UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of June 2004
Commission File Number 1-14522
Open Joint Stock Company "Vimpel-Communications"
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(Translation of registrant's name into English)
10 Ulitsa 8-Marta, Building 14, Moscow, Russian Federation 127083
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(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1):________.
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7):________.
Indicate by check mark whether by furnishing the information contained
in this Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-____________.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OPEN JOINT STOCK COMPANY
"VIMPEL-COMMUNICATIONS"
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(Registrant)
Date: June 10, 2004
By: /s/ Alexander V. Izosimov
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Name: Alexander V. Izosimov
Title: Chief Executive Officer and
General Director
On March 31, 2004, Open Joint Stock Company "Vimpel-Communications"
("VimpelCom" or the "Company") announced, and submitted the press release
containing such announcement in a separate Form 6-K dated March 31, 2004, that
it intends to raise, subject to market and other conditions, approximately
US$300 million of debt financing by the issuance of notes in the international
bond markets. The offering is expected to close during the second quarter of
2004. In connection therewith, we disclosed to prospective purchasers of the
notes information that has not been previously publicly reported. We have
elected to provide this information, certain updates to this information and
other information that has been previously disclosed, in this Form 6-K.
Nothing herein shall constitute an offer to sell or the solicitation of
an offer to buy the notes, nor shall there be any sale of the notes in any state
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state. The
notes will be offered to qualified institutional buyers in reliance on Rule 144A
under the U.S. Securities Act of 1933, as amended (the "Securities Act") and
outside the United States in reliance on Regulation S under the Securities Act.
The notes will not be registered under the Securities Act. Unless and until so
registered, the notes may not be offered or sold in the United States except
pursuant to an exemption from, or in a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities
laws.
VimpelCom is a leading provider of telecommunications services in
Russia, operating under the "Bee Line GSM" brand. The VimpelCom Group's license
portfolio covers approximately 92% of Russia's population (134 million people),
including the City of Moscow, the Moscow Region and the City of St. Petersburg.
VimpelCom was the first Russian company to list its shares on The New York Stock
Exchange ("NYSE"). VimpelCom's ADSs are listed on the NYSE under the symbol
"VIP".
This Form 6-K contains "forward-looking statements," as defined in
Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of
the U.S. Securities Exchange Act of 1934, as amended, including statements
regarding:
o VimpelCom's plans to expand or build networks, including
through acquisitions, notably in the regions of Russia outside
of Moscow and in other countries of the CIS;
o VimpelCom's anticipated capital expenditures in Moscow and the
regions of Russia;
o VimpelCom's ability to resolve issues raised by its regulator
regarding VimpelCom's Moscow operation;
o VimpelCom's ability to merge with our subsidiaries Open Joint
Stock Company "VimpelCom-Region" ("VimpelCom-Region") and Open
Joint Stock Company "KB Impuls" ("KB Impuls") or transfer our
licenses, frequencies and other permissions held by
VimpelCom-Region or KB Impuls to VimpelCom if these mergers
are consummated; and
o VimpelCom's ability to meet license requirements and to obtain
and maintain licenses, frequency allocations and regulatory
approvals.
While these statements are based on sources believed to be reliable and
on our management's current knowledge and best belief, they are merely estimates
or predictions and cannot be relied upon. VimpelCom cannot assure you that
future results will be achieved. Certain factors that could cause actual results
to differ materially from those discussed in any forward-looking statements
include the risks described in the Company's Annual Report on Form 20-F for the
year ended December 31, 2003 (the
1
"Annual Report on Form 20-F") and other public filings made by the Company with
the United States Securities and Exchange Commission, which risk factors are
incorporated herein by reference. VimpelCom expressly disclaims any obligation
to update developments of these risk factors or to announce publicly any
revision to any of the forward-looking statements contained in this Form 6-K, or
to make corrections to reflect future events or developments.
2
EXPLANATORY NOTE
This Form 6-K describes matters that relate generally to VimpelCom, an
open joint stock company organized under the laws of the Russian Federation, and
its consolidated subsidiaries. Thus, terms such as "we," "us," "our" and similar
plural pronouns are used when describing the matters that relate generally to
the VimpelCom consolidated group.
This Form 6-K describes matters that relate to our operations in the
City of Moscow and the surrounding Moscow Region and we use the term "Moscow
license area" to describe this area. This Form 6-K also describes matters that
relate to our operations in the regions of the Russian Federation outside of the
city of Moscow and the surrounding Moscow region. Thus, we use terms such as
"the regions," "the regions outside of Moscow" and "the regions outside of the
Moscow license area" and similar expressions when describing matters that relate
to our operations in the regions of the Russian Federation outside of the City
of Moscow and the surrounding Moscow region.
For the purposes of this Form 6-K, the term "super-region" includes
Russia's seven large geographical regions as well as the Moscow license area.
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CERTAIN INFORMATION WITH RESPECT TO VIMPELCOM NOT PREVIOUSLY PUBLICLY REPORTED
DISCLOSED TO PROSPECTIVE PURCHASERS OF NOTES
SELECTED OPERATING DATA
The following selected operating data as of the three months ended
March 31, 2004 and 2003 have been derived from internal Company sources and from
independent sources that we believe to be reliable. The selected operating data
set forth below should be read in conjunction with the section of the Annual
Report on Form 20-F entitled "Item 5--Operating and Financial Review and
Prospects," our consolidated financial statements and the related notes included
in the Annual Report on Form 20-F and elsewhere in this Form 6-K and VimpelCom's
first quarter 2004 operating and financial results press release submitted in a
Form 6-K dated May 27, 2004.
AS OF MARCH 31,
2004 2003
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SELECTED COMPANY OPERATING DATA:
Monthly average minutes of use per user ("MOU")1....................... 91.4 87.5
Moscow license are MOU............................................... 103.0 90.3
Regional MOU......................................................... 80.9 81.8
Monthly average revenue per subscriber ("ARPU")2....................... US$ 10.8 US$ 13.5
Moscow license area ARPU............................................. US$ 14.1 US$ 15.2
Regional ARPU........................................................ US$ 8.6 US$ 10.8
Churn rate (for the period ended)3..................................... 8.6% 9.6%
Moscow license area churn rate....................................... 8.9% 12.1%
Regional churn rate.................................................. 8.1% 4.6%
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1 Monthly MOU is calculated for each month of the relevant period by
dividing the total number of minutes of usage for incoming and outgoing calls
during that month (excluding guest roamers) by the average number of subscribers
during the month. Beginning with the first quarter of 2004, we decided to
introduce a new definition of MOU based on total minutes of usage (including
both billable minutes of usage and free minutes of usage) instead of only
billable minutes used in the previous definition. The MOU figures presented for
the three months ended March 31, 2004 and March 31, 2003 in the above table have
been calculated under the new definition.
2 Monthly ARPU, a non-U.S. GAAP financial measure, is calculated for
each month in the relevant period by dividing the Company's service revenue
during that month, including roaming revenue, but excluding revenue from
connection fees, sales of handsets and accessories and other non-service
revenue, by the average number of the Company's subscribers during the month.
Reconciliation of ARPU to service revenues and connection fees, the most
directly comparable U.S. GAAP financial measure, is presented below. The Company
believes that ARPU provides useful information to investors because it is an
indicator of the performance of the Company's business operations and assists
management in budgeting. The Company also believes that ARPU provides management
with useful information concerning usage and acceptance of the Company's
services. ARPU should not be viewed in isolation or an alternative to other
figures reported under U.S. GAAP.
3 Churn rate means the total number of subscribers disconnected from
our network in a given period expressed as a percentage of the midpoint of the
number of our subscribers at the beginning and end of that period. Migration of
our subscribers from our D-AMPS network to our GSM network, as well as migration
between tariff plans were technically recorded as churn, although we did not
lose these subscribers.
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RECONCILIATION OF ARPU TO SERVICE REVENUE AND CONNECTION FEES
(UNAUDITED, IN THOUSANDS OF U.S. DOLLARS,
EXCEPT FOR ARPU AND SUBSCRIBER AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
2004 2003
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TOTAL ARPU:
Service revenue and connection fees........................................ US$ 400,903 US$ 230,099
Less: Connection fees..................................................... 185 337
Less: Revenue from rent of fiber-optic channels........................... 549 372
Service revenue used to calculate ARPU..................................... 400,169 229,390
Average number of subscribers (`000)....................................... 12,318 5,659
Average revenue per subscriber per month................................... US$ 10.8 US$ 13.5
MOSCOW LICENSE AREA ARPU:
Total operating revenues................................................... US$ 275,808 US$ 192,233
Less: Revenues from sales of handsets and accessories and other revenues.. 26,974 17,144
Less: Connection fees..................................................... 162 426
Less: Revenue from rent of fiber-optic channels........................... 549 372
Service revenue used to calculate ARPU..................................... 248,123 174,291
Average number of subscribers (`000)....................................... 5,846 3,815
Moscow license area average revenue per subscriber per month............... US$ 14.1 US$ 15.2
REGIONAL ARPU:
Total operating revenues................................................... US$ 178,096 US$ 70,118
Less: Revenues from sales of handsets and accessories..................... 8,805 9,148
Less: Other revenues...................................................... 1,801 1,148
Less: Connection fees..................................................... 98 126
Service revenue used to calculate ARPU..................................... 167,392 59,696
Average number of subscribers (`000)....................................... 6,473 1,842
Regional average revenue per subscriber per month.......................... US$ 8.6 US$ 10.8
RISK FACTORS
The risk factors below are associated with our Company. You should
carefully consider all of the information set forth in VimpelCom's Annual Report
on Form 20-F for the year ended December 31, 2003 and, in particular, the risks
described in the section of the Annual Report on Form 20-F entitled "Item 3--Key
Information--D. Risk Factors." If any of these risks actually occur, VimpelCom's
business, financial condition or results of operations could be harmed.
The risks and uncertainties below and in the Annual Report on Form 20-F
are not the only ones VimpelCom faces, but represent the risks that VimpelCom
believes are material. However, there may be additional risks that VimpelCom
currently considers not to be material or of which VimpelCom is not currently
aware and these risks could have the effects set forth above.
5
RISKS RELATED TO OUR BUSINESS
If we are unable to complete our mergers with Vimpelcom-Region or KB Impuls or
some or all of Vimpelcom-Region's and KB Impuls's licenses, frequencies and
other permissions are not transferred or reissued to us during the merger
process, our business may be materially adversely affected.
On October 24, 2003, our shareholders approved the merger of
VimpelCom-Region into VimpelCom, and, on April 16, 2004, our shareholders
approved amendments to our charter reflecting the merger. The amendments have
not yet been registered. On May 26, 2004, our shareholders approved the merger
of KB Impuls into VimpelCom. We initiated the VimpelCom-Region merger process to
create a stronger platform for future expansion, simplify our Company's capital
structure and give our Company full exposure to the growth potential in the
regions. Although we will continue to own 55.3% of VimpelCom-Region in the event
that the merger is not completed, we will not realize the full benefits of a
simplified capital structure, including the benefits associated with the
elimination of our minority interest. We initiated the KB Impuls merger largely
in response to public statements by the Minister of Information Technologies and
Communications that the re-issuance of the licenses held by KB Impuls to our
Company would resolve the regulatory dispute with Moscow Gossvyaznadzor. The
merger of KB Impuls into our Company is subject to various Russian regulatory
approvals and other conditions precedent and the mergers of KB Impuls and
VimpelCom-Region into VimpelCom are subject to the transfer or reissuance of
VimpelCom-Region's and KB Impuls's licenses, frequencies and other permissions
to VimpelCom. After these conditions are met, certain technical steps will need
to be completed to finalize the mergers.
The current legal and regulatory regime is unclear about the timing and
procedure of the transfer or reissuance of VimpelCom-Region's and KB Impuls's
licenses, frequencies and other permissions to VimpelCom in the event of a
merger or reorganization and this may delay or result in the non-completion of
the mergers of VimpelCom-Region and KB Impuls into VimpelCom. The new Law "On
Communications," or the New Law, which came into effect on January 1, 2004,
contains a series of provisions applicable to the reissuance of licenses,
including in connection with a merger or a reorganization of a licensee. It is
unclear which of the provisions set forth in the New Law apply to different
types of reorganizations. In the case of a merger of one entity into another,
with the latter being the legal successor to the former, it might be reasonable
to conclude that three different provisions of the New Law apply, but these
provisions are contradictory. For instance, certain of these provisions require
the licensee to submit the application for the transfer of a license to the
successor entity while another of these provisions requires the legal successor
to submit the application; in the case of the mergers of each of
VimpelCom-Region and KB Impuls into VimpelCom, these two entities are different.
Furthermore, if the rules are interpreted to require the application to be filed
within 30 days after a merger or consolidation is complete (i.e., in the case of
the mergers of VimpelCom-Region and KB Impuls into VimpelCom, after the licensee
ceases to exist and all of its rights and obligations are transferred to
VimpelCom, which will be the legal successor), it is unclear under the New Law
whether services may continue to be provided under the initial license during
the 30 day period. While we initially filed an application to transfer the
VimpelCom-Region licenses to VimpelCom on March 5, 2004, due to the subsequent
reorganization of the government we were advised to resubmit our application at
a later date. On March 25, 2004, we submitted a new request to transfer the
VimpelCom-Region licenses to VimpelCom and on May 31, 2004, we resubmitted our
applications to the Federal Surveillance Service for Communications. On June 4,
2004, our applications were returned with an explanation that the organization
of the Federal Surveillance Service for Communications has not been completed.
We intend to resubmit the applications.
Because of the uncertainty related to the New Law, there can be no
assurance that the licenses, frequencies and other permissions of
VimpelCom-Region and KB Impuls will be transferred or reissued to VimpelCom in a
timely and complete manner allowing the mergers to be completed in a timely
fashion
6
and their advantages and benefits fully realized. Furthermore, as a
result of the reorganization of the Russian government, not all of the officials
within the Ministry of Information Technologies and Communications and related
government agencies who will be responsible for this transfer or reissuance have
been appointed, and not all of the implementing regulations have been
promulgated. As a result, the timing of the transfer or reissuance of the
licenses, frequencies and permissions and of the planned mergers is uncertain. A
substantial delay in our planned mergers or the failure to transfer or reissue
some or all of VimpelCom-Region's or KB Impuls's licenses, frequencies and other
permissions may materially adversely affect our business.
We anticipate that we will need additional capital and we may not be able to
raise it.
We anticipate that we will need additional capital for a variety of reasons,
such as:
o financing our strategy to develop our regional GSM licenses,
including possible acquisitions of existing operators or any
payments required in connection with new licenses or
frequencies granted to us;
o improving our debt portfolio structure;
o financing new technologies, such as third generation, or 3G,
services;
o improving our infrastructure, including our information technology
systems;
o financing our subscriber growth strategy;
o refinancing existing long-term indebtedness;
o enhancing our service and subscriber support;
o responding to unexpected increases in the pace of network
development;
o complying with regulatory requirements or developments;
o taking advantage of new business opportunities; and
o implementing changes in our business strategy.
Under our current business plan, we plan to raise up to US$600.0 million,
including the proceeds from the Loan, in additional debt financing in the
Russian and/or international capital markets and/or in bank financing to meet
our projected capital expenditures through 2005. This amount does not include
amounts that may be invested in acquiring existing wireless operators in various
license areas and/or in the purchase of cellular licenses in these areas. We
currently are in discussions on a possible acquisition that, if it is
successfully completed, would give us access to key markets in the Far East
super-region. We are also currently actively pursuing opportunities for
expansion in other countries in the CIS. Although we cannot give you any
assurance that we will be able to complete any transactions, if we make a
significant acquisition inside or outside of Russia, we will need to increase
the amount of additional debt financing correspondingly over this period above
the currently projected US$600.0 million. Due to a variety of factors, including
perceived risks related to our regulatory developments, operational performance
or deterioration in the Russian economy or unfavorable conditions in the Russian
or international capital markets, we may not be able to raise additional capital
on acceptable terms. If we cannot obtain adequate financing on acceptable terms,
we may be unable to make desired capital expenditures, take advantage of
opportunities, refinance existing long-term indebtedness or meet unexpected
financial requirements and our growth strategy may be negatively affected. This
could cause us to delay or abandon anticipated expenditures or otherwise limit
operations, which could adversely affect our business.
Our wireless licenses may not be extended or may be suspended or revoked, which
could adversely affect our business.
7
We are required to meet certain terms and conditions to maintain each of our GSM
licenses. These conditions include:
o commencing service by a certain date;
o meeting certain line capacity and territorial or population
coverage benchmarks by specified dates;
o providing telecommunications services only after obtaining
permits for operation of equipment and use of frequencies; and/or
o developing coverage of particular cities by specified dates.
If we fail to meet start-of-service dates, line capacity, territorial
or population coverage requirements or other technical requirements under any of
our GSM licenses, or do not obtain permits for operation of our equipment or use
of frequencies, or if extensions requested are not granted and action is taken
against our Company or our subsidiaries, our business could be adversely
affected. Each of our GSM licenses also contains a requirement that the license
be registered with the local regulatory authority (formerly Gossvyaznadzor). The
authorities have not registered our license in Chechnya due to the fact that
there is no regulator in that region.
Our GSM licenses covering the Central and Central Black Earth, North
Caucasus, Siberian and Volga regions required us, among other things, to meet
certain coverage requirements for certain specified cities by December 31, 2001.
However, we did not have all of the necessary base stations installed with all
necessary permissions by December 31, 2001. The requirement in our regional GSM
licenses that certain networks cover specified cities by a specified date is a
relatively new type of licensing requirement. Russian telecommunications
legislation does not clearly define what "coverage" of a city means and does not
clearly regulate the construction and launching of GSM networks. As a result,
there is a possibility that the Ministry of Information Technologies and
Communications (or any successor to the powers of the former Ministry of
Communications) or the Federal Surveillance Service for Communications may
interpret the requirements differently than us and, consequently, we may be in
violation of our regional GSM licenses despite our best efforts at compliance.
In a non-binding clarification from the Ministry of Communications issued in
December 2001, the Ministry of Communications stated that this coverage
requirement could be met by GSM-900 coverage, and that no minimum number of base
stations need be installed to meet this requirement. Accordingly, it is our
understanding that so long as at least one base station is installed in each
such city in the 900 MHz frequency range, the license requirement is met. As of
today, we have installed at least one 900 MHz base station, based upon all
necessary permissions that we are required to receive from various Russian
government agencies, in each of the cities indicated in each of our licenses
except in Naberezhnye Chelny in the Volga license area and except for those
cities in which the start-of service date has been extended to December 31, 2004
(and we believe that the dates by which the territorial coverage requirements
must be met were also deemed to be extended as a result of the extension of the
start-of service dates). We are currently in the process of obtaining the
necessary governmental permissions for our 900 MHz base station in Naberezhnye
Chelny. However, on April 26, 2004, we received a notice from the local
Gossvyaznadzor stating that some of our base stations in the Republic of
Tatarstan (which is part of the Volga super-region), including our base station
in Naberezhnye Chelny, did not have all necessary permissions and, therefore, we
were in violation of certain terms of our relevant GSM license. We cannot assure
you that we will be able to obtain all governmental permissions for our 900 MHz
base station in Naberezhnye Chelny, notwithstanding the fact that we have
applied for such permissions. We also cannot assure you that the Ministry of
Information Technologies and Communications (or any successor to the powers of
the former Ministry of Communications) or the Federal Surveillance Service for
Communications will not find that we did not fully meet our coverage
requirements by December 31, 2001 in some or all cities or that our delay in
meeting the coverage requirement should be considered to have been cured.
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Our GSM licenses covering the Northwest and Ural regions require us to
meet certain coverage requirements (expressed as percentages of the population).
Our license covering the Northwest region requires us to provide coverage to
20.0%, 40.0% and 80.0% of the covered population by December 31, 2004, December
31, 2006 and December 31, 2011, respectively. Our license for the Ural region
requires us to provide coverage to 30.0% and 70.0% of covered territory's
population by December 31, 2005 and December 2012, respectively. Additionally,
our GSM licenses covering the Northwest and Ural regions each contain a
start-of-service requirement for the area covered by each license. However,
these start-of-service requirements do not provide specific start-of-service
dates for each administrative subject area covered by each license. In the past,
we have interpreted such provisions to require us to install a network in at
least one administrative subject area covered by each license. Because we do not
know whether the Federal Surveillance Service for Communications will interpret
this start-of-service requirement in the same manner as its predecessor, we
cannot assure you that it will not determine that we have violated the
start-of-service requirement if we do not start to provide service in each
administrative subject within the license area by the start-of-service date
specified in the license. If we fail to meet any of these coverage and
start-of-service requirements in our licenses, we anticipate that the Ministry
of Information Technologies and Communications (or any successor to the powers
of the former Ministry of Communications) or the Federal Surveillance Service
for Communications would provide a warning to our Company or our subsidiaries
and provide us with an opportunity to cure any non-compliance. However, we
cannot assure you that we will receive a grace period, and we cannot assure you
that any grace period afforded to us would be sufficient to allow us to cure any
remaining non-compliance. In the event that we do not cure any remaining
non-compliance, the Federal Surveillance Service for Communications could decide
to suspend or terminate the entire license. The occurrence of any of these
events would adversely affect our ability to build out our networks in the
regions in accordance with our business plan and could harm our reputation in
the regions.
If we fail to completely fulfill the specific terms of any of our GSM
licenses, frequency permissions or other governmental permissions or if we
provide services in a manner that violates applicable legislation, government
regulators may levy fines, suspend or terminate our licenses, frequency
permissions or other governmental permissions. A suspension or termination of
any of our GSM licenses could harm our business and our results of operations.
RISKS RELATED TO THE LEGAL AND REGULATORY ENVIRONMENT IN RUSSIA
If we are found not to be in compliance with applicable telecommunications laws
or regulations, we could be exposed to additional costs or suspension or
termination of our licenses, which might adversely affect our business.
We cannot assure you that regulators, judicial authorities or third
parties will not challenge our compliance with applicable laws, decrees and
regulations. Communications regulators conduct periodic inspections and have the
right to conduct additional unscheduled inspections during the year. Until
recently, we have been able to cure many, but not all, violations found by the
regulators within the applicable grace period and/or pay fines. However, we
cannot assure you that in the course of future inspections conducted by
regulatory authorities, we will not be found to have violated any laws, decrees
or regulations, that we will be able to cure such violations within any grace
periods permitted by such notices or that Gossvyaznadzor will be satisfied by
the remedial actions we have taken or will take.
In 2003 and through May 15, 2004, we received approximately 66 notices
from Gossvyaznadzor in connection with our operations nationwide. We have
received notices with respect to violations of each of our seven super-regional
GSM licenses, including our GSM license in the Moscow license area. We have
taken measures that we believe evidence compliance with the requirements of 42
of these notices
9
and are in the process of complying with the remaining 24 notices. We have not
complied within the cure periods specified in a number of these notices,
primarily due to delays in the issuances of frequency permits, permissions for
the installation of base stations and permissions for the operation of our
equipment and communication facilities in connection with the rollout of our
networks (including our transportation network). These delays are largely due to
the fact that the implementing regulations setting forth the procedure for the
issuance of such permits and permissions under the New Law have not yet been
adopted and the fact that the governmental authorities responsible for enacting
the regulations and issuing the permissions have been reorganized in 2004. As a
result, the issuance of permits and permissions has been delayed. With respect
to a portion of the cure periods which we have not met, Gossvyaznadzor orally
extended the time period for compliance recognizing the cause of the delay, but
we have not obtained confirmations of such extensions in writing. Failure to
comply with the provisions of a notice due to a delay in the issuance of such
permits or permissions by the regulatory bodies at times has not been, and in
the future may not be, an acceptable explanation to the authorities issuing the
notices. In addition, these notices include, for example, a challenge to our use
of the GSM license for the Moscow license area, the use of local numbers which
have been assigned to other operators such as Combellga, the form of subscriber
agreement used in the regions, the form of subscriber agreement concluded by our
agent, Corbina-Telecom, with respect to services under our AMPS/D-AMPS license
for the Moscow license area and the form of our interconnect agreements. See the
risk factors in the Annual Report on Form 20-F entitled "Risk Factors--Risks
Related to Our Business--If our agency relationship with KB Impuls is determined
to violate Russian law and KB Impuls's license for the Moscow license area is
suspended or terminated, our business will be materially adversely affected,"
and "Risk Factors--Risks Related to Our Business--We are required to route our
international traffic from our GSM subscribers through Rostelecom but we cannot
provide assurances that Rostelecom will have sufficient capacity or that the
regulator will confirm that our routing of traffic complies with this
requirement." We cannot assure you that we will be able to cure such violations
within the grace periods permitted by such notices or that the Federal
Surveillance Service for Communications will be satisfied by the remedial
actions we have taken or will take. In addition, we cannot assure you that our
requests for extensions of time periods in order to enable us to comply with the
terms of the notices will be granted. Accordingly, we cannot assure you that
such findings by Gossvyaznadzor, its successor entity or any other authority
will not result in the imposition of fines or penalties or more severe
sanctions, including the suspension or termination of our licenses, frequency
allocations, authorizations, registrations or other permissions, any of which
could increase our estimated costs and adversely affect our business.
The Russian Currency Control System could adversely affect our ability to make
payments under our financial obligations.
A new Federal Law No. 173-FZ "On Currency Control and Regulation" dated
December 10, 2003, which we refer to as the New Currency Law, introduces a new
currency control regime that will come into force on June 18, 2004. According to
this new regime, which appears to be more liberal than the existing one, only a
limited number of requirements and restrictions can be imposed in respect of
currency operations (such as, for instance, requirements relating to reserves
and/or to effect certain operations through special accounts). However, the
implementing regulations have not yet been adopted by the Central Bank and the
Russian Government for the New Currency Law and it is not possible to predict
the effect those regulations will have on our business or on the payments that
we will make under our financial obligations. The New Currency Law and related
regulations (some of which have not yet been promulgated) may likely impose
reserve requirements on us in connection with any foreign currency transactions,
including foreign currency-denominated loans and acquisitions of foreign
securities. The reserve requirements are expected to provide that funds be set
aside in a non-interest bearing ruble account at an authorized Russian bank for
a period of up to one year and for an amount of up to 100% of the value of the
transaction. The New Currency Law and related regulations may result in
uncertainties or disputes in interpretation and may be more restrictive than the
existing currency law and regulations As
10
a result, there may be negative effects on our Company's business and our
ability to make payments under financial obligations.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction
with the section of the Annual Report on Form 20-F entitled "Item 5--Operating
and Financial Review and Prospects," our consolidated financial statements and
the related notes included in the Annual Report on Form 20-F and elsewhere in
this Form 6-K and VimpelCom's first quarter 2004 operating and financial results
press release submitted in a Form 6-K dated May 27, 2004. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in the
forward-looking statements as a result of numerous factors, including the risks
discussed above and in the section of the Annual Report on Form 20-F entitled
"Item 3--Key Information--D. Risk Factors."
LIQUIDITY AND CAPITAL RESOURCES
Financing activities
2004. In April 2004, the Savings Bank of the Russian Federation, or
Sberbank, provided our Company with a five-year U.S. dollar-denominated secured
nonrevolving credit line of US$130.0 million. The credit line bears interest at
the rate of 8.5% per annum, which may change upon the occurrence of certain
events, such as a change in Russian law or a change in the interest rate of the
Central Bank of Russia. The credit line is repayable in eight equal quarterly
installments over a two-year period, beginning on February 27, 2007 and ending
April 14, 2009. On May 13, 2004, we drew down US$65.7 million of the credit line
and provided those funds to VimpelCom-Region pursuant to an existing
inter-company loan agreement. On June 8, 2004 we drew down an additional US$29.1
million. The end of the drawdown period under the credit line falls on April 14,
2005. The credit line is secured by a pledge of shares in certain of our
directly and indirectly owned subsidiaries and will be secured by a pledge of
real estate, telecommunications equipment and additional shares in certain of
our directly and indirectly owned subsidiaries. Our Company's ability to draw
upon the credit line is conditioned upon our Company's ability to pledge assets
with a value sufficient to fully secure the borrowings under the credit line.
The proceeds of the credit line may be used to finance the expansion of our
business. The credit line with Sberbank contains certain restrictive covenants
that, among other things, limit borrowings by our Company and certain of our
subsidiaries and requires that a specified amount of our Company's aggregate
credit turnover (as defined in the relevant documentation) be through Sberbank.
The credit line also contains a financial covenant requiring that our Company's
ratio of debt to OIBDA on a consolidated basis not exceed 3.0.
On May 7, 2004, in accordance with the terms of the Russian
ruble-denominated bonds, our subsidiary Limited Liability Company VimpelCom
Finance ("VimpelCom Finance") set the annual interest rate for the third and
subsequent interest payments at 9.9%. On May 18, 2004, bondholders exercised a
put option on bonds with an aggregate principal amount of approximately 2.5
billion Russian rubles (US$86.4 million at the Central Bank of Russia exchange
rate on May 18, 2004), or approximately 83.7% of the outstanding principal
amount of the bonds, at 100.0% of the principal amount of the bonds. Bonds that
were tendered for redemption pursuant to exercise of the put option right were
acquired on May 18, 2004 partly by VimpelCom-Region and partly by ZAO Raiffeisen
Bank Austria ("Raiffeisen Bank") pursuant to the arrangement between Raiffeisen
Bank and VimpelCom-Region described below. The bonds acquired by
VimpelCom-Region and Raiffeisen Bank in connection with the May 18, 2004
redemption are available for resale in the Russian secondary market in
accordance with Russian law. As
11
of the date hereof, VimpelCom-Region has sold bonds with a principal amount of
150 million Russian rubles back into the secondary market.
In May 2004, VimpelCom-Region entered into an arrangement with
Raiffeisen Bank in connection with the redemption of the Russian
ruble-denominated bonds issued by VimpelCom-Finance. In accordance with the
terms of the arrangement, Raiffeisen Bank acquired certain of the bonds tendered
for redemption and VimpelCom- Region undertook an obligation to purchase all of
the bonds held by Raiffeisen Bank as of May 18, 2004. Pursuant to the
arrangement on May 25, 2004, VimpelCom-Region purchased from Raiffeisen Bank
bonds with an aggregate principal amount of 0.5 billion Russian rubles (US$18.4
million at the Central Bank of Russia exchange rate on May 18, 2004) at 100.03%
of the principal amount of the bonds plus accrued interest, equal to 0.19% of
the principal amount of the bonds. Also, as part of the arrangement,
VimpelCom-Region has an irrevocable obligation to purchase the remaining bonds
held by Raiffeisen Bank on August 18, 2004 at 100.78% of their principal amount
plus accrued interest, equal to 2.495% of the principal amount of the bonds, if
requested by Raiffeisen Bank. VimpelCom-Region may be required to purchase bonds
with an aggregate principal amount up to 1.0 billion Russian rubles (US$34.4
million at the Central Bank of Russia exchange rate on May 18, 2004).
Equipment Financing
2004. In February 2004, VimpelCom-Region entered into a non-revolving
credit agreement with Svenska Handelsbanken AB (publ) with a credit limit of
US$69.7 million. The credit line bears interest at the rate of six month LIBOR
plus 0.325%, which is payable semi-annually. The credit line is repayable in
fourteen equal semiannual installments over a seven-year period. Repayment
commences not later than November 20, 2004. The end of the delivery period for
the purchased equipment falls on October 20, 2004. The credit line is secured by
a pledge of the telecommunications equipment acquired from Ericsson, a guarantee
from the Swedish Export Credit Agency "EKN" and a guarantee from our Company for
20.0% of the outstanding indebtedness under the loan. In addition to interest
payments, VimpelCom-Region has paid EKN a fee in the amount of 9.82% of the
total commitment under this loan (to be partially reimbursed if VimpelCom-Region
borrows less than the total commitment under this loan). The credit line may
only be used to finance the acquisition of Ericsson telecommunications equipment
and to refinance the EKN Premium. VimpelCom-Region's credit agreement with
Svenska Handelsbanken AB (publ) contains certain covenants that, among other
things, limit VimpelCom-Region's ability to grant loans (with certain
exceptions) and repay its debt to our Company (the minimal level of indebtedness
to our Company is set at US$110.0 million). In addition, these covenants limit
VimpelCom-Region's ability to effect a merger of VimpelCom-Region with other
entities outside our group of companies. However, VimpelCom-Region is permitted
to prepay at interest payment dates any amounts outstanding under this loan.
VimpelCom and Svenska Handelsbanken AB (publ) will amend and restate this credit
agreement with VimpelCom as the borrower upon completion of the proposed merger
of VimpelCom-Region into VimpelCom. Svenska Handelsbanken AB (publ) and
VimpelCom have already negotiated the terms of this amended and restated credit
agreement. The interest rate, the repayment date and the guarantee from the EKN
will remain the same. VimpelCom's guarantee of VimpelCom-Region's debt as
described above and the restriction on VimpelCom-Region's ability to pay debt to
VimpelCom will cease to exist under this credit facility upon amendment and
restatement of the credit agreement. As of March 31, 2004, US$4.4 million was
outstanding under this loan. Subsequent to March 31, 2004, VimpelCom-Region has
drawn down an additional US$13.0 million of the credit line.
In April 2004, VimpelCom-Region repaid all outstanding amounts on the
vendor financing agreements with Alcatel SEL AG in the amount of US$11.3
million, including interest.
12
Future capital requirements
Wireless service providers require significant amounts of capital to
construct networks and attract subscribers. Our estimated capital expenditures
for 2004 are approximately US$920.0 million, which we currently intend to invest
in our network development. This amount does not include amounts that may be
invested in acquiring existing wireless operators in various license areas
and/or in the purchase of cellular licenses in these areas.
We anticipate that the funds necessary to meet our current capital
requirements and those to be incurred in the foreseeable future (including with
respect to any possible acquisitions) will come from:
o cash currently held by our Company;
o operating cash flows;
o Export Credit Agency guaranteed financing, including our
non-revolving credit agreement with Svenska Handelsbanken AB
(publ);
o borrowings under bank financings, including credit lines currently
available to us; and
o debt financings from Russian and international capital markets,
including the proceeds from this offering.
We believe that funds from a number of these sources, coupled with cash
on hand, will be sufficient to meet our projected capital requirements for the
next 12 months.
INFORMATION ON THE COMPANY
LEGAL PROCEEDINGS
On January 9, 2004, KB Impuls officially received a notice dated
December 30, 2003 from the local regulatory arm of the former Ministry of
Communications, the Moscow Department of Supervision over Communications and
Informatization in the Russian Federation, or Moscow Gossvyaznadzor, containing
a provision that raised issues regarding the adequacy of the documentation of
the agency relationship pursuant to which our Company acts as KB Impuls's agent
for concluding agreements with KB Impuls's Moscow GSM subscribers. In the
relevant notice provision, Moscow Gossvyaznadzor used certain technical drafting
issues in the subscriber agreements and the agency agreement as a basis for
asserting first, that KB Impuls does not have any agreements with subscribers
and, therefore, has violated Russian law, and second, that our agency agreement
with KB Impuls does not specifically provide that we will sign subscriber
agreements on behalf of KB Impuls, also in violation of Russian law. The notice
did not specify the remedial action to be taken and requests to the authorities
for clarification on action to be taken by KB Impuls were not answered. The
notice specified that the violations in this provision were to be cured by
February 1, 2004. Notwithstanding this uncertainty and our belief that there
were no violations of Russian law, in January 2004, we amended our form of
subscriber agreements to be concluded on behalf of KB Impuls and we amended our
agency agreement with KB Impuls in an attempt to address concerns raised by
Moscow Gossvyaznadzor. However, due to the lack of clarification, there can be
no assurance that such amendments would be deemed to have cured any violations
alleged by Moscow Gossvyaznadzor.
KB Impuls challenged this provision in the Moscow Gossvyaznadzor notice
and on March 18, 2004, the Moscow Arbitrazh Court ruled in favor of KB Impuls
and invalidated the relevant provision of the December 30, 2003 notice. Moscow
Gossvyaznadzor attempted to involve the Moscow Prosecutors' office in the case,
but this motion was defeated. In late April 2004, Moscow Gossvyaznadzor filed an
13
appeal and the Appellate Panel of the Moscow Arbitrazh Court issued a decision
on June 1, 2004 confirming the lower court's ruling in favor of KB Impuls.
Moscow Gossvyaznadzor has publicly stated that it will appeal this decision. If
Moscow Gossvyaznadzor prevails in the appeal, it is unclear whether steps
already taken would be deemed to have cured the alleged violations, and, if not,
what steps we would be required to take in order to cure the alleged violations
and whether we could do so within the time period to be allocated to us.
On February 4, 2004, our Company received a resolution issued by the
Moscow Prosecutors' office declaring the initiation of a criminal case stemming
from allegations by a small Moscow-based company that claimed that we operated
our business without a license. We immediately appealed the move by the Moscow
Prosecutors' office and subsequently received an official notice from the Moscow
Prosecutors' office stating that because there was no basis for the case against
us, the case had been dismissed. The company that initially made the allegations
challenged this decision, but the court upheld the prosecutor's decision to
dismiss the criminal case. This same company has filed a further appeal and we
cannot assure you that the decision to dismiss the criminal case and the
upholding of such decision by the court will be upheld on such further appeal.
In addition, there is no assurance that there will be no other criminal
investigations launched into the activities of our group. Criminal
investigations into our activities may have a material adverse effect on our
business.
Several subscribers have filed civil suits against us challenging our
agency relationship with KB Impuls, claiming that VimpelCom provides
telecommunications services without a license in Moscow and the Moscow region
and/or claiming that their subscriber agreements should be terminated and that
they should be compensated for all amounts paid to us. The former Ministry of
Communications was brought into certain of these suits as a third party and has
assisted the subscriber in each of the cases in which it is involved. In
addition, there have been attempts to bring other parties into these cases,
including other regulatory bodies, but to date, these motions have been
defeated. We have ultimately successfully defended our agency relationship
against such claims by subscribers, although we lost one such case on the basis
of the argument that there is no agency relationship between VimpelCom and KB
Impuls and that VimpelCom was "unjustly enriched"; however, the appeals court in
the Moscow region overturned the ruling and found in our favor. In each of these
cases, the subscribers have the right to appeal the decision. In addition,
several subscriber claims (filed in courts in Moscow as well as the regions)
have not yet been heard, other claims remain subject to further appeal and the
media has reported that additional subscriber claims may be brought as part of a
coordinated effort. There is an issue as to whether the courts will enforce the
provision in our subscriber agreements stating that all lawsuits shall be heard
in the court where the operator is located. At least one court has disregarded
this clause and, although other courts have enforced this provision, at least
one such decision is under appeal. We cannot assure you that we will ultimately
prevail in these cases or that different courts will reach the same decision.
Although Russian court rulings are not generally binding on other Russian
courts, rulings that are unfavorable to us may have persuasive force in other
cases brought against us and they may make us more vulnerable to unfavorable
rulings in pending cases or in cases that may be brought in the future by other
subscribers, groups of subscribers or third parties on similar grounds or on the
basis of different arguments. Although the monetary value of each claim
currently pending may not be material, our business may be adversely affected if
management is forced to focus its attention and the Company's resources toward
defending the Company against these and similar claims, should they arise. An
increase in the number of claims brought against us may cause management to
expend additional time and resources to resolve such claims and may ultimately
have a material adverse effect on our business and results of operations. In
addition, the tax authorities and other regulatory bodies may also file claims
against us if, among other things, our subscriber agreements are declared
invalid.
Additionally, other subscribers have filed claims against us alleging
that we have engaged in fraudulent advertising, that we do not have the right to
keep the balance on any prepaid account at the
14
time the subscriber terminates service with us or the time for the use of such
account has expired, and that the quality of our telecommunications services is
not acceptable. Certain subscribers have also filed similar complaints with the
anti-monopoly authorities and the communications regulatory bodies, as well as
complaints with these bodies alleging that their rights were violated as a
result of our agency relationship with KB Impuls. In several cases, the
anti-monopoly authorities have found in favor of subscribers, ruling that the
terms of our prepaid contracts violated the subscribers' rights because unspent
amounts under their prepaid contracts were not refunded when the contracts were
terminated by the subscribers. The decisions of the anti-monopoly authorities
also allege other inconsistencies between our subscriber agreements and Russian
law. We have settled with certain of these subscribers, but plan to appeal
certain rulings by the anti-monopoly authorities. There can be no assurance that
we will prevail or that other subscribers will not file claims. In the event
that we are required to return such prepaid amounts, we will have to make
modifications to our billing system which will result in additional expenses.
There is reportedly coordination among some of these subscribers, as well as
with the company that made allegations leading to the initiation of the criminal
case. Some or all of these rulings referred to above may be appealed and other
cases have not yet been decided. We cannot assure you that similar claims will
not be filed or that the rulings taken by the courts in the future will be in
our favor, and adverse decisions may have an adverse effect on our group. We are
also involved in various lawsuits and claims incidental to our business,
including disputes with the Russian tax authorities. In our opinion, the
ultimate liabilities, if any, resulting from these lawsuits, claims and disputes
incidental to our business will not materially affect our business, financial
position or results of operations.
To date, we have no provision in our accounts for any of the matters
described above.
15
INDEX TO FINANCIAL STATEMENTS
OF OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
Condensed Consolidated Balance Sheets at March 31,
2004 and December 31, 2003........................................ F-2
Condensed Consolidated Statements of Income for the
three months ended March 31, 2004 and 2003........................ F-3
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 2004 and 2003.................... F-4
Notes to the Condensed Consolidated Financial Statements............ F-5
F-1
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(UNAUDITED) (NOTE 1)
----------- ------------
(In thousands of US dollars,
except share amounts)
ASSETS
Current assets:
Cash and cash equivalents ................................................ US$ 130,552 US$ 157,611
Trade accounts receivable ................................................ 109,386 113,092
Inventory................................................................. 19,779 17,905
Deferred income taxes .................................................... 24,031 21,377
Input value added tax .................................................... 162,899 175,045
Other current assets ..................................................... 65,066 41,213
------------ ------------
Total current assets......................................................... 511,713 526,243
Property and equipment, net ................................................. 1,530,372 1,460,542
Telecommunications licenses and allocations of frequencies, net ............. 98,799 103,817
Other intangible assets, net ................................................ 59,919 59,369
Due from related parties..................................................... 1,272 1,171
Unamortised debt issue costs ................................................ 4,188 4,744
Other assets ................................................................ 169,800 146,346
------------ ------------
Total assets ................................................................ US$2,376,063 US$2,302,232
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................... US$ 172,047 US$ 158,467
Due to related parties ................................................... 6,290 8,603
Due to employees.......................................................... 9,007 14,791
Accrued liabilities ...................................................... 22,104 10,153
Taxes payable ............................................................ 67,572 101,294
Deferred revenue ......................................................... 2,596 2,701
Deferred income taxes .................................................... 1,615 1,451
Customer advances ........................................................ 160,339 140,756
Customer deposits ........................................................ 35,984 40,719
Capital lease obligations, current portion ............................... 8,451 6,587
Rouble denominated bonds payable ......................................... 105,317 101,852
Bank loans, current portion .............................................. 30,691 35,343
Equipment financing obligations, current portion ......................... 73,622 70,935
------------ ------------
Total current liabilities ................................................... 695,635 693,652
Deferred income taxes ....................................................... 31,634 34,380
Bank loans, less current portion ............................................ 331,490 330,112
Capital lease obligations, less current portion ............................. 7,924 9,154
Equipment financing obligations, less current portion ....................... 36,288 53,008
Accrued liabilities ......................................................... 4,113 4,046
Commitments and contingent liabilities (Note 9) ............................. -- --
Minority interest............................................................ 193,104 179,664
Shareholders' equity:
Convertible voting preferred stock (.005 roubles nominal value per share),
10,000,000 shares authorized; 6,426,600 shares issued and outstanding .. -- --
Common stock (.005 roubles nominal value per share), 90,000,000 shares
authorized; 40,332,201 shares issued.................................... 90 90
Additional paid-in capital ............................................... 569,828 569,828
Retained earnings......................................................... 505,393 429,262
Accumulated other comprehensive income, net of tax of US$969.............. 3,994 2,466
Treasury stock, at cost, 160,634 shares of common stock
(December 31, 2003: 160,634) .......................................... (3,430) (3,430)
------------ ------------
Total shareholders' equity .................................................. 1,075,875 998,216
------------ ------------
Total liabilities and shareholders' equity .................................. US$2,376,063 US$2,302,232
============ ============
See accompanying notes.
F-2
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31,
2004 2003
---- ----
(In thousands of US dollars,
except per share (ADS) amounts)
OPERATING REVENUES:
Service revenues and connection fees ..................................... US$400,903 US$230,099
Sales of handsets and accessories ........................................ 15,774 13,426
Other revenues ........................................................... 1,020 912
---------- ----------
Total operating revenues .................................................... 417,697 244,437
---------- ----------
OPERATING EXPENSES:
Service costs ............................................................ 62,365 37,160
Cost of handsets and accessories sold .................................... 13,191 10,707
Selling, general and administrative expenses ............................. 138,013 85,310
Depreciation.............................................................. 57,337 31,678
Amortization ............................................................. 9,143 7,372
Provision for doubtful accounts .......................................... 2,103 3,324
---------- ----------
Total operating expenses .................................................... 282,152 175,551
---------- ----------
OPERATING INCOME ............................................................ 135,545 68,886
OTHER INCOME AND EXPENSES:
Interest income .......................................................... 1,501 1,998
Other income ............................................................. 354 574
Interest expense ......................................................... (13,856) (16,036)
Other expenses ........................................................... (403) (432)
Net foreign exchange gain ................................................ 1,671 1,327
---------- ----------
Total other income and expenses ............................................. (10,733) (12,569)
---------- ----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST ............................ 124,812 56,317
Income tax expense (Note 3).................................................. 36,699 14,912
Minority interest in net earnings of subsidiaries............................ 11,982 18
---------- ----------
NET INCOME .................................................................. US$ 76,131 US$ 41,387
========== ==========
BASIC EPS (Note 7):
NET INCOME PER COMMON SHARE ................................................. US$ 1.90 US$ 1.09
========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .................................. 40,172 38,073
========== ==========
NET INCOME PER ADS EQUIVALENT ............................................... US$ 1.43 US$ 0.82
========== ==========
DILUTED EPS (Note 7):
NET INCOME PER COMMON SHARE ................................................. US$ 1.63 US$ 0.93
========== ==========
WEIGHTED AVERAGE DILUTED SHARES ............................................. 46,632 44,544
========== ==========
NET INCOME PER ADS EQUIVALENT ............................................... US$ 1.22 US$ 0.70
========== ==========
See accompanying notes.
F-3
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
2004 2003
---- ----
(In thousands of US dollars)
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................... US $116,669 US$ 75,065
Proceeds from bank and other loans .......................................... 7,189 56,962
Repayments of bank and other loans .......................................... (10,587) (20,910)
Payments of fees in respect of debt issue ................................... -- (1,249)
Repayment of equipment financing obligations ................................ (14,265) (23,824)
Repayment of capital lease obligations....................................... (131) (439)
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ......................... (17,794) 10,540
Purchase of property and equipment .......................................... (107,536) (87,799)
Purchase of StavTeleSot stock, net of cash acquired of US$658 ............... -- (38,143)
Purchase of intangible assets................................................ (4,039) (5,435)
Purchase of other assets..................................................... (13,550) (7,969)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES........................................ (125,125) (139,346)
EFFECT OF EXCHANGE RATE CHANGES ON CASH ..................................... (809) 1,442
----------- -----------
NET DECREASE IN CASH ........................................................ (27,059) (52,299)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................. 157,611 263,657
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................. US$ 130,552 US$ 211,358
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash activities:
Equipment acquired under financing and capital lease agreements ........ US$ 1,659 US$ 24,077
Accounts payable for equipment and other long-lived assets.............. 66,505 50,137
Accrued debt and equity offering costs.................................. 236 294
Operating activities financed by sale of treasury stock ................ -- 1,262
Acquisitions:
Fair value of assets acquired ....................................... -- 66,634
Difference between the amount paid and the fair value of net
assets acquired .................................................. -- (4,699)
Cash paid for the capital stock ..................................... -- (38,801)
----------- -----------
Liabilities assumed ................................................. US$ -- US$ 23,134
=========== ===========
See accompanying notes.
F-4
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three-month periods ended March 31, 2004 and 2003
(Amounts presented are in thousands of US dollars unless otherwise
indicated and except per share (ADS) amounts)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States ("US GAAP") for interim financial information and with the
instructions of the United States Securities and Exchange Commission to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by US GAAP for annual complete financial
statements. In the opinion of VimpelCom's management, all adjustments
(consisting of normal, recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 2004, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2004. For further information, refer to
VimpelCom's audited consolidated financial statements for the year ended
December 31, 2003.
The balance sheet at December 31, 2003 presented herein has been derived
from the audited financial statements at that date but does not include all of
the information and footnotes required by US GAAP for annual complete financial
statements.
FOREIGN CURRENCY TRANSLATION
The functional currency of VimpelCom and its subsidiaries, except for
Closed Joint Stock Company Cellular Company ("Cellular Company"), Open Joint
Stock Company Orensot ("Orensot") and Closed Joint Stock Company StavTeleSot
("StavTeleSot"), is the US dollar because the majority of their revenues, costs,
property and equipment purchased, debt and trade liabilities are either priced,
incurred, payable or otherwise measured in US dollars. Accordingly, transactions
and balances not already measured in US dollars (primarily Russian roubles and
Euros) have been re-measured into US dollars in accordance with the relevant
provisions of US Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation".
Under SFAS No. 52, revenues, costs, capital and non-monetary assets and
liabilities are translated at historical exchange rates prevailing on the
transaction dates. Monetary assets and liabilities are translated at exchange
rates prevailing on the balance sheet date. Exchange gains and losses arising
from re-measurement of monetary assets and liabilities that are not denominated
in US dollars are credited or charged to operations.
Cellular Company's, Orensot's and StavTeleSot's functional currency is the
Russian rouble because the majority of their revenues, costs, property and
equipment purchased, and debt and trade liabilities are either priced, incurred,
payable or otherwise measured in Russian roubles. Assets and liabilities of
these companies are translated into US dollars at exchange rates prevailing on
the balance sheet date; revenues, expenses, gains and losses are translated into
US dollars at historical exchange rates prevailing on the transactions dates.
Translation adjustments resulting from the process of translating their
financial statements into US dollars are reported in other comprehensive income,
a separate component of shareholders' equity.
The rouble is not a fully convertible currency outside the territory of the
Russian Federation. Within the Russian Federation, official exchange rates are
determined daily by the Central Bank of Russia ("CBR"). Market rates may differ
from the official rates but the differences are, generally, within narrow
parameters monitored by the CBR.
As of March 31, 2004, December 31, 2003, and March 31, 2003, the official
rates of exchange were 28.49 roubles = US$1, 29.45 roubles = US$1 and 31.38
roubles = US$1, respectively. The translation of roubledenominated assets and
liabilities into US dollars for the purposes of these financial statements does
not indicate that VimpelCom could realize or settle, in US dollars, the reported
values of these assets and liabilities. Likewise, it does not indicate that
VimpelCom could return or distribute the reported US dollar value of capital to
its shareholders.
F-5
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results may differ from those estimates.
DOUBTFUL ACCOUNTS
VimpelCom reviews the valuation of accounts receivable on a monthly basis.
The allowance for doubtful accounts is estimated based on historical experience
of cash collections and future expectations of conditions that might impact the
collectibility of accounts.
PROPERTY AND EQUIPMENT
Property and equipment is stated at historical cost. Telecommunications
equipment, including equipment acquired under capital leases, is depreciated
using the straight-line method over its estimated useful life of seven years, or
the lease term, whichever is shorter. Buildings and leasehold improvements are
depreciated using the straight-line method over estimated useful lives of twenty
years. Office and measuring equipment, and vehicles and furniture are
depreciated using the straight-line method over estimated useful lives ranging
from five to ten years.
Repair and maintenance costs are expensed as incurred.
INTANGIBLE ASSETS
Intangible assets consist primarily of telephone line capacity, wireless
licenses, goodwill and other intangible assets. VimpelCom capitalizes payments
made to third party suppliers to acquire access to and for use of telephone
lines (telephone line capacity). These payments are accounted for as intangible
assets and are amortized on a straight-line basis over ten years. Licenses are
amortized on a straight-line basis until the expiration date of the licenses.
Goodwill represents the excess of consideration paid over the fair value of net
assets acquired in purchase business combinations and is not amortized. Other
intangible assets are amortized on a straight-line basis over their estimated
useful lives, generally from four to ten years.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
VimpelCom continues to evaluate the amortization period for intangible assets
with finite lives to determine whether events or circumstances warrant revised
amortization periods. In accordance with SFAS No. 142, VimpelCom tests goodwill
for impairment on an annual basis. Additionally, goodwill is tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of an entity below its carrying
value. These events or circumstances would include a significant change in the
business climate, legal factors, operating performance indicators, competition,
sale or disposition of a significant portion of the business or other factors.
LONG-LIVED ASSETS
VimpelCom accounts for impairment of long-lived assets, except for
goodwill, in accordance with the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-6
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
REVENUE RECOGNITION
VimpelCom earns service revenues for usage of its cellular system, which
include airtime charges from contract and prepaid subscribers, monthly contract
fees, roaming charges and charges for value added services. Roaming revenues
include revenues from VimpelCom customers who roam outside their selected home
coverage area and revenues from other wireless carriers for roaming by their
customers on VimpelCom's network. Value added services include short messages
("SMS"), caller number identification, voice mail, call waiting and data
transmission. Generally, these features generate additional revenues through
monthly subscription fees or increased wireless usage through utilization of the
features. Service revenue is generally recognized when the services (including
value added services and roaming revenue) are rendered. Revenue on prepaid cards
is deferred and recognized when services are rendered. Revenues from equipment
sales are recognized in the period in which the equipment is sold. Revenues are
stated net of value-added tax and sales tax charged to customers.
VimpelCom determined that the sale of wireless services through VimpelCom's
direct sales channel with an accompanying handset constitutes a revenue
arrangement with multiple deliverables. In accordance with the provisions of the
Emerging Issue Task Force ("EITF") 00-21 "Revenue Arrangements with Multiple
Deliverables", VimpelCom allocates the arrangement consideration to the separate
units of accounting, including the wireless service and handset, based on their
relative fair values.
In accordance with the provisions of the US SEC Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition in Financial Statements", VimpelCom defers
telecommunications connection fees. The deferral of revenue is recognized over
the estimated average subscriber life, which is generally two years.
DEFERRED TAXES
VimpelCom computes and records income tax in accordance with SFAS No. 109,
"Accounting for Income Taxes". Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
CONCENTRATION OF CREDIT RISK
Trade accounts receivable consist of amounts due from subscribers for
airtime usage and amounts due from dealers and subscribers for equipment sales.
In certain circumstances, VimpelCom requires deposits as collateral for airtime
usage. In addition, VimpelCom has introduced a prepaid service for both DAMPS
and GSM networks. Equipment sales are typically paid in advance of delivery,
except for equipment sold to dealers on credit terms. VimpelCom's credit risk
arising from its trade accounts receivable from subscribers is mitigated due to
the large number of its subscribers, of which approximately 86% subscribed to a
prepaid service as of March 31, 2004 and, accordingly, do not give rise to
credit risk. VimpelCom's credit risk arising from its trade accounts receivable
from dealers is mitigated due to the large number of dealers. Management
periodically reviews the history of payments and credit worthiness of the
dealers.
VimpelCom deposits available cash with financial institutions in the
Russian Federation. Deposit insurance is not offered to financial institutions
operating in Russia. To manage this credit risk, VimpelCom allocates its
available cash, mainly in US dollars, to a variety of Russian banks and Russian
affiliates of international banks. Management periodically reviews the credit
worthiness of the banks in which it deposits cash.
Input value added tax (VAT), representing amounts payable or paid to
suppliers, is recoverable from the tax authorities via offset against VAT
payable to the tax authorities on VimpelCom's revenue or direct cash receipts
from the tax authorities. Management periodically reviews the recoverability of
the balance of input value added tax and believes it is fully recoverable within
one year.
VimpelCom issues advances to a variety of vendors of property and equipment
for its network development. The contractual arrangements with the most
significant vendors (Alcatel and Technoserve A/S) provide for equipment
financing in respect of certain deliveries of equipment. VimpelCom periodically
reviews the financial position of vendors and their compliance with the contract
terms.
F-7
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for financial instruments, consisting of cash and cash
equivalents, trade accounts receivable, forward agreement and obligations under
accounts payable approximate their fair value. The fair value of bank loans,
equipment financing obligations and rouble denominated bonds (based on future
cash flows discounted at current market rates) were as follows:
MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
Rouble denominated bonds ......................... US$109,239 US$103,430
Sberbank loan to VimpelCom-Region ................ 74,821 76,425
Sberbank loan to VimpelCom ....................... 8,378 16,760
J.P. Morgan AG ................................... 277,286 271,759
Technoserve A/S - VimpelCom-Region ............... 16,962 19,263
Technoserve A/S - VimpelCom ...................... 2,430 2,859
General DataCom .................................. 3,876 4,382
STOCK-BASED COMPENSATION
VimpelCom follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", for its stock option plan. SFAS No. 123 generally
allows companies to either account for stock-based compensation under the
provisions of SFAS No. 123 or under the provisions of Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and to
make disclosures in accordance with the provisions of SFAS No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
No. 123." VimpelCom has elected to account for its stock-based compensation in
accordance with the provisions of APB No. 25 and related Interpretations and
present pro forma disclosures of results of operations as if the fair value
method had been adopted.
The following table illustrates the effect on net income and earnings per
share if VimpelCom had applied the fair value recognition provisions of SFAS No.
123 to stock-based employee compensation.
THREE MONTHS ENDED MARCH 31,
2004 2003
---- ----
Net income (loss), as reported ......................................... US$76,131 US$41,387
Add: Compensation expense in respect of 2000 Stock Option Plan,
as reported .......................................................... 3,233 632
Deduct: Compensation expense in respect of 2000 Stock Option Plan
determined under fair value based method for all awards .............. (386) (215)
--------- ---------
Pro forma net income ................................................... US$78,978 US$41,804
========= =========
Earnings per share:
Basic--as reported ................................................... US$ 1.90 US$ 1.09
Basic--pro forma ..................................................... US$ 1.97 US$ 1.10
Diluted--as reported ................................................. US$ 1.63 US$ 0.93
Diluted--pro forma ................................................... US$ 1.69 US$ 0.94
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46,
"Consolidation of Variable Interest Entities". FIN No. 46 amended Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", and established
standards for determining under what circumstances a variable interest ("VIE")
should be consolidated with its primary beneficiary. FIN No. 46 also requires
disclosure about VIEs that are not required to be consolidated but in which the
reporting entity has a significant variable interest. In December 2003, the FASB
revised certain implementation provisions of FIN No. 46. The revised
interpretation ("FIN No. 46R") substantially retained the requirements of
immediate application of FIN No. 46 to VIEs created after January 31,
F-8
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2003. With respect to older VIEs, the consolidation requirements under FIN No.
46R apply not later than for the first financial year or interim period ending
after December 15, 2003, if such a VIE is a special-purpose entity ("SPE"), and
no later than for the first financial year or interim period ending after March
15, 2004, if such a VIE is not an SPE.
VimpelCom completed an evaluation of this guidance and concluded that the
adoption of the provisions of FIN No. 46 did not have a material impact on its
consolidated financial statements.
BUSINESS COMBINATIONS
VimpelCom accounts for its business acquisitions under the purchase method
of accounting. The total cost of acquisitions is allocated to the underlying
assets, including intangible assets, and liabilities based on their respective
estimated fair values. Determining the fair value of assets acquired and
liabilities assumed requires management's judgment and often involves the use of
significant estimates and assumptions, including assumptions with respect to
future cash inflows and outflows, discount rates, asset lives, and market
multiples, among other items.
2. CHANGE IN ESTIMATE
In January 2004, VimpelCom changed the estimated useful life of GSM
telecommunications equipment from 9.5 to 7 years. The change decreased net
income for the three-month period ended March 31, 2004 by approximately
US$7,726, equivalent to US$0.19 per share of common stock - basic and US$0.17
per share of common stock - diluted. This change occurred due to VimpelCom's
continuing evaluation of its use of various technologies combined with the
January 2004 announcements of the plans of the Russian Government to initiate
the process of awarding licenses for new mobile communications technologies.
3. INCOME TAXES
The provision for income taxes varies from expected income tax expense
calculated at the statutory rate due to certain tax exemptions applicable under
Russian tax legislation and to the non-deductibility of certain expenses. Income
tax exemptions relate primarily to accumulated tax losses, which may be carried
forward for use against future income. Non-deductible expenses consist primarily
of legal, consulting, representational and other expenses in excess of allowable
limits.
4. COMPREHENSIVE INCOME
For the three-month periods ended March 31, 2004 and 2003, comprehensive
income for VimpelCom comprised US$77,659 and US$42,013, respectively.
Comprehensive income for the three-month periods ended March 31, 2004 and 2003
included net income in the amount of US$76,131 and US$41,387, respectively, and
other comprehensive income (foreign currency translation adjustment) in the
amount of US$1,528 and US$626, net of minority interest in the amount of
US$1,235, and US$352, respectively.
5. BANK LOANS
On February 24, 2004, Svenska Handelsbanken AB provided a seven-year, US
dollar denominated, credit line of US$69,700 to Open Joint Stock Company
VimpelCom-Region ("VimpelCom-Region"), a subsidiary of VimpelCom.
VimpelCom-Region has the right to draw down the entire amount before November
10, 2004. The loan is to be repaid in fourteen equal instalments, on a
semi-annual basis, commencing not later than November 20, 2004. The loan bears
interest at the rate of six-month LIBOR plus 0.325%, which is payable
semi-annually. Under the loan agreement, VimpelCom-Region is subject to certain
defined debt covenant restrictions, including several restrictions related to
financial condition. As of March 31, 2004 VimpelCom-Region draw down US$4,358
under this credit line.
On February 24, 2004, VimpelCom-Region and Svenska Handelsbanken AB signed
a pledge agreement. Under the pledge agreement, certain equipment and related
software received under a Supply Contract with
F-9
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Ericsson AB is to be pledged as security for the obligations under the Svenska
Handelsbanken AB credit agreement.
VimpelCom irrevocably and unconditionally guarantees twenty percent of
VimpelCom-Region's obligations under this credit line. The credit line is also
secured by a guarantee from the Swedish Export Credit Guarantee Board "EKN"
("EKN"). In April 2004 VimpelCom-Region paid EKN 9.82% of the total committed
amount (US$6,845), to be partially reimbursed if the actual amount drawn under
the credit line is less than the total committed amount.
6. GUARANTEES OF OBLIGATIONS OF CONSOLIDATED SUBSIDIARIES
VimpelCom irrevocably and unconditionally guaranteed VimpelCom-Region's
obligations under the loan from Sberbank for the total amount of US$50,000.
Under the terms of the guarantee VimpelCom should pay any arrears of
VimpelCom-Region within five days after Sberbank's notification. VimpelCom's
guarantee is valid until VimpelCom-Region fulfils all its obligations under the
loan agreement with Sberbank. As of March 31, 2004, the carrying amount of the
loan principal of US$70,000 was included in the accompanying unaudited condensed
consolidated balance sheet.
VimpelCom irrevocably, fully and unconditionally guaranteed Open Joint
Stock Company KB Impuls' ("KBI") payment obligations under equipment financing
agreements with Alcatel for the total amount of US$70,084. VimpelCom will be
liable to Alcatel if KBI fails to pay under any of the Alcatel equipment
financing agreements. VimpelCom's guarantee is valid until KBI fulfils all of
its payment obligations under equipment financing agreements. KBI is a
subsidiary of VimpelCom.
VimpelCom irrevocably, fully and unconditionally guaranteed
VimpelCom-Region's obligations under equipment financing agreements with Alcatel
for the total amount of EURO 9,165 thousand (US$11,177 at exchange rate as of
March 31, 2004). VimpelCom will be liable to Alcatel if VimpelCom-Region
defaulted under equipment financing agreements. VimpelCom's guarantee is valid
until VimpelCom-Region fulfils all its obligations under equipment financing
agreements. VimpelCom-Region repaid all amounts due under the Alcatel equipment
financing agreements in April 2004.
VimpelCom-Region irrevocably, fully and unconditionally guaranteed Limited
Liability Company VimpelCom Finance's ("VimpelCom Finance") obligations under
rouble denominated bonds. Under the terms of the guarantee VimpelCom-Region
should pay any arrears of VimpelCom Finance under the rouble denominated bonds
up to a maximum of 3,000,000 thousand roubles, which equalled the aggregate
principle amount of the bonds at issuance. VimpelCom-Region's guarantee is valid
until VimpelCom Finance fulfils all its obligations under rouble denominated
bonds. As of March 31, 2004, the carrying amount of the rouble denominated bonds
of US$105,317 was included in the accompanying unaudited condensed consolidated
balance sheet. VimpelCom Finance is an ultimate subsidiary of VimpelCom-Region.
F-10
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
THREE MONTHS ENDED MARCH 31,
2004 2003
---- ----
(In thousands of US dollars,
except per share amounts)
Numerator:
Net income .............................................................. US$76,131 US$41,387
Denominator:
Denominator for basic earnings per share - weighted average shares .... 40,172 38,073
Effect of dilutive securities:
Convertible preferred stock ......................................... 6,427 6,427
Employee stock options............................................... 33 44
--------- ---------
Denominator for diluted earnings per share - assumed conversions ...... 46,632 44,544
========= =========
Basic net income per common share ....................................... 1.90 1.09
========= =========
Diluted net income per common share ..................................... 1.63 0.93
========= =========
Senior convertible notes were not included in the computation of earnings
per share assuming dilution for the three-month period ended March 31, 2003
because they would not have a dilutive effect for the these period.
8. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires companies to provide certain information about their
operating segments. VimpelCom has two reportable segments: the Moscow license
area and the regions outside of the Moscow license area (the "Regions"). The
Moscow license area includes the city of Moscow and the Moscow region. The
Regions include all other regions of the Russian Federation.
Management decided to organize the enterprise based on geographical areas.
Management analyses the reportable segments separately because of different
economic environments and stages of development of markets of wireless
telecommunications services in different geographical areas, requiring different
investment and marketing strategies. The Moscow license area represents a more
developed market for VimpelCom's services compared to the Regions.
The Board of Directors and management utilize more than one measurement and
multiple views of data to measure segment performance. However, the dominant
measurements are consistent with VimpelCom's consolidated financial statements
and, accordingly, are reported on the same basis herein. Management evaluates
the performance of its segments primarily based on revenue, operating income,
income before income taxes and net income along with cash flows and overall
economic returns. Intersegment revenues are eliminated in consolidation.
Intersegment revenues may be accounted for at amounts different from sales to
unaffiliated companies. The accounting policies of the segments are the same as
those of VimpelCom.
F-11
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial information by reportable segment for the three-month periods
ended March 31, 2004 and 2003 is presented in the following tables.
THREE MONTHS ENDED MARCH 31, 2004
------------------------------------------------
MOSCOW
LICENSE
AREA REGIONS TOTAL
---------- ---------- ----------
Total operating revenues from external customers ........ US$256,296 US$161,401 US$417,697
Total intersegment revenues ............................. 19,581 16,624 36,205
Operating income ........................................ 88,437 46,321 134,758
Income before income taxes and minority interest......... 84,724 39,177 123,901
Net income .............................................. 60,000 26,785 86,785
THREE MONTHS ENDED MARCH 31, 2003
------------------------------------------------
MOSCOW
LICENSE
AREA REGIONS TOTAL
---------- ---------- ----------
Total operating revenues from external customers ........ US$179,377 US$ 65,060 US$244,437
Total intersegment revenues ............................. 12,855 5,058 17,913
Operating income ........................................ 62,096 6,081 68,177
Income before income taxes and minority interest......... 53,063 2,506 55,569
Net income .............................................. 39,863 37 39,900
Information about total assets of each reportable segment as of March 31,
2004 and December 31, 2003 follows:
MARCH 31, DECEMBER 31,
2004 2003
------------ ------------
Moscow License Area ................... US$1,756,803 US$1,717,716
Regions ............................... 1,133,220 1,021,674
------------ ------------
Total ................................. US$2,890,023 US$2,739,390
============ ============
A reconciliation of VimpelCom's total segment financial information to the
corresponding consolidated amounts follows:
THREE MONTHS ENDED MARCH 31,
2004 2003
---------- ---------
Income before income taxes and minority interest
------------------------------------------------
Total income before income taxes and minority interest for reportable
segments ..................................................................... US$123,901 US$55,569
Elimination of intersegment loss before income taxes and minority interest.... 911 748
---------- ---------
Total consolidated income before income taxes and minority interest........... US$124,812 US$56,317
========== =========
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ---------
Net income
----------
Total net income for reportable segments ..................................... US$86,785 US$39,900
Minority interest in net (income) loss of subsidiaries........................ (11,982) 253
Elimination of intersegment net income ....................................... 1,328 1,234
--------- ---------
Net income.................................................................... US$76,131 US$41,387
========= =========
F-12
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
March 31, December 31,
2004 2003
------------ -------------
Assets
------
Total assets for reportable segments .......... US$2,890,023 US$2,739,390
Elimination of intercompany receivables ....... (513,960) (437,158)
------------ ------------
Total consolidated assets ..................... US$2,376,063 US$2,302,232
============ ============
9. CONTINGENCIES AND UNCERTAINTIES
The Russian economy while deemed to be of market status beginning in 2002,
continues to display certain traits consistent with that of a market in
transition. These characteristics have in the past included higher than normal
historic inflation, lack of liquidity in the capital markets, and the existence
of currency controls, which cause the national currency to be illiquid outside
of Russia. The continued success and stability of the Russian economy will be
significantly impacted by the government's continued actions with regard to
supervisory, legal, and economic reforms.
The taxation system in Russia is evolving as the central government
transforms itself from a command to a market oriented economy. There were many
Russian Federation tax laws and related regulations introduced in the first
quarter 2004 and previous periods which were not always clearly written and
their interpretation is subject to the opinions of the local tax inspectors,
Central Bank officials and the Ministry of Finance. Instances of inconsistent
opinions between local, regional and federal tax authorities and between the
Central Bank and the Ministry of Finance are not unusual. Management believes
that it has paid or accrued all taxes that are applicable. Where uncertainty
exists, VimpelCom has accrued tax liabilities based on management's best
estimate.
As of March 31, 2004, VimpelCom does not believe that any material matters
exist relating to the developing markets and evolving fiscal and regulatory
environment in Russia, including current pending or future governmental claims
and demands, which would require adjustment to the accompanying financial
statements in order for those statements not to be misleading.
In the ordinary course of business, VimpelCom may be party to various legal
and tax proceedings, and subject to claims, certain of which relate to the
developing markets and evolving fiscal and regulatory environments in which
VimpelCom operates. In the opinion of management, VimpelCom's liability, if any,
in all pending litigation, other legal proceeding or other matters other than
what is discussed herein will not have a material effect upon the financial
condition, results of operations or liquidity of VimpelCom.
VimpelCom's operations and financial position will continue to be affected
by Russian political developments including the application of existing and
future legislation and tax regulations. The likelihood of such occurrences and
their effect on VimpelCom could have a significant impact on VimpelCom's ability
to continue operations. VimpelCom does not believe that these contingencies, as
related to its operations, are any more significant than those of similar
enterprises in Russia.
VimpelCom's ability to generate revenues in Moscow and the Moscow region is
dependent upon the operation of the wireless telecommunications networks under
its licenses. VimpelCom's AMPS/D-AMPS license to operate in the Moscow license
area expires in November 2007, while the GSM license for the Moscow license area
expires in April 2008. Various regional GSM 900/1800 licenses belonging to
VimpelCom-Region and its subsidiaries, Orensot, Extel, StavTeleSot and
Vostok-Zapad Telecom, expire between August 2006 and November 14, 2012. Article
39 of the new Federal Law on Communications, which became effective on January
1, 2004, defines the circumstances under which a license may be revoked.
However, there is no precedent as to the practical application of this new law
as it applies to actual license terminations.
VimpelCom is dependent upon a small number of suppliers, principally
Alcatel and Ericsson, for purchases of wireless telecommunications equipment.
Similarly, there is only a small number of telephone line capacity suppliers in
Moscow.
F-13
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
VimpelCom's AMPS licenses to operate wireless networks in the regions (not
including Moscow and the Moscow region) include a condition to make
non-returnable contributions to the development of the public switched
telecommunications network of the Russian Federation. The amount of contribution
is unspecified and will be agreed with or determined by the respective local
administrations. VimpelCom has made no significant payments and it is not
possible to determine the amount that will eventually become payable.
MOSCOW GSM LICENSE
On December 30, 2003, Gossvyaznadzor, an official body responsible for
compliance with the legislation and regulations in telecommunications industry,
issued Notices to each of VimpelCom and KBI ordering them to cure alleged
violations of several government regulations, the Federal Law on
Telecommunications, two provisions of the Civil Code of the Russian Federation
(in the case of KBI) and license provisions. KBI is a wholly-owned subsidiary of
VimpelCom which holds the GSM-900/1800 license for the Moscow license area.
Revenues related to this license were US$245,176 and US$170,317 in the
three-month periods ended March 31, 2004 and 2003, respectively, and US$868,958
and US$633,822 for the years ended December 31, 2003 and 2002, respectively.
The Notices provided specific cure periods for many of the stated
violations and required VimpelCom and KBI to notify Gossvyaznadzor of compliance
with them. The Notices did not, however, specify the actions that VimpelCom and
KBI must take to cure the stated violations. In management's opinion, with the
exception of the stated violation that KBI is disputing and as discussed below,
VimpelCom and KBI have implemented measures to comply with the Notices within
the stipulated cure periods that have passed to date and have notified
Gossvyaznadzor of that fact. Acting in accordance with the Notices, KBI sent to
a number of local operators certain amendments to interconnect agreements with
such operators. Some of such operators executed the required amendments prior to
expiration of the specified cure period but some of them are still considering
the amendments.
On January 22, 2004, KBI filed a motion with the Arbitration Court of
Moscow to issue a preliminary injunction to suspend Clause 5 of the Notice to
KBI ("Clause 5"). KBI is disputing Clause 5, which alleges first that KBI does
not have agreements for provision of telecommunications services with the
subscribers of its network and thereby violates clause 1, article 779 of the
Civil Code of the Russian Federation and second, that the agency agreement
between VimpelCom and KBI does not specifically provide that VimpelCom shall
sign agreements on provision of GSM cellular radiotelephony services on behalf
of KBI and thereby violates clause 1, article 184 of the Civil Code of the
Russian Federation. On January 22, 2004, the Arbitration Court of Moscow issued
a ruling satisfying KBI's motion for injunctive relief by suspending Clause 5.
In a separate ruling on January 22, 2004, the Arbitration Court of Moscow
accepted KBI's complaint challenging the validity of Clause 5. On March 18,
2004, the Moscow Arbitrazh Court ruled in favor of KBI and invalidated the
relevant provision of the December 30, 2003 notice. Gossvyaznadzor attempted to
bring the Moscow Prosecutors' office into the case, but this motion was
defeated. In late April 2004, Gossvyaznadzor filed an appeal and the Appellate
Panel of the Moscow Arbitrazh Court issued a decision on June 1, 2004 confirming
the lower court's ruling in favor of KBI. Gossvyaznadzor has publicly stated
that it will appeal this decision.
VimpelCom's management is unable to predict at this time the final outcome
of this matter or whether the resolution of this matter could materially affect
VimpelCom's results of operations, cash flows or financial position.
10. SUBSEQUENT EVENTS
On March 31, 2004, VimpelCom announced its intention to raise, subject to
market and other conditions, approximately US$300,000 of debt financing by the
issuance of notes in the international bond markets. The offering of the notes
is currently anticipated to close during the second quarter of 2004.
In April 2004, Sberegatelny Bank of the Russian Federation ("Sberbank")
provided a five-year, US dollar denominated, secured, non-revolving credit line
of US$130,000 to VimpelCom. The credit line bears interest at an annual rate of
8.5%, which may be changed by Sberbank upon the occurrence of certain events.
The credit is to be repaid in eight equal quarterly instalments over a two-year
period, beginning on February 27, 2007 and
F-14
OPEN JOINT STOCK COMPANY "VIMPEL-COMMUNICATIONS"
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ending April 14, 2009. VimpelCom has the right to draw down the entire amount on
or before April 14, 2005. Under the loan agreement, VimpelCom is subject to
certain defined debt covenant restrictions, including several restrictions
related to financial condition.
In May 2004, VimpelCom and VimpelCom-Region signed a series of share pledge
agreements with Sberbank. Under the pledge agreement, shares in certain direct
and indirect subsidiaries of VimpelCom were pledged as collateral against the
credit line from Sberbank to VimpelCom. Under the terms of the credit line,
VimpelCom is obligated to procure in the future the pledge of certain additional
shares of subsidiaries, certain items of telecommunications equipment and real
estate.
On May 20, 2003, VimpelCom-Region issued rouble denominated bonds through
VimpelCom Finance, in an aggregate principal amount of 3,000,000 thousand
roubles (US$105,317 at exchange rate as of March 31, 2004). The bondholders had
a put option that was exercisable between May 7 and May 18, 2004 at 100.0% of
nominal value plus accrued interest. The annual interest rate for the first two
interest payments was 8.8%. On May 7, 2004, VimpelCom Finance announced that the
interest rate for the subsequent interest payments would be 9.9%. On May 18,
2004, bondholders exercised put options on bonds with an aggregate principle
amount of 2,512,569 thousand roubles.
F-15