SCHEDULE 14A
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e) (2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
GOLDEN TELECOM, INC.
(Name of Registrant as Specified In Its Charter)
Not Applicable
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No Fee Required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies: Common
Stock, par value $0.01 per share.
2) Aggregate number of securities to which transaction applies: 6,972,382
shares of Common Stock.
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): The average
of the high and low prices on the Nasdaq on October 6 was $29.345
4) Proposed maximum aggregate value of transaction: $204,604,550
5) Total fee paid: $16,553
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule, and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
GOLDEN TELECOM, INC.
Representative Offices of Golden TeleServices, Inc.
1 Kozhevnichesky Proezd, 2nd Floor
Moscow, Russia 115114
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
December 2, 2003
London, England
_________, 2003
Dear Stockholders:
A special meeting of stockholders of Golden Telecom, Inc. (the
"Company" or "Golden Telecom") will be held at the offices of Chadbourne &
Parke, Regis House, 45 King William Street, London EC4R 9AN, United Kingdom on
December 2, 2003 at 10:00 a.m. local time, to consider a proposal by the
Company's Board of Directors to issue shares of our common stock in excess of
20% of our outstanding shares of common stock prior to the issuance of the new
shares, in connection with our acquisition of all of the capital stock of OAO
Comincom, an open joint stock company existing under the laws of the Russian
Federation.
This transaction is more fully described in the proxy statement
accompanying this notice to which your attention is directed.
Stockholders of record at the close of business on October 24, 2003
will be entitled to vote at the special meeting. If you will need special
assistance at the special meeting because of a disability, please notify the
Office of the General Counsel of the Company at the Representative Offices of
Golden TeleServices, Inc., 1 Kozhevnichesky Proezd, 2nd Floor, Moscow, Russia
115114 or Golden Telecom, Inc., 4400 MacArthur Blvd., N.W., Suite 200,
Washington, D.C., 20007 or through e-mail at specialmeeting@gti.ru. A list of
stockholders entitled to vote at the meeting may be examined at the principal
executive offices of the Company at the Representative Offices of Golden
TeleServices, Inc., 1 Kozhevnichesky Proezd, 2nd Floor, Moscow, Russia 115114.
By Order of the Board of Directors
JEFFREY A. RIDDELL
Senior Vice President, General Counsel
and Secretary
IF YOU DO NOT EXPECT TO ATTEND THE MEETING IN PERSON, PLEASE SIGN AND DATE THE
ACCOMPANYING PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
GOLDEN TELECOM, INC.
Representative Offices of Golden TeleServices, Inc.
1 Kozhevnichesky Proezd, 2nd Floor
Moscow, Russia 115114
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
December 2, 2003
London, England
A special meeting of stockholders of Golden Telecom, Inc., a Delaware
corporation, will be held at the offices of Chadbourne & Parke, Regis House,
45 King William Street, London EC4R 9AN, United Kingdom on December 2, 2003 at
10 a.m. local time for the purposes set forth in the accompanying notice of
special meeting of stockholders. THE ENCLOSED PROXY IS SOLICITED BY AND ON
BEHALF OF OUR BOARD OF DIRECTORS FOR USE AT THIS SPECIAL MEETING, AND AT ANY
ADJOURNMENTS AND POSTPONEMENTS OF THIS SPECIAL MEETING. The approximate date on
which this proxy statement and the enclosed proxy are being first mailed to
stockholders is October 30, 2003.
If a proxy in the accompanying form is duly executed and returned, the
shares represented by such proxy will be voted as specified. Any person
executing an enclosed proxy may revoke it prior to its exercise by letter
directed to us, in person at the special meeting, by delivery of a later dated
duly executed proxy relating to the same shares or by voting in person at the
special meeting.
Stockholders of record at the close of business on October 24, 2003 are
entitled to vote at the special meeting.
IF YOU RETURN YOUR PROXY CARD TO US AND DO NOT SPECIFY ON YOUR PROXY
CARD HOW YOU WANT TO VOTE YOUR SHARES, WE WILL VOTE THEM "FOR" THE PROPOSAL.
Throughout this proxy statement, the terms "we," "us," "our" and "our
company" refers to Golden Telecom, Inc. and, unless the context indicates
otherwise, our subsidiaries on a consolidated basis.
TABLE OF CONTENTS
Page
SUMMARY TERM SHEET......................................................... 1
PROPOSAL TO APPROVE THE ISSUANCE OF OUR COMMON STOCK IN EXCESS OF 20%
OF THE AMOUNT OF OUR OUTSTANDING SHARES OF COMMON STOCK IN CONNECTION
WITH OUR ACQUISITION OF OAO COMINCOM....................................... 7
SELECTED FINANCIAL DATA.................................................... 9
CONSOLIDATED FINANCIAL STATEMENTS OF OAO COMINCOM.......................... 13
OAO COMINCOM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION................................................... 43
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS...................... 58
MATERIAL CONTACTS AND BOARD DELIBERATIONS.................................. 71
REGULATORY APPROVALS....................................................... 76
TERMS OF THE SHARE EXCHANGE AGREEMENT...................................... 77
STOCK OWNERSHIP FOLLOWING THE CLOSING...................................... 88
TERMS OF THE OTHER TRANSACTION DOCUMENTS................................... 91
GENERAL QUESTIONS.......................................................... 97
INCORPORATION OF INFORMATION BY REFERENCE.................................. 100
i
SUMMARY TERM SHEET
This summary term sheet describes material terms of the acquisition of OAO
Comincom ("Comincom") and in certain cases provides references to other pages of
this proxy statement for you to obtain further information. You should carefully
read this entire proxy statement, including financial information relating to
our company and Comincom before you vote. You are being asked to approve the
issuance by us of shares of our common stock as the consideration in the
acquisition of Comincom. You are not being asked to approve the acquisition
itself, though if the issuance of our shares is not approved by you, the
acquisition cannot occur. The actual terms of our acquisition of Comincom are
contained in our share exchange agreement, which we have filed with the SEC as
an exhibit to Form 8-K on August 20, 2003. You can review this Form 8-K (and the
share exchange agreement) on the SEC's website, www.sec.gov. A summary of the
share exchange agreement is included in this proxy statement. See "TERMS OF THE
SHARE EXCHANGE AGREEMENT".
OVERVIEW
- On August 19, 2003, we executed a share exchange agreement relating to
the acquisition of all of the capital stock of Comincom by SFMT-CIS,
Inc. ("SFMT"), a Delaware corporation 100% owned by us. Less than one
percent of the capital stock of Comincom will be held by a designee of
SFMT in order to comply with Russian law. Please see the section
entitled "Our acquisition of Comincom".
- We are seeking your approval of the issuance of shares of our common
stock in excess of 20% of the outstanding amount of our common stock
prior to the issuance of the new shares, in connection with our
acquisition of all of the capital stock of Comincom. We are seeking
this approval because under the Nasdaq Marketplace Rules, to which we
are subject, the number of shares to be issued in this transaction may
not equal or exceed 20% of our outstanding shares of common stock,
without stockholder approval. For purposes of the Nasdaq Marketplace
Rules the percentage of outstanding shares is calculated before giving
effect to the issuance of the shares in question. The shares to be
issued to the stockholders of Comincom upon the consummation of our
acquisition of Comincom would constitute approximately 24.2% of our
issued and outstanding shares of common stock before the acquisition
(based on the number of shares outstanding on September 30, 2003) and
19.5% of our issued and outstanding shares of common stock immediately
following the acquisition. Please see the section entitled "THE SPECIAL
MEETING".
THE COMPANIES
Our Company
- Our company is Golden Telecom, Inc., a Delaware corporation. We are the
leading facilities-based provider of integrated telecommunications and
Internet services to businesses and other high-usage customers and
telecommunications operators in Moscow, Kiev, St. Petersburg,
Krasnoyarsk, Nizhny Novgorod and other major population centres
throughout Russia and other countries of the Commonwealth of
Independent States ("CIS"). We organise our operations into four
business groups. These business groups are Business Services, Operator
Services, Consumer Internet Services, and Mobile Services. We offer all
of our integrated telecommunication services under the Golden Telecom
brand and our internet services under the ROL brand in Russia.
1
- Our principal executive offices are: Moscow Representative Office,
Golden TeleServices, Inc., 1 Kozhevnichesky Proezd, Moscow, Russia
115114 and our telephone number, if calling from the United States of
America, is 011-7-501-797-9300.
Comincom
- Comincom is one of the leading facilities-based operators offering
advanced telecommunications services in Russia and has a regional
network covering more than 30 of Russia's regions. Comincom owns 100
percent of OAO Combellga ("Combellga"). Combellga offers integrated
telecommunications and Internet services to businesses and other
high-usage customers and telecommunications operators in Moscow, St.
Petersburg, Voronezh, Samara and several other major population centers
throughout Russia. Comincom is licensed to provide local and intercity
telephone communication services, channels leasing services, telematics
services, data transmission services, and local, intercity and
international telephone communication services through dedicated
networks.
- The principal executive offices of Comincom are located at 6, 2nd
Spasonalivkovsky Pereulok, Moscow, Russia, 117909 and Comincom's
telephone number, if calling from the United States of America, is
011-7-095-238-2031.
THE SHARE EXCHANGE AGREEMENT
SFMT will acquire all the issued and outstanding shares of Comincom from Nye
Telenor East Invest AS ("Telenor") pursuant to the terms of a share exchange
agreement. In exchange for all of these shares of Comincom, we will issue to
Telenor a number of shares of our common stock equal to 19.5% of our outstanding
shares of common stock calculated on a post-acquisition basis. For example, if
on the closing date we have 28,783,421 shares of common stock outstanding, we
would issue 6,972,382 shares of our common stock to Telenor. In this example,
35,755,802 shares of our common stock would be outstanding immediately after the
closing of the acquisition. The actual number of shares issued may differ
depending on the number of outstanding shares on the date of closing the
transaction.
The closing of the acquisition of Comincom is subject to conditions precedent
which are customary for this type of transaction, including approval by the
relevant anti-trust authorities (which we have received), approval of the
issuance of our shares of common stock by you and effectiveness of the other
transaction documents entered into by Golden Telecom, Alfa Telecom Limited
("Alfa"), Capital International Global Emerging Markets Private Equity Fund,
L.P. ("Capital"), Cavendish Nominees Limited ("Cavendish") and First NIS
Regional Fund SICAV ("First NIS") (Cavendish and First NIS, together,
"Barings"), OAO Rostelecom ("Rostelecom") and Telenor. The other transaction
documents are a registration rights agreement, a standstill agreement and a
shareholders agreement. These agreements are described below. See "TERMS OF THE
OTHER TRANSACTION DOCUMENTS".
In addition, the share exchange agreement contains other customary provisions
such as restrictions on the conduct of business prior to the closing and
indemnification. For a more detailed discussion of the share exchange agreement,
please refer to "TERMS OF THE SHARE EXCHANGE AGREEMENT" below.
OUR ACQUISITION OF COMINCOM
Reasons for the Acquisition
2
Our objective is to solidify and extend our position as the leading independent
voice, data and Internet services company in Russia and the CIS. To achieve this
objective, we intend to continue to grow organically in our established markets
and to pursue consolidation opportunities through acquisitions that allow us to
improve and expand our service offerings while maintaining operational control.
Our primary criterion when reviewing consolidation opportunities is the
existence of critical telecommunications infrastructure that will allow us, if
the acquisition is consummated, to achieve synergies and economies of scale. We
have entered into the share exchange agreement because we believe the
acquisition of Comincom presents an excellent opportunity to help our company
further its objectives in a manner that makes sound financial and strategic
sense.
Comincom recorded consolidated revenues of $84.2 million in 2002, an increase of
approximately 34% compared to 2001 consolidated revenues of $62.9 million.
Consolidated net income was $9.5 million in 2002, as compared to 2001
consolidated net income of $0.1 million. As of December 31, 2002, Comincom had
consolidated cash and cash equivalents of $1.9 million, consolidated short-term
borrowings of $4.5 million, and consolidated long-term borrowings of $3.9
million. Comincom recorded consolidated revenues of $49.3 million for the six
months ended June 30, 2003, an increase of approximately 29% compared to the six
months ended June 30, 2002 consolidated revenues of $38.1 million. Consolidated
net income was $4.9 million for the six months ended June 30, 2003, an increase
of approximately 31% compared to the six months ended June 30, 2002 consolidated
net income of $3.8 million. As of June 30, 2003, Comincom had consolidated cash
and cash equivalents of $3.9 million, consolidated short-term borrowings of $3.6
million, and consolidated long-term borrowings of $3.5 million.
Comincom is one of the leading facilities-based providers of integrated
telecommunications and Internet services to businesses and other high-usage
customers and telecommunications operators in Moscow, St. Petersburg, Voronezh,
Samara and several other major population centers throughout Russia. In addition
to Combellga, Comincom has stakes in among other companies, four regional
alternative wireline operators: World Trade Telecom, Zenit Telecom, Nakhodka
Telecom and Sakhalin Telecom. Based on its management estimates, Comincom
believes that it has approximately 12% market share of the Russian alternative
telecommunications market, based on 2002 revenues. Comincom offers a major part
of its integrated telecommunication services under the Combellga and Comincom
brands. Their services primarily consist of:
o Primary telecommunication services. Using its own infrastructure,
consisting of fiber optic backbone, fixed copper and fiber as well as
wireless access network, modern switching network, Internet platform
("IP"), and datacom facilities, Comincom provides a range of services
including local exchange and access services, international and domestic
long-distance telephone services to both end-users and other carriers
through more than 20 access points throughout Russia, international
interconnect services, and radio solutions for long distance vehicles;
and
o Value Added Services. In addition to primary telecommunication services,
Comincom also offers broadband solutions, including Asymmetric Digital
Subscriber Lines ("ADSL"), WEB-hosting and co-location services,
Individual and corporate e-mail solutions, IP-Virtual Private Networking
("VPN") services, and Intelligent Network ("IN") services, including
intelligent routing, voice VPNs, and prepayment card solutions.
Combellga's key customers include embassies, hotels, large office buildings and
large corporate clients. We believe that we will create additional synergies by
offering additional services to a broader range of customers in these key target
areas.
3
Our company aims to extend our leading position in high growth data and Internet
markets. Comincom owns or controls numbering capacity and network assets,
including fiber optic cable and customer access networks, in key Russian
municipal areas which is consistent with our network development strategy and
which we believe we can further develop to increase our penetration in these
markets. The acquisition will help us to reduce operating costs as a percentage
of revenue and help address our infrastructure needs through network planning
and optimization.
We have identified significant revenue, cost and capital expenditure synergies
which we hope to achieve following the acquisition of Comincom:
o Revenue synergies. Revenue synergies are expected to be achieved mainly
through the harmonization of our sales efforts and product offerings.
o Cost synergies. Cost synergies are expected to be achieved in the areas
of network operations, product and service development, IT systems and
infrastructure, purchasing and corporate overhead functions.
o Capital expenditure synergies. Capital expenditure synergies are
expected to be achieved in the areas of network operations, IT systems
and infrastructure and purchasing.
We have experienced significant growth as a result of acquisitions and expect
such growth to continue. As we grow, including growth as a result of the
acquisition of Comincom, it will become increasingly difficult and more costly
to manage our business.
Acquisition transactions are accompanied by a number of risks, including risks
related to:
o the consolidation of the operations and personnel of the acquired
companies;
o the potential disruption of our ongoing business and distraction of
management;
o the introduction of acquired technology content or rights into our
products and unanticipated expenses related to such integration;
o the potential negative impact on reported earnings;
o the possibility that revenues from acquired businesses and other
synergies may not materialize as anticipated;
o the deterioration of relationships with employees and customers as a
result of the acquisition; and
o contingent liabilities associated with acquired businesses, especially
in the markets where we operate.
We may not be successful in addressing these risks or any other problems
encountered in connection with our completed and future acquisitions and our
operating results may suffer as a result of any failure to integrate these
businesses with our existing operations.
Vote Required for the Share Issuance (Page 99)
4
- Under Nasdaq Marketplace rules, because we will be issuing to Telenor,
the stockholder of Comincom, an amount of our common stock in excess of
20% of the amount of our outstanding common stock calculated before
giving effect to the issuance of the new shares, we are required to
obtain the approval of our stockholders prior to consummating the
acquisition. The minimum vote which will constitute stockholder
approval shall be a majority of the total votes cast on the proposal in
person or by proxy. Alfa, Barings, Capital and Rostelecom, which
collectively own 68% of the outstanding shares of common stock, have
indicated that they will vote in favor of the share issuance.
Accounting Treatment
- The acquisition will be accounted for as a purchase of Comincom by our
company. Therefore, the results of operations of Comincom from the date
of the acquisition will be included in our consolidated results of
operations. For purposes of preparing consolidated financial
statements, the purchase price, including the costs associated with the
acquisition at the date of completion will be allocated to the assets
and liabilities of Comincom based on their fair market values, with the
excess allocated to goodwill which is required to be tested for
impairment at least annually.
No Appraisal Rights
- Our stockholders are not entitled to appraisal rights in connection
with the Comincom acquisition.
No Pre-emptive Rights
- Certain of our stockholders (namely, Alfa, Barings, Capital and
Rostelcom) have pre-emptive rights with respect to the issuance of our
common stock which were granted to them in a standstill agreement dated
September 5, 2002. Each of these stockholders has waived its
pre-emptive rights in connection with the issuance of our shares in the
acquisition. These pre-emptive rights would have given these
stockholders a right to purchase new securities issued by us.
Pre-emptive rights protect against dilution to some extent by allowing
such holders to purchase shares according to their percentage ownership
in each issuance of new securities. No other stockholders have
pre-emptive rights. Because of the waiver, all of our stockholders,
including, Alfa, Barings, Capital and Rostelecom, will have their
ownership interest diluted by the issuance of our common stock in
connection with the acquisition of Comincom.
5
Regulatory Approvals (Page [76])
- In order to complete the acquisition of Comincom, we are required to
obtain the approval of the Ministry for Antimonopoly Policy and Support
for Entrepreneurship of the Russian Federation and satisfy the
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976. These approvals have been obtained. In addition, completion of
the acquisition of Comincom will require compliance with applicable
corporate law of the State of Delaware and the Russian Federation,
compliance with Nasdaq Marketplace Rules as set forth in this proxy
statement and compliance with the United States Securities and Exchange
Commission ("SEC") rules and regulations, federal securities laws and
applicable securities and "blue sky" laws of the various states.
THE SPECIAL MEETING
Only stockholders of record at the close of business on October 24, 2003 will be
entitled to vote at the special meeting or any adjournment thereof. Such date is
referred to as the "record date" in this proxy statement. We currently have only
a single class of voting capital stock outstanding, namely, shares of common
stock, $.01 par value per share. Each share of common stock issued and
outstanding on the record date is entitled to one vote at this special meeting.
As of the record date, there were shares of our common stock outstanding.
The majority of the total votes cast in person or by proxy is required for the
approval of the issuance of shares of our common stock in connection with our
acquisition of Comincom.
We intend to count abstentions both for the purpose of determining the presence
or absence of a quorum and in the total number of shares represented and voting
with respect to the proposal. Accordingly, abstentions will have the same effect
as a vote against the proposal. In instances where brokers are prohibited from
exercising discretionary authority for beneficial owners who have not returned a
proxy (so called "broker non-votes"), those votes will have no effect on the
vote for the issuance of shares of our common stock and will not be counted for
purposes of determining the presence or absence of quorum.
6
PROPOSAL TO APPROVE THE ISSUANCE
OF OUR COMMON STOCK IN EXCESS OF 20%
OF THE AMOUNT OF OUR OUTSTANDING SHARES
OF COMMON STOCK IN CONNECTION
WITH OUR ACQUISITION OF OAO COMINCOM
We are seeking your approval pursuant to Nasdaq Marketplace Rule 4350 (i)
(1)(c)(ii)(a), which requires Nasdaq-listed companies to obtain stockholder
approval before issuing 20% or more of their common stock or 20% or more of
their voting power, in connection with an acquisition of the stock or assets of
another company, other than in a public offering for cash. For purposes of the
Nasdaq Marketplace Rules the percentage of outstanding shares is calculated
before giving effect to the issuance of the shares in question.
The shares to be issued to the stockholders of Comincom upon the consummation of
our acquisition of Comincom would constitute 19.5% of our issued and outstanding
shares of common stock following the acquisition. Based on the number of shares
outstanding on September 30, 2003 we would therefore issue 6,972,382 shares of
common stock to the stockholder of Comincom upon the consummation of the
acquisition of Comincom, which shares would represent approximately 24.2% of our
issued and outstanding shares on September 30, 2003.
Our Board of Directors has carefully considered the acquisition of Comincom, has
determined that the acquisition is in the best interest of our stockholders and
has unanimously approved the entering into of the share exchange agreement.
Because some members of our Board are affiliated with stockholders who are
parties to a shareholders agreement, a standstill agreement and a registration
rights agreement with Telenor, Comincom's stockholder, and our company, that
will become effective on the closing of the acquisition, our Board established a
special committee, which was established on March 28, 2003. The members of the
special committee were Mr. David Herman and Mr. Michael North, each of whom is
disinterested in this transaction. The special committee determined that the
acquisition of Comincom and the entering into of the standstill agreement,
registration rights agreement and shareholders agreement is in the best interest
of our company and its shareholders. See "TERMS OF THE TRANSACTION DOCUMENTS"
below.
The special committee was initially established to review and evaluate the
advisability of an amendment to our company's certificate of incorporation such
that in certain circumstances where any person desires to become a beneficial
owner of 50% or more of the issued and outstanding shares of our company, such
person would be required to make an offer to purchase any and all of our
company's shares. It was decided not to include such a provision in our
certificate of incorporation. Similar tender offer provisions were subsequently
included in the shareholders agreement among our company, Alfa, Capital,
Barings, Rostelecom and Telenor. On April 1, 2003, the scope of the special
committees duties was expanded to include exclusive power and authority on
behalf of our company to review, evaluate and determine the advisability of
granting a request for advance approval under Section 203 of the Delaware
General Corporation Law (the "DGCL") in connection with the acquisition of
Comincom and to review, evaluate and determine the advisability of amending the
existing standstill agreement, registration rights agreement and shareholders
agreement, among our company's major shareholders. Section 203 is Delaware's
anti-takeover statute.
The special committee was also given the exclusive power and authority on behalf
of our company to (i) communicate and negotiate with the parties in the
transaction and to the standstill agreement, registration rights agreement and
shareholders agreement, including the requested approval under
7
Section 203 of the DGCL, (ii) determine whether our company should agree to
approval in advance for Telenor attaining interested stockholder status for the
purposes of Section 203 in connection with the acquisition and amending the
shareholder agreement and standstill agreement among our company's major
shareholders and whether such actions are fair to, and in the best interests
of, our company and all of its shareholders, and (iii) exercise all of the power
and authority possessed by our company's full Board of Directors to determine
whether to grant or deny the request by our company for approval pursuant to
Section 203 of the DGCL.
The special committee considered and determined that it was appropriate to waive
the application of Section 203 of the DGCL, such waiver removing restrictions
under the DGCL on Telenor becoming an interested shareholder of our company as a
result of the transaction.
We currently have a sufficient amount of authorized and unissued shares of our
common stock to issue the shares to the Comincom stockholders as consideration
for our acquisition of Comincom.
Alfa, Barings, Capital and Rostelecom, which collectively own approximately 68%
of the outstanding shares of common stock as of September 30, 2003, have
indicated that they will vote in favor of the proposal.
Our Board of Directors has unanimously approved the issuance of the shares of
the common stock to Telenor in connection with the acquisition of Comincom,
subject to stockholder approval.
Accordingly, the Board recommends that you vote in favour of this proposal.
In order to give effect to this proposal the following resolution will be
offered at the special meeting and your vote for this proposal will be deemed a
vote for such resolution:
RESOLVED, THAT THE ISSUANCE BY GOLDEN TELECOM, INC. OF 20% OR MORE OF ITS COMMON
STOCK BEFORE GIVING EFFECT TO THE ISSUANCE IN QUESTION IN CONNECTION WITH THE
ACQUISITION OF OAO COMINCOM, AN OPEN JOINT STOCK COMPANY EXISTING UNDER THE LAWS
OF THE RUSSIAN FEDERATION, BE AND HEREBY IS APPROVED.
8
SELECTED FINANCIAL DATA
The following selected historical consolidated financial data at December 31,
1998, 1999, 2000, 2001 and 2002, and for all of the years presented are derived
from consolidated financial statements of Golden Telecom, Inc. which have been
audited by Ernst & Young (CIS) Limited, independent auditors. The selected
historical consolidated financial data at June 30, 2002 and 2003 and for the six
months ended June 30, 2002 and 2003 are derived from consolidated financial
statements of Golden Telecom and are unaudited.
The data should be read in conjunction with the consolidated financial
statements, related notes, and other financial information included in this
document or incorporated herein by reference.
FOR THE SIX MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------------ ------------------------
1998 1999 2000 2001 2002 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ......................... $ 86,086 $ 97,931 $ 113,089 $ 140,038 $ 198,727 $ 75,567 $ 159,138
Cost of revenues (excluding
depreciation and
amortization) .................. 43,574 40,516 50,954 63,685 91,189 32,926 76,735
Gross margin ..................... 42,512 57,415 62,135 76,353 107,538 42,641 82,403
Selling, general and
administrative (excluding
depreciation and
amortization) .................. 45,327 41,011 45,420 48,935 46,147 19,924 26,823
Depreciation and amortization .... 16,709 28,143 31,851 41,398 29,961 12,250 20,947
Abandonment and
restructuring charge ........... -- 19,813 -- -- -- -- --
Impairment charge ................ -- -- -- 31,291 -- -- --
Income (loss) from operations .... (19,524) (31,552) (15,136) (45,271) 31,430 10,467 34,633
Equity in earnings (losses)
of ventures .................... 2,559 (6,677) (285) 8,155 4,375 487 (29)
Interest income (expense), net ... (3,003) 2,814 7,126 777 (667) (85) (973)
Foreign currency gains (losses) .. (7,452) (2,739) (390) (647) (1,174) (507) 213
Minority interest ................ (1,040) (1,477) (431) (117) (527) (227) (215)
Other non-operating expense ...... -- -- (148) -- -- -- --
Provision for income taxes ....... 5,184 6,823 990 1,902 4,627 2,149 8,974
Net income (loss) before
cumulative effect of change
in accounting principle ........ (33,644) (46,454) (10,254) (39,005) 28,810 7,986 24,655
Cumulative effect of change in
accounting principle ........... -- -- -- -- 974 974 --
Net income (loss) ................ (33,644) (46,454) (10,254) (39,005) 29,784 8,960 24,655
Net income (loss) per share
before Cumulative effect of
change in accounting
principle - basic(1) ........... (3.17) (3.38) (0.43) (1.65) 1.20 0.36 0.90
Cumulative effect of change in
accounting principle ........... -- -- -- -- 0.04 0.04 --
Net income (loss) per share -
basic(1) ....................... (3.17) (3.38) (0.43) (1.65) 1.24 0.40 0.90
Weighted average shares
- basic(1) ..................... 10,600 13,736 24,096 23,605 24,102 22,593 27,271
Net income (loss) per share
before cumulative effect
of change in accounting
principle - diluted(1) ......... (3.17) (3.38) (0.43) (1.65) 1.17 0.35 0.89
Cumulative effect of change
in accounting principle ........ -- -- -- -- 0.04 0.04 --
Net income (loss) per share -
diluted(1) ..................... (3.17) (3.38) (0.43) (1.65) 1.21 0.39 0.89
Weighted average shares -
diluted(1) ..................... 10,600 13,736 24,096 23,605 24,517 23,062 27,836
9
AT DECEMBER 31, AT JUNE 30,
-------------------------------------------------------------- -----------------------
1998 1999 2000 2001 2002 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents ............ $ 14,164 $ 162,722 $ 57,889 $ 37,404 $ 59,625 $ 51,679 $ 55,305
Investments available for sale ....... -- -- 54,344 8,976 -- 1,998 --
Property and equipment, net .......... 52,186 62,176 82,377 98,590 166,121 98,278 174,607
Investments in and advances
to ventures ........................ 46,519 45,196 49,629 45,981 721 46,447 512
Goodwill and intangible assets, net .. 71,924 53,467 70,045 57,146 127,669 53,403 125,803
Total assets ......................... 235,849 366,624 348,456 300,384 435,810 302,944 449,604
Total debt, including current
portion ............................ 24,459 28,029 18,997 22,220 40,495 12,582 8,688
Minority interest .................... 7,993 2,816 3,337 5,967 2,187 4,761 2,359
Shareholders' equity ................. 168,783 288,552 283,193 220,844 307,458 233,557 340,263
(1) Per share amounts in this table were calculated based upon the
assumption that the 10,600,000 common shares issued in connection with
the formation of the company are outstanding for all periods prior to
September 30, 1999.
Refer to Note 3 in the Annual Report on Form 10-K to the Consolidated Financial
Statements for descriptions of recent acquisitions that impact the comparability
of financial information. Other business combinations not disclosed in the
footnotes are as follows:
In February 1998, the company acquired the remaining interest in Sovam Teleport
("Sovam") for cash consideration of $5.0 million. In July 1998, the company
acquired the remaining interest in GTS-Vox Ltd., the holding company for TCM,
for cash consideration of $37.0 million. In June 1998, the company increased its
beneficial interest in Golden Telecom (Ukraine) to 56.75% for cash consideration
of approximately $9.8 million. The company began consolidating Sovam in February
1998 and TCM and Golden Telecom (Ukraine) in July 1998.
In August 1999, the company increased its beneficial ownership in TCM from 95%
to 100%. Goodwill in the amount of $3.2 million was recorded by the company.
An affiliate of ING Barings which indirectly owned 12.25% of Golden Telecom
(Ukraine), contributed its indirect interest in Golden Telecom (Ukraine) to a
wholly owned subsidiary of Golden Telecom, Inc., upon the consummation of our
initial public offering on September 30, 1999 in exchange for 420,000 newly
issued shares of common stock of the company. In accordance with the
subscription agreement we issued an additional 30,000 shares of common stock in
full and final settlement to the affiliate of ING Barings. Our beneficial
interest in Golden Telecom (Ukraine) increased from 56.75% to 69% as the result
of this transaction.
In June 1999, we acquired the assets of Glasnet, a Moscow based Internet
Services Provider ("ISP"). In July 1999, we acquired a 75% interest in SA Telcom
LLP, a telecommunications and data services provider in Kazakhstan. In December
1999, we acquired the assets of Nevalink, an ISP, and of full-equity ownership
of NevaTelecom. Both Nevalink and NevaTelecom provided telecom and Internet
services to the St. Petersburg market. These acquisitions were purchased for
approximately $2.5 million in cash.
Refer to Note 2 in the Annual Report on Form 10-K to the Consolidated Financial
Statements for a description of the change in method of accounting for goodwill
in 2002.
10
OAO COMINCOM SELECTED FINANCIAL DATA
The following selected historical consolidated financial data at December 31,
2001 and 2002, and for the two years ended December 31, 2001 and 2002 are
derived from the audited consolidated financial statements of OAO Comincom
("Comincom"). The selected historical consolidated financial data as of December
31, 2000 and as of June 30, 2002 and 2003, and for the year ended December 31,
2000 and for the six months ended June 30, 2002 and 2003, are derived from the
consolidated financial statements of Comincom and are unaudited. Selected
financial data for 1998 and 1999 has been derived from consolidated financial
information of Comincom and are unaudited.
The data should be read in conjunction with the consolidated financial
statements, related notes, and other financial information included in this
document or incorporated herein by reference.
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
(in thousands) 1998 1999 2000 2001 2002 2002 2003
----------- ----------- ----------- -------- -------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Revenue ........................................ $ 59,833 $ 50,384 $ 54,238 $ 62,906 $ 84,154 $ 38,079 $ 49,272
Operating expenses ............................. (26,418) (25,288) (31,749) (35,692) (47,840) (20,910) (27,971)
Selling, general and administrative ............ (7,053) (6,752) (8,477) (9,928) (11,431) (5,669) (4,662)
Depreciation and amortization .................. (4,733) (5,081) (8,452) (12,887) (11,047) (5,238) (6,680)
Operating income ............................... 21,629 13,263 5,560 4,399 13,836 6,262 9,959
Other income/(loss) ............................ (10,403) (197) 1,423 (1,162) 607 (187) (274)
Income tax expense ............................. (5,795) (4,876) (4,824) (2,413) (4,945) (2,424) (4,599)
Minority interests ............................. (417) (440) (459) (422) (316) (154) (131)
Net income ..................................... 5,014 7,750 1,700 402 9,182 3,497 4,955
1998 1999 2000 2001 2002 2002 2003
----------- ----------- ----------- -------- -------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
BALANCE SHEET DATA:
Cash and cash equivalents ...................... $ 988 $ 853 $ 4,068 $ 3,926 $ 1,915 $ 2,509 $ 3,899
Property, plant and equipment, net ............. 35,151 41,480 48,585 66,334 83,453 74,561 83,278
Goodwill and intangible assets, net ............ 218 368 46,755 43,125 44,952 43,051 52,951
Total assets ................................... 50,325 56,852 117,279 137,035 160,320 154,001 176,124
Total debt, including current portion ......... 8,703 14,165 14,310 9,706 8,362 7,629 7,080
Shareholders' equity ........................... 26,089 31,103 83,951 107,595 122,575 116,890 133,658
In June 2003 Nye Telenor East Invest AS ("Telenor") acquired the remaining 25%
of Comincom, which it did not previously own. The acquisition triggered a
requirement to apply push-down accounting as of June 2003 for Comincom's
consolidated financial statements. As a result, these financial statements
reflect Telenor's basis in Comincom's assets and liabilities to the extent of
Telenor's ownership percentage of Comincom's common stock during the periods
presented. Telenor's ownership of the Coimcom is summarized as follows:
11
AS OF TELENOR OWNERSHIP
-----------------------------------------------------------------------
December 31, 2000 60%
December 31, 2001 75%
December 31, 2002 75%
June 30, 2003 100%
Telenor's basis represents the allocation of Telenor's share of fair values to
the net assets acquired when Telenor purchased 60% of Comincom in 2000 and 25%
of Comincom in 2003. In 2001, Telenor acquired 15% of Comincom newly issued
shares in exchange for cash and 31% of previously acquired Combellga shares.
This transaction has been accounted for as a common control transaction. Based
on Telenor's allocation of fair value to net assets acquired, Telenor's basis in
the net assets of Comincom differs from Comincom's historical cost basis
principally for fixed assets, intangible assets, goodwill, deferred revenue and
costs and deferred taxes.
Effective January 1, 2002, the Group adopted Statement of Financial Accounting
Standard No. 142 "Goodwill and Other Intangible Assets." Accordingly, the Group
ceased the amortization of goodwill and took the net book value of the goodwill
at this date as the carry value. No amounts were transferred out of goodwill to
other intangibles and no amount was posted as a cumulative effect of a change in
accounting principle as a result of the adoption.
12
OPEN JOINT STOCK COMPANY COMINCOM
US GAAP CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
13
CONTENTS PAGE
Report of Independent Auditors 15
Consolidated Statements of Income 16
Consolidated Balance Sheets 17
Consolidated Statements of Cash Flows 18
Consolidated Statements of Changes in Shareholders' Equity 19
Notes to the Consolidated Financial Statements 20
14
(PRICEWATERHOUSECOOPERS LOGO) ZAO PRICEWATERHOUSECOOPERS AUDIT
Kosmodamianskaya Nab. 52, Bld. 5
115054 Moscow
Russia
Telephone +7 (095) 967 6000
Facsimile +7 (095) 967 6001
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF OJSC COMINCOM
We have audited the accompanying consolidated balance sheets of OJSC Comincom
and its subsidiaries (hereafter referred to as "the Group") as of December 31,
2002 and December 31, 2001 and the related statements of income, of cash flows
and of changes in shareholders' equity for the years then ended. These
consolidated financial statements are the responsibility of the Group's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OJSC Comincom and
its subsidiaries as of December 31, 2002 and December 31, 2001, and the results
of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in note 2 to the financial statements, the Company adopted SFAS No.
142 "Goodwill and other Intangible Assets" as of January 1, 2002.
October 6, 2003
Moscow, Russia
15
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
NOTES DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
REVENUE 10 84,154 62,906
-----------------------------------------------------------------------------------------------------------------------
Interconnect fees and channel rentals - third party (22,585) (16,231)
Interconnect fees and channel rentals - related party (1,451) (193)
Wages, salaries, other benefits and payroll taxes (14,825) (12,631)
Materials, repairs and maintenance, utilities (2,639) (1,492)
Selling, general and administrative expenses - third party (10,879) (9,328)
Selling, general and administrative expenses - related party (552) (600)
Taxes other than on income (1,963) (1,200)
Depreciation and amortisation (11,047) (12,887)
Cost of equipment (2,157) (896)
Other expenses (2,220) (3,049)
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 13,836 4,399
-----------------------------------------------------------------------------------------------------------------------
Financing income/(loss) 12 607 (1,162)
-----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 14,443 3,237
-----------------------------------------------------------------------------------------------------------------------
INCOME TAXES
Current tax expense (4,609) (3,745)
Deferred tax benefit/(expense) (336) 1,332
-----------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE 11 (4,945) (2,413)
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTERESTS 9,498 824
-----------------------------------------------------------------------------------------------------------------------
Minority interests (316) (422)
-----------------------------------------------------------------------------------------------------------------------
NET INCOME 9,182 402
=======================================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements
16
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTES DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 3 1,915 3,926
Trade accounts receivable - third parties, net of provision of $3,145
(December 31, 2001: $2,597) 15,013 10,212
Trade accounts receivable - related parties 576 63
Advances paid 1,038 1,158
Taxes and other receivables 4 5,771 4,358
Inventories 1,926 1,743
Prepaid expenses and other current assets 792 496
Deferred costs 270 106
Deferred income taxes 11 1,246 1,757
-----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 28,547 23,819
-----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 5 83,453 66,334
Goodwill and intangible assets, net 6 44,952 43,125
Deferred costs 686 301
Advances to suppliers of equipment 2,682 3,456
-----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 160,320 137,035
=======================================================================================================================
LIABILITIES, SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
CURRENT LIABILITIES
Short-term borrowings 9 4,479 7,003
Accounts payable, trade - third parties 12,461 8,880
Accounts payable, trade - related parties 1,757 155
Accrued liabilities 939 982
Income and other taxes 1,547 524
Advances received and other current liabilities 3,912 4,597
Dividends Payable 1,404 343
Deferred revenue 1,764 755
-----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 28,263 23,239
-----------------------------------------------------------------------------------------------------------------------
Long-term borrowings 9 3,883 2,703
Deferred revenue 4,379 2,103
Deferred income taxes 11 1,220 1,395
-----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 37,745 29,440
-----------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS - -
-----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES 15 - -
-----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 7 202 202
Additional paid-in capital 95,190 95,190
Receivables from shareholders - (7,000)
Retained earnings 27,183 19,203
-----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 122,575 107,595
-----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, SHAREHOLDERS' EQUITY AND MINORITY INTERESTS 160,320 137,035
=======================================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements
17
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTES FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
CASH GENERATED BY OPERATING ACTIVITIES 13 24,070 11,303
=======================================================================================================================
INVESTING ACTIVITIES
Capital expenditures (30,672) ( 29,141)
Increase in long term investments - 64
Distribution of profits of joint venture (316) (422)
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (30,988) (29,499)
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments on capital lease (1,987) (1,074)
Loans received 2,400 -
Repayment of loans (2,457) (4,084)
Amounts received from shareholder companies 7,000 23,240
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES 4,956 18,082
-----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (49) (28)
-----------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,011) (142)
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 2001 / 2000 3 3,926 4,068
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 2002 / 2001 3 1,915 3,926
=======================================================================================================================
-----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid 1,306 2,140
Income taxes paid 4,781 4,589
-----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements
18
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
TOTAL
RECEIVABLES FROM ADDITIONAL RETAINED SHAREHOLDERS'
SHARE CAPITAL SHAREHOLDERS PAID-IN CAPITAL EARNINGS EQUITY
-----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 200 - 64,950 18,801 83,951
-----------------------------------------------------------------------------------------------------------------------
Net income - - 402 402
Share issue 2 (7,000) 30,240 - 23,242
-----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 202 (7,000) 95,190 19,203 107,595
-----------------------------------------------------------------------------------------------------------------------
Net income - - - 9,182 9,182
Share issue - 7,000 - - 7,000
Dividends - - - (1,202) (1,202)
-----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 202 - 95,190 27,183 122,575
=======================================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements
19
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Open Joint Stock Company Comincom (hereinafter "the Company" or "Comincom") was
formed in 1990 as a commercial enterprise and was incorporated in 1992 as a
joint stock company under the laws of the Russian Federation. The Company is
owned and controlled by the Telenor Group.
The principal activities of the Company and its subsidiaries (collectively "the
Group") are the provision of telecommunications services and the sale of
telecommunications equipment to companies and individuals located in the Russian
Federation. Telecommunications services mainly include international and
domestic long distance calls, connection fees, Internet and data transfer. The
Group owns several switches and channels and also rents channels from other
telecom operators (both Russian and foreign).
The subsidiary undertakings included in the consolidated financial statements
are Open Joint Stock Company Combellga ("Combellga"), Closed Joint Stock Company
Comincom-Chernozemie and the joint venture between Combellga and Comstar,
another local telecommunication operator. This joint venture has been set up by
the participants to provide telecommunication services in Park Place business
centre and its day-to-day operations are managed and controlled by Combellga
and, therefore, this joint venture is consolidated. This results in the
recording of minority interest amounts for 50% of net income of the joint
venture. Combellga is a telecommunication company incorporated in the Russian
Federation. Combellga was initially formed by Comincom and other shareholders in
1991.
In June 2003, Telenor acquired the remaining 25% of Comincom which it did not
previously own. The acquisition triggered a requirement to apply push-down
accounting as of June 2003 for Comincom's consolidated financial statements. As
a result, these financial statements reflect Telenor's basis in Comincom's
assets and liabilities to the extent of Telenor's ownership percentage of
Comincom's common stock during the periods presented. Telenor's ownership of the
Company is summarized as follows:
AS OF TELENOR OWNERSHIP
December 31, 2000 60%
December 31, 2001 75%
December 31, 2002 75%
June 30, 2003 100%
Telenor's basis represents the allocation of Telenor's share of fair values to
the net assets acquired when Telenor purchased 60% of Comincom in 2000 and 25%
of Comincom in 2003. In 2001, Telenor acquired 15% of Comincom newly issued
shares in exchange for cash and 31% of previously acquired Combellga shares.
This transaction has been accounted for as a common control transaction. Based
on Telenor's allocation of fair value to net assets acquired, Telenor's basis in
the net assets of Comincom differs from Comincom's historical cost basis
principally for fixed assets, intangible assets, goodwill, deferred revenue and
costs, and deferred taxes.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual outcomes
could differ from those estimates. The most significant estimates made in
preparing these financial statements are the allocation of purchase price to
fair values of net assets for Telenor's acquisition of shares in Comincom, the
useful lives for fixed assets and intangible assets, and provision for bad debt.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the Group
are based on the financial statements of the entities presented in Note 1
"Nature of operations and basis of presentation".
20
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Subsidiary undertakings, which are those entities in which the Company has an
interest of more than one half of the voting rights, or otherwise has power to
exercise control over the operations, are consolidated. Subsidiaries are
consolidated from the date on which control is transferred and are no longer
consolidated from the date that control ceases. All intercompany transactions
and balances between group companies are eliminated.
FOREIGN CURRENCY AND TRANSLATION METHODOLOGY. The Russian economy is
hyperinflationary. The US$ is the reporting and the functional currency for the
purpose of these financial statements. Accordingly, transactions not already
measured in US$ have been remeasured into US$ in accordance with the relevant
provisions of Statement of Financial Accounting Standards ("SFAS") No. 52,
"Foreign Currency Translation".
Monetary assets and liabilities of Group entities operating in Russia have been
translated at the rate prevailing at the balance sheet date. Non-monetary assets
and liabilities have been translated at historic rates.
Revenues, expenses and cash flows have been translated at average exchange
rates. Translation gains and losses from the remeasurement of assets and
liabilities that are not denominated in US$ are credited or charged to the
consolidated statement of income.
Exchange restrictions and controls exist relating to converting the rouble into
other currencies. At present, the rouble is not convertible outside of Russia
and, further, consolidated entities are required to convert 50% of their hard
currency earnings into roubles. Future movements in the exchange rates between
the rouble and the US$ will affect the carrying value of rouble denominated
monetary assets and liabilities. Such movements may also affect the Company's
ability to realise non-monetary assets represented in US$ in these consolidated
financial statements. Accordingly, any translation of local currencies to US$
should not be construed as a representation that such amounts have been, could
be, or will in the future be converted into US$ at the exchange rate shown or at
any other exchange rate.
The official rate of exchange, as determined by the Central Bank of the Russian
Federation, between the Russian Rouble and the US Dollar at December 31, 2002
was 31.78 for US$ 1 (30.14 at December 31, 2001).
REVENUE RECOGNITION. Revenue is primarily derived from the sale of voice and
data transfer services to customers and is recognized in the period the related
services are provided.
Traffic. Traffic revenue is recorded in the period when the service is provided
determined based on the current tariffs and the service utilised.
Sales of equipment. The revenue from sales of equipment is recognised when the
ownership is transferred to the customers. This equipment mainly represents
switches to be installed in the customers' premises that will be used for
traffic transmission. When a contract with a customer is terminated, the
equipment remains with the customer.
Connection fees. Under SAB 101 connection fees and incremental costs are
deferred over the estimated average customer relationship period of five years.
All revenue figures are recorded net of value added tax ("VAT").
ACCOUNTS RECEIVABLE. Accounts receivable are presented at realisable value net
of any provision for bad and doubtful debts.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents consist of cash on hand and
balances with banks.
21
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY VALUATION. Inventories, which include spare parts and ancillary
equipment, are valued at the lower of cost as determined by the weighted average
method and net realisable value.
PENSIONS. The Group, in the normal course of business, makes payments to the
pension fund, medical insurance, employment fund and social insurance of the
Russian Federation on behalf of its employees. These payments are expensed when
incurred and included within personnel costs.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is recorded at
cost. Depreciation is recorded principally on the straight-line method at rates
based on the estimated useful lives of the assets, which are as follows:
Machinery and equipment 5-10
Networks 10-15
Switches and radio installations 10
Other 4-5
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or disposal of Long-Lived Assets" ("SFAS 144"),
property, plant and equipment held and used by the Group are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any assets may not be recoverable. For the purposes of
evaluating the recoverability of property, plant and equipment, the
recoverability test is performed using undiscounted net cash flows for property,
plant and equipment.
Profits or losses from the sale of assets are included in operating income.
Capital improvements, renewals and repairs that extend the life of an asset are
capitalised, other repairs and maintenance are expensed as incurred.
LEASED ASSETS. Leases on equipment where the Company substantially assumes the
risks and rewards of ownership are classified as capital leases in accordance
with Statement of Financial Accounting Standards No 13, "Accounting for leases"
("SFAS 13"). Capital leases are booked at the present value of the minimum lease
payments. Value added taxes to be offset from the budget are recognized as part
of other current assets. The corresponding lease obligations net of finance
charges are classified as current and non-current capital lease obligations,
depending upon the period in which the amounts are due. Rental payments are
apportioned between finance charges and reduction of the outstanding liability.
The finance charge is allocated to periods during the lease term so as to
produce a constant periodic rate of interest on the remaining balance of the
liability for each period.
Leased assets are depreciated on a straight-line basis over the estimated
economic useful life of the assets (or the lease term, if less) in the same
manner as other fixed assets of the same class.
Where the Company does not assume the risks and rewards of ownership, the rental
expense is recognized as a period charge in the statement of operations.
GOODWILL AND INTANGIBLE ASSETS. Goodwill represents the excess of acquisition
costs over the fair value of the net assets of Comincom acquired by Telenor, and
was amortized on a straight-line basis over its estimated useful life of ten
years until December 31, 2001. Intangible assets consist principally of
numbering capacity and the subscriber base, which are amortised over 10 and 7
years respectively. Effective 1 January 2002, the Group adopted SFAS No. 142
"Goodwill and Other Intangible Assets" and ceased amortising goodwill as of that
date. The management has completed the transitional goodwill test and concluded
that no provision for impairment is required.
22
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS. The fair value of financial instruments (cash and cash
equivalents, advances, accounts receivable and accounts payable) is determined
with reference to various market information and other valuation methods as
considered appropriate.
VALUE ADDED TAXES. In the consolidated balance sheets and the consolidated
statements of cash flows, transactions and balances are presented inclusive of
the associated VAT applicable under the legislation of the relevant jurisdiction
in which the transaction occurred. These taxes are excluded from the
consolidated statements of income since the payment and collection of VAT
generally has no effect on the results of operations.
INCOME TAXES. Deferred income tax assets and liabilities are recognised for the
future tax consequences attributable to differences between the consolidated
financial statements' carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in the years in which these temporary differences are
expected to reverse. Valuation allowances are provided against deferred tax
assets that are not expected to be realised.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 2002, the FASB issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," under which a liability for an exit cost was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after 31
December 2002. The Group believes that the adoption of the provisions of SFAS
No. 146 had no material impact on its results of operations, financing position,
or cash flows.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 (FIN 46), "Consolidation of Variable Interest Entities" FIN 46 addresses
consolidation and disclosure by business enterprises of variable interest
entities. The Group believes that the adoption of this standard will have no
material impact on its consolidated financial statements.
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
This Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Group believes that the adoption of this standard
will have no material impact on its consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
The Group believes that the adoption of this standard will have no material
impact on its consolidated financial statements.
RISKS AND CONCENTRATIONS. A description of the Group's major products and its
principal markets, as well as exposure to foreign currency risks are provided in
Note 1 "Nature of operations and basis of presentation" and Note 2 "Summary of
significant accounting policies".
23
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 3: CASH AND CASH EQUIVALENTS
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
Cash at bank, US$ 121 3,559
Cash at bank, Russian roubles 1,688 297
Other cash equivalents 106 70
-----------------------------------------------------------------------------------------------------------------------
TOTAL CASH AND CASH EQUIVALENTS 1,915 3,926
=======================================================================================================================
NOTE 4: TAXES AND OTHER RECEIVABLES
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
VAT recoverable 4,482 3,251
Prepaid profit tax 1,050 634
Other non-trade receivables 239 473
-----------------------------------------------------------------------------------------------------------------------
TOTAL TAXES AND OTHER RECEIVABLES 5,771 4,358
=======================================================================================================================
VAT recoverable relates to input VAT incurred with respect to goods and services
purchased and available for offset against future output VAT following the
settlement of accounts payable in relation to such goods and services.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
Historical cost 104,215 75,401
Less: accumulated depreciation (29,231) (18,615)
-----------------------------------------------------------------------------------------------------------------------
Net book value 74,984 56,786
Construction in progress 8,469 9,548
-----------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 83,453 66,334
=======================================================================================================================
Included in property, plant and equipment at 31 December 2002 are capitalised
finance leases with a net book value of $6,838 (as at 31 December 2001: $7,218).
Accumulated depreciation on those assets amounted to $2,275 and $1,413 at 31
December 2002 and 31 December 2001 respectively.
24
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 6: GOODWILL AND INTANGIBLE ASSETS
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
COST
Goodwill 35,034 40,816
Customer base 3,620 3,620
Numbering capacity 9,399 6,333
-----------------------------------------------------------------------------------------------------------------------
TOTAL COST 48,053 50,769
-----------------------------------------------------------------------------------------------------------------------
AMORTISATION
Goodwill - (5,782)
Customer base (1,250) (733)
Numbering capacity (1,851) (1,129)
-----------------------------------------------------------------------------------------------------------------------
TOTAL AMORTISATION (3,101) (7,644)
-----------------------------------------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 44,952 43,125
=======================================================================================================================
Effective 1 January 2002 the Group ceased amortising goodwill and took the net
book value of the goodwill at this date as the carrying value. The net income
for the year ended 31 December 2001 before amortisation of the goodwill was
$4,484. No amounts were transferred out of goodwill to other intangibles and no
amount was posted as a cumulative effect of a change in accounting principle as
a result of the adoption.
NOTE 7: SHARE CAPITAL
At 31 December 2002, the total share capital authorised, issued and fully paid,
consists of 129,327 ordinary shares, 511 preference shares and 22,379
convertible preference shares (at 31 December 2001: 99,459 and 541
respectively). The nominal value of each class of shares is RR 1 per share.
Additional paid-in capital represents the difference between the nominal value
of the issued shares and the amounts contributed by the shareholders.
All ordinary shares have equal voting rights. The rights of ordinary
shareholders in the event of liquidation are governed by existing legislation.
Preference shares have no voting rights except on resolutions regarding the
liquidation or reorganisation.
Preferred shareholders generally have rights of preference on payment of
dividends and proceeds from liquidation.
NOTE 8: CAPITAL LEASE OBLIGATIONS
Capital lease obligations are as follows:
COST OF ASSETS COST OF ASSETS
ACQUIRED AT ACQUIRED AT LIABILITY AT LIABILITY AT
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
LESSOR 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------------
International Moscow Bank -Leasing 7,749 7,267 2,225 3,750
Financial Technologies Group 1,364 1,364 86 548
-----------------------------------------------------------------------------------------------------------------------
TOTAL 9,113 8,631 2,311 4,298
=======================================================================================================================
25
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 8: CAPITAL LEASE OBLIGATIONS (CONTINUED)
Future minimum lease payments:
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
2002 - 2,654
2003 1,743 1,354
2004 884 722
2005 97 79
-----------------------------------------------------------------------------------------------------------------------
TOTAL MINIMUM LEASE OBLIGATIONS 2,724 4,809
-----------------------------------------------------------------------------------------------------------------------
Interest (413) (511)
Present value of net minimum obligations 2,311 4,298
Current portion 1,495 2,178
Long term obligations 816 2,120
-----------------------------------------------------------------------------------------------------------------------
TOTAL FINANCE LEASE PAYABLE 2,311 4,298
=======================================================================================================================
NOTE 9: SHORT-TERM AND LONG-TERM BORROWINGS
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
BANK LOANS
International Moscow Bank; interest of LIBOR plus 3.4% (1) (a) 2,400 -
International Moscow Bank; interest of LIBOR plus 5.5% (1) (b) 584 1,178
-----------------------------------------------------------------------------------------------------------------------
TOTAL BANK LOANS 2,984 1,178
-----------------------------------------------------------------------------------------------------------------------
MGTS promissory note - 2,978
Cable and Wireless PLC - 669
Capital lease obligations 1,495 2,178
-----------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM BORROWINGS 4,479 7,003
=======================================================================================================================
LONG-TERM BORROWINGS
BANK LOANS
International Moscow Bank; interest of LIBOR plus 5.5% (1) (b) - 583
-----------------------------------------------------------------------------------------------------------------------
TOTAL BANK LOANS - 583
-----------------------------------------------------------------------------------------------------------------------
MGTS promissory note (c) 3,067 -
Capital lease obligations 816 2,120
-----------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM BORROWINGS 3,883 2,703
=======================================================================================================================
US$ denominated loans;
Details of significant loan balances are summarised below:
(a) International Moscow Bank
The loan is collateralised by property, plant and equipment with pledge value of
$3,644 which does not significantly differ from its carrying value. The maturity
of the loan is November 2003.
26
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 9: SHORT-TERM AND LONG-TERM BORROWINGS (CONTINUED)
Under the terms of the agreement there are a number of covenants and
restrictions. The significant covenants relate to cross-default provisions,
transfer of control over Combellga to another party and sale and / or purchase
of assets worth over 25% of the total assets.
The bank also has a right to write-off amounts overdue on the loan from the
current account opened with this bank.
(b) International Moscow Bank
25% + 1 common shares of Combellga have been pledged as collateral.
(c) MGTS promissory note.
This is a Russian rouble denominated promissory note with a face value of
RR89,764 thousand given by the Company to MGTS in 1999 maturing in April 2002.
In 2002 the Company paid to MGTS US$611 in cash and issued a new promissory note
for the remaining balance repayable in April 2005.
NOTE 10: REVENUE
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
ANALYSED BY TYPE:
Domestic traffic 35,188 26,451
International traffic 26,513 24,225
Leased lines 2,491 2,957
Connection fees 2,955 1,344
Internet 8,792 4,897
Sale and rental of equipment 2,680 1,462
Other 5,535 1,570
-----------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 84,154 62,906
-----------------------------------------------------------------------------------------------------------------------
Revenue - third party 83,501 62,665
Revenue - related party 653 241
=======================================================================================================================
TOTAL REVENUE 84,154 62,906
=======================================================================================================================
NOTE 11: INCOME TAXES
The Group calculates deferred income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", applying the specific provisions for foreign
companies using the US$ as the reporting currency.
SFAS No. 109 requires deferred income taxes to be computed on non-current assets
in local currency by comparing the historic book and tax basis in local currency
after respective depreciation but before indexing for either accounting or tax
purposes. The local currency deferred income tax balance is then remeasured into
US$ using the period-end exchange rate.
27
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 11: INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities at December 31, 2002 and December 31,
2001 are as follows:
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
Accounts receivable - 864
Accounts payable 582 865
Losses carried forward 123 221
Deferred revenue 1,665 970
Other assets and liabilities 562 1,146
-----------------------------------------------------------------------------------------------------------------------
Deferred income tax assets 2,932 4,066
-----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment (2,515) (2,819)
Accounts receivables (130) -
Accounts payables - (70)
Other assets and liabilities (261) (815)
-----------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities (2,906) (3,704)
-----------------------------------------------------------------------------------------------------------------------
NET DEFERRED INCOME TAX ASSET 26 362
=======================================================================================================================
A reconciliation between the income tax expense and taxes determined by applying
the statutory tax rate to income before income taxes and minority interests is
presented below:
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 14,443 3,237
Statutory income tax rate 24% 35%
-----------------------------------------------------------------------------------------------------------------------
Theoretical income tax charge at statutory rate 3,466 1,133
-----------------------------------------------------------------------------------------------------------------------
(Decrease)/increase due to:
Tax allowances (255) ( 3,473)
Non-deductible expenses 1,624 4,710
Remeasurement of non-current assets to US$ 820 1,258
Other (710) (1,485)
Effect of decrease of tax rate from 35% to 24% - 270
-----------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 4,945 2,413
=======================================================================================================================
Effective January 1, 2002, the standard rate of income tax payable by companies
in the Russian Federation decreased from 35% to 24%. As this tax rate was
enacted before December 31, 2001, the effect of the change on deferred tax
liabilities at December 31, 2001 of $270 has been recognised in these
consolidated financial statements.
28
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 12: FINANCING INCOME/(LOSS)
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
Exchange difference (215) 1,035
Interest income 6 2
Income from investing activities 81 106
Interest expense (1,370) (2,399)
Forgiveness of penalties 2,002 -
Other, net 103 94
-----------------------------------------------------------------------------------------------------------------------
TOTAL FINANCING INCOME/(LOSS) 607 (1,162)
=======================================================================================================================
In accordance with the decree of the Ministry of Finance of the Russian
Federation signed on 31 December 2002 the liability of the Group for penalties
on a loan from the Ministry of Finance was forgiven and US$2,002 was included as
financing income in 2002 related to the forgiveness of penalties. The principal
of the loan and the interest have been settled during the year ended 31 December
2000.
NOTE 13: CASH GENERATED BY OPERATING ACTIVITIES
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
-----------------------------------------------------------------------------------------------------------------------
NET INCOME 9,182 402
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH GENERATED FROM OPERATIONS:
Depreciation and amortisation 11,047 12,887
Loss on disposal of property, plant and equipment 728 614
Change in deferred income taxes 336 (1,332)
Foreign exchange gains 215 (1,034)
Bad debt expenses 704 672
Minority interests 316 422
Gain on forgiveness of penalties on overdue loan (2,002) -
Changes in operating working capital:
(Increase)/decrease in receivables (6,018) 1,391
(Increase)/decrease in advances to suppliers 122 438
Increase in inventories (183) (1,074)
(Increase)/decrease in prepaid expenses and other current assets (1,709) (2,821)
Reduction/(increase) in trade accounts payable and accrued liabilities 6,662 (3,809)
Reduction in advances received and other current liabilities 911 3,236
Increase/(reduction) in income and other taxes 1,023 (569)
Increase/(reduction) in deferred revenue and costs 2,736 1,880
-----------------------------------------------------------------------------------------------------------------------
CASH GENERATED BY OPERATING ACTIVITIES 24,070 11,303
=======================================================================================================================
NOTE 14: RELATED PARTY TRANSACTIONS
Related party transactions are disclosed on the face of each primary
consolidated financial statement. Such transactions primarily comprise provision
of telecommunication services and payments for provision of personnel to
Telenor, the principal shareholder of the Group.
29
--------------------------------------------------------------------------------
OPEN JOINT STOCK COMPANY COMINCOM (OJSC COMINCOM LOGO)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF US$)
--------------------------------------------------------------------------------
NOTE 15: COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS. The Group is engaged in the construction of a
telecommunication network and equipment purchase programs with estimated future
spending of $1,165 (December 31, 2001: $5,077). These programs are subject to
periodic reviews and actual construction costs may vary from these estimates for
many reasons including, but not limited to, general business conditions,
environmental regulations, exchange rate fluctuations, the cost and efficiency,
of construction labor, equipment and materials, and the availability and cost
of capital. At December 31, 2002 no significant purchase commitments or
contracts were outstanding in connection with such construction programs.
OPERATING ENVIRONMENT. While there have been improvements in the economic
situation in the Russian Federation in recent years, the country continues to
display some characteristics of an emerging market. These characteristics
include, but are not limited to, the existence of a currency that is not freely
convertible in most countries outside of the Russian Federation, restrictive
currency controls, and relatively high inflation.
The prospects for future economic stability are largely dependent upon the
effectiveness of economic measures undertaken by the governments, together with
legal, regulatory, and political developments.
TAXATION. Russian tax, currency and customs legislation is subject to varying
interpretations and changes, occurring frequently. Furthermore, the
interpretation of such legislation by the authorities as applied to the
transactions and activity of the Group may not coincide with that of management.
As a result, such authorities may challenge certain transactions. The periods
remain open to review by the tax and customs authorities with respect to tax
payments for three years.
REGULATORY AND TARIFF POLICY. The telecommunications industry is continuing to
undergo significant restructuring and reform and the future direction and
effects of such reforms are unknown at this time. Potential reforms in tariff
setting policies and the restructuring of the sector could have significant
effects on the operations of the Group. On 18 June 2003, the government of the
Russian Federation issued a new Law on Telecommunications. The management of the
Group is currently assessing the impact of this law on the operations of the
Group.
NOTE 16: SUBSEQUENT EVENTS
In June 2003, Telenor completed the acquisition of the remaining 25% shares of
the Company. One of the conditions of this transaction was that the shareholders
waived the 2002 dividends.
On August 19, 2003, Telenor (the Company's sole shareholder) entered into a
share exchange agreement with Golden Telecom, Inc. (GTI) by which GTI will
acquire 100% of Telenor's ownership interest in Comincom. Upon closure, Telenor
will be issued GTI common stock such that Telenor will hold 19.5% of the
outstanding common shares on the date of closing. GTI is a United States
Securities and Exchange Commission registrant and such a transaction requires
the approval of GTI's shareholders. Accordingly, GTI must file a proxy statement
to obtain shareholder approval. To date, GTI shareholder approval has not been
received and accordingly the transaction has not yet closed.
30
OPEN JOINT STOCK COMPANY COMINCOM
US GAAP CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2003 AND SIX MONTHS THEN ENDED
31
CONTENTS PAGE
Consolidated Statements of Income 33
Consolidated Balance Sheets 34
Consolidated Statements of Cash Flows 35
Notes to the Consolidated Financial Statements 36
32
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
CONSOLIDATED STATEMENTS OF INCOME [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
FOR 6 MONTHS ENDED FOR 6 MONTHS ENDED
NOTES JUNE 30, 2003 JUNE 30, 2002
(UNAUDITED) (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------
REVENUE 6 49,272 38,079
-----------------------------------------------------------------------------------------------------------------------
Interconnect fees and channel rentals - third party (13,820) (9,539)
Interconnect fees and rentals - related party (491) (480)
Wages, salaries, other benefits and payroll taxes (8,693) (7,461)
Materials, repairs and maintenance, utilities (2,041) (1,591)
Selling, general and administrative expenses - third party (4,445) (5,351)
Selling, general and administrative expenses - related party (207) (318)
Taxes other than on income (1,060) (906)
Depreciation and amortization (6,680) (5,238)
Cost of equipment (968) (831)
Other expenses (908) (102)
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 9,959 6,262
-----------------------------------------------------------------------------------------------------------------------
Financing income/(loss) 7 (274) (187)
-----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS 9,685 6,075
-----------------------------------------------------------------------------------------------------------------------
INCOME TAXES
Current tax expense (3,064) (2,581)
Deferred tax (expense) /credit (1,535) 157
-----------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE 8 (4,599) (2,424)
-----------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTERESTS 5,086 3,651
-----------------------------------------------------------------------------------------------------------------------
Minority interests (131) (154)
-----------------------------------------------------------------------------------------------------------------------
NET INCOME 4,955 3,497
=======================================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
33
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
CONSOLIDATED BALANCE SHEETS [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
NOTES JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents 3,899 1,915
Trade accounts receivable - third parties, net of provisions of $2,258
(December 31, 2002 $3,145) 19,741 15,013
Trade accounts receivable - related parties 472 576
Advances paid 3,035 1,038
Taxes and other receivables 4,463 5,771
Inventories 2,738 1,926
Prepaid expenses and other current assets 1,484 792
Deferred costs 256 270
Deferred income taxes 8 - 1,246
-----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 36,088 28,547
-----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 3 83,278 83,453
Goodwill and intangible assets, net 4 52,951 44,952
Deferred costs 599 686
Advances to suppliers of equipment 3,208 2,682
-----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 176,124 160,320
=======================================================================================================================
LIABILITIES, SHAREHOLDERS' EQUITY AND MINORITY INTERESTS
CURRENT LIABILITIES
Short-term borrowings 5 3,590 4,479
Accounts payable, trade - third parties 16,091 12,461
Accounts payable, trade - related parties 720 1,757
Accrued liabilities 1,104 939
Income and other taxes 3,965 1,547
Advances received and other current liabilities 4,936 3,912
Dividends payable 112 1,404
Deferred revenue 1,752 1,764
Deferred income taxes 8 432 -
-----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 32,702 28,263
-----------------------------------------------------------------------------------------------------------------------
Long-term borrowings 5 3,490 3,883
Deferred revenue 4,124 4,379
Deferred income taxes 8 2,150 1,220
-----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 42,466 37,745
-----------------------------------------------------------------------------------------------------------------------
MINORITY INTERESTS - -
-----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES 9 - -
-----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital 202 202
Additional paid-in capital 100,857 95,190
Retained earnings 32,599 27,183
-----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 133,658 122,575
-----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, SHAREHOLDERS' EQUITY AND MINORITY INTERESTS 176,124 160,320
=======================================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
34
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
CONSOLIDATED STATEMENTS OF CASH FLOWS [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
NOTES FOR 6 MONTH ENDED FOR 6 MONTH ENDED
JUNE 30, 2003 JUNE 30, 2002
(UNAUDITED) (UNAUDITED)
-----------------------------------------------------------------------------------------------------------------------
CASH GENERATED BY OPERATING ACTIVITIES 13,366 8,568
=======================================================================================================================
INVESTING ACTIVITIES
Capital expenditures (9,571) (14,693)
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (9,571) (14,693)
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments on capital lease (843) (758)
Repayment of loans (584) (1,534)
Dividend paid (384) -
Amounts received from shareholder companies - 7,000
-----------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (1,811) 4,708
-----------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,984 (1,417)
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,915 3,926
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 3,899 2,509
=======================================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
35
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
NOTE 1: NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Open Joint Stock Company Comincom (hereinafter "the Company" or "Comincom") was
formed in 1990 as a commercial enterprise and was incorporated in 1992 as a
joint stock company under the laws of the Russian Federation. The Company is
owned and controlled by the Telenor Group.
The principal activities of the Company and its subsidiaries (collectively "the
Group") are the provision of telecommunications services and the sale of
telecommunications equipment to companies and individuals located in the Russian
Federation. Telecommunications services mainly include international and
domestic long distance calls, connection fees, Internet and data transfer. The
Group owns several switches and channels and also rents channels from other
telecom operators (both Russian and foreign).
The subsidiary undertakings included in the consolidated financial statements
are Open Joint Stock Company Combellga ("Combellga"), Closed Joint Stock Company
Comincom-Chernozemie and the joint venture between Combellga and Comstar,
another local telecommunication operator. This joint venture has been set up by
the participants to provide telecommunication services in Park Place business
center and its day-to-day operations are managed and controlled by Combellga
and, therefore, this joint venture is consolidated. This results in the
recording of minority interest amounts for 50% of net income of the joint
venture. Combellga is a telecommunication company incorporated in the Russian
Federation. Combellga was initially formed by Comincom and other shareholders in
1991.
Combellga is a telecommunication company incorporated in the Russian Federation.
Combellga was initially formed by Comincom and other shareholders in 1991.
In June 2003, Telenor acquired the remaining 25% of Comincom which it did not
previously own. The acquisition triggered a requirement to apply push-down
accounting as of June 2003 for Comincom's consolidated financial statements. As
a result, these financial statements reflect Telenor's basis in Comincom's
assets and liabilities to the extent of Telenor's ownership percentage of
Comincom's common stock during the periods presented. Telenor's ownership of the
Company is summarized as follows:
AS OF TELENOR OWNERSHIP
--------------------------------------------------------------------------------
December 31, 2000 60%
December 31, 2001 75%
December 31, 2002 75%
June 30, 2003 100%
Telenor's basis represents the allocation of Telenor's share of fair values to
the net assets acquired when Telenor purchased 60% of Comincom in 2000 and 25%
of Comincom in 2003. In 2001, Telenor acquired 15% of Comincom newly issued
shares in exchange for cash and 31% of previously acquired Combellga shares.
This transaction has been accounted for as a common control transaction. Based
on Telenor's allocation of fair value to net assets acquired, Telenor's basis in
the net assets of Comincom differs from Comincom's historical cost basis
principally for fixed assets, intangible assets, goodwill, deferred revenue and
costs and deferred taxes.
The financial statements included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("US GAAP") for interim financial reporting. Certain information and
footnote disclosures normally included in complete financial statements prepared
in accordance with US GAAP have been condensed or omitted pursuant to such US
GAAP requirements. In the opinion of management, the financial statements
reflect all adjustments of a normal and recurring nature necessary to present
fairly the Company's financial position, results of operations and cash flows
for the interim periods. These financial statements should be read in
conjunction with the Company's 2002 audited consolidated financial statements
and the notes related thereto. The results of operations for the six months
ended June 30, 2003 may not be indicative of the operating results for the full
year.
36
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES. The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual outcomes
could differ from those estimates. The most significant estimates made in
preparing these financial statements are the allocation of purchase price to
fair values of net assets for Telenor's acquisition of shares in Comincom, the
useful lives for fixed assets and intangible assets, and provision for bad debt.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the Group
are based on the financial statements of the entities presented in Note 1
"Nature of operations and basis of presentation".
Subsidiary undertakings, which are those entities in which the company has an
interest of more than one half of the voting rights, or otherwise has power to
exercise control over the operations, are consolidated. Subsidiaries are
consolidated from the date on which control is transferred and are no longer
consolidated from the date that control ceases. All intercompany transactions
and balances between group companies are eliminated.
FOREIGN CURRENCY AND TRANSLATION METHODOLOGY. Revenues, expenses and cash flows
have been translated at the average exchange rates. Translation gains and losses
from the remeasurement of assets and liabilities that are not denominated in US$
are credited or charged to the consolidated statement of income. Monetary assets
and liabilities of Group entities operating in Russia have been translated at
the rate prevailing at the balance sheet date. Non-monetary assets and
liabilities have been translated at historic rates.
Exchange restrictions and controls exist relating to converting the rouble into
other currencies. At present, the rouble is not convertible outside of Russia
and, further, consolidated entities are required to convert 50% of their hard
currency earnings into roubles. Future movements in the exchange rates between
the rouble and the US$ will affect the carrying value of rouble denominated
monetary assets and liabilities. Such movements may also affect the Company's
ability to realise non-monetary assets represented in US$ in these consolidated
financial statements. Accordingly, any translation of local currencies to US$
should not be construed as a representation that such amounts have been, could
be, or will in the future be converted into US$ at the exchange rate shown or at
any other exchange rate.
The official rate of exchange, as determined by the Central Bank of the Russian
Federation, between the Russian Rouble and the US Dollar at June 30, 2003 and
December 31, 2002 was 30.35 and 31.78 respectively for US$1.
REVENUE RECOGNITION. Revenue is primarily derived from the sale of voice and
data transfer services to customers and is recognized in the period the related
services are provided.
Traffic. Traffic revenue is recorded in the period when the service is provided
determined based on the current tariffs and the service utilised.
Sales of equipment. The revenue from sales of equipment is recognised when the
ownership is transferred to the customers. This equipment mainly represents
switches to be installed in the customers' premises that will be used for
traffic transmission. When a contract with a customer is terminated, the
equipment remains with the customer.
Connection fees. Under SAB 101 connection fees and direct incremental costs are
deferred over the estimated average customer relationship life of 5 years.
All revenue figures are recorded net of Value Added Tax ("VAT").
ACCOUNTS RECEIVABLE. Accounts receivable are presented at net realisable value
net of any provision for bad and doubtful debts.
37
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHAREHOLDER'S DIVIDENDS. In 2003, Comincom shareholders waived dividends
declared but not paid for 2002 and 2003. The amount of dividends relating to
2002, net of tax paid by the Company on 2003 dividends, in the amount of $461
are recorded as an increase in equity for 1st half of 2003.
RECENTLY ISSUED ACCOUNTING STANDARDS. In June 2002, the FASB issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," under which a liability for an exit cost was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after 31
December 2002. The adoption of the provisions of SFAS No. 146 had no material
impact on our results of operations, financial position or cash flow.
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 (FIN 46), "Consolidation of Variable Interest Entities" FIN 46 addresses
consolidation and disclosure by business enterprises of variable interest
entities. The adoption of the provisions of FIN No. 46 had no impact on our
results of operations, financial position or cash flow.
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities".
This Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. Our initial adoption of this statement on July 1, 2003
will not have a material impact on its results of operations, financial
position, or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity". This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity.
Our initial adoption of this statement on July 1, 2003 will not have impact on
our results of operations, financial position, or cash flows.
RISKS AND CONCENTRATIONS. A description of the Group's major products and its
principal markets, as well as exposure to foreign currency risks are provided in
Note 1 "Nature of operations and basis of presentation" and Note 2 "Summary of
significant accounting policies"
NOTE 3: PROPERTY, PLANT AND EQUIPMENT, NET
JUNE 30, 2003 DECEMBER 31, 2002
(UNAUDITED)
--------------------------------------------------------------------------------
Cost 103,476 104,215
Less: accumulated depreciation (26,443) (29,231)
--------------------------------------------------------------------------------
Net book value 77,033 74,984
Construction in progress 6,245 8,469
--------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 83,278 83,453
================================================================================
38
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
NOTE 4: GOODWILL AND INTANGIBLE ASSETS
JUNE 30, 2003 DECEMBER 31, 2002
(UNAUDITED)
-------------------------------------------------------------------------------------------
COST
Goodwill 36,499 35,034
Customer base 8,200 3,620
Numbering capacity 10,065 9,399
Licenses and interconnect arrangements 1,090 -
-------------------------------------------------------------------------------------------
TOTAL COST 55,854 48,053
-------------------------------------------------------------------------------------------
AMORTISATION
Customer base (1,260) (1,250)
Numbering capacity (1,643) (1,851)
-------------------------------------------------------------------------------------------
TOTAL AMORTISATION (2,903) (3,101)
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS, NET 52,951 44,952
===========================================================================================
Effective January 1, 2002, the Group adopted SFAS No. 142 "Goodwill and Other
Intangible Assets." Accordingly, the Group ceased the amortization of goodwill
and took the net book value of the goodwill at this date as the carry value. No
amounts were transferred out of goodwill to other intangibles and no amount was
posted as a cumulative effect of a change in accounting principle as a result of
the adoption.
NOTE 5: SHORT-TERM AND LONG-TERM BORROWINGS, INCLUDING CAPITAL LEASES
JUNE 30, 2003 DECEMBER 31, 2002
(UNAUDITED)
------------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS
BANK LOANS
International Moscow Bank; interest of LIBOR plus 3.4% 2,400 2,400
International Moscow Bank; interest of LIBOR plus 5.5% - 584
------------------------------------------------------------------------------------------
TOTAL BANK LOANS 2,400 2,984
------------------------------------------------------------------------------------------
Capital lease obligations 1,190 1,495
------------------------------------------------------------------------------------------
TOTAL SHORT-TERM BORROWINGS, INCLUDING CAPITAL LEASES 3,590 4,479
=========================================================================================
LONG-TERM BORROWINGS
MGTS promissory note, interest of 11.0% 3,212 3,067
Capital lease obligations 278 816
------------------------------------------------------------------------------------------
TOTAL LONG-TERM BORROWINGS, INCLUDING CAPITAL LEASES 3,490 3,883
=========================================================================================
39
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
NOTE 6: REVENUE
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
(UNAUDITED) (UNAUDITED)
-----------------------------------------------------------------------------------
ANALYSED BY TYPE:
Domestic traffic 18,653 14,889
International traffic 17,174 13,773
Leased lines 1,339 1,334
Connection fees 1,456 677
Internet 6,780 4,070
Sale and rental of equipment 1,314 1,570
Other 2,556 1,766
-----------------------------------------------------------------------------------
TOTAL REVENUE 49,272 38,079
-----------------------------------------------------------------------------------
Revenue - third party 49,016 37,810
Revenue - related party 256 269
===================================================================================
TOTAL REVENUE 49,272 38, 079
===================================================================================
NOTE 7: FINANCING INCOME
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002
(UNAUDITED) (UNAUDITED)
-----------------------------------------------------------------------------------
Interest expense (460) (620)
Foreign exchange gain 205 57
Other financing income (cost), net (19) 376
-----------------------------------------------------------------------------------
FINANCING INCOME (274) (187)
-----------------------------------------------------------------------------------
NOTE 8: INCOME TAXES
The Group calculates deferred income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", applying the specific provisions for foreign
companies using the US$ as the reporting currency.
SFAS No. 109 requires deferred income taxes to be computed on non-current assets
in local currency by comparing the historic book and tax basis in local currency
after respective depreciation but before indexing for either accounting or tax
purposes. The local currency deferred income tax balance is then remeasured into
US$ using the period-end exchange rate.
40
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
NOTE 8: INCOME TAXES (CONTINUED)
Deferred income tax assets and liabilities at June 30, 2003 and December 31,
2002 are as follows:
JUNE 30, 2003 DECEMBER 31, 2002
(UNAUDITED)
----------------------------------------------------------------------------------------------
Accounts payable 616 582
Losses carried forward - 123
Deferred revenue 1,952 1,665
Other assets and liabilities 358 562
----------------------------------------------------------------------------------------------
Deferred income tax assets 2,926 2,932
----------------------------------------------------------------------------------------------
Property, plant and equipment (3,435) (2,515)
Accounts receivables (460) (130)
Other assets and liabilities (1,613) (261)
----------------------------------------------------------------------------------------------
Deferred income tax liabilities (5,508) (2,906)
----------------------------------------------------------------------------------------------
NET DEFERRED INCOME TAX (LIABILITY)/ASSET (2,582) 26
==============================================================================================
A reconciliation between the income tax expense and taxes determined by applying
the statutory tax rate to income before income taxes and minority interests is
presented below:
FOR 6 MONTH ENDED FOR 6 MONTH ENDED
JUNE 30, 2003 JUNE 30, 2002
----------------------------------------------------------------------------------------------
Income before income taxes and minority interests 9,685 6,075
Statutory income tax rate 24% 24%
----------------------------------------------------------------------------------------------
Theoretical income tax charge at statutory rate 2,324 1,458
----------------------------------------------------------------------------------------------
(Decrease)/increase due to:
Tax allowances - 188
Non-deductible expenses 2,259 885
Remeasurement of non-current assets to US$ 16 (377)
Effect of change in effective tax rate - 270
==============================================================================================
INCOME TAX EXPENSE 4,599 2,424
==============================================================================================
Effective January 1, 2002, the standard rate of income tax payable by companies
in the Russian Federation decreased from 35% to 24%. At this tax rate was
enacted before December 31, 2001, the effect of the change on deferred tax
liabilities at December 31, 2001 of $270 has been recognised in these
consolidated financial statements.
NOTE 9: COMMITMENTS AND CONTINGENCIES
CAPITAL COMMITMENTS. The Group is engaged in the construction of
telecommunication network and equipment purchase programs currently estimated to
amount to $1,400 (June 30, 2002: $1,100). These programs are subject to periodic
reviews and actual construction costs may vary from these estimates for many
reasons including, but not limited to, general business conditions,
environmental regulations, exchange rate fluctuations, the cost and efficiency
of construction labor, equipment and materials, and the availability and cost
of capital. At June 30, 2003 no significant purchase commitments or contracts
were outstanding in connection with such construction programs.
41
================================================================================
OPEN JOINT STOCK COMPANY COMINCOM
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS [COMINCOM LOGO]
(IN THOUSANDS OF US$)
================================================================================
NOTE 9: COMMITMENTS AND CONTINGENCIES (CONTINUED)
OPERATING ENVIRONMENT. Whilst there have been improvements in the economic
situation in the Russian Federation in recent years, the country continues to
display some characteristics of an emerging market. These characteristics
include, but are not limited to, the existence of a currency that is not freely
convertible in most countries outside of the Russian Federation, restrictive
currency controls, and relatively high inflation.
The prospects for future economic stability are largely dependent upon the
effectiveness of economic measures undertaken by the governments, together with
legal, regulatory, and political developments.
TAXATION. Russian tax, currency and customs legislation is subject to varying
interpretations and changes, occurring frequently. Furthermore, the
interpretation of such legislation by the authorities as applied to the
transactions and activity of the Group may not coincide with that of management.
As a result, such authorities may challenge certain transactions. The periods
remain open to review by the tax and customs authorities with respect to tax
payments for three years.
REGULATORY AND TARIFF POLICY. The telecommunications industry is continuing to
undergo significant restructuring and reform and the future direction and
effects of such reforms are unknown at this time. Potential reforms in tariff
setting policies and the restructuring of the sector could have significant
effects on the operations of the Group. On June 18, 2003 the government of the
Russian Federation issued a new Law on Telecommunications. The management of the
Group is currently assessing the impact of this law on the operations of the
Group.
NOTE 10: SUBSEQUENT EVENTS
On August 19, 2003, Telenor (the Company's sole shareholder) entered into a
share exchange agreement with Golden Telecom, Inc. (GTI) by which GTI will
acquire 100% of Telenor's ownership interest in Comincom. Upon closure, Telenor
will be issued GTI common stock such that Telenor will hold 19.5% of the
outstanding common shares on the date of closing. GTI is a United States
Securities and Exchange Commission registrant and such a transaction requires
the approval of GTI's shareholders. Accordingly, GTI must file a proxy statement
to obtain shareholder approval. To date, GTI shareholder approval has not been
received and accordingly the transaction has not yet closed.
42
OAO COMINCOM'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis relate to the financial condition and
results of operations of Comincom for the years ended December 31, 2002 and 2001
and for the six months ended June 30, 2003 and 2002. This discussion should be
read in conjunction with the Selected Historical Consolidated Financial Data and
Comincom's Consolidated Financial Statements and the notes related thereto
included elsewhere in this document.
BUSINESS OVERVIEW
Comincom was established in 1991 and is one of the leading facilities-based
providers of integrated telecommunications and Internet services to businesses
and other high-usage customers and telecommunications operators in Moscow. It
also provides services in St. Petersburg, Voronezh, Samara and several other
major population centers throughout Russia. In addition to Combellga, Comincom
has stakes in, among other companies, four regional alternative wireline
operators: World Trade Telecom, Zenit Telecom, Nakhodka Telecom and Sakhalin
Telecom. Based on its management estimates, Comincom believes that it has
approximately a 12% share of the Russian alternative telecommunications market,
based on 2002 revenues. Comincom currently offers a major part of its integrated
telecommunication services under the Combellga and Comincom brands. Comincom's
services primarily consist of:
o Primary Telecommunications Services. Using its own infrastructure
consisting of a fiber optic backbone, fixed copper and fiber as well as
wireless access network, modern switching network, Internet platform
("IP") and datacom facilities, Comincom provides a range of services
including local exchange and access services, international and
domestic long-distance telephone services to both end-users and other
carriers through more than 20 access points in Russia, international
interconnect services, internet access, leased lines, and radio
solutions for long distance vehicles; and
o Value Added Services. In addition to primary telecommunications
services, Comincom also offers broadband access solutions over fiber,
copper (using Asynchronous Digital Subscriber Line "ADSL" technology)
and wireless connections, WEB-hosting and co-location services,
individual and corporate e-mail solutions, IP-Virtual Private
Networking ("VPN") services, and Intelligent Network ("IN") services,
including intelligent routing, voice VPN's and prepayment card
solutions.
Most of Comincom's revenue is derived from two sources: (1) business customers
that require access to highly reliable and advanced telecommunications
facilities to sustain their operations and (2) other carriers. Comincom's
business customers include multi-national companies and both large and
medium-sized local enterprises in a broad range of industries, trade and service
sectors, hotels, foreign embassies and government agencies. Customers are
invoiced on a monthly basis and tariffs are mostly denominated in United States
dollars.
Comincom has traditionally competed for customers on the basis of network
quality, customer service and range of services offered. In the past several
years, other telecommunications operators have also introduced high-quality
services in those segments of the business market in which Comincom operates.
Competition with these other operators is intense and frequently results in
declining prices for some of Comincom's services, which adversely affects
Comincom's revenues.
Since early 2000, there has been a recovery in the Russian market, but downward
pressure on pricing has persisted. The downward pricing pressures are the result
of increased competition in Russia and the global trend toward lower
telecommunications tariffs. In 2001, 2002 and the first half of 2003,
43
increases in Comincom's traffic volume have exceeded the reduction in tariffs on
certain types of voice traffic. This is a contributing factor to increases in
Comincom's revenue during these periods. Comincom expects that this trend of
year-over-year increases in connections and traffic volumes will continue as
long as the Russian economy continues to develop at its current pace.
Although Comincom expects competition to continue to force the general level of
tariffs downward, Comincom also expects to be able to partially mitigate the
effects of this pressure by seeking to further reduce Comincom's rates for
settlement, interconnection and other costs related to service provision.
Comincom will also seek to increase its operating costs at a slower rate than
its growth in revenue.
Comincom has expanded and will continue to expand Comincom's fiber optic
capacity along its heavy traffic and high cost routes to mitigate declines in
traffic margins, reduce its unit transmission costs and ensure sufficient
capacity to meet the growing demand for voice, data and Internet services. As
part of this strategy, Comincom established two STM-1 fiber optic channels on
its Moscow to Stockholm route in 2002 in order to significantly reduce its unit
cost per E-1 fiber optic link on this route.
BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES
In June 2003, Telenor acquired the remaining 25% of Comincom which it did not
previously own. The acquisition triggered a requirement to apply push-down
accounting as of June 2003 for Comincom's consolidated financial statements. As
a result, these financial statements reflect Telenor's basis in Comincom's
assets and liabilities to the extent of Telenor's ownership percentage of
Comincom's common stock during the periods presented. Telenor's historic
ownership of the Company is summarized as follows:
As of Telenor ownership
----- -----------------
December 31, 2000 60%
December 31, 2001 75%
December 31, 2002 75%
June 30, 2003 100%
Telenor's basis represents the allocation of fair values to the net assets
acquired when Telenor purchased 60% of Comincom in 2000 and 25% of Comincom in
2003. In 2001, Telenor acquired 15% of Comincom newly issued shares in exchange
for cash and 31% of previously acquired Combellga shares. This transaction has
been accounted for as a common control transaction. Based on Telenor's
allocation of fair value to net assets acquired, Telenor's basis in the net
assets of Comincom differs from Comincom's historical cost basis principally for
fixed assets, intangible assets, goodwill, deferred revenue and costs and
deferred taxes.
The fundamental objective of financial reporting is to provide useful
information that allows a reader to understand Comincom's business activities.
To assist their understanding, management has identified Comincom's "critical
accounting policies". These policies could have a significant impact on
Comincom's financial statements, either because of the significance of the
financial statement item to which they relate, or because they require judgment
and estimation due to the uncertainty involved in measuring events, which are
continuous in nature.
Revenue recognition policies: Comincom recognizes operating revenues as services
are rendered or as products are delivered to customers. Certain revenues, such
as connection fees, are deferred in accordance with Staff Accounting Bulletin
("SAB") No. 101. In connection with recording revenue, estimates and assumptions
are required in determining the expected conversion of the revenue
44
streams to cash collected. In accordance with SAB No. 101, Comincom also defers
direct incremental costs related to connection fees to the extent they do not
exceed the revenues also deferred. Based on an analysis of customer lives
performed by Comincom management on May 15, 2003, Comincom has determined that
the estimated average customer life is 5 years. Deferred revenues are
subsequently recognized over the estimated average customer lives, which
Comincom periodically reassesses. Such reassessments may impact Comincom's
future operating results.
Allowance for doubtful accounts policies: the allowance estimation process
requires Comincom's management to make assumptions based on historical results,
future expectations, the economic and competitive environment, changes in the
creditworthiness of Comincom's customers and other relevant factors. Changes in
the underlying assumptions may have a significant impact on the results of
Comincom's operations, although Comincom's management believes that the
possibility of an adverse outcome is small.
Long-lived asset recovery policies: this policy is in relation to long-lived
assets, consisting primarily of property and equipment and intangibles, which
comprise a significant portion of Comincom's total assets. Changes in technology
or changes in Comincom's intended use of these assets may cause the estimated
period of use or the value of these assets to change. Comincom performs periodic
internal studies to confirm the appropriateness of estimated economic useful
lives for each category of current property and equipment. Additionally,
long-lived assets, including intangibles, are reviewed for impairment whenever
events or changes in circumstances have indicated that their carrying amounts
may not be recoverable. Estimates and assumptions used in both setting useful
lives and testing for recoverability of Comincom's long-lived assets requires
its management to exercise judgment and make significant estimates based on
certain assumptions concerning the expected life of an asset and expected future
cash flows generated from its use.
Valuation allowance for deferred tax asset: Comincom records valuation
allowances related to tax effects of deductible temporary differences and loss
carry forwards when, in the opinion of its management, it is more likely than
not that the respective tax assets will not be realized. Changes in its
assessment of probability of realization of deferred tax assets may impact its
effective income tax rate.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", and
No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized but are subject
to annual impairment tests in accordance with SFAS No. 142. Other intangible
assets continue to be amortized over their useful lives. Impairment losses that
arise due to the initial application of this standard are reported as a
cumulative effect of a change in accounting principle. Comincom adopted SFAS No.
141, "Business Combinations" which was effective for business combinations
consummated after June 30, 2001. Comincom adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" on January 1, 2002 and discontinued amortization of
goodwill as of such date.
Comincom completed the transitional impairment test for existing goodwill as of
January 1, 2002. Based on a comparison of the carrying amounts of its reporting
units with their fair values, it was determined that no goodwill was impaired as
of that date. Fair values of the reporting units were established using the
discounted cash flow method.
45
Upon the adoption of SFAS No. 142, the impact of non-amortization of goodwill
on Comincom's net income for the twelve months ended December 31, 2002 was an
increase of approximately $0.3 million.
Amortization expense for intangible assets for the twelve months ended December
31, 2002 was $1.6 million. Amortization expense for the succeeding five years is
expected to be as follows: 2003 - $2.1 million, 2004 - $2.4 million, 2005 - $2.4
million, 2006 - $2.4 million and 2007 - $2.4 million.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement deals with the costs of closing facilities and
removing assets. SFAS No. 143 requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period it is incurred.
This cost is initially capitalized and amortized over the remaining life of the
asset. Once the obligation is ultimately settled, any difference between the
final cost and the recorded liability is recognized as a gain or loss on
disposition. SFAS No. 143 is effective for years beginning after June 15, 2002.
Comincom's adoption of SFAS No. 143 as of January 1, 2003, had no impact on its
consolidated financial position or results of operations for the period.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
for the disposal of a segment of a business (as previously defined in that
opinion). This statement also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", to eliminate the exception for the
consolidation of a subsidiary for which control is likely to be temporary. The
provisions of the statement became effective for financial statements issued for
fiscal years beginning after December 15, 2001 and Comincom adopted this new
standard from January 1, 2002. The adoption of the pronouncement had no effect
on its results of operations or financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections",
which is effective for fiscal years beginning after May 15, 2002. The adoption
of this standard in 2003 had no material impact on Comincom's financial position
or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This statement nullifies Emerging Issues Task Force No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring),"
which required that a liability for an exit cost be recognized upon the entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of the
provisions of SFAS No. 146 had no material impact on Comincom's results of
operations, financial position or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The disclosure
provisions of FIN 45 are effective for financial statements of annual periods
that end after December 15, 2002. The provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002. The adoption of the pronouncement in 2003
had no effect on Comincom's results of operations or financial position.
46
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133. Comincom's initial adoption of this statement on July 1, 2003 will not
have a material impact on its results of operations, financial position or cash
flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
Specifically, it requires that financial instruments within the scope of the
statement be classified as liabilities because they embody an obligation of the
issuer. Under previous guidance, many of these instruments could be classified
as equity or be reflected as mezzanine equity between liabilities and equity on
the balance sheet. Comincom's initial adoption of this statement on July 1, 2003
will not have impact on its results of operations, financial position or cash
flows.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 defines the concept of "variable interests" and requires
existing unconsolidated variable interest entities to be consolidated into the
financial statements of their primary beneficiaries if the variable interest
entities do not effectively disperse risks among the parties involved. FIN No.
46 applies immediately to variable interest entities created after January 31,
2003, and is effective first fiscal year or interim period beginning after June
15, 2003. If it is reasonably possible that an enterprise will consolidate or
disclose information about a variable interest entity when FIN No. 46 becomes
effective, the enterprise must disclose information about those entities in all
financial statements issued after January 31, 2003. The interpretation may be
applied prospectively with a cumulative-effect adjustment as of the date on
which it is first applied or by restating previously issued financial statements
for one or more years, with a cumulative-effect adjustment as of the beginning
of the first year restated. The adoption of the provisions of FIN No. 46 had no
impact on Comincom's future results of operations, financial position or cash
flow.
Comincom's functional currency is the US dollar, as the majority of its cash
flows are indexed to or denominated in US dollars. Prior to December 31, 2002,
Russia was considered a highly inflationary environment. However, from January
1, 2003, Russia has ceased to be considered a highly inflationary economy. As
its functional currency is the US dollar, Comincom does not expect this change
to have a material impact on its results of operations or financial position.
The discussion of Comincom's consolidated results of operations is organized as
follows:
o Consolidated Results of Operations. Consolidated results of operations
for the six months ended June 30, 2003 compared to the consolidated
results of operations for the six months ended June 30, 2002.
o Consolidated Results of Operations. Consolidated results of operations
for the year ended December 31, 2002 compared to the consolidated
results of operations for the year ended December 31, 2001.
o Consolidated Financial Position. Significant changes in consolidated
financial position at June 30, 2003 compared to consolidated financial
position at December 31, 2002.
Consolidated Results of Operations for the Six Months Ended June 30, 2003
compared to the Consolidated Results of Operations for the Six Months Ended June
30, 2002
47
Revenue
Comincom's revenue increased by 29% to $49.3 million for the six months ended
June 30, 2003 from $38.1 million for the six months ended June 30, 2002. The
increase in the number of corporate customers connected to Comincom's network
increased by 38% from approximately 43,700 connections at June 30, 2002 to
approximately 60,500 connections at June 30, 2003. The breakdown of revenue by
principal type of revenue is as follows:
CONSOLIDATED REVENUE CONSOLIDATED REVENUE
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 2003 ENDED JUNE 30, 2002
------------------- --------------------
(IN MILLIONS)
REVENUE
Domestic traffic ........... $ 18.7 $ 14.9
International traffic ...... 17.2 13.8
Leased lines ............... 1.3 1.3
Connection fees ............ 1.5 0.7
Internet ................... 6.8 4.0
Sale of equipment .......... 1.3 1.6
Other revenue .............. 2.5 1.8
-------------- --------------
TOTAL REVENUE ................ $ 49.3 $ 38.1
Domestic traffic. Domestic traffic revenue includes revenue from both corporate
customers and other telecommunications operators for calls terminating within
Russia. Although most revenue is volume-based traffic charges, domestic traffic
revenue also includes fixed monthly charges for local telephone numbering
capacity sold to corporate customers. Comincom's revenue from domestic traffic
increased by 26% to $18.7 million for the six months ended June 30, 2003 from
$14.9 million for the six months ended June 30, 2002. This increase is mainly
due to growth in the number of corporate customers connected to Comincom's
network and the increased average usage per corporate customer offset partly by
pricing concessions made due to competitive pressures.
International traffic. Comincom's international traffic revenue consists
primarily of outgoing international traffic and a much smaller proportion of
incoming international traffic. International traffic revenue increased by 25%
to $17.2 million for the six months ended June 30, 2003 from $13.8 million for
the six months ended June 30, 2002. This increase is mostly due to increases in
traffic volumes from domestic telecommunications operators, including local
cellular operators. This increase is also due to growth in the number of
corporate customers connected to Comincom's network, partly offset by pricing
concessions due to competitive pressures.
Leased lines. Revenue from leased lines arises from fixed monthly charges to
corporate customers predominantly located in Moscow for connection to Comincom's
fiber based metropolitan access network. Revenue from leased lines remained
unchanged at $1.3 million for the six months ended June 30, 2003 and $1.3
million for the six months ended June 30, 2002.
Connection fees. Revenue from connection fees represents one-time installation
fees for local numbering capacity and for connection to Comincom's fiber based
metropolitan access network. Comincom's revenue from connection fees increased
by 114% to $1.5 million for the six months ended June 30, 2003 from $0.7 million
for the six months ended June 30, 2002. The increase is primarily a result of
growth in new customers and related new corporate customer connections between
the two periods. This revenue is recognized in accordance with SAB No. 101, with
the entire connection fee revenue being initially deferred and subsequently
recognized over the estimated average corporate customer life of 5 years.
Internet. Comincom derives Internet revenue primarily from dedicated internet
access, including broadband access technologies such as ADSL, as well as from
dial-up internet access fees. Revenue from Internet increased by 70% to $6.8
million for the six months ended June 30, 2003 from $4.0 million for the six
months ended June 30, 2002. This increase reflects growth in the number of
dedicated connections and in Internet traffic volumes for Moscow-based corporate
customers.
48
Sale of equipment. Revenue from equipment sales represents the sale of
telecommunication equipment such as personal exchanges and routers to corporate
customers as part of Comincom's integrated service offering. Comincom's revenue
from equipment sales and rentals decreased by 19% to $1.3 million for the six
months ended June 30, 2003 from $1.6 million for the six months ended June 30,
2002. This decrease is due in part to the introduction of deferred payment plans
for equipment sales in early 2003 where title only transfers after full payment
has been received.
Other revenue. Other revenue consists primarily of non-recurring revenue from
special projects and revenue from ancillary telecommunications and integrator
services. Comincom's other revenue increased by 39% to $2.5 million for the six
months ended June 30, 2003 from $1.8 million for the six months ended June 30,
2002. This increase is largely the result of continued growth in the number of
corporate customers and expansion of services offered.
Expenses
The following table sets forth Comincom's principal expenses for the six months
ended June 30, 2003 and June 30, 2002:
CONSOLIDATED EXPENSES CONSOLIDATED EXPENSES
FOR THE SIX MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, 2003 ENDED JUNE 30, 2002
--------------------- ---------------------
(IN MILLIONS)
OPERATING EXPENSES
Interconnect fees and channel
rentals ........................... $ 14.3 $ 10.0
Wages, salaries, other benefits
and payroll taxes ................. 8.7 7.4
Material, repairs and maintenance
and utilities ..................... 2.0 1.6
Selling, general and administrative .. 4.7 5.7
Taxes other than on income ........... 1.1 0.9
Depreciation and amortization ........ 6.7 5.2
Cost of equipment for resale ......... 1.0 0.8
Other expenses ....................... 0.9 0.1
---------------- ----------------
TOTAL OPERATING EXPENSES ............... 39.4 31.7
Financing income/(loss) ................ (0.3) (0.2)
Provision for income tax ............... 4.6 2.4
Minority interest ...................... 0.1 0.1
Comincom's operating expenses increased by 24% to $39.4 million for the six
months ended June 30, 2003 from $31.7 million for the six months ended June 30,
2002. The principal reason for this increase was an increase in interconnection
charges, wages and salaries and depreciation and amortization. As a percentage
of revenue, operating expenses fell from 83.2% for the six months ended June 30,
2002 to 79.9% for the six months ended June 30, 2003.
Interconnect fees and channel rentals. Interconnect fees and channel rentals
consist primarily of monthly interconnect fees paid to incumbent local
operators, the cost of terrestrial international, long distance and intra-city
capacity and costs related to terminating traffic on the networks of other
operators. Interconnect fees and channel rentals costs increased by 43% to $14.3
million for the six months ended June 30, 2003 from $10.0 million for the six
months ended June 30, 2002. This increase is primarily due to additional
interconnect and channel capacities acquired to support current and expected
future growth in customer connections.
Wages, salaries, other benefits and payroll taxes. Wages, salaries, other
benefits and payroll taxes increased by 18% to $8.7 million for the six months
ended June 30, 2003 from $7.4 million for the six months ended June 30, 2002.
This increase resulted in part from the greater number of full-time employees
during the six months ended June 30, 2003. The total number of full-time
employees
49
increased from 774 at June 30, 2002 to 834 June 30, 2003. The increase in wages,
salaries and other benefits was also attributable to increases in the salaries
of certain Moscow-based employees.
Materials, repairs and maintenance and utilities. Materials, repairs and
maintenance and utilities increased by 25% to $2.0 million for the six months
ended June 30, 2003 from $1.6 million for the six months ended June 30, 2002.
This increase resulted primarily from the higher maintenance and equipment
related costs arising from the expansion of Comincom's network in Moscow.
Selling, general and administrative. Selling, general and administrative
expenses decreased by 18% to $4.7 million for the six months ended June 30, 2003
from $5.7 million for the six months ended June 30, 2002. This decrease
primarily resulted from a write-back of bad debt expense of $0.9 million
collected from customer accounts previously identified as uncollectible and
lower advertising and marketing expenses, partly offset by increases in office
rent.
Taxes other than on income. Taxes other than on income increased to $1.1 million
for the six months ended June 30, 2003 from $0.9 million for the six months
ended June 30, 2002, the most significant component of which was the tax on
fixed assets. The tax on fixed assets is calculated as 2% of net fixed assets
recorded in the local accounting records in local currency. This tax base has
increased due to significant capital investments made during this period.
Depreciation and amortization. Depreciation and amortization expenses increased
by 29% to $6.7 million for the six months ended June 30, 2003 from $5.2 million
for the six months ended June 30, 2002. Most of this increase resulted from the
higher depreciation expense of $1.5 million for the six months ended June 30,
2003 as compared to the six months ended June 30, 2002 related to the property,
plant, and equipment added to the company's network to develop customer
connections and support additional customer traffic.
Cost of equipment. Cost of equipment for resale increased by 25% to $1.0 million
for the six months ended June 30, 2003 from $0.8 million for the six months
ended June 30, 2002. This increase resulted from lower margins earned on
revenue from customer equipment sales.
Financing income/(loss). Financing income/(loss) was a loss of 0.3 million for
the six months ended June 30, 2003 compared to a gain of $0.2 million for the
six months ended June 30, 2002. Comincom's foreign exchange gains of $0.2
million for the six months ended June 30, 2003 was offset by the $0.5 million of
financing costs for the period. Comincom's financing costs of $0.3 million for
the six months ended June 30, 2002 was partially offset by net foreign exchange
gains of $0.1 million for the period.
Provision for income tax. Comincom's income tax expense was $4.6 million, or 47%
of its income before income taxes and minority interests, for the six months
ended June 30, 2003 as compared to $2.4 million or 40% of its income before
income taxes and minority interests, for the six months ended June 30, 2002. The
increase in effective tax rate in 2003 is due primarily to increased levels of
non-deductible amortization of intangible assets which generate a deferred tax
liability and other non-deductible operating costs.
Consolidated Results of Operations for the Year Ended December 31, 2002 compared
to the Consolidated Results of Operations for the Year Ended December 31, 2001
50
Revenue
Comincom's revenue increased by 34% to $84.2 million for the year ended December
31, 2002 from $62.9 million for the year ended December 31, 2001. The increase
in the number of corporate customers connected to Comincom's network increased
by 40% from approximately 37,000 connections at December 31, 2001 to
approximately 51,700 connections at December 31, 2002. The breakdown of revenue
by principal types is as follows:
CONSOLIDATED REVENUE CONSOLIDATED REVENUE
FOR THE YEAR FOR THE YEAR
ENDED DECEMBER 31, 2002 ENDED DECEMBER 31, 2001
----------------------- -----------------------
(IN MILLIONS)
REVENUE
Domestic traffic .............. $ 35.2 $ 26.5
International traffic ......... 26.5 24.2
Leased lines .................. 2.5 2.9
Connection fees ............... 3.0 1.3
Internet ...................... 8.8 4.9
Sale of equipment ............. 2.7 1.5
Other revenue ................. 5.5 1.6
---------------- ----------------
TOTAL REVENUE ................... $ 84.2 $ 62.9
Domestic traffic. Revenue from domestic traffic increased by 33% to $35.2
million for the year ended December 31, 2002 from $26.5 million for the year
ended December 31, 2001. This increase is mainly due to growth in the number of
corporate customers connected to Comincom's network and the increased average
usage per corporate customer, partly offset by pricing concessions made due to
competitive pressures.
International traffic. Revenue from international traffic increased by 10% to
$26.5 million for the year ended December 31, 2002 from $24.2 million for the
year ended December 31, 2001. This increase is mostly due to increases in
traffic volumes from domestic telecommunications operators, including local
cellular operators. This increase is also due to growth in the number of
corporate customers connected to Comincom's network, partly offset by pricing
concessions due to competitive pressures.
Leased lines. Revenue from leased lines decreased by 16% to $2.5 million for the
year ended December 31, 2002 from $2.9 million for the year ended December 31,
2001. This decrease is due to a combination of pricing pressures and a migration
of customers to ADSL and other Internet-based connections that are included in
the "Internet" line item below.
Connection fees. Revenue from connection fees increased by 131% to $3.0 million
for the year ended December 31, 2002 from $1.3 million for the year ended
December 31, 2001. The increase is consistent with the growth in new corporate
customers and related new connections. This revenue is recognized in accordance
with Staff Accounting Bulletin No. 101, with the entire connection fee revenue
being initially deferred and subsequently recognized over the estimated average
customer life of five years.
Internet. Revenue from Internet increased by 80% to $8.8 million for the year
ended December 31, 2002 from $4.9 million for the year ended December 31, 2001.
This increase is largely the result of increases in revenue from a higher number
of dedicated connections, growth in Internet traffic volumes, and the migration
of customers to ADSL and other Internet-based connections from leased lines
revenue above.
Sale of equipment. Revenue from equipment sales and rentals increased by 80% to
$2.7 million for the year ended December 31, 2002 from $1.5 million for the year
ended December 31, 2001. This increase resulted primarily from the growth in
Comincom's customer base as well as growth in more
51
complex client projects which Comincom's provides fully integrated
telecommunications services to its customers.
Other revenue. Other revenue increased by 244% to $5.5 million for the year
ended December 31, 2002 from $1.6 million for the year ended December 31, 2001.
This increase is largely the result of continued growth in the number of
corporate customers and expansion of services offered.
Expenses
The following table sets forth Comincom's principal expenses for the years ended
December 31, 2002 and December 31, 2001:
CONSOLIDATED EXPENSES CONSOLIDATED EXPENSES
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------- ---------------------
(IN MILLIONS)
OPERATING EXPENSES
Interconnect fees and channel
rentals ............................... $ 24.0 $ 16.4
Wages, salaries, other benefits
and payroll taxes ..................... 14.8 12.6
Material, repairs and maintenance
and utilities ......................... 2.6 1.5
Selling, general and administrative ...... 11.4 9.9
Taxes other than on income ............... 2.0 1.2
Depreciation and amortization ............ 11.1 12.9
Cost of equipment for resale ............. 2.2 0.9
Other expenses .......................... 2.2 3.1
---------------- ----------------
TOTAL OPERATING EXPENSES ................... 70.3 58.5
Financing and foreign exchange loss ........ 0.6 (1.2)
(gain)
Provision for income tax ................... 4.9 2.4
Minority interest .......................... 0.3 0.4
Comincom's operating expenses increased by 20% to $70.3 million for the year
ended December 31, 2002 from $58.5 million for the year ended December 31, 2001.
The principal reason for this increase was an increase in interconnection
charges resulting from higher traffic volumes and the expansion of its network
as well as an increase in wages and salaries and selling, general and
administrative expenses. As a percentage of revenue, operating expenses fell
from 93.0% for the year ended December 31, 2001 to 83.5% for the year ended
December 31, 2002. The principal reason for the decrease as a percentage of
revenue was stopping the amortization of goodwill as of January 1, 2002.
Interconnect fees and channel rentals. Interconnect fees and channel rentals
costs increased by 46% to $24.0 million for the year ended December 31, 2002
from $16.4 million for the year ended December 31, 2001. This increase is
primarily due to additional interconnect and channel capacities acquired to
support current and expected future growth in customer connections.
Wages, salaries, other benefits and payroll taxes. Wages, salaries, other
benefits and payroll taxes increased by 17% to $14.8 million for the year ended
December 31, 2002 from $12.6 million for the year ended December 31, 2001. This
increase is due to the higher number of full time employees during the year
ended December 31, 2002. The total number of full time employees increased from
747 at December 31, 2001 to 793 December 31, 2002. Comincom also increased the
salaries of certain Moscow-based employees.
Materials, repairs and maintenance and utilities. Materials, repairs and
maintenance and utilities increased by 73% to $2.6 million for the year ended
December 31, 2002 from $1.5 million for the year ended December 31, 2001. This
increase resulted primarily from higher maintenance and equipment related costs
arising from the expansion of Comincom's network in Moscow.
52
Selling, general and administrative. Selling, general and administrative
expenses increased by 16% to $11.4 million for the year ended December 31, 2002
from $9.0 million for the year ended December 31, 2001. This increase is mainly
due to higher levels of advertising and increased commission expenses to
building owners of major business centers in Moscow.
Taxes other than on income. Taxes other than on income increased by 67% to $2.0
million for the year ended December 31, 2002 from $1.2 million for the year
ended December 31, 2001. Comincom incurred primarily fixed asset and revenue
related taxes during the relevant periods. The tax on fixed assets is calculated
as 2% of net fixed assets recorded in the local accounting records in local
currency. Taxes on fixed assets increased for the year ended December 31, 2002
as a result of significant investments made during the periods. The increase in
fixed asset tax was offset by a decrease in revenue related taxes, due to
changes in local legislation that reduced the revenue related tax rates.
Depreciation and amortization. Depreciation and amortization expenses decreased
by 14% to $11.1 million for the year ended December 31, 2002 from $12.9 million
for the year ended December 31, 2001. The decrease is in part due to the
adoption of SFAS No. 142 which requires that goodwill no longer be amortized
effective from January 1, 2002 and which reduced Comincom's amortization expense
by $4.5 million. This decrease is offset by an increase in depreciation expense
of $1.0 million for the year ended December 31, 2002 as compared the year ended
December 31, 2001, related to $27.9 million in capital expenditures to support
additional customer traffic.
Cost of equipment for resale. Cost of equipment for resale increased by 144% to
$2.2 million for the year ended December 31, 2002 from $0.9 million for the year
ended December 31, 2001. The increase is partly related to the growth in revenue
from the sale of equipment and partly due to Comincom's willingness to accept
lower margins earned on revenue from customer equipment sales.
Financing income/(loss). Financing income increased by $1.8 million to $0.6
million for the year ended December 31, 2002 from a $1.2 million loss for the
year ended December 31, 2001. The improvements in Comincom's financing income
primarily resulted from the forgiveness of a penalty previously owed by Comincom
on an overdue loan. In accordance with the decree of the Ministry of Finance of
the Russian Federation signed on December 31, 2002, Comincom's liability on a
loan from the Ministry of Finance was forgiven and outstanding penalties of $2.0
million were included in 2002 financing income. The principal and interest on
the loan were settled during the year ended December 31, 2000. In addition, the
market-driven decreases in interest rates and an overall decrease in Comincom's
interest bearing debt contributed to a decrease of $1.0 million in interest
expense in 2002 compared to 2001. The $3.0 million reduction in financing cost
was offset in part by a $0.8 million reduction in Comincom's foreign exchange
gains due to the combined impact of movements in exchange rates and changes in
the amount of net monetary assets denominated in foreign currencies.
Provision for income tax. Comincom's current income tax expense was $4.9
million, or 34% of its income before income taxes and minority interests, for
the year ended December 31, 2002 as compared to $2.4 million, or 75% of its
income before income taxes and minority interests, for the year ended December
31, 2001. The significant reduction in Comincom's effective tax rate is mainly
due to the adoption of certain provisions of SFAS No. 142 which requires that
goodwill no longer be amortized effective from January 1, 2002 and which reduced
Comincom's income before taxes and minority interests by $4.5 million for the
year ended December 31, 2001. This decrease as a percentage of income before
income taxes and minority interests is also due to a reduction in the statutory
income tax rate from 35% to 24%, effective from January 1, 2002, partly offset
by the cancellation of the capital investment allowances.
53
Significant Changes in Consolidated Financial Position at June 30, 2003 compared
to Consolidated Financial Position at December 31, 2002
Accounts Receivable
Accounts receivable increased by $4.6 million between December 31, 2002 and June
30, 2003. This increase is mainly as a result of increased revenue during the
six months ended June 30, 2003 and a relative increase in Comincom's sales to
carriers, whose payment terms are typically longer than those of corporate
customers. A decrease of $0.9 million in Comincom's allowance for doubtful
accounts between December 31, 2002 and June 30, 2003 also contributed to the
increase in accounts receivables during the period. The reduction in the
allowance primarily resulted from improvements in the structure of Comincom's
accounts receivable due to factors such as continued economic growth in Russia,
improved solvency of Comincom's clients, and the successful in its ongoing
efforts to manage cash collection from its customers efficiently.
Accounts Payable
Accounts payable increased by $2.6 million from December 31, 2002 to June 30,
2003 mainly as a result of increased purchases of network equipment and
increased interconnection fees with other operators to support the growth in
Comincom's operations as well as its efforts to extend payment terms with its
suppliers to further strengthen its liquidity position.
Debt Obligations
Comincom's debt obligations decreased by $1.3 million at June 30, 2003 as
compared to December 31, 2002 mainly as a result of scheduled repayments of its
capital lease obligations to the International Moscow Bank.
Income and Other Taxes Payable
The $2.4 million increase in income and other taxes payables as at June 30, 2003
as compared to December 31, 2002 is the result of the growth in Comincom's
taxable profits and related tax expense during the period.
Shareholders' Equity
The increase in shareholders' equity is the result of net income of $5.0 million
for the six months ended June 30, 2003 and the reversal of a previously declared
but unpaid shareholder dividend of $0.5 million, as well as the effect of push
down accounting to reflect Telenor's basis in the 25% of Comincom acquired in
June 2003.
Income Taxes
Comincom's effective rate of income tax differs from the Russian statutory rate
due principally to the impact of certain non-deductible expenses including
amortization of goodwill and certain acquired intangible assets. Further,
Russian tax regulations include limitations for tax deductibility of various
operating costs.
On January 1, 2002, changes in tax regulations were introduced in Russia. The
corporate income tax rate was reduced from 35% to 24%. At the same time, it was
no longer possible to reduce taxable income by deducting certain capital
expenditures. Further, it became necessary to calculate taxes on an accruals
basis while before January 1, 2002 companies could choose between a cash basis
and accruals basis. Comincom changed calculations from a cash basis to accruals
basis.
54
LIQUIDITY AND CAPITAL RESOURCES
Comincom's cash balances were $3.9 million and $1.9 million as of June 30, 2003
and December 31, 2002, respectively. Comincom normally uses its cash to finance
its operating activities and make necessary capital investments to maintain and
develop its operations. Comincom did not have any investments available for sale
or restricted cash balances as at June 30, 2003 or December 31, 2002.
During the six months ended June 30, 2003, Comincom had net cash inflows of
$13.4 million from its operating activities, compared to $8.6 million during the
six months ended June 30, 2002. During the twelve months ended December 31, 2002
and 2001, Comincom had net cash inflows of $24.1 million and $11.3 million,
respectively. The increases in net cash inflows from operating activities in the
six months ended June 30, 2003 as compared to the same period in 2002 and in the
year ended December 31, 2002 as compared to 2001 are mainly due to the fact that
customer revenues increased at a greater rate that its operating expenses for
the period. Comincom used cash of $9.6 million and $14.7 million for investing
activities for the six months ended June 30, 2003 and 2002, respectively, and
$31.0 and $29.5 million for investing activities for the twelve months ended
December 31, 2002 and 2001, respectively, which were principally attributable to
building its telecommunications networks and related purchases of fixed assets.
Comincom had working capital of $3.4 million as of June 30, 2003 and working
capital of $0.3 million as of December 31, 2002. The increase in its working
capital between December 31, 2002 and June 30, 2003 primarily relates to the
fact that its cash and other current assets increased at a greater rate than its
current liabilities due to continued growth in its revenues, net income and
operating cash flows during the six months ended June 30, 2003. At June 30,
2003, Comincom had total debt, including capital lease obligations, of
approximately $7.1 million, of which $3.6 million were current maturities. At
December 31, 2002, Comincom had total debt, including capital lease obligations,
of approximately $8.4 million, of which $4.5 million had short-term maturities.
At December 31, 2001, Comincom had total debt, including capital lease
obligations, of approximately $9.7 million, of which $7.0 million had short-term
maturities. During the year ended December 31, 2002, a ruble denominated
promissory note payable to MGTS, the incumbent fixed line operator in Moscow,
maturing in April 2002 was restructured and extended to 2005. In November 2002,
a credit line of $2.4 million was obtained from International Moscow Bank to
enable Comincom to pursue increased market growth. At December 31, 2002, the
loans from International Moscow Bank had US dollar denominated interest rates of
LIBOR plus 3.4% and LIBOR plus 5.5%. The interest on leasing agreements range
from LIBOR plus 11% to LIBOR plus 16% and the MGTS promissory note carries an
interest rate of 11% denominated in Rubles.
Contractual Obligations
As of June 30, 2003, Comincom had the following contractual obligations,
including short- and long-term debt arrangements, capital lease arrangements and
purchase obligations:
PAYMENTS DUE BY PERIOD
----------------------------------------------
LESS 1 - 3 4 - 5
TOTAL THAN 1 YEAR YEARS YEARS THEREAFTER
------------ ------------ ------------ ------------ ------------
(IN MILLIONS)
Short- and long-term debt ....... $ 5,612 $ 2,400 $ 3,212 $ -- --
Capital lease obligations ....... 1,468 1,190 278 -- --
Purchase obligations ............ 1,400 1,400 -- -- --
------------ ------------ ------------ ------------ ------------
Total contractual cash
Obligations ................... $ 8,480 $ 4,990 $ 3,490 $ -- $ --
============ ============ ============ ============ ============
55
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK AND TREASURY AND
CURRENCY EXPOSURE MANAGEMENT
MOVEMENTS IN THE U.S. DOLLAR / RUSSIAN RUBLE EXCHANGE RATE MAY ADVERSELY AFFECT
COMINCOM'S FINANCIAL POSITION, CASH FLOWS AND NET INCOME.
The ruble is generally non-convertible outside Russia so Comincom's ability to
hedge against further devaluation by converting to other currencies is
significantly limited. Further, Comincom's ability to convert rubles into other
currencies in Russia is subject to rules that restrict the purposes for which
conversion and the payment of foreign currencies are allowed. Much of Comincom's
operating costs are indexed to or denominated in US dollars, including supplier
arrangements, employee compensation expense, capital expenditure agreements and
interest expense.
Comincom's treasury function has managed Comincom's funding, liquidity and
exposure to interest rate and foreign currency exchange rate risks. Comincom's
treasury operations are conducted within establish Comincom guidelines. In
accordance with Comincom's policy, Comincom does not enter into any treasury
management transactions of a speculative nature.
Comincom has taken specific steps to minimize its exposure to fluctuations in
foreign currency. Although local currency control regulations require Comincom
to collect virtually all of its revenue in local currency, Comincom generally
either prices or invoices in US dollars or indexes its invoices and collections
to the applicable dollar exchange rate. Customer contracts may include clauses
allowing additional invoicing if the applicable exchange rate changes
significantly between the invoice date and the date of payment and there are
penalty clauses for overdue payments. Maintaining the dollar value of Comincom's
revenue subjects it to additional tax on exchange gains.
Although Comincom is attempting to match revenue, costs, borrowing and
repayments in terms of their respective currencies, Comincom may experience
economic loss and a negative impact on earnings as a result of foreign currency
exchange rate fluctuations.
Comincom's cash and cash equivalents are held largely in interest bearing
accounts denominated in Russian rubles, US Dollars and Euro. Book value as at
December 31, 2002 and 2001 approximates fair value.
The following table provides information about Comincom's financial instruments
in their local currency as at December 31, 2002 and 2001 and, where applicable,
presents such information in US dollar equivalents (in thousands). The table
summarizes information on instruments that are sensitive to foreign currency
exchange rates, including foreign currency denominated debt obligations.
2002 2003
2003 2004 2005 THEREAFTER TOTAL TOTAL
------------ ------------ ------------ ------------ ------------ ------------
(IN MILLIONS)
Cash equivalents ........... $ 1,915 $ -- $ -- $ -- $ 1,915 $ 3,926
Long-term debt, including
current portion
Fixed rate ............. $ -- $ -- $ 3,067 $ -- $ 3,067 $ 2,978
Average interest rate .. -- -- 11.00% -- 11.00% 12.00%
Long-term debt, including
current portion
Variable rate .......... $ 4,479 $ 732 $ 84 $ -- $ 5,295 $ 6,728
Average interest rate .. 8.84% 15.40% 13.00% -- -- --
A SIGNIFICANT CHANGE IN THE MARKET INTEREST RATE COULD ADVERSELY AFFECT
COMINCOM'S OPERATING CASH FLOWS.
Comincom is exposed to market risk from changes in interest rates and faces
exposure to adverse movements in foreign currency exchange rates. Comincom's
interest expenses are most sensitive to
56
changes in the general level of US interest rates. Comincom has developed risk
management policies that establish guidelines for managing foreign currency
exchange rate risk and Comincom also periodically evaluates the materiality of
foreign currency exchange exposures and the financial instruments available to
mitigate this exposure.
57
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
On August 27, 2003, Golden Telecom, Inc. ("GTI" or the "Company") finalized
the acquisition of 100% of OOO Sibchallenge Telecom ("Sibchallenge"), an
alternative wireline operator in Krasnoyarsk, Russia. Sibchallenge owns 100% of
the ownership interest in ZAO Tel, an Internet services provider, also based in
Krasnoyarsk. The total purchase price of approximately $15.4 million consisted
of cash consideration of $15.0 million and $0.4 million in estimated direct
transaction costs, including an investment banking fee of $0.3 million paid to
Belongers Ltd., an affiliate of Alfa Telecom Limited, a shareholder of the
Company. The purchase price was determined through arms' length negotiations
between the Company and the previous shareholders of Sibchallenge. The Company
began consolidating Sibchallenge upon the date of closure.
On August 19, 2003, GTI and wholly-owned subsidiaries of GTI entered into
share exchange agreements with Nye Telenor East Invest AS ("Telenor") to acquire
100% of the issued and outstanding shares of capital stock of OAO Comincom
("Comincom") held by Telenor. Upon closure, Telenor will be issued GTI common
stock such that Telenor will hold 19.5% of the outstanding common shares on the
date of closing. For purposes of these condensed pro forma consolidated
financial statements, the assumed closing date is June 30, 2003 resulting in
6,705,921 shares of GTI common stock assumed issued in conjunction with this
transaction. The purchase price was determined through arms' length negotiation
between the Company and Telenor. For purposes of this transaction, the 6,705,921
million shares were valued at $23.11 per share. The estimated total purchase
price of approximately $156.6 million consisted of approximately $155.0 million
in GTI common stock and direct transaction costs of approximately $1.6 million.
Pursuant to a Shareholders' Agreement, Telenor will be represented on the
Company's Board of Directors. The Company will begin to consolidate the
financial position and results of operations of Comincom upon the date of
closure, estimated to be before the end of 2003. The Company was advised by JP
Morgan PLC.
The acquisition of 100% of Comincom will further strengthen the Company's
position in the key Moscow and St. Petersburg communications markets, and
position the Company to realize future operating and cost synergies. Comincom
provides telecommunications services, principally to major hotels, business
offices and mobile communication companies through its telecommunications
network in Russia, including Moscow, St. Petersburg, Voronezh, Samara and
several other major population centers. The Company intends to use the assets of
Comincom in the manner in which they were previously used.
The following unaudited condensed pro forma consolidated financial
statements give effect to the acquisition by GTI of 100% of Sibchallenge for
approximately $15.4 million in cash consideration, including estimated direct
transaction costs of $0.4 million. In addition, the following unaudited
condensed pro forma consolidated financial statements also give effect to the
acquisition by GTI of 100% of Comincom and the related issuance of GTI's common
shares and direct transaction costs. The final purchase price allocation will be
calculated based on the transaction value and the fair values of Comincom's
identifiable assets and liabilities at the date of closure. Therefore, the
actual goodwill amount, as well as other balance sheet items, could differ from
the preliminary unaudited condensed pro forma consolidated financial statements
presented herein, and in turn affect items in the preliminary condensed pro
forma consolidated statement of operations, such as intangible asset
amortization and income taxes.
The accompanying condensed pro forma consolidated balance sheet as of June
30, 2003 and accompanying condensed pro forma consolidated statements of
operations for the year ended December 31, 2002 and for the six month period
ended June 30, 2003 were prepared based on the Company's interpretation of
guidance issued by the United States Securities and Exchange Commission ("SEC")
(specifically Section 11.02 of Regulation S-X). The unaudited condensed pro
forma consolidated income statements for the year ended December 31, 2002 and
for the six month period ended June 30, 2003 give effect to the acquisitions as
if the transactions had occurred on January 1, 2002. The unaudited condensed pro
forma balance sheet as of June 30, 2003 gives effect to the acquisitions as if
the transactions had occurred on June 30, 2003.
GTI has presented these unaudited condensed pro forma consolidated
financial statements for illustrative purposes only. The unaudited condensed pro
forma consolidated financial statements are
58
not necessarily indicative of the actual results of operations or financial
position that would have occurred had the acquisitions occurred on the dates
indicated, nor are they necessarily indicative of future operating results or
financial position. No account has been taken within the unaudited condensed pro
forma consolidated financial statements to any synergy or any severance and
restructuring costs that may, or may be expected to, occur following the
acquisition. The unaudited condensed pro forma consolidated financial statements
are only a summary and should be read in conjunction with the historical
consolidated financial statements and related notes of GTI and Comincom and
other information included or incorporated by reference in this document.
The estimated total purchase price of Comincom of approximately $154.9
million consists of approximately $156.5 million in GTI's common stock,
representing 6,705,921 newly issued shares and estimated direct transactions
costs of approximately $1.6 million. The value of the common stock was
determined based on the average closing price of the Company's common stock for
the five day period beginning on June 26, 2003 and ending on July 2, 2003 in
accordance with the guidance set forth in Emerging Issues Task Force Technical
Bulletin ("EITF") 99-12, "Determination of the Measurement Date for the Market
Price of Acquirer Securities Issued in a Purchase Business Combination" ("EITF
99-12").
59
GOLDEN TELECOM, INC.
CONDENSED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 2003
(IN THOUSANDS OF US$)
(UNAUDITED)
PRO FORMA
PRO FORMA COMBINED
COMBINED GOLDEN
GOLDEN TELECOM,
GOLDEN PRO FORMA TELECOM & PRO FORMA COMINCOM &
TELECOM COMINCOM ADJUSTMENTS COMINCOM SIBCHALLENGE ADJUSTMENTS SIBCHALLENGE
-------- -------- ----------- --------- ------------ ----------- ------------
NOTE 1 NOTE 3 NOTE 4
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................. $ 55,305 $ 3,899 $ (1,600)(A) $ 57,604 $ 200 $(15,400)(A) $ 42,404
Accounts receivable, net .................. 50,639 20,213 (806)(H) 70,046 539 (219)(H) 70,366
VAT receivable ............................ 9,901 4,146 -- 14,047 186 -- 14,233
Prepaid expenses .......................... 8,386 1,484 -- 9,870 144 -- 10,014
Other current assets ...................... 14,139 6,346 (256)(F) 20,229 997 (542)(F) 20,684
-------- -------- -------- -------- -------- -------- --------
TOTAL CURRENT ASSETS ........................ 138,370 36,088 (2,662) 171,796 2,066 (16,161) 157,701
Property and equipment, net ................. 174,607 83,278 (4,295)(E) 253,590 7,825 -- 261,415
Goodwill and intangible assets:
Goodwill, net ............................. 71,703 36,499 (36,499)(C) 116,717 -- 87 (C) 116,804
-- -- 45,014 (C) -- -- -- --
Intangible assets, net .................... 54,100 16,452 18,223 (D) 88,775 -- 10,760 (D) 99,535
-------- -------- -------- -------- -------- -------- --------
Net goodwill and intangible assets ... 125,803 52,951 26,738 205,492 -- 10,847 216,339
Restricted cash ............................. 1,136 -- -- 1,136 -- -- 1,136
Other non-current assets .................... 9,688 3,807 (599)(F) 12,896 2,169 (2,169)(F) 12,896
-------- -------- -------- -------- -------- -------- --------
TOTAL ASSETS ................................ $449,604 $176,124 $ 19,182 $644,910 $ 12,060 $ (7,483) $649,487
======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited condensed pro forma financial statements.
60
GOLDEN TELECOM, INC.
CONDENSED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 2003
(IN THOUSANDS OF US$)
(UNAUDITED)
PRO FORMA
PRO FORMA COMBINED
COMBINED GOLDEN
GOLDEN TELECOM
GOLDEN PRO FORMA TELECOM & PRO FORMA COMINCOM, &
TELECOM COMINCOM ADJUSTMENT COMINCOM SIBCHALLENGE ADJUSTMENTS SIBCHALLENGE
------- -------- ---------- -------- ------------ ----------- ------------
NOTE 1 NOTE 3 NOTE 4
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses .. $ 52,114 $ 17,915 $ (806)(H) $ 69,223 $ 1,718 $ (219)(H) $ 70,722
VAT payable ............................ 8,262 2,492 -- 10,754 65 -- 10,819
Debt maturing within one year .......... 1,399 2,400 -- 3,799 -- -- 3,799
Current capital lease obligation ....... 1,859 1,190 -- 3,049 -- -- 3,049
Other current liabilities .............. 13,798 8,705 (1,752)(F) 21,110 869 (791)(F) 21,248
--------- --------- 359 (G) --------- --------- 60 (G) ---------
--------- ---------
TOTAL CURRENT LIABILITIES ................ 77,432 32,702 (2,199) 107,935 2,652 (950) 109,637
Long-term debt, less current portion ..... 760 3,212 -- 3,972 -- -- 3,972
Long-term capital lease obligation,
less current portion ................ 4,670 278 -- 4,948 -- -- 4,948
Long-term deferred tax liability ......... 9,070 2,150 4,189 (G) 15,409 -- 2,821 (G) 18,230
Other non-current liabilities ............ 15,050 4,124 (4,124)(F) 15,050 3,219 (3,165)(F) 15,104
--------- --------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES ........................ 106,982 42,466 (2,134) 147,314 5,871 (1,294) 151,891
Minority interest ........................ 2,359 -- -- 2,359 -- -- 2,359
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value ....... -- -- -- -- -- -- --
Common stock, $0.01 par value .......... 277 202 67 (B) 344 -- -- 344
(202)(I) -- -- -- --
Additional paid-in capital ............. 454,358 100,857 154,907 (B) 609,265 2,956 (2,956)(I) 609,265
(100,857)(I)
Accumulated earnings (deficit) ......... (114,372) 32,599 (32,599)(I) (114,372) 3,233 (3,233)(I) (114,372)
--------- --------- --------- --------- --------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY ............... 340,263 133,658 21,316 495,237 6,189 (6,189) 495,237
--------- --------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY .................. $ 449,604 $ 176,124 $ 19,182 $ 644,910 $ 12,060 $ (7,483) $ 649,487
========= ========= ========= ========= ========= ========= =========
See accompanying notes to unaudited condensed pro forma financial statements.
61
GOLDEN TELECOM, INC.
CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS OF US$, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
PRO FORMA COMBINED
COMBINED GOLDEN
GOLDEN TELECOM
GOLDEN PRO FORMA TELECOM & PRO FORMA COMINCOM, &
TELECOM COMINCOM ADJUSTMENTS COMINCOM SIBCHALLENGE ADJUSTMENTS SIBCHALLENGE
------- -------- ----------- -------- ------------ ----------- ------------
NOTE 1 NOTE 3 NOTE 4
REVENUE:
Telecommunication services ........... $158,439 $49,016 $(1,440)(O) $ 205,133 $4,894 $ (582)(O) $ 209,036
(882)(L) (409)(L)
Revenue from related parties ......... 699 256 955 -- -- 955
-------- ------- ------- --------- ------ ------ ---------
TOTAL REVENUE .......................... 159,138 49,272 (2,322) 206,088 4,894 (991) 209,991
OPERATING COSTS AND EXPENSES:
Access and network services (excluding
depreciation and amortization ..... 76,735 18,220 (1,434)(O) 93,386 2,684 (582)(O) 95,205
(135)(L) (283)(L)
Selling, general and administrative
(excluding depreciation and
amortization) .................... 26,823 14,413 (6)(O) 41,230 887 -- 42,117
Depreciation and amortization ........ 20,947 6,680 1,025 (J) 28,345 547 448 (J) 29,340
-------- ------- (307)(K) --------- ------ ------ ---------
---------
TOTAL OPERATING COSTS
AND EXPENSES ......................... 124,505 39,313 (857) 162,961 4,118 (417) 166,662
-------- ------- ------- --------- ------ ------ ---------
INCOME FROM OPERATIONS ................. 34,633 9,959 (1,465) 43,127 776 (574) 43,329
OTHER INCOME (EXPENSE):
Equity in losses of ventures ......... (29) -- -- (29) -- -- (29)
Interest income ...................... 605 -- -- 605 -- -- 605
Interest expense ..................... (1,578) (479) -- (2,057) (193) -- (2,250)
Foreign currency gains (losses) ...... 213 205 -- 418 (139) -- 279
Minority interest .................... (215) (131) -- (346) -- -- (346)
-------- ------- ------- --------- ------ ------ ---------
TOTAL OTHER INCOME (EXPENSE) ........... (1,004) (405) -- (1,409) (332) -- (1,741)
-------- ------- ------- --------- ------ ------ ---------
Income before income taxes ............. 33,629 9,554 (1,465) 41,718 444 (574) 41,588
Income taxes ........................... 8,974 4,599 (352) (M) 13,221 160 (138)(M) 13,243
-------- ------- ------- --------- ------ ------ ---------
NET INCOME ............................. $ 24,655 $ 4,955 $ (1,113) $ 28,497 $ 284 $ (436) $ 28,345
======== ======= ========= ========= ====== ====== =========
Basic earnings per share of common
stock:
Net income per share - basic ..... 0.90 $ 0.84 $ 0.83
======== ========= =========
Weighted average common shares - basic.. 27,271 6,706 33,977 33,977
======== ========= ========= =========
Diluted earnings per share of common
stock:
Net income per share - diluted ... $ 0.89 $ 0.82 $ 0.82
======== ========= =========
Weighted average common shares -
diluted............................... 27,836 6,706 34,542 34,542
======== ========= ========= =========
See accompanying notes to unaudited condensed pro forma financial statements.
62
GOLDEN TELECOM, INC.
CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
(IN THOUSANDS OF US$, EXCEPT PER SHARE DATA)
(UNAUDITED)
PRO FORMA
PRO FORMA COMBINED
COMBINED GOLDEN
GOLDEN TELECOM
GOLDEN PRO FORMA TELECOM & PRO FORMA COMINCOM, &
TELECOM COMINCOM ADJUSTMENTS COMINCOM SIBCHALLENGE ADJUSTMENTS SIBCHALLENGE
------- -------- ----------- -------- ------------ ----------- ------------
NOTE 2 NOTE 3 NOTE 4
REVENUE:
Telecommunication services.......... $285,271 $ 83,501 $ (3,319)(O) $ 364,698 $ 6,870 $ (272)(O) $ 370,478
(755)(L) (818)(L)
Revenue from related parties ....... 1,727 653 -- 2,380 -- -- 2,380
-------- --------- --------- --------- --------- ------- ---------
TOTAL REVENUE ........................ 286,998 84,154 (4,074) 367,078 6,870 (1,090) 372,858
OPERATING COSTS AND EXPENSES:
Access and network services
(excluding depreciation
and amortization ................. 134,467 30,799 (3,319)(O) 161,841 4,538 (272)(O) 165,542
(106)(L) (565)(L)
Selling, general and administrative
(excluding depreciation and
amortization) .................. 58,003 28,472 -- 86,475 812 -- 87,287
Depreciation and amortization ...... 38,872 11,047 2,049 (J) 51,354 802 897(J) 53,053
-------- --------- (614)(K) --------- --------- ------- ---------
---------
TOTAL OPERATING COSTS AND EXPENSES ... 231,342 70,318 (1,990) 299,670 6,152 60 305,882
-------- --------- --------- --------- --------- ------- ---------
INCOME (LOSS) FROM OPERATIONS ........ 55,656 13,836 (2,084) 67,408 718 (1,150) 66,976
OTHER INCOME (EXPENSE):
Equity in earnings of ventures ..... (4,139) -- -- (4,139) -- -- (4,139)
Interest income .................... 2,077 190 -- 2,267 -- -- 2,267
Interest expense ................... (4,306) (1,370) -- (5,676) (529) -- (6,205)
Forgiveness of penalties ........... -- 2,002 -- 2,002 -- -- 2,002
Foreign currency gains (losses) .... (1,792) (215) -- (2,007) 158 -- (1,849)
Minority interest .................. (527) (316) -- (843) -- -- (843)
-------- --------- --------- --------- --------- ------- ---------
TOTAL OTHER INCOME ................... (8,687) 291 -- (8,396) (371) -- (8,767)
-------- --------- --------- --------- --------- ------- ---------
Income (loss) before income taxes .... 46,969 14,127 (2,084) 59,012 347 (1,150) 58,209
Income taxes ......................... 10,382 4,945 (500)(M) 14,827 290 (276)(M) 14,841
-------- --------- --------- --------- --------- ------- ---------
Income (loss) before cumulative
effect of change in accounting
principle .......................... 36,587 9,182 (1,584) 44,185 57 (874) 43,368
Cumulative effect of change in
accounting principle ............... 974 -- -- 974 -- -- 974
-------- --------- --------- --------- --------- ------- ---------
NET INCOME (LOSS) .................... $ 37,561 $ 9,182 $ (1,584) $ 45,159 $ 57 $ (874) $ 44,342
======== ========= ========= ========= ========= ======= =========
Basic earnings per share of common
stock:
Income before cumulative effect of
a change in accounting principle.. 1.36 $ 1.32 $ 1.30
Cumulative effect of a change in
accounting principle.............. 0.04 0.03 0.03
-------- --------- ---------
Net income per share - basic........ 1.40 $ 1.35 $ 1.33
======== ========= =========
Weighted average common shares -
basic............................... 26,748 6,706 33,454 33,454
======== ========= ========= =========
Diluted earnings per share of common
stock:
Income before cumulative effect of
a change in accounting principle.. $ 1.34 $ 1.30 $ 1.28
Cumulative effect of a change
in accounting principle........... 0.04 0.03 0.03
-------- --------- ---------
Net income per share - diluted.. $ 1.38 $ 1.33 $ 1.31
======== ========= =========
Weighted average common shares -
diluted............................. 27,163 6,706 33,869 33,869
======== ========= ========= =========
See accompanying notes to unaudited condensed pro forma financial statements.
63
GOLDEN TELECOM, INC.
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
NOTE 1 HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF GOLDEN TELECOM, INC.
These columns reflect GTI's historical consolidated balance sheet as of
June 30, 2003 and statement of operations for the six month period ended June
30, 2003 prepared and presented in accordance with accounting principles
generally accepted in the United States of America ("US GAAP").
NOTE 2 HISTORICAL PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR
ENDED DECEMBER 31, 2002 OF GOLDEN TELECOM, INC.
In September 2002, subsidiaries of the Company completed the acquisition of
50% of EDN Sovintel LLC ("Sovintel") that the Company did not own. This column
reflects GTI's historical unaudited pro forma combined results of operations to
give effect to the Sovintel business combination as if it had occurred on
January 1, 2002. The table below summarizes the historical results of GTI for
the year ended December 31, 2002 and the historical results for Sovintel for the
period from January 1, 2002 to September 16, 2002, along with pro forma
adjustments necessary to present pro forma combined results for the year ended
December 31, 2002.
HISTORICAL
----------------------------
PRO FORMA
COMBINED
GOLDEN PRO FORMA GOLDEN
TELECOM SOVINTEL ADJUSTMENTS TELECOM
------------ ---------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue....................................................... 198,727 101,261 (12,990) 286,998
Operating costs and expenses.................................. 167,297 75,386 (11,341) 231,342
------------ ---------- ------------ ---------
Income (loss) from operations................................. 31,430 25,875 (1,649) 55,656
Other operating income (expense).............................. 2,007 (113) (10,581) (8,687)
------------ ----------- ------------ ---------
Income (loss) before income taxes............................. 33,437 25,762 (12,230) 46,969
Income taxes.................................................. 4,627 6,647 (892) 10,382
Cumulative effect of a change in accounting principle......... 974 -- -- 974
------------ ---------- ----------- ---------
Net income (loss)............................................. $ 29,784 $ 19,115 $ (11,338) $ 37,561
============ ========== =========== =========
Net income per share-basic................................... $ 1.24 $ 1.40
============ =========
Weighted average common shares-basic.......................... 24,102 26,748
============ =========
Net income per share-dilutive................................ $ 1.21 $ 1.38
============ =========
Weighted average common shares-dilutive....................... 24,517 27,163
============ =========
As described in the Company's 8-K/A dated September 17, 2002, the nature of the
principal pro forma adjustments were to provide (a) amortization of intangible
assets over estimated useful lives; (b) for the effect of purchase accounting to
fixed assets on depreciation; (c) interest expense on debt assumed; (d)
elimination of connection fee revenue and costs; and (e) elimination of
previously recorded equity in earnings of Sovintel.
NOTE 3 HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF OAO COMINCOM
These columns reflect Comincom historical consolidated income statements
for the year ended December 31, 2002 and for the six months ended June 30, 2003
and balance sheet as of June 30, 2003 prepared and presented in accordance with
US GAAP.
Certain reclassifications have been made to Comincom's historical
consolidated income statements to conform to the presentation format in these
unaudited condensed pro forma consolidated financial statements. Such
reclassifications have no impact on revenue, income from operations, income
before income taxes and minority interests or net income.
64
GOLDEN TELECOM, INC.
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Certain reclassifications have also been made to Comincom's historical
consolidated balance sheet to conform to the presentation format in these
unaudited condensed pro forma consolidated financial statements. Such
reclassifications have no impact on total assets or shareholder's equity.
NOTE 4 HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF OOO SIBCHALLENGE
These columns reflect Sibchallenge's historical consolidated income
statements for the year ended December 31, 2002 and for the six months ended
June 30, 2003 and balance sheet as of June 30, 2003 prepared and presented in
accordance with US GAAP.
Certain reclassifications have been made to Sibchallenge's consolidated
income statements to conform to the presentation format in these unaudited
condensed pro forma consolidated financial statements. Such reclassifications
have no impact on revenue, income from operations, income before income taxes
and minority interests or net income.
Certain reclassifications have also been made to Sibchallenge's balance
sheet to conform to the presentation format in these unaudited condensed pro
forma consolidated financial statements. Such reclassifications have no impact
on total assets or shareholder's equity.
NOTE 5 ALLOCATION OF PURCHASE PRICE
ACQUISITION OF COMINCOM
The acquisition of 100% of Comincom will be accounted for as a purchase
business combination in accordance with US GAAP. As the transaction will reflect
the acquisition of 100% interest in Comincom, the Company will record the net
assets of Comincom at 100% of their estimated fair values.
The estimated total purchase price of approximately $156.6 million consists
of approximately $155.0 million of GTI's common stock, representing an estimated
6,705,921 shares and estimated direct transaction costs of approximately $1.6
million. Under US GAAP, securities issued in a purchase business combination
should be valued at market prices for a reasonable period before and after the
measurement date in determining the fair value of the securities issued. For the
purposes of these unaudited pro forma consolidated financial statements, the
purchase consideration has been estimated using a closing date of the
transaction, the measurement date, of June 30, 2003. Accordingly, the GTI shares
issued in consideration are valued based on a weighted average for the five
consecutive trading days between June 26 and July 2, 2003, which was $23.11 per
share.
65
GOLDEN TELECOM, INC.
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The following is the actual condensed balance sheet of Comincom as of June 30,
2003 reflecting preliminary purchase price accounting adjustments to the net
assets acquired:
JUNE 30, 2003
----------------
(IN THOUSANDS)
ASSETS:
Current assets......................................................... $ 35,832
Property and equipment................................................. 78,983
Telecommunications service contracts
intangible assets................................................... 14,804
Contract based customer relationship
intangible assets................................................... 19,871
Goodwill............................................................... 45,014
Other assets........................................................... 3,208
----------------
Total assets......................................................... $ 197,712
================
LIABILITES:
Current liabilities.................................................... $ 31,309
Non-current liabilities................................................ 9,829
----------------
Net assets........................................................... $ 156,574
================
Consideration and acquisition costs:
GTI shares consideration............................................... 154,974
Direct transaction costs............................................... 1,600
----------------
Total purchase consideration and acquisition costs....................... $ 156,574
================
The purchase allocation will be finalized upon closure of the acquisition
by GTI of 100% of the outstanding shares of capital stock of Comincom and
completion of the valuation of certain tangible and intangible assets. The final
purchase price allocation will be calculated based on the transaction value and
the fair values of Comincom's identifiable assets and liabilities at the date of
closure. Therefore, the actual goodwill amount, as well as other balance sheet
items, could differ from the preliminary unaudited condensed pro forma
consolidated financial statements presented herein, and in turn affect items in
the preliminary condensed pro forma consolidated statement of operations, such
as intangible asset amortization and income taxes. The excess purchase price
over the fair value of the net tangible and intangible assets acquired of
approximately $45.0 million has been assigned to goodwill and is not deductible
for tax purposes. In accordance with the Financial Accounting Standards Board's
Statement on Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets", the
Company will not amortize the goodwill recorded in connection with the
acquisition of 100% of Comincom. The goodwill will be tested for impairment at
least annually. The impact of a one dollar change in the average closing price
used to value the shares of common stock for the purpose of this transaction
would result in an increase or decrease in goodwill of approximately $6.7
million.
ACQUISITION OF SIBCHALLENGE
The acquisition of 100% of Sibchallenge was accounted for as a purchase
business combination in accordance with US GAAP. As the transaction reflects the
acquisition of 100% interest in Sibchallenge, the Company will record the net
assets of Sibchallenge at 100% of their estimated fair values.
The total purchase price of approximately $15.4 million consisted of cash
consideration of approximately $15.0 million and approximately $0.4 million in
direct transaction costs, including an investment banking fee of $0.3 million
paid to Belongers Limited., an affiliate of Alfa Telecom Limited, a shareholder
of the Company.
66
GOLDEN TELECOM, INC.
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The following is the actual condensed balance sheet of Sibchallenge as of June
30, 2003 reflecting preliminary purchase price accounting adjustments to the net
assets acquired (in thousands of USD):
JUNE 30, 2003
----------------
(IN THOUSANDS)
ASSETS:
Current assets............................................. $ 1,524
Property and equipment..................................... 7,825
Telecommunications service contracts
intangible assets....................................... 10,760
Goodwill................................................... 87
----------------
Total assets............................................. $ 20,196
================
LIABILITES:
Current liabilities........................................ $ 1,921
Non-current liabilities.................................... 2,875
----------------
Net assets............................................... $ 15,400
================
Consideration and acquisition costs:
Cash consideration......................................... 15,000
Direct transaction costs................................... 400
----------------
Total purchase consideration and transaction costs........... $ 15,400
================
These unaudited condensed pro forma consolidated financial statements
reflect the preliminary allocation of the purchase price to assets acquired and
liabilities assumed based on their fair values on an assumed closing date of
June 30, 2003. The final purchase price allocation will be calculated based on
the transaction value and the fair values of Sibchallenge's identifiable assets
and liabilities at the date of closure. Therefore, the actual goodwill amount,
as well as other balance sheet items, could differ from the preliminary
unaudited condensed pro forma consolidated financial statements presented
herein, and in turn affect items in the preliminary condensed pro forma
consolidated statement of operations, such as intangible asset amortization and
income taxes. The excess purchase price over the fair value of the net tangible
and intangible assets acquired of approximately $0.1 million has been assigned
to goodwill and is not deductible for tax purposes. In accordance with the
Financial Accounting Standards Board's Statement on Financial Accounting
Standard ("SFAS") No. 141, "Business Combinations" and SFAS No. 142 "Goodwill
and Other Intangible Assets", the Company will not amortize the goodwill
recorded in connection with the acquisition of 100% of Comincom. The goodwill
will be tested for impairment at least annually.
NOTE 6 CONDENSED PRO FORMA BALANCE SHEET ADJUSTMENTS
The accompanying unaudited condensed pro forma consolidated balance sheet
includes the adjustments necessary to give effect to the business combination as
if it had occurred on June 30, 2003 and to reflect the allocation of the
estimated acquisition cost to the estimated fair value of tangible and
intangible assets acquired and liabilities assumed as noted above, including the
elimination of Comincom's and Sibchallenge's equity accounts.
As discussed above, an element of the business combination consideration
for Comincom was paid in the form of GTI shares, and was valued based upon the
guidance of EITF 99-12. Goodwill amounts computed as of the estimated pro forma
June 30, 2003 closing date were a function of both this share price
determination and the resulting tangible and intangible net assets existing as
of June 30, 2003.
67
GOLDEN TELECOM, INC.
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Adjustments included in the June 30, 2003 pro forma consolidated balance sheet
are summarized as follows:
(A) Direct transaction costs of approximately $1.6 million were paid for
Comincom. Cash consideration of approximately $15.4 million, including
direct transaction costs of approximately $0.4 million was paid for
Sibchallenge.
(B) An element of the purchase price of Comincom will be paid in the form of
GTI shares consideration, representing an estimated 6,075,921 shares
with an assigned value of $155.0 million.
(C) The Company recorded approximately $45.0 million in goodwill on the
Comincom transaction and eliminated approximately $36.5 million of
previously recorded goodwill and recorded approximately $0.1 million in
goodwill on the Sibchallenge transaction.
(D) The Company has assigned approximately $5.3 million to
telecommunications service contracts intangible assets and approximately
$12.9 million to contract based customer relationship intangible assets
in the Comincom transactions. These identified intangible assets will be
amortized over a weighted-average period of approximately 9 years, and
are non-deductible for Russian tax purposes. The value assigned to the
intangible assets reflects 100% of the appraised value, corresponding to
the 100% of Comincom that will be purchased.
The Company has assigned approximately $10.8 million to
telecommunications service contracts intangible assets in the
Sibchallenge acquisition. These identified intangible assets will be
amortized over a weighted-average period of approximately 10 years, and
are non-deductible for Russian tax purposes. The value assigned to the
intangible assets reflects 100% of the appraised value, corresponding to
the 100% of Sibchallenge currently purchased.
(E) Property and equipment's estimated fair market value was computed using
the net current replacement cost valuation method. The preliminary value
assigned to property and equipment in the accompanying pro forma balance
sheet represents 100% of these estimated fair values.
(F) The Company has eliminated approximately $5.9 million in previously
recorded Comincom deferred revenues and approximately $0.9 million in
previously recorded Comincom deferred costs. The Company has eliminated
approximately $4.0 million in previously recorded Sibchallenge deferred
revenues and approximately $2.7 million in previously recorded deferred
costs. These purchase accounting adjustments relate to previous
connection fee deferrals in accordance with Staff Accounting Bulletin
No. 101 ("SAB 101"). The purchase price accounting adjustments were made
under the guidance provided by EITF 01-03, "Accounting in a Business
Combination for Deferred Revenue of an Acquiree".
(G) For Comincom, the Company has recorded a pro forma adjustment to
deferred taxes which consists of the following (amounts in thousands of
USD):
Property and equipment adjustment - Note 6 (E).............................. $ (4,295)
Deferred revenue and cost adjustment - Note 6 (F)........................... 5,021
Intangible asset adjustment - Note 6 (D).................................... 18,223
----------------
Total adjustments to timing differences..................................... 18,949
Russian statutory tax rate.................................................. 24%
-----------------
Pro forma deferred tax liability adjustment................................. $ 4,548
================
68
For Sibchallenge, the Company has recorded a pro forma adjustment
to deferred taxes which consists of the following (amounts in thousands of USD):
GOLDEN TELECOM, INC.
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
Deferred revenue and cost adjustment - Note 6 (F).......................... 1,245
Intangible asset adjustment - Note 6 (D)................................... 10,760
----------------
Total adjustments to timing differences.................................... 12,005
Russian statutory tax rate................................................. 24%
-----------------
Pro forma deferred tax liability adjustment................................ $ 2,881
================
(H) Elimination entries related to operational activity between Comincom and
the Company, Sibchallenge and the Company, and Comincom and
Sibchallenge.
(I) Elimination of Comincom and Sibchallenge equity accounts upon consolidation.
NOTE 7 CONDENSED PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS
The unaudited condensed pro forma statements of operations include
adjustments necessary to give effect to the merger as if it had occurred on
January 1, 2002.
Adjustments included in the condensed pro forma consolidated statement of
operations are summarized as follows:
(J) Amortization of intangible assets over estimated useful lives (average 9
years for Comincom and 10 years for Sibchallenge).
(K) Effect of purchase accounting adjustments to fixed assets on
depreciation expense.
(L) Elimination of connection fee revenues and costs associated with the
deferred revenue and cost adjustment referenced in Note 6 (F) above
(M) The following is a pro forma tax computation based on a Russian
statutory rate of 24% applied to the incremental variation of reported
net earnings for pro forma combined GTI and Comincom, exclusive of the
following implied permanent differences:
FOR THE FOR THE
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, 2002 JUNE 30, 2003
----------------- -------------
(IN THOUSANDS)
Combined pre-tax net income (loss),
previously reported ....................... $ 61,096 $ 43,183
Pro forma combined pre-tax net income (loss),
reported herein ........................... 59,012 41,718
-------- --------
Net change in reported pre-tax income ....... $ 2,084 $ 1,465
======== ========
Less - permanent taxation differences:
Transactions costs, deductible in USA .... $ 1,600 $ --
Valuation allowance, transaction costs ... (1,600) --
-------- --------
Net change in taxable items ................. $ 2,084 $ 1,465
======== ========
Russian statutory tax rate .................. 24% 24%
-------- --------
Incremental reduction (increase) in taxes ... $ 500 $ 352
======== ========
69
GOLDEN TELECOM, INC.
NOTES TO CONDENSED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2003
(UNAUDITED)
The following is a pro forma tax computation based on a Russian statutory rate
of 24% applied to the incremental variation of reported net earnings for pro
forma combined GTI and Sibchallenge, exclusive of the following implied
permanent differences:
FOR THE FOR THE
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, 2002 JUNE 30, 2003
----------------- -------------
(IN THOUSANDS)
Combined pre-tax net income (loss),
previously reported ....................... $ 47,316 $ 34,073
Pro forma combined pre-tax net income (loss),
reported herein ........................... 46,166 33,499
-------- --------
Net change in reported pre-tax income ....... $ 1,150 $ 574
======== ========
Less - permanent taxation differences:
Transactions costs, deductible in USA .... $ 400 $ --
Valuation allowance, transaction costs ... (400) --
-------- --------
Net change in taxable items ................. $ 1,150 $ 574
======== ========
Russian statutory tax rate .................. 24% 24%
-------- --------
Incremental reduction (increase) in taxes ... $ 276 $ 138
======== ========
(O) Elimination entries related to operational activity between Comincom and
the Company, Sibchallenge and the Company and Comincom and Sibchallenge.
70
MATERIAL CONTACTS AND BOARD DELIBERATIONS
In a letter dated December 21, 2001, Mr. V. Bulgak, Chairman of the Boards of
Directors of OAO Comincom and ZAO Combellga wrote to Mr. Petr Aven, Chairman of
the Board of Directors of our company. Mr. Bulgak's letter discussed the
telecommunications business in Russia and favorable trends in the
telecommunications business internationally. Mr. Bulgak proposed a merger of our
company and Comincom and Combellga. Mr. Bulgak suggested several possible
advantages of merging the companies.
On April 10, 2002, our company, Comincom, Telenor East Invest AS (which later
assigned its rights to Telenor) and certain Russian investors who at that time
held shares in Comincom signed a Mutual Confidentiality, Non-Disclosure and
Non-solicitation Agreement ("Confidentiality Agreement") with a term of one
year.
On May 15, 2002, Mr. Sergei Stefanovich, Director of Business Development of our
company, met with Mr. Kjell Morten Johnsen and Mr. Tron Ostby, both of Telenor,
to discuss a tentative timetable for the transaction. The Telenor
representatives were accompanied by representatives of Morgan Stanley.
On May 21, 2002, Mr. Aven initiated a discussion with our company's Board of
Directors regarding the possible acquisition of Comincom/Combellga. He noted
that valuation of Comincom/Combellga prepared by our company was significantly
lower than that prepared by the shareholders of Comincom/Combellga.
On May 22, 2002, Stan Abbeloos, the company's Chief Operating Officer, and
Sergei Stefanovich met with Mr. Johnsen, Mr. Ostby and representatives of Morgan
Stanley. The participants in the meeting discussed the initial valuation
presentation that was produced by Morgan Stanley reflecting a proposed exchange
ratio of 29-33% of our company's shares for 100% of Comincom/Combellga shares.
On July 9, 2002, the Board of Directors resolved to retain JPMorgan plc
("JPMorgan") to act as our company's financial advisor with respect to the
proposed acquisition of Comincom/Combellga. On July 12, 2002, our company
retained JPMorgan to act as its financial advisor in the transaction.
On July 23, 2002, representatives of JPMorgan and Morgan Stanley met to discuss
the transaction process.
On August 8, 2002, Mr. Stefanovich and representatives of JPMorgan met with Mr.
Johnsen, Mr. Ostby and representatives of Morgan Stanley. The parties agreed on
many of the transaction procedures, including anticipated timing, information
sharing, valuation parameters and follow-on steps. The parties agreed to proceed
with a view to presenting key details of the transaction to our company's Board
of Directors on September 10, 2002.
On September 10, 2002, the Board resolved to propose to Telenor 17% of our
company's shares on a post-transaction basis in exchange for 100 percent of the
shares in Comincom.
On September 17, 2002, Mr. Alexander Vinogradov, our company's President and
Chief Executive Officer, wrote on behalf of our company to Telenor with an offer
of 17% of our company's issued and outstanding shares on a post-transaction
basis in return for the target companies. Representatives of JPMorgan met with
representatives of Morgan Stanley in London on September 18, 2002 to discuss our
company's proposal.
On September 25, 2002, representatives of JPMorgan and Morgan Stanley met in
London and agreed that the companies' trading multiples should serve as a
natural benchmark on which to assess the value of Comincom/Combellga.
On October 10, 2002, Mr. Stefanovich and Mr. Jeffrey Riddell, General Counsel
and Senior Vice President of our company, and representatives of JPMorgan met
with Mr. Johnsen, Mr. Ostby, representatives of Morgan Stanley and
representatives of the law firm, Coudert
71
Brothers, counsel to Telenor, in the offices of Coudert Brothers in London to
discuss valuation, corporate governance and information exchange issues.
On October 23, 2002, representatives of our company met with representatives of
Telenor in Moscow to discuss valuation and corporate governance issues in
relation to the proposed transaction.
On November 2, 2002, in response to the meeting on October 23, 2002, Mr. Johnsen
wrote a letter to Mr. Vinogradov outlining Telenor's proposal regarding key
terms of the transaction. Telenor proposed that it receive approximately
22.6%-23.4% of our company's issued and outstanding shares on a post-transaction
basis in exchange for 100% shares of Comincom/Combellga.
On November 5, 2002, Golden Telecom's Board of Directors met to discuss
Telenor's proposal and rejected the proposal.
On November 11, 2002, Mr. Petr Aven, our Chairman of the Board, wrote to Mr.
Johnsen, proposing up to a maximum of 20% of the post-transaction outstanding
shares for Comincom, subject to the completion of legal and financial due
diligence. The letter also stated that Telenor's proposal regarding corporate
governance issues should be subject to further negotiation.
On November 14, 2002, Mr. Johnsen responded in writing to Mr. Aven's letter
rejecting Golden Telecom's proposal. Mr. Johnsen suggested that the parties
conduct further due diligence as a way of bridging the valuation gap between the
parties.
On December 10, 2002, Mr. Aven wrote to Mr. Johnsen and suggested that Telenor
put forward its proposal regarding corporate governance issues that would
provide suitable protection to our company's minority shareholders. On January
14, 2003, Mr. Johnsen responded to Mr. Aven and Mr. Vinogradov with a revised
proposal regarding corporate governance issues.
On January 24, 2003, Golden Telecom and Telenor exchanged revised business plans
and estimated 2002 financial results for Golden Telecom and Comincom/Combellga,
respectively.
On January 28, 2003, representatives of Golden Telecom and JPMorgan interviewed
the management of Comincom/Combellga with respect to Comincom/Combellga's
operations and financial position. On January 29, 2003, representatives of
Telenor, Comincom/Combellga and Morgan Stanley interviewed the management of
Golden Telecom with respect to the company's operations and financial position.
On February 3, 2003, representatives of JPMorgan and Morgan Stanley held
discussions regarding adjustments to the EBITDA calculation for Golden Telecom
and Comincom/Combellga in order to bring them to the same accounting base for
the purposes of valuation.
On February 18, 2003, Mr. Aven reported to the Board that the company conducted
limited operational due diligence on Comincom/Combellga. The Board resolved to
offer to the principals of Comincom/Combellga up to 19% of the company's
outstanding shares on a post-transaction basis for 100% of the shares of
Comincom.
On February 21, 2003, based on the revised business plan and additional
information on Comincom/Combellga received during the management interviews,
Golden Telecom made a revised proposal to Telenor for Comincom/Combellga by
offering Telenor 18.2%-18.7% of
72
the outstanding shares of Golden Telecom on a post-transaction basis. This
proposal was rejected by Telenor. Mr. Johnsen indicated that Telenor was
prepared to accept no less than 21% of the outstanding shares of Golden Telecom
on a post-transaction basis.
On March 4, 2003, Golden Telecom, in a letter from Mr. Vinogradov to Mr.
Johnsen, reiterated its proposal to Telenor of 18.2-18.7% of the outstanding
shares of Golden Telecom on a post-transaction basis for 100% of the shares of
Comincom/Combellga. Since there was still a significant gap in valuation between
the parties, it was proposed that the negotiations be suspended until the
differences between the parties narrowed.
On March 7, 2003, Golden Telecom, Alfa and Telenor met to discuss the
valuation deadlock and key corporate governance issues.
On March 12, 2003, Mr. Andrei Shtyrba of Alfa Bank wrote Mr. Johnsen stating
that Alfa was prepared to propose to Golden Telecom's Board of Directors that
the Board approve the transaction on the basis of Golden Telecom offering
approximately 19.5% of the issued and outstanding shares of Golden Telecom on a
post-transaction basis. On March 14, 2003, Mr. Ostby wrote to Mr. Shtyrba and
indicated that Telenor was willing to accept the exchange ratio of 19.5%.
Thereafter representatives of Telenor and us held various discussions and
commenced the preparation of a term sheet. On March 21, 2003, Coudert Brothers,
circulated a draft of the term sheet. Over the next eight weeks, we, Telenor and
representatives for each of us held various meeting and telephone conferences to
negotiate terms.
On March 28, 2003 the Board of Directors established a special committee
consisting of Mr. David Herman and Mr. Michael North, each of whom is a
disinterested director in this transaction. The special committee was
established to review and evaluate the advisability of an amendment to our
company's certificate of incorporation such that in certain circumstances where
any person desires to become a beneficial owner of 50% or more of the issued and
outstanding shares of our company, such person would be required to make an
offer to purchase any and all of our company's shares. Similar provisions were
subsequently included in the shareholders agreement among our company, Alfa,
Capital, Barings, Rostelecom and Telenor.
On April 1, 2003, Mr. Vinogradov provided an update on the Combellga/Comincom
transaction to the Board. The Board resolved to propose 19.5% of the company's
post-transaction outstanding shares in exchange for all of the issued and
outstanding shares of Comincom. The Board also resolved to expand the scope of
the special committee to include exclusive power and authority on behalf of our
company to review, evaluate and determine the advisability of granting a request
for advance approval under Section 203 of the DGCL in connection with the
acquisition of Comincom/Combellga and the advisability of amending the
shareholders agreement among our company's major shareholders. The special
committee was also given the exclusive power and authority on behalf of our
company to (i) communicate and negotiate with the parties in the transaction and
to the shareholders agreement and standstill agreement, including the requested
approval under Section 203 of the DGCL, (ii) determine whether our company
should agree to approval for the attainment of interested stockholder status by
Telenor for the purposes of Section 203 in connection with the acquisition and
amending the shareholder agreement and standstill agreements among our
73
company's major shareholders and whether such actions are fair to, and in the
best interests of, our company and all of its stockholders, and (iii) exercise
all of the power and authority possessed of our Company's full Board of
Directors to determine whether to grant or deny the request by our company for
approval pursuant to Section 203 of the DGCL.
On April 1, 2003, the special committee met and elected Mr. North as Chair of
the special committee. The special committee participated in a telephone
conference call with representatives of JPMorgan to review the advisability of
the amendment to our company's certificate of incorporation. The special
committee also participated in a telephone conference call with attorneys from
the law firm of Potter Anderson, counsel to the special committee, to discuss
the advisability of the amendment.
On April 25, 2003, the special committee discussed the mandatory tender
provisions and resolved to instruct our company's management to include the
substance of the amendment in the agreements to be negotiated by our company and
its major shareholders and that such agreements be presented to the special
committee for final review prior to execution.
On May 20, 2003, Mr. Jeff Riddell, Senior Vice President, General Counsel and
Corporate Secretary reported to the Board on the Comincom/Combellga transaction.
He noted that our company was continuing negotiations with the sellers and
reported that the parties finalized the term sheet. A copy of the term sheet was
distributed to the directors.
On May 21, 2003, our company, Telenor (as assignee of Telenor East Invest AS),
Comincom and the Strategic Russian Investors executed an amendment to the
Confidentiality Agreement under which the parties agreed to negotiate
exclusively which each other regarding the transaction and not to engage in any
other transaction which could be reasonably expected to diminish the likelihood
of the consummation of the transaction. Such exclusivity provisions were to
apply to the parties from May 20, 2003 to August 1, 2003.
On May 22, 2003 the parties executed a non-binding term sheet that set forth the
principal terms for the transaction including the requirement for a tender offer
with a minimum acceptance condition in the event that a person desired to gain
control of our company. See "Description of Other Transaction Documents".
From June 4 to July 25, 2003, Golden Telecom and Telenor conducted detailed
legal, financial and operating due diligence of Comincom/Combellga and Golden
Telecom, respectively.
On June 10, 2003, our counsel, Chadbourne & Parke LLP, distributed the first
draft of the share exchange agreement and Telenor's counsel distributed the
first draft of the shareholders agreement, standstill agreement and registration
rights agreement. During the next week, counsel for us and Telenor exchanged
comments on the agreements. On June 16 and 17, 2003, Telenor and its financial
and legal advisors met with us and our financial and legal advisors in London to
negotiate the agreements. At the conclusion of these meetings, it was agreed
that many of the key open issues had been resolved but that until Telenor
delivered the audited consolidated financial statements that were specified in
the term sheet we would not be able to verify the assumptions made in valuing
the Comincom shares and consequently we were not in a position to sign any of
the agreements.
In late June 2003, revised drafts of the agreements reflecting the points agreed
to in the June London meetings were exchanged.
74
On June 28, 2003, the drafts of the shareholders agreement, standstill agreement
and registration rights agreement were distributed for review to the
shareholders who would be party to them.
On July 3, 2003, Mr. Riddell provided an update on the Comincom/Combellga
transaction to the Board. The Board authorized our company's management on
behalf of the company to negotiate and enter into transaction documents for the
purchase of Comincom/Combellga.
On July 3, 2003, representatives of JPMorgan and Morgan Stanley held discussions
regarding a post-closing adjustment mechanism, depending on the relative
financial performance of Golden Telecom and Comincom/Combellga between signing
of the share exchange agreement and closing of the transaction, to be
incorporated into the share exchange agreement.
On July 9, 2003, the special committee met to discuss the status of the
Comincom/Combellga transaction.
During July 2003, we held discussions with Telenor and its accountants regarding
the status of the Comincom and Combellga financial statements.
On July 30, 2003, we meet with Telenor and its counsel to continue discussions
on the agreements.
During the first week of August 2003, negotiations were held to finalize the
agreements.
On August 8, 2003, our Board approved the form of share exchange agreement and
the special committee of the Board approved the other transaction agreements and
authorized a waiver under Delaware General Corporation Law Section 203, the
Delaware anti-takeover statute.
On August 19, 2003, the Comincom/Combellga transaction agreements were executed.
75
REGULATORY APPROVALS
In order to complete the acquisition of Comincom, we are required to obtain the
approval of the Ministry for Antimonopoly Policy and Support for
Entrepreneurship of the Russian Federation ("Anti-monopoly Ministry") and
satisfy the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 ("HSR Act"). On August 27, 2003, we received permission from the
Anti-monopoly Ministry to acquire Comincom. On September 26, 2003, we received
early termination of the waiting period under the HSR Act. In addition,
completion of the acquisition of Comincom will require compliance with
applicable corporate law of the State of Delaware and the Russian Federation,
compliance with Nasdaq Marketplace Rules as set forth in this proxy statement
and compliance with the United States Securities and Exchange Commission rules
and regulations, federal securities laws and applicable securities and "blue
sky" laws of the various states.
76
TERMS OF THE SHARE EXCHANGE AGREEMENT
GENERAL
Our wholly owned subsidiary, SFMT, will acquire Comincom pursuant to the terms
of a share exchange agreement in a transaction that involves Golden Telecom
issuing shares of its common stock equal to 19.5% of the outstanding shares of
its common stock calculated on a post-acquisition basis in exchange for all the
issued and outstanding capital stock of Comincom. The full text of the share
exchange agreement is included as an exhibit to the Form 8-K which we filed with
the SEC on August 20, 2003. You can review this Form 8-K and the share exchange
agreement on the SEC's website, www.sec.gov. The following is a description of
the material terms of the share exchange agreement and is qualified in its
entirety by reference to the full share exchange agreement.
THE CLOSING
The closing of the acquisition is to take place five business days after the
satisfaction or waiver of all of the conditions precedent. One of the conditions
to the closing is your approval of the issuance of the shares of our common
stock.
THE TRANSACTION
Golden Telecom, SFMT and Telenor entered into the share exchange agreement on
August 19, 2003. Pursuant to the share exchange agreement, SFMT will acquire
from Telenor 129,292 shares of common stock of Comincom, nominal value 1 Ruble
per share, 541 shares of Class A non-convertible preferred stock of Comincom,
nominal value 1 Ruble per share, and 29,838 shares of Class B convertible
preferred stock of Comincom, nominal value 1 Ruble per share. There are also 5
shares of common stock issued by Comincom owned by a designee of Telenor which
are to be transferred to a designee of ours. In exchange for all of these
shares, we will issue to Telenor a number of shares of our common stock equal to
19.5% of our outstanding shares of common stock on a post-acquisition basis. For
example, if on the closing date we have 28,783,421 shares of common stock
outstanding, we would issue 6,972,382 shares of our common stock to Telenor. In
this example, 35,755,802 shares of our common stock would be outstanding
immediately after the closing of the acquisition. The actual number of shares
issued may differ depending on the number of outstanding shares on the date of
closing the transaction.
POST CLOSING ADJUSTMENT
The share exchange agreement provides for a post closing adjustment to be made
based on our company's and Comincom's results through September 30, 2003. Any
adjustment will be paid to the appropriate party in cash, not shares.
Within thirty days of the closing, (a) our company is required to deliver to
Telenor a balance sheet prepared for our company on a consolidated basis in
accordance with Generally Accepted Accounting Principles in the United States
("US GAAP") and reviewed in accordance with Statement on Auditing Standards
("SAS 100") as of the closing, together with a
77
supporting schedule setting forth a determination of our company's indebtedness
on a consolidated basis as of the closing (the "Company Closing Statement"), and
(b) Telenor is required to deliver to us a balance sheet prepared for Comincom
and Comincom's subsidiaries on a consolidated basis in accordance with US GAAP
and reviewed in accordance with FASB 100 as of the closing, together with a
supporting schedule setting forth a determination of the indebtedness of
Comincom and its subsidiaries on a consolidated basis as of the closing (the
"Comincom's Closing Statement", and together with the Company Closing Statement,
the "Closing Statements"). In preparing the Company Closing Statement, any
adjustment caused to our financial results that arises from the acquisition by
us of the telephone service provider, Sibchallenge Telecom, and an Internet
service provider, Tel, in Krasnoyarsk, Russia, shall not be taken into account,
and the Company Closing Statement shall be prepared as if such acquisitions did
not occur, provided that if such adjustment would negatively affect our
consolidated net cash position by more than US$20,000,000, then the amount in
excess of US$20,000,000 by which such adjustment would affect such net cash
position shall be taken into account in preparing the Company Closing Statement.
In preparing the Comincom Closing Statement, any adjustment caused to Comincom's
consolidated financial results that results from (a) the payment of fees to
PricewaterhouseCoopers and American Appraisal for their services in connection
with the acquisition, which in any event shall not exceed US$190,000 in the
aggregate, and (b) the payment of any fees of PricewaterhouseCoopers for its
services in connection with the preparation of the financial materials to be
provided by Telenor in connection with this proxy statement which in any event
shall not exceed US$100,000 in the aggregate, shall not be taken into account,
and Comincom's Closing Statement shall be prepared as if such fees had not been
paid.
We will cause our employees (and the employees of our subsidiaries and
affiliates) to assist Telenor in the preparation of the Comincom Closing
Statement and to assist Telenor's auditor in connection with its review of the
Comincom Closing Statement.
We and Telenor will seek in good faith to resolve any differences that may exist
with respect to the matters specified in any notice of disagreement delivered in
accordance with the share exchange agreement. If Telenor and we cannot reach
agreement on such matters, an independent accounting firm of recognized
international standing will be engaged (the "Unaffiliated Firm") to resolve the
matters which remain in dispute with respect to the disputed Closing Statements.
The Unaffiliated Firm will resolve the differences submitted to it based solely
upon the information provided to the Unaffiliated Firm by us and Telenor
pursuant to the terms of the share exchange agreement (and not by independent
review). The Unaffiliated Firm's authority will be limited to resolving disputes
with respect to whether the disputed Closing Statements were properly prepared
with respect to the individual items on the Closing Statements in dispute. The
decision of the Unaffiliated Firm will be, for all purposes, conclusive,
non-appealable, final and binding upon us and Telenor. The fees of the
Unaffiliated Firm will be borne by us and Telenor in the same proportion that
the US Dollar amount of disputed items lost by a party bears to the total US
Dollar amount in dispute resolved by the Unaffiliated Firm. Telenor and we will
each bear the fees, costs and expenses
78
of its own accountants and all of its other expenses in connection with matters
contemplated by such disputes.
Upon resolution of the disputed items (if any) under the Closing Statements, the
Closing Statements shall be deemed to be the Final Closing Statements for all
purposes. Using the relevant numbers set forth below for September 30, 2003 and
December 31, 2003, a straight-line interpolation of indebtedness (adjusted for
cash) for each party for the period between September 30, 2003 and the closing
shall be calculated (the "Required Indebtedness"). The Required Indebtedness for
each party shall be compared to the appropriate amount of indebtedness set out
in the Final Closing Statements (the "Closing Indebtedness").
OUR COMPANY OUR COMPANY
COMINCOM RESULTS FOR COMINCOM RESULTS FOR RESULTS FOR THE RESULTS FOR THE
THE NINE MONTHS THE TWELVE MONTHS NINE MONTHS ENDED TWELVE MONTHS
ENDED 9/30/03 ENDED 12/31/03 9/30/03 ENDED 12/31/03
-------------------- -------------------- ----------------- -------------------
INDEBTEDNESS 2.7 (0.6) (41.0) (50.0)
(ADJUSTED FOR
CASH)
If this comparison shows that the Comincom has failed to meet its Required
Indebtedness target (by having more indebtedness and/or less cash such that the
net cash position of Comincom is less than the amount of such target), Telenor
shall pay to our company the difference between its Closing Indebtedness and its
Required Indebtedness. If this comparison shows that we have failed to meet our
Required Indebtedness target (by having more indebtedness and/or less cash such
that our net cash position is less than the amount of such target), we shall pay
to Telenor the difference between our Closing Indebtedness and our Required
Indebtedness.
CONDITIONS TO CLOSING
The closing of the acquisition of Comincom is subject to conditions precedent
which are customary for this type of transaction, including approval by the
relevant anti-trust authorities in Russia and the United States (which we have
received), approval of the issuance of our shares of common stock by our
shareholders and effectiveness of the other transaction documents entered into
by Golden Telecom, Alfa, Barings, Capital, Rostelecom, and Telenor. The other
transaction documents are a registration rights agreement, a standstill
agreement and a shareholders agreement. These agreements are described below.
See "TERMS OF THE OTHER TRANSACTION DOCUMENTS".
In addition there are financial conditions that each side to the transaction
must satisfy. The material financial conditions are described immediately below.
79
The indebtedness (adjusted for cash) of Comincom at December 31, 2002 on a
consolidated basis calculated in accordance with US GAAP shall not exceed
US$6,100,000. For the financial year ending December 31, 2002, Comincom's
audited accounts, calculated in accordance with US GAAP, shall show consolidated
Earnings Before Interest, Taxes and Amortization (which is commonly referred to
as EBITDA) of no less than US$26,700,000.
Comincom's accounts for the 2003 period ending on the last day of the quarter
ending immediately preceding the closing date shall show consolidated EBITDA of
no less than the target specified in the table below and consolidated
indebtedness and capital expenditures of no more than the targets specified in
the table below; provided that (1) with respect to their consolidated EBITDA, at
any date of determination, if the target for such date does not exceed by more
than 1% their consolidated EBITDA as at such date, and, with respect to their
consolidated indebtedness, as at any date of determination, if such amount does
not exceed the target for such date by more than 2.5%, and, with respect to
their consolidated capital expenditures, if such amount does not exceed the
target for such date by more than 5%, then the relevant target shall be deemed
to have been meet, (2) if following June 30, 2003, Comincom achieves one of the
subsequent pre-closing date targets for EBITDA, on a cumulative basis, any
failure to have achieved any preceding target shall be deemed to have been
waived, and (3) if, with respect to the incurrence of indebtedness or capital
expenditures, as the case may be, Comincom has exceeded such targets but, by the
closing date, has achieved the most recent subsequent pre-closing date targets
for indebtedness or capital expenditures, as the case may be, then such failure
shall be deemed to have been waived. The targets with respect to consolidated
EBITDA, indebtedness and capital expenditures for Comincom for the 2003 periods
ending on the last day of the first nine months and the full year of 2003,
respectively, are outlined in the table below (all figures in the table below
are in millions of US Dollars):
NINE MONTHS TWELVE MONTHS
ENDED 9/30/03 ENDED 12/31/03
------------- --------------
EBITDA 23.8 33.3
INDEBTEDNESS
(ADJUSTED FOR CASH) 2.7 (0.6)
CAPITAL EXPENDITURES 17.0 21.5
In making any determination as to whether the above referenced targets have been
met, any adjustment caused to Comincom's and its subsidiaries' consolidated
financial results that results from (a) the payment of fees to
PricewaterhouseCoopers and American Appraisal for their services in connection
with the acquisition, which in any event shall not exceed US$190,000 in the
aggregate, and (b) the payment of any fees of
80
PricewaterhouseCoopers for its services in connection with the preparation of
the financial materials to be provided by Telenor in connection with this proxy
statement which in any event shall not exceed US$100,000 in the aggregate, shall
not be taken into account, and such determination shall be made as if such fees
had not been paid.
Comincom shall have delivered to us Comincom's profit and loss statement and
balance sheet, each prepared in accordance with US GAAP, for each quarter
beginning with the quarter ending September 30, 2003 through the last full
quarter prior to the closing. Further, neither Comincom nor its subsidiaries
shall have declared a moratorium on any of its indebtedness, be unable or admit
its inability to pay its debts as they generally fall due or shall have passed a
resolution to wind up or liquidate themselves. Our indebtedness at December 31,
2002 on a proportionately consolidated basis calculated in accordance with US
GAAP shall not exceed US$21,100,000. For the financial year ending December 31,
2002, our audited accounts, calculated in accordance with US GAAP, shall show
proportionately consolidated EBITDA of no less than US$100,600,000.
Our accounts for the 2003 period ending on the last day of the quarter ending
immediately preceding the closing date shall show proportionately consolidated
EBITDA of no less than the target specified in the table below and
proportionately consolidated indebtedness and capital expenditures of no more
than the target specified below; provided that (1) with respect to our
proportionately consolidated EBITDA, as at any date of determination, if the
target for such date does not exceed by more than 1% our proportionately
consolidated EBITDA as at such date, and, with respect to our proportionately
consolidated indebtedness, as at any date of determination, if such amount does
not exceed the target for such date by more than 2.5%, and, with respect to our
proportionately consolidated capital expenditures, as at any date of
determination, if such amount does not exceed the target for such date by more
than 5%, then we shall be deemed to have met such target, (2) if following June
30, 2003, we achieve one of the subsequent pre-closing date targets for EBITDA,
on a cumulative basis, any failure by us to have achieved any preceding target
shall be deemed to have been waived, and (3) if, with respect to the incurrence
of indebtedness or capital expenditures, as the case may be, we have exceeded
such targets but, by the closing date, have achieved the most recent subsequent
pre-closing date targets for indebtedness or capital expenditures, as the case
may be, then such failure shall be deemed to have been waived. Our targets with
respect to proportionately consolidated EBITDA, indebtedness and capital
expenditures for the 2003 periods ending on the last day of the first nine
months and the full year of 2003, respectively, are outlined in the table below
(all figures in the table below are in millions of United States Dollars):
81
NINE MONTHS TWELVE MONTHS
ENDED 9/30/03 ENDED 12/31/03
------------- --------------
EBITDA 87.5 122.4
INDEBTEDNESS (ADJUSTED FOR CASH) (41.0) (50.0)
CAPITAL EXPENDITURES 45.0 59.5
In making any determination as to whether the above referenced targets have been
met, any adjustment caused to the financial results of our company for the
relevant quarter that results from the acquisition by us of the telephone
service provider, Sibchallenge Telecom, and an Internet service provider, Tel,
in Krasnoyarsk, Russia, shall not be taken into account, and such determination
shall be made as if such acquisitions did not occur, provided that if such
adjustment would negatively affect our consolidated net cash position by more
than US$20,000,000, then the amount in excess of US$20,000,000 by which such
adjustment would affect our cash position shall be taken into account.
We shall have delivered to Comincom our company's profit and loss statement and
balance sheet, each prepared in accordance with US GAAP, for each quarter
beginning with the quarter ending September 30, 2003 through the last full
quarter prior to the closing. Further, neither our company nor any of its
subsidiaries shall have declared a moratorium on any of its indebtedness, be
unable or admit its inability to pay its debts as they generally fall due or
shall have passed a resolution to wind up or liquidate themselves.
INDEMNIFICATION AND GUARANTY
The share exchange agreement provides for Telenor to indemnify us for breaches
of their representations and warranties or the non-performance by Telenor of
their covenants in the agreement. We may not seek indemnity from Telenor unless
our aggregate losses for such breaches or non-performance exceed $2,750,000 and
to reach that aggregate amount we may only bring individual claims that are at
least equal to $250,000. Telenor is not required to indemnify us in an amount in
excess of the sum of the notional price of the acquisition, our costs and
expenses in the transaction and any amounts expended by us in pursuing claims
against Telenor. The notional price shall be determined by multiplying the
average of the market price of a share of our company's common stock for each of
the ten trading days immediately preceding the closing by the number of our
company shares issued in the transaction, provided, that if the share exchange
agreement is terminated and the closing does not occur, then the maximum amount
of the indemnity shall be the amount obtained by multiplying the average market
price of a share of our company's common stock for each of the ten trading days
immediately preceding such termination date by the number of shares of our
company's common stock that would have represented 19.5% of our company's
outstanding common stock assuming the acquisition had been consummated on such
termination date (the "Notional Price").
The share exchange agreement also provides for us to indemnify Telenor for
breaches of our representations and warranties or the non-performance by us of
our covenants in the
82
agreement. Telenor may not seek indemnity from us unless their aggregate losses
for such breaches or non-performance exceed $11,000,000 and to reach that
aggregate amount they may only bring individual claims that are at least equal
to $250,000. We are not required to indemnify Telenor in an amount in excess of
the sum of the Notional Price, Telenor's costs and expenses in the transaction
and any amounts expended by Telenor in pursuing claims against our company.
We have agreed to provide to Telenor a guaranty of complete payment when due and
performance of each covenant, agreement and obligation of SFMT under the share
exchange agreement. An affiliate of Telenor has agreed to provide to us and SFMT
a guaranty of complete payment when due and performance of each covenant,
agreement and obligation of Telenor under the share exchange agreement.
CONDUCT OF BUSINESS
Pursuant to the share exchange agreement, Telenor has agreed to cause Comincom
and each of its subsidiaries, prior to the closing date, (a) to conduct its
business in the ordinary course in accordance with present policies and as
previously conducted, (b) to preserve its business organization intact, (c)
consistent with efficient and economical management, to retain the services of
its present officers, employees and agents to the end that the Comincom and each
of its subsidiaries may retain their goodwill and preserve their business
relationships with customers, suppliers and others, (d) to maintain or renew all
existing authorizations necessary for them to carry out their business as
currently conducted and to comply with all of the terms and conditions of the
authorizations and (e) report to us, as and when requested in writing,
concerning the status of the business and operations of Comincom or any of its
subsidiaries. Telenor shall not, and shall not permit Comincom or any its
subsidiaries to, take any action that would, or that could reasonably be
expected to, result in any of the conditions to the closing not being satisfied.
Prior to the closing date, Telenor shall not permit Comincom or any of its
subsidiaries to engage in any of the following, without our prior written
approval:
o changing or altering their corporate structure or amending their charter
documents or by-laws or other governing or organizational documents, or
initiating or undertaking any liquidation or dissolution;
o issuing or selling any shares of their capital stock, any ownership,
membership or equity interests, or any other securities or issuing any
securities convertible into or exchangeable for, or options, warrants to
purchase, scrip, rights to subscribe for, calls or commitments of any
character whatsoever relating to, or entering into any contract,
understanding or arrangement with respect to the issuance of, any
ownership, membership or equity interests, any shares of their capital
stock or any of their other securities, or entering into any arrangement
or contract with respect to the purchase, redemption or voting of their
ownership, membership or equity interests or shares of their capital
stock, or adjusting, splitting, reacquiring, redeeming, combining or
reclassifying any of their securities, or making any other changes in
their capital structure;
83
o directly or indirectly, establishing any new subsidiary, or making any
equity investment in, or advancing any funds to, any person involving an
aggregate amount for Comincom and its subsidiaries in excess of
US$10,000 (or the equivalent thereof in any other currency) other than
trade advances or prepayments made in the ordinary course of business;
o incurring (contingently or otherwise) any indebtedness, other than in
the ordinary course of business, but in no event shall the aggregate of
such amount incurred by Comincom and its subsidiaries exceed
US$2,500,000 (or the equivalent thereof in any other currency);
o incurring (contingently or otherwise) any other obligation or liability
except for normal operating purposes in the ordinary course of business;
o declaring, setting aside or paying any dividends (in cash or in kind)
on, or making any distributions in respect of, any capital stock or
other ownership, membership or equity interests (except in case such
dividends or distributions are due to Comincom or any its Subsidiaries);
o entering into, amending or affirmatively renewing or terminating any
contract, commitment, lease (whether of real property or any personal
(movable) property) or other agreement, except on an arm's length basis
and in the ordinary course of business;
o guaranteeing or entering into any obligation to guarantee the obligation
of any person, provided that the aggregate potential liability under all
of such guarantees in combination with any indebtedness incurred as
described above shall not exceed US$2,500,000 (or the equivalent thereof
in any other currency), and provided further that a guarantee or
assumption of obligations in favor of Comincom or any its subsidiaries
shall not be subject to this restriction;
o mortgaging, pledging or subjecting to any lien, any of their assets,
properties or business;
o selling or otherwise transferring or leasing any properties or assets or
canceling any debt or claim or waiving any right, or purchasing or
otherwise acquiring or leasing any properties or assets, in each case
except in the ordinary course of business;
o permitting to lapse any right with respect to any intellectual property
or other intangible asset necessary for the conduct of their business;
o granting any increase in wages or salary rates or in employment,
retirement, severance, termination or other benefits or paying any
bonus, or making any
84
loan to any officer, director or employee, other than increases or
bonuses in the ordinary course consistent with past practice or required
by any agreement in effect on the date the share exchange agreement was
signed and which was disclosed to us, or entering into any employment
contract with any person except in accordance with any budget or
business plan, or adopting any bonus, profit sharing, compensation,
stock option, pension, retirement, deferred compensation, employment or
other employee benefit plan, agreement, trust, plan, fund or other
arrangement for the benefit or welfare of any of their employees;
o accelerating the collection of accounts receivable, delaying the payment
of accounts payable or deferring maintenance and other expenses,
reducing inventories, or otherwise increasing cash on hand, in a manner
inconsistent with past practice or not in the ordinary course of
business;
o repaying any indebtedness, except as required by existing debt
instruments;
o making any material tax election, settling or compromising any liability
for taxes, preparing and filing tax returns or declarations other than
in accordance with applicable law and on a basis consistent with their
past practices or, other than in the ordinary course of business,
engaging in any transaction or operating the business in a manner that
would directly or indirectly result in any liability to them for taxes;
o making any changes in the type or amount of their insurance coverages,
other than any increase in coverage amount or renewal of a policy in the
ordinary course of business;
o making any material change in its accounting methods or practices; or
o agreeing, in writing or otherwise, to do any of the foregoing.
Pursuant to the share exchange agreement we agreed to, and to cause each of our
key subsidiaries to, prior to the closing date, (a) conduct its business in the
ordinary course in accordance with present policies and as previously conducted,
(b) consistent with efficient and economical management, retain the services of
its present officers and management to the end that we and each of the key
subsidiaries may retain its goodwill and preserve its business relationships
with customers, suppliers and others, and (c) report to Telenor, as and when
requested in writing, concerning the status of our business and operations or
the business and operations of any of our key subsidiaries. For purposes of the
share exchange agreement our key subsidiaries means each of the following 13
wholly-owned subsidiaries:
LLC EDN Sovintel, GTS-Vox, Ltd., SFMT-Rusnet, Inc., SFMT-CIS, Inc., LLC
Golden Telecom (Ukraine), LLC Invest-Holding, CellUkraine Ltd., LLC GTS
Ukrainian TeleSystems, GTS Mobile Services, Inc., GTS Finance, Inc., ROL
85
Holdings Ltd., LLC Business Communications Agency (ADS) and Golden
TeleServices, Inc.
We shall not, and shall not permit any of the key subsidiaries to, take any
action that would, or that could reasonably be expected to, result in any of the
conditions to closing not being satisfied. Prior to the closing date, we shall
not, and shall not permit any of our key subsidiaries to, engage in any of the
following, without the prior written approval of Telenor:
o except as otherwise disclosed to Telenor or as may be required by
applicable law, and in such case, only to the extent necessary, changing
or altering our or any of our key subsidiaries' corporate structures or
amending any of our or our key subsidiaries' charter documents or
by-laws or other governing or organizational documents, or initiating or
undertaking any liquidation or dissolution;
o solely in relation to shares of capital stock of our company and except
for option grants under our equity incentive plan within the limits in
effect when the share exchange agreement was signed or the issuance of
shares of our common stock upon exercise of options under the incentive
plan, issuing or selling any shares of our company's capital stock or
any other securities or issuing any securities convertible into or
exchangeable for, or options, warrants to purchase, scrip, rights to
subscribe for, calls or commitments of any character whatsoever relating
to, or entering into any contract, understanding or arrangement with
respect to the issuance of any shares of our company's capital stock or
any of our other securities, or entering into any arrangement or
contract with respect to the purchase, redemption or voting of our
company's capital stock, or adjusting, splitting, reacquiring,
redeeming, combining or reclassifying any of our company's securities,
or making any other changes in our capital structure;
o declaring, setting aside or paying any dividends in the form of shares
of capital stock or other securities on any capital stock or other
ownership, membership or equity interests of our company or any of our
key subsidiaries (except in case such dividends are due to our company
or any key subsidiary);
o except as previously disclosed to Telenor, selling or otherwise
transferring or leasing any properties or assets or canceling any debt
or claim or waiving any right, other than in the ordinary course of
business, transfers among our company or any of its subsidiaries or in
any case where the amount involved does not exceed US$2,000,000 (or the
equivalent thereof in any other currency);
o granting to any employee, officer or director of Golden Telecom or any
key subsidiary any retirement, severance, termination or other
severance-related benefits in respect of which the aggregate potential
liability to Golden
86
Telecom or any key subsidiary is in excess of US$250,000 (or the
equivalent thereof in any other currency), or adopting any profit
sharing or similar plan;
o incurring any indebtedness other than in the ordinary course of
business, provided that the aggregate amount of such indebtedness
incurred shall not exceed US$5,000,000 (or the equivalent thereof in any
other currency), or indebtedness incurred by our company or any of our
subsidiaries under a loan agreement to be entered into by our company
and certain of its subsidiaries with the European Bank for
Reconstruction and Development;
o changing the manner in which our company or any key subsidiary accounts
for its tax liabilities, or deviating from past practice in preparing
and filing any tax returns, unless required to do so by applicable law;
o making any material change in its accounting methods or practices,
except as may be required by applicable law;
o taking any action to delist our capital stock from the Nasdaq national
market; or
o agreeing, in writing or otherwise, to do any of the foregoing.
87
STOCK OWNERSHIP FOLLOWING THE CLOSING
On the record date and immediately after the closing of the acquisition and
assuming that we do not issue any other shares between the record date and the
closing and that none of the following shareholders disposes of any of their
shares of Golden Telecom common stock before the closing or acquires any
additional shares, our principal stockholders and their ownership of common
stock will be:
88
PERCENTAGE OF PERCENTAGE OF
NUMBER OF OUTSTANDING OUTSTANDING
SHARES OWNED SHARES OWNED NUMBER OF SHARES OWNED
IMMEDIATELY IMMEDIATELY SHARES OWNED IMMEDIATELY
BEFORE THE BEFORE THE IMMEDIATELY AFTER THE
SHAREHOLDER CLOSING CLOSING AFTER CLOSING CLOSING
----------- ------------ ------------- ------------- -------------
Alfa Telecom Limited (1) 10,731,707 37.3 10,731,707 30.0
PO Box 3339 Geneva Place
333 Waterford Drive
Road Town, Tortola
British Virgin Islands
Nye Telenor East Invest AS 0 0 6,972,382 19.5
Snaroyveien 30
N-1331 Fornebu
Norway
OAO Rostelecom 4,024,067 14.0 4,024,067 11.3
1st Tverskaya-Yamskaya 14
Moscow, Russia
125047
European Bank of Reconstruction 3,003,564 10.4 3,003,564 8.4
and Development
One Exchange Square
London EC2A 2JN
Capital International Global 2,166,405 7.5 2,166,405 6.1
Emerging Markets Private Equity
Fund L.P.
c/o Capital International, Inc.
11100 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025
First NIS Regional Fund SICAV(2)(3)(4) 723,906 2.5 723,906 2.0
c/o Bank of Bermuda (Luxemburg) S.A
13 rue Goethe
B.P. 413
L-2014 Luxemburg
Cavendish Nominees Limited (2)(3)(4) 1,845,769 7.4 1,845,769 5.2
c/o International Private Equity Services
13-15 Victoria Road, P.O. Box 431
St. Peter Port
Guernsey, Channel Islands, GY1 3ZD
1. Based on information provided in Amendment No. 7 to Schedule 13D filed
with the Securities and Exchange Commission on August 29, 2003, we
understand that Alfa Telecom Limited is a wholly-owned subsidiary of
Alfa Finance Holdings S.A. As a consequence of its ownership interests
in the majority shareholders of Alfa Finance, CTF Holdings Limited may
be deemed to have the power to direct the voting of the majority of
shares of Alfa Finance. CTF Holdings Limited is a wholly-owned
subsidiary of Crown Finance Foundation. As a result of these
relationships, each of Alfa Finance, CTF Holdings Limited and Crown
Finance Foundation may be deemed to beneficially own the shares held
for the account of Alfa Telecom Limited. In addition, Alfa Telecom
Limited has granted Alfa Capital Holdings (Cyprus) Limited ("Alfa
Capital Holdings") an option to purchase 1,609,756 of the shares
reported herein. Alfa Capital Holdings is a wholly-owned subsidiary of
ABH Financial Limited, which is a wholly-owned subsidiary of Alfa
Finance.
89
2. Shares beneficially owned by The Barings Vostok Private Equity Fund
L.P. and The NIS Restructuring Facility (together, "Barings") are held
in the name of Cavendish Nominees Limited, as nominee. Of the 1,845,769
shares held of record by Cavendish Nominees Limited, 1,491,485 shares
are beneficially owned by The Barings Vostok Private Equity Fund L.P.
and 354,284 shares are beneficially owned by The NIS Restructuring
Facility.
3. First NIS Regional Fund SICAV and the Barings Funds holding shares
through Cavendish Nominees Limited may be deemed to be members of a
group pursuant to Rule 13(d)(5) under the Securities Exchange Act of
1934, as amended. However, such persons disclaim group status.
4. First NIS Regional Fund SICAV and the Barings Funds holdings shares
through Cavendish Nominees Limited are advised by Barings Vostok
Capital Partners Limited, as investment adviser. Mr. Michael Calvey is
the Managing Partner of Barings Vostok Capital Partners Limited. Mr.
Calvey disclaims beneficial ownership of the shares held by First NIS
Regional Fund SICAV and the Barings Funds holdings shares held by
Cavendish Nominees Limited.
90
TERMS OF THE OTHER TRANSACTION DOCUMENTS
GENERAL
We currently have entered into a shareholders agreement and a standstill
agreement with Alfa, Barings, Capital and Rostelecom. We also have entered into
various registration rights agreements with these shareholders. In connection
with the acquisition of the capital stock of Comincom these agreements are being
terminated and new agreements have been executed that include Telenor as a
party. The old agreements will terminate and the new agreements will become
effective upon the closing of the acquisition of Comincom. The full text of each
of these agreements has been filed as an exhibit to the Form 8-K that we filed
with the SEC on August 20, 2003. This Form 8-K and the exhibits to the Form 8-K,
including each of these agreements may be viewed at the SEC's website,
www.sec.gov. The following is a description of the material terms of these
agreements and is qualified in its entirety by reference to the full agreements.
SHAREHOLDERS AGREEMENT
We have previously entered into a shareholders agreement with Alfa, Barings,
Capital and Rostelecom. In connection with the acquisition of Comincom the
parties have agreed to terminate the existing agreement and enter into a new
shareholders agreement which will include Telenor as a party. The terms of the
new agreement are very similar to the existing agreement.
Under the terms of the new agreement our Board of Directors will be set at ten
(10) members. In addition, each shareholder agrees to vote its shares to elect
designees to our Board of Directors initially as follows:
(A) three directors designated by Alfa;
(B) two directors designated by Telenor;
(C) two directors designated by Rostelecom (one of whom shall be an
independent director);
(D) one director designated by Capital (who shall be an independent
director);
(E) one director designated by Barings (who shall be an independent
director); and
(F) one director (who shall be an independent director and, if at such
time there is no other director who is a financial expert as defined
in the NASDAQ Marketplace Rules and SEC rules, a financial expert)
designated by the directors sitting on the Board on the date of the
Board meeting at which the Board adopts the resolutions concerning our
annual meeting of stockholders including the resolution in which our
Board nominates individuals to stand for election as directors for the
year following the annual meeting of stockholders.
The agreement provides the procedures to remove and replace directors designated
by the shareholders. In addition, subject to the detailed provisions in the
agreement dealing with the
91
designation of directors by the shareholders who are party to the agreement, the
right to designate directors shall be allocated among Alfa, Barings, Capital,
Rostelecom and Telenor as follows:
Percent of issued and outstanding shares
of our company's voting stock owned by Number of Designees
such shareholder to Board
--------------------------------------------------- ------------------------------------------
Ten percent (10%) or less 0
More than ten percent (10%) but less than twenty 1
percent (20%)
More than twenty percent (20%) but less than thirty 2
percent (30%)
More than thirty percent (30%) but less than forty 3
percent (40%)
Forty percent (40%) or more 3; plus the right to designate an
independent director (who shall be a
financial expert and qualified and willing
to serve on the audit committee)
provided that the size of the Board shall not be increased beyond ten members,
and a shareholder who would be entitled to designate an additional director due
to such shareholder's acquisition of additional shares of voting stock may only
exercise such right when another shareholder loses the right to designate a
director.
The agreement also governs the transfer of shares of our company stock by Alfa,
Barings, Capital, Rostelecom and Telenor, including rights of first offer and
tag along rights. Consistent with the existing agreement, we have provided to
these shareholders preemptive rights which will allow them to purchase their pro
rata share of any additional voting stock that we may issue. In addition, during
the first two years following the closing, Barings, Capital and Rostelecom shall
be entitled to designate one director so long as their respective ownership
interest in us does not fall below 3% of our issued and outstanding voting
shares.
The agreement also imposes limited restrictions on the ability of these
shareholders to compete with us.
92
In order to prevent a party from acquiring control of us without paying a
premium for that control, we have included a requirement in the agreement that
no party to the shareholders agreement (together with its affiliates) may
acquire more than fifty percent of our voting stock (50%) unless such share or
shares are acquired by such shareholder and/or one of its affiliates pursuant to
a "Tender Offer". For purposes of the shareholders agreement "Tender Offer"
means an offer made by a shareholder who is party to the agreement or any of its
affiliates in accordance with Section 14 of the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder, to purchase
any and all of our company's issued and outstanding shares, which, subject to
the exceptions described below, is accepted by our company's stockholders
holding a simple majority of the issued and outstanding shares of our voting
stock, excluding any shares of voting stock held by such shareholder and its
affiliates.
Exceptions to this restriction are, if at any time (1) a third party investor
makes a bona fide tender offer to purchase such percentage of the issued and
outstanding shares of our voting stock that when aggregated with any of the
issued and outstanding shares of our voting stock then owned by such investor
and its affiliates would equal more than fifty percent (50%) of the issued and
outstanding shares of our voting stock, and a shareholder who is a party to the
agreement or any of its affiliates thereafter makes a Tender Offer during the
period in which the tender offer made by such third party investor is still in
effect, or (2) a third party investor makes a bona fide tender offer during the
period in which a Tender Offer made by a shareholder or any of its affiliates is
still in effect, then the requirement in the definition of "Tender Offer" that
the Tender Offer made by such shareholder be accepted by our stockholders
holding a simple majority of the issued and outstanding shares of our voting
stock (excluding any shares of voting stock held by such shareholder and its
affiliates) shall not apply.
If any person shall, individually or together with any of its affiliates acquire
beneficial ownership of any share or shares of our voting stock from a
shareholder who is a party to the agreement (other than in a public sale) and,
after giving effect thereto, such person and its affiliates own ten percent or
more of the issued and outstanding shares of our voting stock, then such person
shall be required to become bound by the Tender Offer requirement. Each
shareholder who is a party to the agreement agrees to cause any such person to
which shares are so transferred to become bound by the Tender Offer requirement.
Except with respect to Tender Offers and participation in an auction in
accordance with the new standstill agreement, each shareholder who is a party to
the agreement agrees that it will not, nor will it permit any of its affiliates
to, engage in any Business Combination (as defined in the Delaware General
Corporation Law) with us without the prior approval of our Board, which approval
will be effective only if it includes the affirmative vote of a majority of the
disinterested directors. If no disinterested directors are in office, then each
such shareholder agrees that such shareholder will not, nor will it permit any
of its affiliates to, engage in any Business Combination with us unless such
Business Combination is approved in accordance with Section 203(a)(3) of the
Delaware corporate law.
93
The agreement shall become effective on the closing date of the acquisition of
Comincom and remain in effect until the earlier of:
(a) the date on which all of the parties agree in writing to the
termination of the agreement; and
(b) the date on which any person owns, individually or collectively with
its affiliates, more than fifty percent of the issued and outstanding
shares of our voting stock;
provided that (a) any shareholder who ceases to own at least three percent of
the issued and outstanding shares of our voting stock shall cease to be a party
to, or have any rights or obligations under, the agreement from and after the
date of the relevant transfer (or dilution); and (b) no such transfer, dilution
or termination shall be deemed to relieve any party of any obligations under the
agreement accruing, or resulting from actions or omissions of such party
occurring, prior to the date of such transfer, dilution or termination.
STANDSTILL AGREEMENT
We have previously entered into a standstill agreement with Alfa, Barings,
Capital and Rostelecom. In connection with the acquisition of Comincom, the
parties have agreed to terminate the existing agreement and enter into a new
standstill agreement which will include Telenor as well. The terms of the new
agreement are very similar to the existing agreement.
Under the terms of the agreement each shareholder who is a party to the
agreement agrees that such shareholder will not, nor will it permit any of its
affiliates to, directly or indirectly, in any manner acquire, or agree to
acquire, any shares of our voting stock, if the acquisition of such shares of
voting stock would increase the ownership of the shareholder and its affiliates
to more than (i) the percentage of the shares of voting stock then outstanding
(calculated on a fully diluted basis) set forth opposite each such shareholder's
name in the column headed "Fully Diluted" below, or (ii) the percentage of the
shares of voting stock then outstanding (calculated on a non-fully diluted
basis) set forth opposite such shareholder's name in the column headed
"Non-Fully Diluted" below:
Shareholder Fully Diluted Non-Fully Diluted
----------- ------------- -----------------
Alfa 43.00% 49.99%
Telenor 35.00% 40.00%
Rostelecom 30.00% 35.00%
Capital 17.20% 20.00%
Barings 17.20% 20.00%
This restriction will not apply to the following acquisitions or circumstances:
94
(1) the acquisition by a shareholder of shares of voting stock in
a Tender Offer (see our discussion of what is a tender offer
for purpose of the agreement in the summary of the shareholder
agreement above);
(2) if our Board determines to conduct an auction of our company,
in which case, each shareholder may participate in such
auction on the same terms as all other bidders; or
(3) if any person other than Alfa, Barings, Capital, Rostelecom or
Telenor or any of their respective affiliates acquires, or has
entered into a binding agreement to acquire, beneficial
ownership of greater than fifteen percent of our voting stock,
as evidenced by a Schedule 13D filing made by such person.
Each shareholder who is a party to the agreement agrees that it will not make,
nor will it permit any of its affiliates to make, or in any way participate in,
any "solicitation" of "proxies" (as such terms are used in the proxy rules of
the United States Securities and Exchange Commission) to vote any shares of
voting stock in connection with the election of members of the Board (other than
proxies to vote any shares of voting stock beneficially owned by such
shareholder and/or any of its affiliates or in connection with a Tender Offer
made by such shareholder or any of its affiliates).
Each shareholder who is a party to the agreement also agrees that it will not
make, nor will it permit any of its affiliates to make, or in any way
participate in any "solicitation" of "proxies" (as such terms are used in the
proxy rules of the United States Securities and Exchange Commission) to vote any
shares of voting stock, with respect to any matter, other than the election of
directors of our company, which may be submitted to a vote of the stockholders
of our company (other than proxies to vote any shares of voting stock
beneficially owned by such shareholder and/or any of its affiliates or in
connection with a Tender Offer made by such shareholder or any of its
affiliates) with respect to any such non-election issue.
If the new standstill agreement becomes effective it shall remain in effect
until the earliest of:
(a) the date on which all of the parties agree in writing to the
termination of the agreement;
(b) the date eighteen months following the closing of the
acquisition of Comincom;
(c) the date on which any person owns, individually or
collectively with its affiliates, more than fifty percent of
our company's issued and outstanding shares of voting stock;
and
(d) the voluntary or involuntary filing of a petition in
bankruptcy by or against our company, the occurrence of an
event of insolvency affecting our company, or the appointment
of a receiver for our company;
provided that any shareholder who ceases to own at least three percent of the
shares of our voting stock shall cease to be a party to, or have any rights or
obligations under, the agreement, and no transfer or dilution or termination
shall be deemed to relieve any
95
shareholder of any obligations of such shareholder under the new standstill
agreement accruing or resulting from any breach by such shareholder prior to the
date of such transfer, dilution or termination.
REGISTRATION RIGHTS AGREEMENT
We have previously entered into registration rights agreements with Alfa,
Barings, Capital and Rostelecom. In connection with the transaction, the parties
have agreed to terminate the existing agreements and enter into one agreement
which will include Telenor as well. The terms of the new agreement are very
similar to the existing agreements.
Pursuant to the new registration rights agreement each of Alfa, Rostelecom and
Telenor will be entitled to request two demand registrations. Each of Barings
and Capital will be entitled to request one demand registration. Our company
shall not be obligated to register any securities pursuant to any demand
registration unless the demand is for at least 500,000 shares of common stock
(subject to adjustments).
The shareholders will have unlimited "piggyback rights" that allow them to
include their shares of common stock in other registration statements for common
stock that we may file, subject to a cutback if the inclusion of shareholder
shares would be harmful to the offering.
We will be responsible for most of the fees incurred in connection with any
registration under the agreement but we will not be responsible for the fees of
the shareholder's counsel or any selling commission or underwriter discounts.
The new agreement, as is the case in the old registration rights agreement,
provides for customary indemnification and contribution provisions.
96
GENERAL QUESTIONS
Q.: WHEN AND WHERE IS THE SPECIAL SHAREHOLDER MEETING?
A.: The special meeting of stockholders of our company will be held at the
offices of Chadbourne & Parke, Regis House, 45 King William Street, London EC4R
9AN, United Kingdom on December 2, 2003 at 10 a.m. local time.
Q.: WHY AM I RECEIVING THIS PROXY STATEMENT AND PROXY CARD?
A.: You are receiving this proxy statement and proxy card from us because you
owned shares in our company on the record date. This proxy statement describes
issues on which we would like you, as a stockholder, to vote. It also provides
you information on these issues so that you can make an informed decision. The
proxy card is used for voting.
Q.: WHO CAN VOTE?
A.: Stockholders of record at close of business on October 24, 2003 are entitled
to vote at the special meeting. A list of the stockholders of record entitled to
vote at the special meeting will be available for review by any stockholder, for
any purpose relating to the meeting between 9:00 a.m. and 5:00 p.m. at our
company's executive offices at the Representative Offices of Golden
TeleServices, Inc., 1 Kozhevnichesky Proezd, 2nd Floor, Moscow, Russia 115114.
Q.: HOW MANY SHARES ARE ENTITLED TO VOTE?
A.: On October 24, 2003, the record date, our company had outstanding
approximately [ ] shares of Common Stock, par value $0.01 per share, with each
share representing one vote.
Q.: WHAT IS QUORUM?
A.: In order to hold the meeting, there must be present in person or by proxy
card holders of a majority of voting power of the outstanding shares of stock
entitled to vote at the meeting, which is approximately shares.
Q.: WHO PAYS THE COST OF SOLICITATION?
A.: Our company pays the cost of soliciting your proxy and reimburses brokerage
firms and others for forwarding this proxy statement and proxy card to you. In
addition, Mellon Investor Services has been retained by our company to assist in
soliciting proxies from brokerage firms, bank nominees and other institutional
holders to assure a timely vote by the beneficial owners of stock held of record
by such firms, banks and institutions. This firm will receive a fee of
approximately $6,500, plus reasonable expenses, for its services. In addition to
solicitation by mail, proxies may be solicited in person, or by telephone,
facsimile transmission or other means of electronic communication, by directors,
officers and other
97
employees of our company. If you plan to attend, please advise our Corporate
Secretary by e-mail at specialmeeting@gti.ru or by written correspondence.
Q.: WHO CAN ATTEND THE SPECIAL MEETING?
A.: Only stockholders are invited to attend the meeting. To gain admittance to
the meeting, you must bring proof of your ownership. If you are a stockholder of
record and received this proxy statement and your proxy card by mail, no
admissions ticket is needed for you to attend the special meeting. If a broker
or other nominee holds your shares, and you plan to attend the special meeting,
you should bring a recent brokerage statement showing your ownership of the
shares. In all cases you must also bring a form of personal identification.
* * * * * * * * * * * * * * * * * *
VOTING PROCEDURES (For Stockholders of Record)
You are a stockholder of record if you have an account directly with our
transfer agent, Mellon Investor Services.
Q.: HOW DO I VOTE?
A.: You may vote by signing and mailing your proxy card. If you return your
signed proxy card to our company before the special meeting, our company will
vote your shares as you direct. You can specify whether you approve, disapprove,
or abstain from the proposal. The proposal will be presented at the special
meeting by our management.
Q.: WHAT DOES DISCRETIONARY AUTHORITY MEAN FOR STOCKHOLDERS OF RECORD?
A.: If you return your proxy card to our company, but do not specify on your
proxy card how you want to vote your shares, we will vote them "FOR" the
proposal on your proxy card.
Q.: HOW DO I CHANGE MY VOTE?
A.: Stockholders of record who execute proxies may revoke them at any time
before they are voted. Any proxy card may be revoked by the person giving it any
time before it is voted by delivering to our company's Corporate Secretary at
the Representative Offices of Golden TeleServices, Inc., 1 Kozhevnichesky
Proezd, 2nd Floor, Moscow, Russia 115114 or Golden Telecom, Inc., 4400 MacArthur
Blvd., N.W., Suite 200, Washington, D.C., 20007 on or before the business day
prior to the special meeting or at the special meeting itself, a subsequent
written notice of revocation or a subsequent proxy card relating to the same
shares or by attending the meeting and voting in person.
* * * * * * * * * * * * * * * * * *
VOTING PROCEDURES (For Beneficial Stockholders)
98
You are a beneficial stockholder if a brokerage firm, bank, trustee or other
agent (the "nominee") holds your stock. This form of ownership is often called
ownership in "street name" since your name does not appear anywhere on our
records.
Q.: HOW DO I VOTE?
A.: You must vote in the manner described by the nominee in the materials
delivered by the nominee with this proxy statement. Detailed instructions are
also included in this proxy statement.
Q.: HOW DO I CHANGE MY VOTE?
A.: To change your vote, follow the nominee's instructions on revoking or
changing your proxy card.
* * * * * * * * * * * * * * * * * *
GENERAL VOTING QUESTIONS
Q.: HOW MANY VOTES ARE NEEDED FOR THE PROPOSAL TO PASS?
A.: The vote of the holders of at least a majority of the shares of Common Stock
present in person or represented by proxy at the meeting and entitled to vote is
required to approve the proposal.
Q.: WHAT SHARES ARE REFLECTED ON MY PROXY CARD?
A.: The proxy card we delivered to you reflects all shares owned by you at the
close of business on the record day as a stockholder of record. If you hold
shares "in street name" you will receive a voting instruction card from your
nominee for those shares.
Q.: IF I PLAN TO ATTEND THE MEETING SHOULD I STILL VOTE BY PROXY CARD?
A.: Yes. Casting your vote in advance does not affect your right to attend the
meeting. Written ballots will be available at the special meeting for
stockholders of record. If you send in your proxy card and also attend the
meeting, you do not need to vote again at the meeting unless you want to change
your vote. Beneficial owners who wish to attend the meeting and vote in person
must request a proxy from the nominee and bring that proxy to the meeting.
99
INCORPORATION OF INFORMATION BY REFERENCE
The following information contained in documents filed by Golden
Telecom, Inc. with the United States Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934 are hereby incorporated by reference in
this proxy statement:
(1) Item 7, Managements' Discussion and Analysis of Financial Condition
and Results of Operations and Item 8, Consolidated Financial Statements and
Supplementary Information for the Company from our Annual Report on Form 10-K
for the fiscal year ended December 31, 2002 (File No. 0-27423); and
(2) Item 1, Condensed Consolidated Financial Statements of Golden
Telecom, Inc. (unaudited) and Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations from our Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2003 (File No. 0-27423).
100
PROXY
COMMON STOCK
GOLDEN TELECOM, INC.
Representative Offices of Golden TeleServices, Inc.
1 Kozhevnichesky Proezd, 2nd Floor, Moscow, 115114, Russia
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby nominates and appoints Jeff Riddell as proxy
with full power of substitution to him, and hereby authorizes him to represent
and to vote, as designated hereon, all shares of Common Stock of GOLDEN TELECOM,
INC. (the "Company") which the undersigned is entitled to vote on all matters
that come before the Special Meeting of Stockholders to be held on , 2003,
and any adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED TO APPROVE THE ISSUANCE BY GOLDEN TELECOM, INC. OF 20% OR MORE OF ITS
COMMON STOCK BEFORE GIVING EFFECT TO THE ISSUANCE IN QUESTION IN CONNECTION WITH
THE ACQUISITION OF OAO COMINCOM, AN OPEN JOINT STOCK COMPANY EXISTING UNDER THE
LAWS OF THE RUSSIAN FEDERATION.
The Board of directors recommends a vote for the following proposals:
For Against Abstain
Approve the issuance by Golden Telecom, Inc. of 20% or more [ ] [ ] [ ]
of its common stock in connection with the acquisition of OAO
Comincom, an open joint stock company existing under the laws
of the Russian Federation.
Approve such other business as may properly come before the [ ] [ ] [ ]
meeting or any adjournment thereof.
Signatures __________________ Signature if held jointly __________________ Dated: _______________, 2003
Note: Please sign above exactly as the shares are issued. When shares are held
by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by the President or other
authorized officer. If a partnership, please sign in partnership name by an
authorized person.