in financing activities).
Investments during the first three months of 1999 on telecommunications
equipment and infrastructure within PeterStar, ALTEL and Teleport-TP totaled
$5.5 million. Funds held in escrow at March 31, 1999 increased to $16.4 million
from $14.9 million at the end of 1998 reflecting $0.2 million in interest earned
for the quarter and $1.3 million in installment sales receipts from
subsidiaries.
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<PAGE> 48
Cash provided by financing activities of $0.4 million related primarily to
$2.5 million in short-term funding provided to the Company from News America
offset by $0.6 million in dividends paid to a minority shareholder and $1.5
million in long-term debt repayments.
As of March 31, 1999, the Company reported a working capital deficit of
$29.2 million compared to a working capital deficit of $16.0 million at the end
of 1998. At March 31, 1999, the Company had consolidated total assets of $349.9
million ($352.1 million as of December 31, 1998) which consisted of $36.5
million in current assets (including $5.7 million in cash and cash equivalents),
$169.6 million in property and equipment, $74.6 million in unamortized
telecommunications licenses relating to PeterStar, ALTEL and Teleport-TP, escrow
funds of $16.4 million and other assets and investments of $52.7 million,
including $35.9 million in goodwill, net of amortization, relating to the
Company's November 1997 acquisition of an additional 29.65% interest in
Technocom and August 1998 acquisition of an additional 11% interest in
PeterStar.
Long-term indebtedness of $149.4 million, consisting primarily of the
Company's Senior and Convertible Notes, as a percentage of total assets, was
42.7% as of March 31, 1999, compared to $151.8 million or 43.1% of total assets
as of December 31, 1998.
Shareholders' equity of $112.2 million, as of March 31, 1999, compared with
$124.9 million as of December 31, 1998, and consisted of $245.7 million in
common stock and additional paid-in capital offset by the Company's deficit of
$133.5 million. The Company's ratio of long-term indebtedness to equity at March
31, 1999 was 133.1% compared to 121.5% at December 31, 1998.
Commitments and Sources of Funds for 1999
Operating Businesses. The Company has historically funded the needs of its
operating businesses for capital expenditures and operating expenses out of the
proceeds of its financing activities, including supplier financing, proceeds
from sales of assets and, to the extent these existed, distributions from its
operating businesses (in the form of dividends and management fees). Except for
its Cardlink business and the Carrier Services Business, the Company's operating
businesses have largely become self-sustaining, in that they have been able to
pay for capital expenditures and operational expenses out of internally
generated cash flows from operations and/or have been able to arrange their own
financing, including supplier financing. Some supplier financing is back-to-back
financing arranged by the Company, where PLDCA, a wholly owned subsidiary of the
Company, acquires equipment, pays the supplier and resells the equipment to the
operating business. The principal source of funds for the latter activity has
been the escrow funds, discussed in greater detail below.
The Company plans to endeavor to accelerate the implementation of its
Cardlink business and Carrier Services Business, to the extent possible, in
1999. While Cardlink is not anticipated to require significant immediate cash,
development of the first phase of the Carrier Services Business is expected to
require approximately $17.0 million. The Company is currently negotiating with
an Ericsson company for a vendor financing arrangement for the Carrier Services
Business. Both the Cardlink business and the Carrier Services Business are
expected to be self-sustaining (in terms of generating sufficient cash to
fund -- or support financing for -- their operating and capital needs) in 2000.
To the extent that the operating businesses (other than Cardlink and the
Carrier Services Business) experience lower than expected revenues, higher
operating costs or higher development costs, so that they are no longer able to
fund their activities internally, the Company has the choice to provide
financing support itself, or cause the businesses to scale back or slow down the
build-out of their networks and/or to cut costs. The Company has already
initiated a number of these actions in response to the economic difficulties in
Russia and Kazakhstan, and anticipates continuing to take such actions in the
event that its businesses appear to need additional support.
In the event that the Company is unable to fully support the planned
implementation of the Carrier Services Business in 1999, it has the option to
defer capital expenditures scheduled for 1999 to 2000 or later, and to scale
back the development of its network. This will result in reduced traffic being
handled by, and reduced revenues from this business during 1999. The Company is
currently unable to quantify the effect on revenues of any such deferrals or
scaling back of development.
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<PAGE> 49
The Company. The Company has to date funded its own operations from the
same sources as it has funded its operating businesses, namely, proceeds of its
financing activities, including supplier financing, proceeds from sales of
assets and, to the extent, these existed, distributions from its operating
businesses. As the operating businesses have become self-sustaining, so too has
the level of distributions (including management fees) from its operating
businesses increased. The Company anticipates receiving approximately $8.0
million in distributions (including management fees) from its operating
businesses in 1999.
Expatriate employees working for the Company's operating businesses in
Russia, Kazakhstan and Belarus are employed through NWE Cyprus, which also acts
as an intermediate holding company for three of the Company's operating
businesses -- PeterStar, ALTEL and Yellow Pages. On an overall basis, the funds
received by NWE Cyprus through management fees and dividends are currently
sufficient to enable it to make the monthly salary and other payments due to
such expatriates. However, due to timing differences between receipt of
management fees/dividends and requirements to pay salaries etc. on a regular
basis, PLD periodically has to provide "top-up" funding to NWE Cyprus, but the
amounts involved are insignificant. Should the levels of management fees and
dividends reduce in future, the Company could, if necessary, reduce the number
of its expatriate employees, although this would have a detrimental effect upon
its ability to monitor and support its operating businesses.
The Company has the following commitments upcoming during the remainder of
1999 and intends to endeavor to deal with them as set forth below. To the extent
that the Company is unable to deal with any or all of the commitments described
below, the Company could be required to resort to extraordinary measures,
including making sales of assets under distressed conditions or ultimately
seeking the protection of the bankruptcy courts. The Company believes that
certain of its assets, notably its interests in PeterStar and ALTEL, are readily
saleable, but that, given that they could be sold under distressed conditions,
the Company would be unlikely to receive full value for either of them. The
Company would be receptive to entering into a transaction with another company
with greater financial resources as an alternative to having to enter into sales
of assets under distressed conditions or to take other extraordinary measures,
and has this option under active consideration. However, there can be no
assurance that such a transaction can be accomplished.
Travelers Financing. In November 1997, in connection with its acquisition
of additional interests in Technocom, the Company issued $12.32 million in 12%
Series A secured revolving credit notes (the "Series A Notes") and $3.1 million
in 12% Series B revolving credit notes (the "Series B Notes" and, together with
the Series A Notes, the "Revolving Credit Notes"), to The Travelers Insurance
Company and The Travelers Indemnity Company (collectively, the "Travelers
Parties") pursuant to a Revolving Credit Note and Warrant Agreement dated
November 26, 1997 between the Company and the Travelers Parties (the "Revolving
Credit Agreement"). Both the Series A Notes and the Series B Notes are secured
by the Company's inventory and accounts receivable. In addition, the Series A
Notes are secured by 28 of the Technocom shares acquired. In addition to issuing
the Series A and Series B Notes, the Company also issued to the Travelers
Parties a total of 423,000 warrants to purchase Common Stock at $8.625 at any
time up to December 31, 2008 (the "Travelers Warrants").
Pursuant to the terms of the Series A Notes and the Series B Notes, the
Company had the option of making certain "targeted reductions in commitment"
with respect to such Notes commencing in July 1998, or of issuing additional
warrants to purchase shares of the Company's Common Stock (the "Additional
Warrants") at an exercise price of $8.625 each, expiring on December 31, 2008.
The Company elected not to make any such "targeted reductions in commitment"
and, as a result, issued a total of 182,000 Additional Warrants to the Travelers
Parties.
The Company made required amortization payments of $1,000,000 on each of
July 31, 1998 and August 31, 1998, which were applied in reduction of the Series
B Notes. The $1,100,000 balance due under the Series B Notes was payable in full
on September 30, 1998 but, as a result of News America issuing a guarantee in
respect of the amount due, the maturity date was deferred by the Travelers
Parties to December 31, 1998. Required amortization payments of $1,000,000 due
on each of October 31, 1998 and November 30, 1998 were also deferred by the
Travelers Parties to December 31, 1998, also as a result of News America issuing
guarantees in respect of the amounts due.
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<PAGE> 50
On December 31, 1998 the Series A Notes and the amounts deferred under the
Series B Notes would have matured and the balance due become payable in full.
Taking into account the amounts deferred, the total that would have been due
under the Series A and Series B Notes as of that date was $13,420,000, of which
$3,100,000 was guaranteed by News America as described above. Prior to December
31, 1998, the Travelers Parties issued a deferral of the payment of the amounts
due to January 15, 1999. The Travelers Parties have given the Company a further
series of payment deferrals since December 31, 1998 with respect to the amounts
due under the Series A and Series B Notes, the last of which was given on May
10, 1999 and defers payment of the Notes to May 31, 1999. The Company has
continued to make monthly interest payments due on the Notes on a current basis.
Under the terms of the Revolving Credit Agreement, if the Series A and
Series B Notes were not repaid in full when due, the exercise price of all
warrants issued to the holders of the Series A and Series B Notes would have
been reset at $0.01 per share. In addition, in the event if such non-repayment,
on December 31, 1998 and on the last day of each succeeding month until the
Revolving Credit Notes were repaid in full, the holders of the Series A Notes
would have been entitled to receive 70,000 additional warrants to purchase
shares of the Company's Common Stock and the holders of the Series B Notes would
have been entitled to receive 32,000 additional warrants to purchase shares of
the Company's Common Stock, in each case at a price of $0.01 per share. All such
warrants, referred to as "Default Warrants", would have had an expiration date
ten years after their respective dates of issue.
The Travelers Parties 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 believes that the Travelers Parties have no basis for such claims and,
if asserted, they will not be successful.
Obligations under Senior and Convertible Notes. In June 1996 the Company
issued to a limited number of U.S. institutional investors $123.0 million
aggregate principal amount at maturity of Senior Notes and $26.5 million
aggregate principal amount of Convertible Notes. In March 1998 the Indentures
pursuant to which such Notes were issued were amended pursuant to a Consent
Solicitation. In October 1998 the Senior Notes were exchanged for Exchange Notes
of substantially similar tenor pursuant to an Exchange Offer.
Under the terms of the Senior Note Indenture, approximately $37.0 million
of the proceeds of the sale of the Senior Notes was required to be placed in
escrow and released solely to acquire assets for use in a telecommunications
business. As of March 31, 1999 the Company has used approximately $27.4 million
to fund purchases of equipment for its operating businesses, by having PLDCA
purchase equipment using the funds in escrow and then reselling the equipment to
the operating businesses, and the balance of such funds remain available for
such purposes (or for the payment of interest on the Senior and Convertible
Notes). However, the limitation on the use of proceeds to acquire assets has
meant that the Company has not been able to use the funds in escrow for working
capital needs of its operating businesses, nor to pay for other expenses
associated with setting up a telecommunications network. Furthermore, the
Company has found compliance with the conditions for the release of funds from
escrow to be burdensome, in that it is time consuming and expensive. Finally,
the covenants of the Indentures impose substantial restrictions upon the
Company's activities.
Interest in the amount of $1,192,500 is payable semi-annually in cash on
the Convertible Notes. The Company has made all such interest payments to date.
The next two payments in the amount of $1,192,500 each are due on June 1 and
December 1, 1999. The Company anticipates making such payments out of cash on
hand or out of funds held in the escrow account.
The Senior Notes accreted at a rate of 14% per annum from issue through May
31, 1998 and at a rate of 14.5% since such date through November 30, 1998. The
Company is required to pay interest in cash on the Senior Notes commencing June
1, 1999 and semi-annually thereafter. The installment of interest due on June 1,
1999 is $8,917,500, and a similar amount will be due on December 1, 1999. The
Company anticipates making such payments out of funds in the escrow account and
cash on hand.
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<PAGE> 51
News Revolving Credit Agreement. On November 30, 1998, News America
entered into the News Revolving Credit Agreement with the Company pursuant to
which News America agreed to advance $8.1 million (subsequently increased to
$9.55 million) to the Company.
The amounts payable under the News Revolving Credit Agreement are due on
June 30, 1999; however, the Company believes that, based upon its relationship
with News America as the major stockholder of the Company, it will both be able
to defer payment of the amounts due until such time as it can satisfactorily
handle such repayment, and be able to call upon News America for additional
financing for emergency matters, if required.
Technocom Put/Call. In addition, the Company may become obligated to make
payments in July 1999 of up to $28.1 million to Plicom Limited ("Plicom") and
Elite International Limited ("Elite"), the two minority shareholders of
Technocom. The Company has put and call agreements with Plicom and Elite which,
following the November 1997 acquisition by the Company of a portion of each of
their interests in Technocom, beneficially own 14.57% and 5.03%, respectively,
of the ordinary shares of Technocom. 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. The Company believes that, if required
in the absence of any other alternatives, such minority shareholders will agree
to an accommodation which will enable the Company to meet its commitments to the
minority shareholders in a manner which does not require the Company to resort
to extraordinary measures. 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.
Scientific Atlanta. The Company has issued a note to Scientific Atlanta in
respect of amounts due under its supply contract with Scientific Atlanta for the
Satelink network being developed by Teleport-TP, in the amount of $1,204,000,
which comes due on November 20, 1999. The Company anticipates having sufficient
cash on hand at the time in order to be able to make such payment.
Operating Leases, etc. The Company currently leases space at 43 Dover
Street in London, 505 Park Avenue in New York and 67 Broad Street in New York.
No rental is due with respect to 67 Broad Street, New York until July 1999. The
aggregate rental payable for these premises in 1999 is approximately $660,000.
The Company also has acquired an "indefeasible right of use" in a transatlantic
cable for $4.5 million, payable in twelve equal quarterly installments of
$375,000 each, the first of which is due in June 1999. The Company anticipates
meeting these obligations out of cash on hand.
The Company's operating businesses all lease space for their operations,
some of which is provided free of charge by their local shareholders. All such
businesses anticipate paying such rentals, where applicable, on a current basis
during 1999.
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Other Capital Commitments. As noted above, the Company's operating
businesses have ongoing capital requirements associated with the development of
their businesses. In no case is the Company specifically obligated to provide
capital to its operating businesses; it was so obligated in the past, but all
such obligations have been met. Furthermore, the Company is in a position to
control the level of commitments undertaken by its operating businesses, so as
to minimize the number of times when the Company may be required to step in to
support commitments made by an operating business. At the end of the day, the
Company's ultimate protection lies in being able to slow or, if necessary, stop
for a period of time, the development of the networks of one or more of its
operating businesses. In this respect the Company is closely monitoring the
situation of the one business which is likely to require significant capital
infusion, namely, its Carrier Services Business, to determine the rate at which
that business can be developed, consistent with the need of the Company to meet
its other obligations. In addition, the Company has had discussions with the
holders of the Senior and Convertible Notes relative to the release from escrow
of funds in order to support this business. While no commitment has been made to
release such funds, the Company believes that such holders are generally
supportive of the Carrier Services Business and are willing to work with the
Company, consistent with the protection of their own positions, in order to
develop such business.
Guarantees and Other Commitments. While the Company has guaranteed
obligations of its subsidiaries in the past, the only guarantee that is
outstanding as of March 31, 1999 is to Siemens in the amount of $1.5 million
relating to equipment purchased by Technocom.
Subsidiaries of the Company have guaranteed the Senior and Convertible
Notes, and two subsidiaries, BCL and WTC, have guaranteed the Revolving Credit
Notes.
As noted above, these factors raise substantial doubt about the Company's
ability to continue as a going concern, and the consolidated condensed financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
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.
In August 1998, the Russian government experienced a significant upheaval,
with the dismissal of the reformist government led by Sergei Kiriyenko and its
replacement by one led by Yevgeny Primakov. The
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<PAGE> 53
Primakov government did not propose a plan to address Russia's economic and
financial difficulties, one result of which has been to cause the International
Monetary Fund to delay further assistance to the Russian government. In May
1999, another political upheaval occurred, when President Boris Yeltsin
dismissed the Primakov government and selected Sergei Stepashin as the new Prime
Minister. It is too soon to predict what policies will be adopted by the new
Stepashin government. This most recent governmental reshuffling creates
increased uncertainty about the future political situation in Russia, which in
turn creates additional concern about the ability of the government to deal with
the many problems currently afflicting the Russian economic system.
Additionally, the International Monetary Fund has yet to approve the
disbursement of the next tranche of funding due to be received by Russia, and
this creates additional uncertainty regarding the health of the Russian economy.
At the present time, it is not possible to predict the complete effect of
the continuing economic, financial and political difficulties in Russia,
although they have made for a difficult business environment in Russia. Although
demand for the Company's telecommunications services continued during the
economic and banking crisis in the second half of 1998, the economic
difficulties in Russia have adversely affected the Company's operating
subsidiaries and the Company's consolidated results for the year ended December
31, 1998 and the first three months of 1999. As described in more detail in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Company's operating subsidiaries incurred an increased exchange
loss in the first three months of 1999 as compared to the same period in 1998,
together with a reduction in revenues on a year-on-year basis, and the Company
expects that revenues and margins will remain under pressure. The Company is not
yet able to predict the effects of the ongoing difficulties on its results for
1999, but the continuing economic difficulties in Russia will likely continue to
have an adverse effect on the Company in current and future reporting periods,
and there can be no assurance that such adverse effects will not be material.
Weakening Economic Conditions in Kazakhstan
The drop in the prices of the principal commodities on which the Kazakhstan
economy depends, namely oil, gas and gold, in late 1998, coupled with a slow
down in economic activity prompted by the Russian financial crisis and poorer
economic conditions experienced by its other trading partners, led to a
reduction in economic activity in Kazakhstan during the early part of 1999.
Also, in April 1999 the Kazakh government made the determination to cease
supporting the Tenge, with the result that it experienced a significant decline
in value. While the price of oil has since recovered, the prospects for growth
in the Kazakh economy in the near term remain uncertain. Since ALTEL's business
depends in part upon such growth, this is likely to inhibit its own development,
and could exacerbate the negative effect of the other factors, such as increased
competition, with which it has to deal.
EFFECTS OF NEWLY-ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities", was
issued. SFAS 133 established accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. SFAS 133 cannot be applied
retroactively to financial statements of prior periods. At the current time the
Company has not evaluated the impact SFAS 133 will have, if any.
YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications,
particularly older systems and applications, use a two-digit, rather than a
four-digit, date field to designate a particular year. As a result of the
century change, date-sensitive systems may recognize dates in the twenty-first
century (i.e., after 2000) as dates in the twentieth century (i.e., the
corresponding year commencing with the prefix 19--). Equally, such systems may
not recognize dates in the twenty-first century at all. All of this could lead
to system failures or miscalculations which could lead to disruption of
operations such as data being lost, an inability to process
52
<PAGE> 54
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.
As of April 30, 1999, the Company has expended approximately $1.0 million
for remediation efforts and expects that its total remediation costs, including
scheduled upgrades and replacements of approximately $3.1 million, will be
approximately $4.0 million.
Starting in January 1998, all operating businesses were required to use
their best efforts to obtain specific warranties of Year 2000 compliance from
parties with which they contract for products or services thereafter. While
almost all new contracts for products or services entered into since that date
have contained some form of warranty, these have generally been limited to
recovering of direct losses, and not indirect or consequential losses, such as
loss of revenues or profits. In consequence, the actual efficacy of such
warranties may be somewhat limited.
Additionally, all operating businesses have been required to review the
terms under which they have heretofore supplied products and/or services to
third parties. No case has been identified in which any operating business has
specifically guaranteed Year 2000 compliance, and the Company has instituted a
policy regarding the giving of such guarantees in the future in order to control
and limit possible exposure thereunder. Further, since none of the operating
businesses manufacture equipment or produce proprietary software for customers
other than in exceptional cases, virtually all such transactions involve the
re-sale or assignment of products and services supplied by others. Accordingly,
the Company believes that, to the extent that such products and services are
either warranted or shown to be Year 2000 compliant, its own exposure is
commensurately reduced.
While there can be no assurances that equipment failures will not occur,
the effect of such failures may be ameliorated by the fact that such equipment
is usually part of a network of facilities and equipment maintained by the
Company. This means that a failure in an individual component will not
necessarily cause a substantial disruption to the network as a whole, because no
individual item is critical to the operation of the network as a whole, and the
network also provides opportunities to by-pass the failure.
The foregoing indicates that, to the extent that its business depends upon
equipment, software, facilities and networks under its control, the Company
believes that, by the year 2000, it will have taken all steps reasonably
required to ensure that those items are Year 2000 compliant, and that it has
reasonable contingency arrangements to deal with failures.
The Company's principal Year 2000 risks arise from the fact that it is
dependent for the completion of its calls upon a variety of other traffic
carriers who provide interconnection and termination services. Since in many
cases there are a variety of routes over which traffic can be carried, it is
simply not possible for the Company to verify that each entity which could be
involved in providing telecommunications services to its operating subsidiaries
will be Year 2000 compliant. To a large extent, the Company is reliant in these
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<PAGE> 55
circumstances on the actions of the other telecommunications operators and
service providers to ensure that their counterparts are Year 2000 compliant.
While the Company believes that the parties providing these services which are
based in the United States and other Western countries are expected to be
substantially Year 2000 compliant, the Year 2000 compliance and readiness of the
Russian and other C.I.S. parties with which the Company's operating businesses
interact appears to be substantially behind that of Western parties. The Company
has been unable to determine with any degree of certainty the extent to which
its interconnect partners in the C.I.S. are non-compliant because those parties
have generally been reluctant to share this information. The recent decision by
the Russian government not to cooperate in Year 2000 compliance exercises,
prompted by the Kosovo crisis, is likely to make it more difficult for the
Company to obtain this information. Nevertheless the Company believes, based on
such reluctance and anecdotal and other evidence, that many of those partners,
particularly in those in the less developed regions of the Russian Federation or
the C.I.S., are substantially non-compliant.
Furthermore, the likelihood that those parties will be able to become Year
2000 compliant seems problematical, given the limited amount of time left for
this, the severe funding constraints faced by those parties, principally as a
result of poor economic conditions in their home countries, and the possible
lack of governmental pressure on those parties.
Accordingly, there is a significant risk that the Company's operating
businesses may experience disruptions in their operations as a result of their
C.I.S. interconnect partners not being able to complete calls or pass traffic to
those businesses. While the Company is unable to predict the extent or duration
of such disruptions, the possibility exists that they could be extensive, and
also take considerable time, perhaps even months, to correct.
An additional risk is the likelihood that the billing systems of those
interconnect partners may also be disrupted, resulting in those partners being
unable to collect from their customers or to make timely settlements with the
Company's operating businesses.
Accordingly, the Company believes that there is a considerable risk that it
will experience disruptions in providing telecommunications services to and from
the countries of the C.I.S. which it serves, and that those disruptions may be
substantial. Given its inability to obtain an accurate assessment of the extent
to which its C.I.S. partners may be non-compliant, it is impossible for the
Company to predict either the extent or the magnitude of those disruptions.
Nevertheless, they have the potential to adversely impact the operations of its
operating subsidiaries, and such adverse impact may be material.
The Company has investigated the possibility of obtaining insurance against
liability arising out of claims that products or services supplied are not Year
2000 compliant, but has determined that such insurance is not obtainable upon
terms which are sufficiently comprehensive and/or is only obtainable upon terms
which are uneconomical given the level of perceived risk, and accordingly has
elected not to pursue such insurance.
54
<PAGE> 56
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
55
<PAGE> 57
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amended report to be signed on its behalf by the
undersigned thereunto duly authorized.
PLD TELEKOM INC.
Date: August 31, 1999 By: /s/ SIMON EDWARDS
--------------------------------------
Simon Edwards
Senior Vice President, Chief Financial
Officer, Principal Accounting
Officer and Treasurer
56
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLD TELEKOM
INC.'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q AND THE CONSOLIDATED FINANCIAL
STATEMENTS FOR PLD TELEKOM INC. AT AND FOR THE THREE MONTHS ENDED MARCH 31, 1999
CONTAINED THEREIN.
</LEGEND>
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