e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-27423
Golden Telecom, Inc.
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of
incorporation or organization)
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51-0391303
(I.R.S. Employer
Identification No.) |
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Representative Office Golden TeleServices, Inc.
1 Kozhevnichesky Proezd
Moscow, Russia
(Address of principal executive office)
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115114
(Zip Code) |
(011-7-495) 797-9300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act:
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-accelerated Filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
At August 9, 2007, there were 40,308,222 outstanding shares of common stock of the registrant.
TABLE OF CONTENTS
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* |
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Please refer to the special note regarding forward-looking statements in this section. |
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GOLDEN TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
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December 31, |
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June 30, |
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2006 |
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2007 |
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ASSETS
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CURRENT ASSETS |
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Cash and cash equivalents |
|
$ |
18,413 |
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$ |
96,124 |
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Cash held in escrow |
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10,000 |
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Accounts receivable, net of allowance for doubtful accounts of
$25,224 and $30,054 at December 31, 2006 and June 30, 2007, respectively |
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147,719 |
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198,829 |
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VAT receivable |
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21,486 |
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34,220 |
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Prepaid expenses |
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11,371 |
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12,528 |
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Taxes receivable, excluding VAT |
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6,466 |
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9,000 |
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Notes receivable |
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379 |
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1,715 |
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Deferred tax asset |
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11,098 |
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14,467 |
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Inventory |
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7,682 |
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10,262 |
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Due from affiliates and related parties |
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1,227 |
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2,806 |
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Restricted cash |
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235 |
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Other current assets |
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5,564 |
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7,714 |
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TOTAL CURRENT ASSETS |
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231,405 |
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|
397,900 |
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Property and equipment, net of accumulated depreciation of $352,765
and $409,661 at December 31, 2006 and June 30, 2007, respectively |
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552,341 |
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799,530 |
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Goodwill and intangible assets: |
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Goodwill |
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180,539 |
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290,219 |
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Intangible assets, net of accumulated amortization of $90,314 and $103,702 at
December 31, 2006 and June 30, 2007, respectively |
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116,545 |
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236,993 |
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Net goodwill and intangible assets |
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297,084 |
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527,212 |
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Investments in and advances to ventures |
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11,886 |
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12,152 |
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Notes receivable |
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2,500 |
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20,973 |
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Restricted cash |
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233 |
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Other non-current assets |
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11,741 |
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15,779 |
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TOTAL ASSETS |
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$ |
1,107,190 |
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$ |
1,773,546 |
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See notes to unaudited condensed consolidated financial statements.
3
GOLDEN TELECOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
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December 31, |
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June 30, |
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2006 |
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2007 |
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LIABILITIES AND SHAREHOLDERS EQUITY
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CURRENT LIABILITIES |
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Accounts payable and accrued expenses |
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$ |
146,058 |
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$ |
257,530 |
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VAT payable |
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|
2,725 |
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|
13,412 |
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Debt maturing within one year |
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12,305 |
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11,728 |
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Current capital lease obligation |
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753 |
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5,072 |
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Deferred revenue |
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21,634 |
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25,104 |
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Due to affiliates and related parties |
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4,505 |
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5,533 |
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Liability
for acquisition |
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|
378 |
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|
8,205 |
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Other current liabilities |
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233 |
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193 |
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TOTAL CURRENT LIABILITIES |
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188,591 |
|
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326,777 |
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Long-term debt, less current portion |
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29 |
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225,149 |
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Long-term deferred tax liability |
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29,268 |
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72,339 |
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Long-term deferred revenue |
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36,951 |
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44,847 |
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Long-term capital lease obligations |
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1,591 |
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9,496 |
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Other non-current liabilities |
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2,321 |
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2,510 |
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TOTAL LIABILITIES |
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258,751 |
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681,118 |
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Minority interest |
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31,263 |
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72,208 |
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SHAREHOLDERS EQUITY |
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Preferred stock, $0.01 par value (10,000,000 shares
authorized; none issued and outstanding at December 31, 2006
and June 30, 2007) |
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Common stock, $0.01 par value (100,000,000 shares authorized;
36,673,015 and 39,915,234 shares issued and outstanding at December 31,
2006 and June 30, 2007, respectively) |
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|
367 |
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|
399 |
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Additional paid-in capital |
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674,993 |
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822,124 |
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Retained earnings |
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66,744 |
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107,238 |
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Accumulated other comprehensive income |
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|
75,072 |
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90,459 |
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TOTAL SHAREHOLDERS EQUITY |
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|
817,176 |
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|
1,020,220 |
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|
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
|
$ |
1,107,190 |
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|
$ |
1,773,546 |
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|
|
|
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|
See notes to unaudited condensed consolidated financial statements.
4
GOLDEN TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2006 |
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2007 |
|
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2006 |
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2007 |
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REVENUE: |
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Telecommunication services |
|
$ |
195,242 |
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$ |
295,263 |
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|
$ |
371,889 |
|
|
$ |
548,460 |
|
Revenue from affiliates and related parties |
|
|
1,726 |
|
|
|
2,406 |
|
|
|
3,219 |
|
|
|
4,948 |
|
|
|
|
|
|
|
|
|
|
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|
|
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|
|
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|
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|
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|
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TOTAL REVENUE |
|
|
196,968 |
|
|
|
297,669 |
|
|
|
375,108 |
|
|
|
553,408 |
|
|
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OPERATING COSTS AND EXPENSES: |
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
Access and network services (excluding depreciation
and amortization) |
|
|
105,608 |
|
|
|
171,633 |
|
|
|
199,001 |
|
|
|
321,728 |
|
Selling, general and administrative (excluding
depreciation and amortization) |
|
|
33,569 |
|
|
|
44,797 |
|
|
|
67,450 |
|
|
|
93,783 |
|
Depreciation and amortization |
|
|
23,923 |
|
|
|
32,413 |
|
|
|
46,572 |
|
|
|
60,970 |
|
|
|
|
|
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|
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|
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|
|
|
|
|
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TOTAL OPERATING COSTS AND EXPENSES |
|
|
163,100 |
|
|
|
248,843 |
|
|
|
313,023 |
|
|
|
476,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
|
33,868 |
|
|
|
48,826 |
|
|
|
62,085 |
|
|
|
76,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
OTHER INCOME (EXPENSE): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Equity in earnings (losses) of ventures |
|
|
347 |
|
|
|
107 |
|
|
|
671 |
|
|
|
(268 |
) |
Interest income |
|
|
156 |
|
|
|
1,160 |
|
|
|
803 |
|
|
|
1,428 |
|
Interest expense |
|
|
(74 |
) |
|
|
(3,065 |
) |
|
|
(150 |
) |
|
|
(3,065 |
) |
Foreign currency gains (losses) |
|
|
669 |
|
|
|
1,326 |
|
|
|
1,575 |
|
|
|
1,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL OTHER INCOME (EXPENSE) |
|
|
1,098 |
|
|
|
(472 |
) |
|
|
2,899 |
|
|
|
(312) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
34,966 |
|
|
|
48,354 |
|
|
|
64,984 |
|
|
|
76,615 |
|
Income taxes |
|
|
11,356 |
|
|
|
14,706 |
|
|
|
20,770 |
|
|
|
24,836 |
|
Minority interest |
|
|
965 |
|
|
|
1,385 |
|
|
|
2,103 |
|
|
|
2,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in
accounting principle |
|
|
22,645 |
|
|
|
32,263 |
|
|
|
42,111 |
|
|
|
48,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of a change in accounting principle,
net of tax of $52 |
|
|
|
|
|
|
|
|
|
|
681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET INCOME |
|
$ |
22,645 |
|
|
$ |
32,263 |
|
|
$ |
41,430 |
|
|
$ |
48,982 |
|
|
|
|
|
|
|
|
|
|
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|
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|
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Basic earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in
accounting principle |
|
|
0.62 |
|
|
|
0.85 |
|
|
|
1.15 |
|
|
|
1.31 |
|
Cumulative effect of a change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
$ |
0.62 |
|
|
$ |
0.85 |
|
|
$ |
1.13 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic |
|
|
36,600 |
|
|
|
37,872 |
|
|
|
36,537 |
|
|
|
37,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in
accounting principle |
|
$ |
0.62 |
|
|
$ |
0.85 |
|
|
|
1.15 |
|
|
|
1.31 |
|
Cumulative effect of a change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted |
|
$ |
0.62 |
|
|
$ |
0.85 |
|
|
$ |
1.13 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares diluted |
|
|
36,716 |
|
|
|
37,983 |
|
|
|
36,687 |
|
|
|
37,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.20 |
|
|
$ |
|
|
|
$ |
0.40 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
5
GOLDEN TELECOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2006 |
|
|
2007 |
|
OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,430 |
|
|
$ |
48,982 |
|
Adjustments to Reconcile Net Income to Net Cash Provided by |
|
|
|
|
|
|
|
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
36,545 |
|
|
|
49,395 |
|
Amortization |
|
|
10,027 |
|
|
|
11,575 |
|
Equity in (earnings) losses of ventures |
|
|
(671 |
) |
|
|
268 |
|
Foreign currency gain |
|
|
(1,575 |
) |
|
|
(1,593 |
) |
Bad debt expense |
|
|
4,555 |
|
|
|
3,394 |
|
Stock based compensation expense |
|
|
2,273 |
|
|
|
11,223 |
|
Cumulative effect of a change in accounting principle, net
of tax of $52 |
|
|
681 |
|
|
|
|
|
Other |
|
|
452 |
|
|
|
534 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(27,855 |
) |
|
|
(36,659 |
) |
Accounts payable and accrued expenses |
|
|
22,916 |
|
|
|
19,505 |
|
VAT, net |
|
|
(6,552 |
) |
|
|
(925 |
) |
Other changes in assets and liabilities |
|
|
(1,055 |
) |
|
|
3,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
81,171 |
|
|
|
109,677 |
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchases of property and equipment and intangible assets |
|
|
(81,206 |
) |
|
|
(110,162 |
) |
Acquisitions, net of cash acquired |
|
|
(16,486 |
) |
|
|
(106,066 |
) |
Restricted cash |
|
|
337 |
|
|
|
(2 |
) |
Cash held in
escrow |
|
|
|
|
|
|
(10,000 |
) |
Loans made |
|
|
(3,000 |
) |
|
|
(19,815 |
) |
Other investing |
|
|
1,206 |
|
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(99,149 |
) |
|
|
(245,449 |
) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net proceeds from exercise of employee stock options |
|
|
2,306 |
|
|
|
756 |
|
Cash dividends paid |
|
|
(14,622 |
) |
|
|
|
|
Proceeds from debt |
|
|
|
|
|
|
281,706 |
|
Repayment of debt |
|
|
|
|
|
|
(69,203 |
) |
Other financing |
|
|
(1,062 |
) |
|
|
(697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
|
(13,378 |
) |
|
|
212,562 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
591 |
|
|
|
921 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(30,765 |
) |
|
|
77,711 |
|
Cash and cash equivalents at beginning of period |
|
|
67,176 |
|
|
|
18,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
36,411 |
|
|
$ |
96,124 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
6
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
Golden Telecom, Inc. (the Company or GTI) is a provider of a broad range of telecommunications
services to businesses, other telecommunications service providers and consumers. The Company
provides these services through its operation of voice, Internet and data networks, international
gateways, local access and various value-added services in the Commonwealth of Independent States
(CIS), primarily in Russia, and through its fixed line and mobile operations in Ukraine.
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 and United States Securities and Exchange Commission (SEC)
regulations. Certain information and footnote disclosures normally included in complete financial
statements prepared in accordance with US GAAP and SEC rules and regulations have been condensed or
omitted pursuant to such US GAAP and SEC rules and regulations. In the opinion of management, the
financial statements reflect all adjustments of a normal and recurring nature necessary to present
fairly the Companys financial position, results of operations and cash flows for the interim
periods. These financial statements should be read in conjunction with the Companys 2006 audited
consolidated financial statements and the notes related thereto. The results of operations for the
three and six months ended June 30, 2007 may not be indicative of the operating results for the
full year.
Note 2: Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements for the three and six
months ended June 30, 2007 should be read in conjunction with the consolidated financial statements
contained in the Companys annual report on Form 10-K filed with the SEC on March 16, 2007. The
Companys significant accounting policies have not changed since December 31, 2006, except as
outlined below.
Accounting from Uncertainty in Income Taxes
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes
an interpretation of SFAS No. 109. FIN No. 48 creates a single model to address uncertainty in
tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition
threshold a tax position is required to meet before being recognized in the financial statements.
FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The adoption of FIN No. 48
resulted in the cumulative effect adjustment to the opening balance of retained earnings as of
January 1, 2007, of approximately $8.5 million. As of June 30, 2007, the Company included accruals
for unrecognized income tax benefits totaling approximately $20.1 million as a component of accrued
liabilities.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
|
|
|
|
|
|
|
(in thousands) |
|
Balance at January 1, 2007 |
|
$ |
8,555 |
|
Additions based on tax positions related to the
current year (including
additions related to the acquisition of ZAO
Cortec in May 2007 of $10,221) |
|
|
10,457 |
|
Additions of tax positions of prior years |
|
|
1,044 |
|
Reductions of tax positions of prior years |
|
|
|
|
Settlements |
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
20,056 |
|
|
|
|
|
Approximately
$9.9 million of unrecognized tax benefits, if recognized, would
affect the effective tax rate. The Company considers it reasonably possible that approximately
$5.3 million of the unrecognized income tax benefit will be reversed within the next twelve months,
due to expiration of the statute of limitations. It is also reasonably possible that the total
amounts of unrecognized tax benefits will decrease by approximately
$6.5 million due to the
potential deconsolidation of a variable interest entity in the period ending September 30, 2007.
7
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Although the Company believes it is more likely than not that all recognized income tax
benefits would be sustained upon examination, the Company has recognized some income tax benefits
that have a reasonable possibility of successfully being challenged by the tax authorities. These
income tax positions could result in total unrecognized tax benefits increasing by up to
approximately $13.2 million if the Companys position was successfully challenged. However, the
Company believes that it is reasonably possible that such an increase in total unrecognized tax
benefits will be recognized as certain tax position due to a
favorable outcome of the litigation with tax authorities in the
amount of approximately $8.0 million before the end of 2007.
The Company recognizes accrued interest related to unrecognized tax benefits and penalties in
income tax expenses. During the three and six months ended June 30, 2007, the Company recognized
approximately $0.4 million and $0.6 million, respectively, in interest and penalties. At January
1, 2007 and June 30, 2007, the Company had accrued for approximately $3.2 million and $7.0 million,
respectively, for the payment of interest and penalties.
As of the adoption of FIN No. 48, the tax years ended December 31, 2003, 2004, 2005 and 2006
remained subject to examination by United States tax authorities. As of the adoption date of FIN
No.48, the tax years ended December 31, 2004, 2005 and 2006 remained subject to examination by
Russian and Ukrainian tax authorities.
Income Taxes
The Company accounts for income taxes using the liability method required by Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. For interim
reporting purposes, the Company also follows the provisions of Accounting Principles Board No. 28,
Interim Financial Reporting, which requires the Company to account for income taxes based on the
Companys best estimate of the effective tax rate expected to be applicable for the full fiscal
year on a current year-to-date basis. The rate so determined is based on the tax rates currently
applicable to the Company in the United States and to the Companys subsidiaries in Russia and
other CIS countries and includes the Companys best estimate of the annual tax effect of
non-deductible expenses, primarily related to amortization of intangible assets, foreign exchange
and other permanent differences as well as estimates as to the realization of certain deferred tax
assets. Deferred income taxes result from temporary differences between the tax basis of assets
and liabilities and the basis as reported in the consolidated financial statements. The Company
does not provide for deferred taxes on the undistributed earnings of its foreign subsidiaries, as
such earnings are generally intended to be reinvested in those operations permanently. In the case
of non-consolidated entities, where the Companys partner requests that a dividend be paid, the
amounts are not expected to have a material impact on the Companys income tax liability. It is not
practical to determine the amount of unrecognized deferred tax liability for such reinvested
earnings.
Comparative Figures
Certain prior year amounts have been reclassified to conform to the presentation adopted in
the current year. Such reclassifications did not affect the consolidated statements of operations.
Recent Accounting Pronouncements
Income Statement Presentation of Taxes Collected from Customers and Remitted to Government
Authorities
In June 2006, the Emerging Issues Task Force reached (EITF) a consensus on EITF Issue No.
06-03 (EITF No. 06-03), How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).
EITF No. 06-03 provides that the presentation of taxes assessed by a governmental authority that is
directly imposed on a revenue-producing transaction between a seller and a customer on either a
gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an
accounting policy decision that should be disclosed. The provisions of EITF No. 06-03 became
effective for fiscal years beginning after December 15, 2006. The Company continues to present
such taxes on a net basis in the consolidated statement of operations, and therefore, the adoption
of EITF No. 06-03 had no effect on the Companys consolidated financial position or results of
operations.
8
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value Measurements
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires
enhanced disclosures about fair value measurements. SFAS No. 157 creates a fair value hierarchy,
which prioritizes the inputs that should be used in determining fair value. Under this
pronouncement, companies must provide disclosures containing relevant information in the financial
statements, allowing users to assess inputs used to measure fair value, as well as the effect of
those measurements on earnings for the periods presented, including a reconciliation of the
beginning and ending balances separately for each major category of assets and liabilities. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company is currently evaluating the
provisions of SFAS No. 157 to determine the potential impact, if any, the adoption will have on the
Companys financial statements.
Fair Value Option
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financials Liabilities Including an Amendment of FASB Statement No. 115. This standard
permits measurement of certain financial assets and financial liabilities at fair value. If the
fair value option is elected, the unrealized gains and losses are reported in earnings at each
reporting date. Generally, the fair value option may be elected on an instrument-by-instrument
basis, as long as it is applied to the instrument in its entirety. The fair value option election
is irrevocable, unless a new election date occurs. SFAS No. 159 requires prospective application
and also establishes certain additional presentation and disclosure requirements. The standard is
effective as of the beginning of the fiscal year that begins after November 15, 2007. The Company
is currently evaluating the provisions of SFAS No. 159 to determine the potential impact, if any,
the adoption will have on the Companys financial statements.
Note 3: Comprehensive Income
SFAS No. 130,
Reporting Comprehensive Income, requires the reporting of comprehensive income
in addition to net income. Accumulated other comprehensive income includes foreign currency
translation adjustments. For the three and six months ended June 30, 2007, total comprehensive
income included, in addition to net income, the effect of translating foreign currency denominated
financial statements of the Companys foreign subsidiaries domiciled in Russia and Ukraine into the
Companys reporting currency, in accordance with SFAS No. 52, Foreign Currency Translation.
Comprehensive income comprises the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,645 |
|
|
$ |
32,263 |
|
|
$ |
41,430 |
|
|
$ |
48,982 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
7,493 |
|
|
|
|
|
|
|
15,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
22,645 |
|
|
$ |
39,756 |
|
|
$ |
41,430 |
|
|
$ |
64,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4: Intangible Assets
The total gross carrying value and accumulated amortization of the Companys intangible assets
by major asset class is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
As of June 30, 2007 |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
Weighted Average |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Accumulated |
|
|
|
Amortization Lives |
|
|
Cost |
|
|
Amortization |
|
|
Cost |
|
|
Amortization |
|
Intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telecommunications service contracts |
|
10 years |
|
$ |
119,433 |
|
|
$ |
(49,450 |
) |
|
$ |
132,215 |
|
|
$ |
(54,163 |
) |
Contract-based customer relationships |
|
5 years |
|
|
42,104 |
|
|
|
(28,578 |
) |
|
|
51,263 |
|
|
|
(33,878 |
) |
Licenses |
|
10 years |
|
|
26,948 |
|
|
|
(4,295 |
) |
|
|
102,083 |
|
|
|
(4,469 |
) |
Brand name |
|
10 years |
|
|
|
|
|
|
|
|
|
|
32,800 |
|
|
|
(2,269 |
) |
Other intangible assets |
|
6 years |
|
|
18,374 |
|
|
|
(7,991 |
) |
|
|
22,334 |
|
|
|
(8,923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
206,859 |
|
|
$ |
(90,314 |
) |
|
$ |
340,695 |
|
|
$ |
(103,702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately
$85.5 million of licenses are not being amortized because they
are not ready for their intended use.
9
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 5: Net Income Per Share
Basic earnings per share at June 30, 2006 and 2007 are computed on the basis of the weighted
average number of common shares outstanding. Diluted earnings per share at June 30, 2006 and 2007
are computed on the basis of the weighted average number of common shares outstanding plus the
effect of outstanding employee stock options using the treasury stock method. The number of stock
options excluded from the diluted earnings per share computation, because their effect was
antidilutive for the three and six months ended June 30, 2006 and 2007 was 10,000 and 1,456,020
stock options, respectively.
The components of basic and diluted earnings per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
|
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of a change in
accounting principle |
|
$ |
22,645 |
|
|
$ |
32,263 |
|
|
$ |
42,111 |
|
|
$ |
48,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock shares |
|
|
36,600 |
|
|
|
37,872 |
|
|
|
36,537 |
|
|
|
37,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
116 |
|
|
|
111 |
|
|
|
150 |
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock and common stock equivalents |
|
|
36,716 |
|
|
|
37,983 |
|
|
|
36,687 |
|
|
|
37,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share before cumulative effect of a change
in accounting principle: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.62 |
|
|
$ |
0.85 |
|
|
$ |
1.15 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.62 |
|
|
$ |
0.85 |
|
|
$ |
1.15 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6: Business Combinations and Investment Transactions
In February 2007, the Company completed the acquisition of 65% ownership interest in Fortland
Limited (Fortland) from an entity, the principal shareholder of which is also a shareholder in
three of the Companys other subsidiaries. Fortland owns Kolangon-Optim LLC (Kolangon), an
early-stage digital video broadcast enterprise in Russia. The Company acquired Fortland for
approximately $49.7 million consisting of cash consideration of approximately $38.6 million paid in
April 2007, and a deferred payment of $11.1 million due in October 2007, approximately $0.2 million
of direct transaction costs plus the assumption of approximately $1.8 million debt. The
acquisition of Fortland was accounted for as an asset purchase of television license through a
variable interest entity. The Company has consolidated the financial position and results of
operations of Fortland from February 1, 2007. On acquisition, the Company allocated approximately
$72.1 million to licenses, approximately $17.2 million to deferred tax liability, and approximately
$15.0 million to noncontrolling interest. In conjunction with this transaction, the Company also
entered into an agreement whereby the Company agreed to provide a secured loan of approximately
$12.1 million to the seller. The loan, issued in April 2007, is secured by a pledge of a 15%
interest in Fortland owned by the seller and matures in April 2011. In conjunction with this
transaction, the Company also entered into a put option agreement that, if exercised, would require
the Company to purchase the sellers remaining 35% interest in Fortland at fair market value. In
conjunction with this transaction, the Company also entered into a call option agreement that, if
exercised, would require the seller to sell the sellers remaining 35% interest in Fortland at fair
market value. The put and call options are exercisable on and after September 30, 2010.
In April 2007, the Company completed the acquisition of 100% ownership interest in ZAO
Telecommunications Agency (Atel), a fixed line alternative telecommunications operator in Perm,
for approximately $4.5 million in cash consideration. The Company has consolidated the financial
position and results of operations of Atel from April 1, 2007.
10
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Companys consolidated financial statements reflect the preliminary allocation of the
purchase price based on a preliminary fair value assessment of the assets acquired and liabilities
assumed, and as such, the Company has assigned approximately $2.7 million to fixed assets which
will be depreciated over a weighted average period of approximately 7 years. The excess of the
purchase price over the fair value of the net assets acquired of approximately $1.8 million has
been assigned to goodwill and is not deductible for tax purposes. The purchase price allocation
will be finalized upon completion of the valuation of the acquired fixed and intangible assets.
The goodwill has been assigned to Business and Corporate Services reportable segment. In
accordance with 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
above acquisitions. The goodwill will be tested for impairment at least annually.
In May 2007, the Company completed the acquisition of 100% ownership interest in OOO ICA
Center of Commercial Real Estate (CKN), which owns 6,181 square meters of a building in Moscow.
The Company acquired CKN for approximately $9.8 million of cash consideration. The acquisition of
CKN was accounted for as an asset purchase of a building through a variable interest entity. On
acquisition, the Company allocated $12.0 million to fixed assets and approximately $2.3 million to
deferred tax liability. The Company has consolidated the financial position and the results of
operations of CKN from May 1, 2007.
In May 2007, the Company completed the acquisition of a 51% ownership interest in ZAO Cortec
and its subsidiaries (together Corbina) from Inure Enterprises Ltd. and Rambert Management
Limited, pursuant to a Stock Purchase Agreement. The total purchase price of approximately $196.8
million consisted of approximately $142.1 million of GTIs common stock, representing 3,193,219
shares, cash consideration of approximately $8.2 million, and direct transaction costs of
approximately $1.4 million. At June 30, 2007, the Company had $10.0 million held in
escrow out of which the $8.2 million of cash consideration was
paid in August 2007. In addition, as part of the purchase
price, the Company refinanced $45.0 million of debt that the
seller owed to OAO Vneshtorgbank. The refinancing was effected through a loan to Corbina from the Company. The purchase consideration of
GTIs common stock, which was issued on May 25, 2007, was determined based on the closing price of
the Companys common stock on December 20, 2006, when the Company announced that it had entered
into a binding Memorandum of Understanding with Dawn Key Limited to acquire a 51% ownership interest in
Corbina. Accordingly, the GTI shares issued in consideration are valued based on the average
closing price of the Companys common stock for the five consecutive trading days between December
18, 2006 and December 22, 2006, which was $44.51 per share. Management believes the acquisition of
51% of Corbina further strengthens the Companys position in the Companys broadband strategy and
positions the Company to realize future operating and cost synergies. Corbina is an integrated
telecommunications provider of telecommunications and Internet services in Russia. The Company has
consolidated the financial position of Corbina from May 31, 2007 and the results of operations of
Corbina from June 1, 2007. Corbina holds a variable interest and is the primary beneficiary of
Mircom Trading, Inc. (Mircom), a British Virgin Islands registered wholesale telecommunications
operator providing a range of carrier and operator services to foreign telecommunications
operators. Mircom is owned by a member of the Board of Directors of Corbina. As of June 30, 2007,
Mircom had net liabilities of approximately $14.8 million. For the month ended June 30, 2007,
Mircom had revenues of approximately $0.7 million and net loss of approximately $0.3 million.
The creditors of Mircom have no recourse to the Companys general credit.
The acquisition of 51% ownership interest in Corbina was accounted for as a purchase business
combination in accordance with SFAS No. 141, Business Combinations. The following is the
condensed balance sheet of Corbina as of May 31, 2007 reflecting the preliminary purchase price
allocation to the net assets acquired:
11
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
May 31, 2007 |
|
|
|
(in thousands) |
|
ASSETS: |
|
|
|
|
Current assets |
|
$ |
31,743 |
|
Property and equipment |
|
|
150,327 |
|
Intangible assets |
|
|
51,591 |
|
Goodwill |
|
|
103,698 |
|
Other assets |
|
|
23 |
|
|
|
|
|
Total assets |
|
$ |
337,382 |
|
|
|
|
|
|
|
|
|
|
LIABILITES: |
|
|
|
|
Current liabilities |
|
$ |
94,100 |
|
Non-current liabilities |
|
|
25,307 |
|
|
|
|
|
Net assets |
|
$ |
217,975 |
|
|
|
|
|
|
|
|
|
|
Less: Minority interest in net assets acquired |
|
|
(21,194 |
) |
|
|
|
|
Total purchase consideration and transaction costs |
|
$ |
196,781 |
|
|
|
|
|
|
|
|
|
|
Consideration and transaction costs: |
|
|
|
|
GTI shares consideration |
|
|
142,130 |
|
Cash consideration |
|
|
8,205 |
|
Loan refinancing |
|
|
45,000 |
|
Direct transaction costs |
|
|
1,446 |
|
|
|
|
|
Total purchase consideration and transaction costs |
|
$ |
196,781 |
|
|
|
|
|
The Companys financial statements reflect the preliminary allocation of the purchase price
based on a preliminary fair value assessment of the assets acquired and liabilities assumed, and as
such, the Company has assigned approximately $32.8 million to brand which will be amortized over a
period of 10 years, approximately $10.5 million to telecommunications service contracts intangible
assets which will be amortized over a weighted average period of approximately 6 years,
approximately $7.6 million to contract-based customer relationship intangible assets which will be
amortized over a weighted average period of approximately 9 years, approximately $0.1 million to
licenses which will be amortized over a weighted average period of 5 years, and approximately $0.6
million to other intangible assets which will be amortized over a weighted average period of 5
years. The Company has recorded approximately $10.3 million of
tax contingencies related to the acquisition of Corbina. The purchase
price allocation will be finalized upon the completion of the valuation of the acquired fixed and
intangible assets and resolving tax contingencies. The excess purchase price over the fair value
of the net tangible and intangible assets acquired of approximately $103.7 million has been
assigned to goodwill and is not deductible for tax purposes. Approximately $23.0 million of this
goodwill has been assigned to the Business and Corporate Services reportable segment, approximately
$5.0 million of this goodwill has been assigned to the Carrier and Operator Services reportable
segment, approximately $66.8 million of this goodwill has been assigned to the Consumer Internet
Services reportable segment, and approximately $8.9 million of this goodwill has been assigned to
the Mobile Services reportable segment. In accordance with 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 51% ownership interest in Corbina. The goodwill
will be tested for impairment at least annually.
The following unaudited pro forma consolidated results of operations for the Company give
effect to the Corbina business combination as if it had occurred at the beginning of 2006 and to
give effect to the Corbina business combination as if it had occurred at the beginning of 2007.
These unaudited pro forma amounts are provided for informational purposes only and do not purport
to present the results of operations of the Company had the transactions assumed therein occurred
on or as of the date indicated, nor is it necessarily indicative of the results of operations which
may be achieved in the future.
12
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
|
(in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
217,059 |
|
|
$ |
320,363 |
|
|
$ |
414,166 |
|
|
$ |
604,968 |
|
Income before cumulative effect of
a change in accounting principle |
|
|
22,395 |
|
|
|
33,654 |
|
|
|
41,840 |
|
|
|
50,320 |
|
Cumulative effect of a change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
(681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,395 |
|
|
$ |
33,654 |
|
|
$ |
41,159 |
|
|
$ |
50,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
a change in accounting principle |
|
$ |
0.56 |
|
|
$ |
0.82 |
|
|
$ |
1.05 |
|
|
$ |
1.24 |
|
Cumulative effect of a change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic |
|
$ |
0.56 |
|
|
$ |
0.82 |
|
|
$ |
1.03 |
|
|
$ |
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
a change in accounting principle |
|
$ |
0.56 |
|
|
$ |
0.82 |
|
|
$ |
1.05 |
|
|
$ |
1.24 |
|
Cumulative effect of a change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share diluted |
|
$ |
0.56 |
|
|
$ |
0.82 |
|
|
$ |
1.03 |
|
|
$ |
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2007, the Company completed the acquisition of 100% ownership interest in
ZAO Direct Net Telecommunications (DirectNet) and ZAO Satcom Tel (Satcomtel), fixed line
alternative telecommunications operators in Moscow and the assets of NDNT, Inc. and NDNT (UK)
Limited, for approximately $1.4 million in cash consideration, including the assignment of
approximately $0.7 of intercompany debt from the seller to the Company. The Company has
consolidated the financial position and the results of operations of DirectNet and Satcomtel from June
1, 2007.
The Companys consolidated financial statements reflect the preliminary allocation of the
purchase price based on a preliminary fair value assessment of the assets acquired and liabilities
assumed, and as such, the Company has assigned approximately $0.1 million to telecommunications
services contracts intangible assets which will be amortized over a weighted average period of
approximately 10 years and approximately $0.1 million to other intangible assets which will be
amortized over a weighted average period of approximately 10 years. The excess of the purchase
price over the fair value of the net assets acquired of approximately $1.9 million has been
assigned to goodwill and is not deductible for tax purposes. The purchase price allocation will be
finalized upon completion of the valuation of the acquired fixed and intangible assets. The
goodwill has been assigned to Business and Corporate Services reportable segment. In accordance
with 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 above
acquisitions. The goodwill will be tested for impairment at least annually.
In June 2007, the Company completed the acquisition of 75% ownership interest in OOO Alcar
(Alcar), an early-stage WiFi enterprise in Russia from
an entity, the principal shareholder of which is also a shareholder
in three of the Companys other subsidiaries. The Company acquired Alcar
for approximately $1.9 million of cash consideration. The acquisition of Alcar was accounted for
as an asset purchase of WiFi frequencies through a variable interest entity. On acquisition, the
Company allocated approximately $3.1 million to licenses, approximately $0.7 million to deferred
tax liability, and approximately $0.8 million to noncontrolling interest. The Company has
consolidated the financial position and the results of operations of Alcar from June 1, 2007.
Note 7: Shareholders Equity
Common Stock
The Companys outstanding shares of common stock increased by 167,358 shares and 49,000 shares
in the six months ended June 30, 2006 and 2007, respectively, which shares were issued in
connection with the exercise of employee stock options.
13
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In May 2007, the Company issued 3,193,219 shares of the Companys common stock in connection
with the acquisition of 51% ownership interest in Corbina.
At June 30, 2007, there were 5,597 unvested restricted shares of the Companys common stock
outstanding with a value of $0.3 million. Unvested restricted shares of 497 relate to restricted
shares issued to senior management of the Company in August 2005 and vest gradually over
approximately two years. The remaining 5,100 unvested restricted shares relate to restricted
shares issued to certain members of the Board of Directors of the Company in May 2007 and vest
after one year.
Note 8: Stock Option and Stock Appreciation Rights Plans
During the six months ended June 30, 2006 and 2007, the Company recorded pretax stock-based
compensation expense of approximately $2.2 million and $11.2 million, respectively, related to the
expensing of the Companys Stock Appreciation Rights
(SARs), non-qualified stock options and restricted shares.
The Company has established the 1999 Equity Participation Plan of Golden Telecom, Inc. (the
Equity Plan) and granted stock options to key employees and members of the Board of Directors of
the Company. In April 2007, the Compensation Committee of the Board of Directors recommended and
the Board of Directors approved an amendment to the Equity Plan to increase the number of shares
available under the Equity Plan by 1,000,000. The decision of the Board of Directors was ratified
by the Companys shareholders on May 17, 2007. Under the Equity Plan not more than 5,320,000
shares of common stock (subject to anti-dilution and other adjustment provisions) are authorized
for issuance upon exercise of options or upon vesting of restricted
or deferred stock awards. There are 1,959,019 securities remaining
available for future issuance under the Companys Equity Plan.
The Company has established the Golden Telecom, Inc. 2005 Stock Appreciation Rights Plan (SARs
Plan) and the EDN Sovintel 2005 Stock Appreciation Rights Bonus Plan (Sovintel SARs Bonus Plan).
On June 27, 2007, the terms of the outstanding SARs issued under the SARs plan and the Sovintel
SARs Bonus Plan were modified to cap the maximum of payout to the
employee at the closing sales price per
share of the Companys common stock on the NASDAQ Global Select Market on June 27, 2007, or $53.80.
On June 27, 2007, the participants of the SARs Plan, the Sovintel SARs Bonus Plan, and the SARs
granted to the Chief Executive Officer (CEO) outside of these plans, were granted 849,150 stock
options (one stock option for every capped SAR) with essentially the same terms as the capped SARs
with the exercise price of $53.80.
On
June 28, 2007, the Companys Board of Directors approved
and the Company granted 606,870
options to senior management and key employees. Under the terms of the Companys Equity Plan the
options were granted at a share price which was the closing sales price per share of the Companys
common stock on the NASDAQ Global Select Market on the date immediately preceding the date of
grant, which was $53.80 (Option Granting Share Price). Seventy-five percent of the options grant
shall be subject to time vesting, one-third of which shall be and become vested and nonforfeitable
on each of the first three anniversary dates from the grant date, provided that the employee
remains continuously employed by the Company until each such relevant date. The Option Granting
Share Price shall increase by five percent on each anniversary date after the grant date in
association with the options that shall be and become vested and nonforfeitable on each such
anniversary date. Twenty-five percent of the options granted are subject to market condition
vesting upon the Companys common stock achieving an average closing trading price of at least
$82.15 per share for thirty consecutive days as determined in the sole discretion of the Company.
If the Companys stock does not achieve an average closing trading price of at least $82.15 per
share for thirty consecutive days within three years of the date of grant, such portion of the
options shall expire by its own terms and shall not be exercisable. The options have a
contractual term of 5 years and are settled in stock only .
14
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
A summary of activity under the SARs Plan, the Sovintel SARs Bonus Plan, and the SARs granted
to the CEO outside of these plans, as of June 30, 2006 and 2007, and changes during the six months
then ended are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Aggregate |
|
|
|
SARs |
|
|
Price |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Outstanding at January 1,
2006 |
|
|
1,251,800 |
|
|
$ |
29.19 |
|
|
|
|
|
SARs granted |
|
|
60,000 |
|
|
|
31.46 |
|
|
|
|
|
SARs exercised |
|
|
|
|
|
|
|
|
|
|
|
|
SARs expired |
|
|
|
|
|
|
|
|
|
|
|
|
SARs forfeited |
|
|
(42,400 |
) |
|
|
28.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30,
2006 |
|
|
1,269,400 |
|
|
|
29.30 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30,
2006 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Aggregate |
|
|
|
SARs |
|
|
Price |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Outstanding at January 1,
2007 |
|
|
1,293,800 |
|
|
$ |
29.05 |
|
|
|
|
|
SARs granted |
|
|
|
|
|
|
|
|
|
|
|
|
SARs exercised |
|
|
(648,117 |
) |
|
|
28.43 |
|
|
|
|
|
SARs expired |
|
|
|
|
|
|
|
|
|
|
|
|
SARs forfeited |
|
|
(33,900 |
) |
|
|
29.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30,
2007 |
|
|
611,783 |
|
|
|
29.67 |
|
|
$ |
15,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30,
2007 |
|
|
21,100 |
|
|
$ |
26.19 |
|
|
$ |
608 |
|
The weighted-average fair value of SARs outstanding as of June 30, 2007 was $19.19
per SAR. As of June 30, 2007, there was approximately $3.3 million of total unrecognized
compensation cost related to non-vested SARs awards. That cost is expected to be recognized over a
weighted-average requisite service period of 0.9 years.
A summary of activity under the Equity Plan as of June 30, 2006 and 2007, and changes during
the six months then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Aggregate |
|
|
|
Stock options |
|
|
Price |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Outstanding at January 1,
2006 |
|
|
373,012 |
|
|
$ |
14.31 |
|
|
|
|
|
Stock options granted |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
|
|
(167,358 |
) |
|
|
13.81 |
|
|
|
|
|
Stock options expired |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30,
2006 |
|
|
205,654 |
|
|
|
14.71 |
|
|
$ |
2,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30,
2006 |
|
|
205,654 |
|
|
$ |
14.71 |
|
|
$ |
2,272 |
|
15
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Aggregate |
|
|
|
Stock options |
|
|
Price |
|
|
Intrinsic Value |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Outstanding at January 1,
2007 |
|
|
157,915 |
|
|
$ |
13.82 |
|
|
|
|
|
Stock options granted |
|
|
1,456,020 |
|
|
|
55.58 |
|
|
|
|
|
Stock options exercised |
|
|
(49,000 |
) |
|
|
15.07 |
|
|
|
|
|
Stock options expired |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30,
2007 |
|
|
1,564,935 |
|
|
|
55.34 |
|
|
$ |
5,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30,
2007 |
|
|
367,382 |
|
|
$ |
41.78 |
|
|
$ |
4,860 |
|
The weighted-average fair value of stock options outstanding as of June 30, 2007 was
$18.80 per stock option. As of June 30, 2007, there was approximately $23.3 million of total
unrecognized compensation cost related to non-vested stock option awards. That cost is expected to
be recognized over a weighted-average requisite service period of 1.5 years.
16
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 9: Commitments and Contingencies
Tax Matters
The Companys policy is to accrue for contingencies in the accounting period in which a
liability is deemed probable and the amount is reasonably determinable. In this regard, because of
the uncertainties associated with taxes in the Commonwealth of Independent States Taxes (CIS
Taxes), the Companys final CIS Taxes may be in excess of the estimated amount expensed to date
and accrued at December 31, 2006 and June 30, 2007. It is the opinion of management that the
ultimate resolution of the Companys CIS Tax liability, to the extent not previously provided for,
will not have a material effect on the financial condition of the Company. However, depending on
the amount and timing of an unfavorable resolution of any contingencies associated with CIS Taxes,
it is possible that the Companys future results of operations or cash flows could be materially
affected in a particular period.
The Companys wholly-owned Russian subsidiary, EDN Sovintel LLC (Sovintel) is engaged in
litigation with the Russian tax inspectorate in regard to claims issued by the tax inspectorate on
September 25, 2006. The Russian tax inspectorate claimed that Sovintel owes taxes, fines and
penalties in the amount of approximately $21.9 million for the years ended December 31, 2004 and
2005. On October 4, 2006, Sovintel filed a lawsuit against the tax inspectorate disputing the
claims. Court hearings were held between November 8, 2006 and March 19, 2007. The first instance
court ruled in favor of Sovintel by dismissing the tax inspectorates claim on April 3, 2007. On
April 28, 2007 the tax inspectorate appealed this decision. The second instance court ruled in
favor of Sovintel by dismissing the tax inspectorates claim on July 16, 2007. The Company expects
that the tax inspectorate will appeal this decision in the third instance court. The term for
appeal will expire on September 26, 2007. Currently, the Company does not consider an unfavorable
outcome probable for this claim. In October 2006, ZAO International Moscow Bank, a related party,
provided a bank guarantee for up to 518,000,000 Russian Rubles, equivalent to approximately $20.1 million, for
Sovintels obligation in connection with this claim.
Starting in 2006, the Russian tax inspectorate, in the course of tax audits of Russian
long-distance telecom operators, started to challenge the offset of Value Added Taxes (VAT)
relating to the cost of international telecommunication services. Therefore, there is a risk that
the Company may be assessed additional VAT, fines and penalties on similar issues. The amount of
such risk relating to the years ended December 31, 2004 and 2005 is included in the approximately
$21.9 million tax claim currently disputed, as disclosed above. The amount of similar risk
relating to the year ended December 31, 2006 is assessed as being up to approximately $13.0
million. The amount of risk relating the six months ended June 30, 2007 is assessed as being up to
approximately $7.3 million. Should the Russian tax inspectorate assert such claim, the Company
believes it has meritorious defenses to successfully dispute such claim and defend its position in
court. However, due to the fact that court cases on such matters are appearing for the first time,
the expected outcome of such cases is currently unclear.
Taxes Other Than Income Tax
The Company has also identified contingencies related to taxes other than income tax. Such
possible tax contingencies could materialize and require the Company to pay additional amounts of
tax. As of June 30, 2007 management estimates such contingencies related to taxes on other than
income tax to be up to approximately $3.0 million. The Company believes the estimated loss related
to these contingencies is not probable and, as such, it is not accrued at June 30, 2007.
Russian Environment and Current Economic Situation
While there have been improvements in the Russian economic situation, such as an increase in
gross domestic product and a reduced rate of inflation, Russia continues economic reform and
development of its legal, tax and regulatory frameworks as required by a market economy. The
future stability of the Russian economy is largely dependent on these reforms and developments and
the effectiveness of economic, financial and monetary measures undertaken by the Russian
government.
In a letter dated December 20, 2006, several deputies of the State Duma wrote to the Russian
General Prosecutor alleging that Sovintel was illegally providing domestic and international
services prior to receipt of access codes. The letter states that because Sovintel had not yet
received access codes to offer such services in the first, second and third quarter of 2006, then
Sovintel was operating illegally in this respect. Further, the letter requests that the Prosecutor
Generals office conduct an investigation of Sovintels activities and, if appropriate, charge
those Sovintel officials responsible for the activities. Sovintel received the access codes in
December 2006 and prior to construction of its Federal Transit Network was operating under its previous licenses. The
Company believes that it was acting in accordance with Russian regulations and legislation and our
licenses.
17
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Net Assets Position in Accordance with Statutory Requirements
In accordance with Russian legislation, joint stock companies must maintain a level of equity
(net assets) that is greater than the charter capital. In the event that a companys net assets,
as determined under Russian accounting legislation, fall below certain minimum levels, specifically
below zero, the company can be forced to liquidate.
Kolangon and some of the Companys other regional entities have had, and continue to have,
negative equity as reported in each of their Russian statutory financial statements. Management
believes that the risk of the initiation of statutory liquidation procedures or other material
adverse actions is remote. However, if such actions were taken, it could have a material adverse
effect on the Companys results of operations, financial position and operating plans. The
Company is currently in the process of remediating this situation.
Other Commitments and Contingencies
The Company has future purchase commitments of approximately $95.2 million as of June 30,
2007, which primarily includes equipment, interconnection and satellite transponder capacity.
In January 2007, the Company entered into a five-year term Facility Agreement (the Facility
Agreement) with banks, financial institutions and other institutional lenders, Citibank, N.A.
London Branch and ING Bank N.V. as mandated lead arrangers, and Citibank International plc as
agent. The Facility Agreement established an unsecured credit facility under which, the Company,
GTS Finance, Inc., a wholly-owned subsidiary of the Company, and Sovintel may borrow up to an
aggregate of $275.0 million. The credit facility carries interest at a rate equal to London
Interbank Offered Rate (LIBOR) plus 1.5% per annum for the first twenty-four months and LIBOR
plus 2% per annum thereafter. Funds borrowed may be used for general corporate purposes, including
acquisitions, the payment of dividends and capital expenditures. The Facility Agreement places
various restrictions on the Company related to incurrence of debt, asset disposals, mergers and
acquisitions, and negative pledges. The Facility Agreement also requires the Company to meet
various financial and non-financial covenants, including several restrictions related to financial
condition. As of June 30, 2007, the Companys has $225.0 million outstanding under the Facility
Agreement. The Company paid approximately $3.9 million of arrangement fees to the lead arrangers
which are recorded in other non-current assets.
In January 2007, the Company entered into a five year lease agreement with ZAO Rascom, the
Companys equity method investee, for the right to use eight STM-64 fiber optic cable systems
between Moscow and Stockholm. The Company had the right to take possession of two STM-64 fiber
optic cable systems as of January 1, 2007 and the option to increase to six STM-64 fiber optic
cable systems in the future. In connection with this lease, the Company has recorded a capitalized
leased asset and a related capital lease obligation, which were approximately $1.6 million and
$1.4 million, respectively as of June 30, 2007.
In February 2007, the Company entered into a five year lease agreement for the right to use
STM-1 fiber optic capacity on major routes within Russia. The Company had the right to take
possession of this STM-1 fiber optic capacity beginning April 1, 2007. In March 2007, the Company
issued a $2.0 million loan to the same company that has provided the lease and in May 2007 the
Company issued an additional approximately $5.9 million loan to the same company that has provided
the lease. The loan has payment terms of 59 months, which start in May 2007, and carries interest
at the rate of 9 percent per annum. In connection with this lease, the Company has recorded a
capitalized leased asset and a related capital lease obligation, which were approximately $9.8 million
and $9.8 million, respectively as of June 30, 2007.
Other Matters
In the ordinary course of business, the Company may be party to various legal and tax
proceedings, and subject to claims, certain of which relate to the developing markets and evolving
fiscal and regulatory environments in which the Company operates. In the opinion of management, the
Companys liability, if any, in all pending litigation, other legal proceeding or other matters,
will not have a material effect upon the financial condition, results of operations or liquidity of
the Company.
18
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Sovintel is currently engaged in litigation with a minority shareholder of Kubtelecom LLC
(Kubtelecom), a 74% owned subsidiary of the Company, in regard to the shareholders claim that
the shareholders pre-emptive right to acquire 74% ownership in Kubtelecom was breached. The first
instance court ruled in favor of the minority shareholders on December 4, 2006. The second instance
court ruled in favor of Sovintel by dismissing the minority shareholders claim on March 14, 2007.
The minority shareholder appealed this ruling and on April 18, 2007, the third instance court ruled
in favor of Sovintel. The shareholder appealed to the Supreme Arbitration Court of the Russian
Federation and on July 11, 2007, the court turned down the claim. The shareholder may file a new
claim based on other grounds. The Company does not consider an unfavorable outcome probable for
this claim. However, in case of an unfavorable outcome of this litigation, the Company may be
forced to unwind the Kubtelecom acquisition.
On March 6, 2007, Rossvyaznadzor, a governmental body that reports to the Ministry of
Information Technologies and Communications of the Russian Federation, warned Sovintel that it
should remedy certain alleged violations in traffic routing. The allegation followed an inspection
by Rossvyaznadzor of an independent operator, OAO Arctel (Arctel). Rossvyaznadzor believes that
Sovintel inappropriately converted telephone traffic of Arctel into IP-telephone traffic and then
incorrectly routed this traffic abroad. Sovintel carried out a full analysis of the routing of
these calls. Following Sovintels review, the Company notified Rossvyaznadzor that the Company
believes that Sovintel has not violated its licenses. Sovintel filed a lawsuit against
Rossvyaznadzor and on May 17, 2007, the court turned down Sovintels lawsuit for procedural reasons
that the license in question had been annulled and that there were no grounds for dispute. On May
29, 2007, Sovintel appealed this court decision and on June 26, 2007, Sovintel withdrew its
lawsuit. On June 29, 2007, the court accepted Sovintels withdrawal of the lawsuit and revoked the
decision of the first instance court.
The Company is currently
engaged in a regulatory dispute with the National Commission of
Communications Regulation of Ukraine (NCCR) over
re-registration of the license, recorded at approximately $13.3
million, for wireless broadband radio frequencies issued to S-Line LLC (S-Line), a 75% owned
Ukrainian subsidiary of the Company. The first instance court ruled in favor of S-Line on April
18, 2007 obliging the NCCR to re-register the license. NCCR appealed this decision and on August 3,
2007 the second instance court ruled in favor of NCCR. On August 8, 2007, S-Line filed an appeal
of this decision to the Supreme Administrative Court of Ukraine. The Company considers the
re-registration of this license probable. While the Company awaits
formal re-registration, the license continues to be valid.
During the six months ended June 30, 2007, the Company purchased services of approximately
$1.6 million from a minority shareholder in four of the Companys subsidiaries.
Note 10: Investments in and Advances to Ventures
The Company has various investments in ventures that are accounted for by the equity method.
The Companys ownership percentages in its equity method investments range from approximately 50%
to 54%.
The components of the Companys investments in and advances to ventures are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006 |
|
|
As of June 30, 2007 |
|
|
|
(in thousands) |
|
Equity in net assets acquired |
|
$ |
13,448 |
|
|
$ |
13,022 |
|
Goodwill as part of investment |
|
|
1,313 |
|
|
|
1,313 |
|
Difference between fair value and historical value of
assets acquired |
|
|
(1,355 |
) |
|
|
(1,485 |
) |
Cash advances and other |
|
|
(1,520 |
) |
|
|
(698 |
) |
|
|
|
|
|
|
|
Total investments in and advances to ventures |
|
$ |
11,886 |
|
|
$ |
12,152 |
|
|
|
|
|
|
|
|
The Company has financed the operating and investing cash flow requirements of several of
the Companys ventures in the form of cash advances and loans. The Company aggregates all of the
receivable and payable balances with the ventures in the Companys investments in and cash advances
to the ventures.
19
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 11: Segment Information
Line of Business Data
The Company operates in four segments within the telecommunications industry. The four
segments are: (1) Business and Corporate Services; (2) Carrier and Operator Services; (3) Consumer
Internet Services; and (4) Mobile Services. The following tables present financial information for
both consolidated subsidiaries and equity investee ventures, segmented by the Companys lines of
businesses for the three and six months ended June 30, 2006 and 2007, respectively. Transfers
between lines of businesses are included in the adjustments to reconcile segment to consolidated
results. The Company evaluates performance based on the operating income (loss) of each strategic
business unit, among other performance measures. In accordance with SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, the Company has presented the following
four segments consistent with the information used by the chief operating decision maker to manage
the operations for purposes of making operating decisions and allocating resources.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to Reconcile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Results |
|
|
Business |
|
Carrier |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business |
|
|
|
|
|
Equity |
|
|
|
|
and |
|
and |
|
Consumer |
|
Mobile |
|
Corporate & |
|
Segment |
|
Consolidated |
|
Method |
|
Affiliate |
|
|
Corporate |
|
Operator |
|
Internet |
|
Services |
|
Eliminations |
|
Total |
|
Results |
|
Ventures |
|
Adjustments |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external
customers |
|
$ |
113,073 |
|
|
$ |
71,398 |
|
|
$ |
12,243 |
|
|
$ |
2,621 |
|
|
$ |
|
|
|
$ |
199,335 |
|
|
$ |
196,968 |
|
|
$ |
(4,210 |
) |
|
$ |
1,843 |
|
Intersegment revenue |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
30,787 |
|
|
|
7,399 |
|
|
|
667 |
|
|
|
501 |
|
|
|
(4,468 |
) |
|
|
34,886 |
|
|
|
33,868 |
|
|
|
(1,018 |
) |
|
|
|
|
Identifiable assets |
|
|
520,706 |
|
|
|
364,875 |
|
|
|
73,136 |
|
|
|
9,145 |
|
|
|
(2.968 |
) |
|
|
964,894 |
|
|
|
935,924 |
|
|
|
(28,970 |
) |
|
|
|
|
Capital expenditures |
|
|
22,318 |
|
|
|
9,365 |
|
|
|
5,067 |
|
|
|
5,614 |
|
|
|
24 |
|
|
|
42,388 |
|
|
|
41,873 |
|
|
|
(515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to Reconcile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Results |
|
|
|
Business |
|
|
Carrier |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business |
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
and |
|
|
and |
|
|
Consumer |
|
|
Mobile |
|
|
Corporate & |
|
|
Segment |
|
|
Consolidated |
|
|
Method |
|
|
Affiliate |
|
|
|
Corporate |
|
|
Operator |
|
|
Internet |
|
|
Services |
|
|
Eliminations |
|
|
Total |
|
|
Results |
|
|
Ventures |
|
|
Adjustments |
|
|
|
(in thousands) |
|
Three
Months Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external
customers |
|
$ |
167,466 |
|
|
$ |
116,883 |
|
|
$ |
13,445 |
|
|
$ |
3,666 |
|
|
$ |
|
|
|
$ |
301,460 |
|
|
$ |
297,669 |
|
|
$ |
(5,602 |
) |
|
$ |
1,811 |
|
Intersegment revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
47,578 |
|
|
|
12,790 |
|
|
|
(4,528 |
) |
|
|
(275 |
) |
|
|
(5,971 |
) |
|
|
49,594 |
|
|
|
48,826 |
|
|
|
(768 |
) |
|
|
|
|
Identifiable assets |
|
|
809,745 |
|
|
|
540,818 |
|
|
|
357,770 |
|
|
|
48,342 |
|
|
|
53,959 |
|
|
|
1,810,634 |
|
|
|
1,773,546 |
|
|
|
(37,088 |
) |
|
|
|
|
Capital expenditures |
|
|
42,450 |
|
|
|
14,883 |
|
|
|
14,364 |
|
|
|
2,950 |
|
|
|
754 |
|
|
|
75,401 |
|
|
|
76,000 |
|
|
|
599 |
|
|
|
|
|
20
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to Reconcile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Results |
|
|
Business |
|
Carrier |
|
|
|
|
|
|
|
|
|
|
|
|
|
Business |
|
|
|
|
|
Equity |
|
|
|
|
and |
|
and |
|
Consumer |
|
Mobile |
|
Corporate & |
|
Segment |
|
Consolidated |
|
Method |
|
Affiliate |
|
|
Corporate |
|
Operator |
|
Internet |
|
Services |
|
Eliminations |
|
Total |
|
Results |
|
Ventures |
|
Adjustments |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external
customers |
|
$ |
216,432 |
|
|
$ |
133,821 |
|
|
$ |
24,502 |
|
|
$ |
5,211 |
|
|
$ |
|
|
|
$ |
379,966 |
|
|
$ |
375,108 |
|
|
$ |
(8,089 |
) |
|
$ |
3,231 |
|
Intersegment revenue |
|
|
|
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
57,016 |
|
|
|
14,432 |
|
|
|
304 |
|
|
|
1,035 |
|
|
|
(8,922 |
) |
|
|
63,865 |
|
|
|
62,085 |
|
|
|
(1,780 |
) |
|
|
|
|
Identifiable assets |
|
|
520,706 |
|
|
|
364,875 |
|
|
|
73,136 |
|
|
|
9,145 |
|
|
|
(2.968 |
) |
|
|
964,894 |
|
|
|
935,924 |
|
|
|
(28,970 |
) |
|
|
|
|
Capital expenditures |
|
|
43,123 |
|
|
|
17,400 |
|
|
|
7,962 |
|
|
|
5,661 |
|
|
|
29 |
|
|
|
74,175 |
|
|
|
73,460 |
|
|
|
(715 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to Reconcile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Segment to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Results |
|
|
|
Business |
|
|
Carrier |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business |
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
and |
|
|
and |
|
|
Consumer |
|
|
Mobile |
|
|
Corporate & |
|
|
Segment |
|
|
Consolidated |
|
|
Method |
|
|
Affiliate |
|
|
|
Corporate |
|
|
Operator |
|
|
Internet |
|
|
Services |
|
|
Eliminations |
|
|
Total |
|
|
Results |
|
|
Ventures |
|
|
Adjustments |
|
|
|
(in thousands) |
|
Six
Months Ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external
customers |
|
$ |
315,474 |
|
|
$ |
216,015 |
|
|
$ |
23,718 |
|
|
$ |
5,503 |
|
|
$ |
|
|
|
$ |
560,710 |
|
|
$ |
553,408 |
|
|
$ |
(9,749 |
) |
|
$ |
2,447 |
|
Intersegment revenue |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
81,023 |
|
|
|
18,416 |
|
|
|
(9,658 |
) |
|
|
(656 |
) |
|
|
(12,088 |
) |
|
|
77,037 |
|
|
|
76,927 |
|
|
|
(110 |
) |
|
|
|
|
Identifiable assets |
|
|
809,745 |
|
|
|
540,818 |
|
|
|
357,770 |
|
|
|
48,342 |
|
|
|
53,959 |
|
|
|
1,810,634 |
|
|
|
1,773,546 |
|
|
|
(37,088 |
) |
|
|
|
|
Capital expenditures |
|
|
72,091 |
|
|
|
32,213 |
|
|
|
21,511 |
|
|
|
3,624 |
|
|
|
760 |
|
|
|
130,199 |
|
|
|
124,390 |
|
|
|
(5,809 |
) |
|
|
|
|
Geographic Data
Revenues from external customers are based on the location of the operating company providing
the service.
The Company operated within two main geographic regions of the CIS: Russia and Ukraine.
Geographic information as of three and six months ended June 30, 2006 and 2007, respectively is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Countries & |
|
|
Consolidated |
|
|
|
Russia |
|
|
Ukraine |
|
|
Eliminations |
|
|
Results |
|
|
|
(in thousands) |
|
Three months ended
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
175,430 |
|
|
$ |
19,359 |
|
|
$ |
2,179 |
|
|
$ |
196,968 |
|
Long-lived assets |
|
|
654,249 |
|
|
|
57,659 |
|
|
|
12,736 |
|
|
|
724,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Countries & |
|
|
Consolidated |
|
|
|
Russia |
|
|
Ukraine |
|
|
Eliminations |
|
|
Results |
|
|
|
(in thousands) |
|
Three months ended
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
272,939 |
|
|
$ |
25,188 |
|
|
$ |
(458 |
) |
|
$ |
297,669 |
|
Long-lived assets |
|
|
1,243,696 |
|
|
|
95,197 |
|
|
|
36,753 |
|
|
|
1,375,646 |
|
21
GOLDEN TELECOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Countries & |
|
|
Consolidated |
|
|
|
Russia |
|
|
Ukraine |
|
|
Eliminations |
|
|
Results |
|
|
|
(in thousands) |
|
Six months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
334,480 |
|
|
$ |
37,054 |
|
|
$ |
3,574 |
|
|
$ |
375,108 |
|
Long-lived assets |
|
|
654,249 |
|
|
|
57,659 |
|
|
|
12,736 |
|
|
|
724,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Countries & |
|
|
Consolidated |
|
|
|
Russia |
|
|
Ukraine |
|
|
Eliminations |
|
|
Results |
|
|
|
(in thousands) |
|
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
505,338 |
|
|
$ |
48,177 |
|
|
$ |
(107 |
) |
|
$ |
553,408 |
|
Long-lived assets |
|
|
1,243,696 |
|
|
|
95,197 |
|
|
|
36,753 |
|
|
|
1,375,646 |
|
Note 12: Supplemental Cash Flow Information
The following table summarizes significant non-cash investing and financing activities for the
Company.
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
2006 |
|
|
2007 |
|
|
|
(in thousands) |
|
Amounts payable in connection with
business acquisitions |
|
$ |
378 |
|
|
$ |
8,205 |
|
Capitalized leased assets |
|
|
|
|
|
|
11,477 |
|
Issuance of
common stock in connection with an acquisition |
|
|
|
|
|
|
142,130 |
|
Note 13: Subsequent Events
In July 2007, the Company issued 392,988
unregistered shares of GTIs common stock, par value
$0.01, to OAO Rostelecom (Rostelecom) for cash consideration of approximately $20.4 million, or
$51.95 per share of common stock, the closing price on the NASDAQ Global Select Market on May 25,
2007. Rostelecom had the right to acquire these shares under the Shareholders Agreement dated as of
August 19, 2003. This right became exercisable because of the shares issued as part of the
acquisition of Corbina. No underwriter or underwriting discount was involved in the offering. The
shares of common stock were not registered under the Securities Act in reliance on an exemption
under Section 4(2) thereof.
In July 2007, TeliaSonera Acquisition Corp. acquired MCT Corp. (MCT) in a merger
transaction. GTS Mobile Services, Inc. (GMS), a wholly-owned subsidiary of the Company, owned
approximately 22.8% of MCT. GMS tendered its shares in MCT and received cash consideration of
approximately $38.6 million. GMS may receive up to an additional $9.9 million upon the satisfaction
of certain conditions. The Companys investment in MCT had a carrying value of zero, therefore the amount
received will be recorded as a gain in the consolidated statement of operations.
22
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis relates to our financial condition and results of
operations for each of the three and six months ended June 30, 2006, and 2007. This discussion
should be read in conjunction with our Condensed Consolidated Financial Statements and the notes
related thereto appearing elsewhere in this Report.
Overview
We are a leading facilities-based provider of integrated telecommunication and Internet
services in major population centers throughout Russia and other countries of the Commonwealth of
Independent States (CIS). We offer voice, data and Internet services to corporations, operators
and consumers using our metropolitan overlay network in major cities throughout Russia, Ukraine,
Kazakhstan, and Uzbekistan, and via leased channels and inter-city fiber optic and satellite-based
networks, including approximately 295 access points in Russia and other countries of the CIS as of
June 30, 2007, a 3% increase from 287 access points as of June 30, 2006. In addition, we offer
mobile services in Moscow and the Moscow region, and the Ukrainian cities of Kiev and Odessa.
We organize our operations into four business segments, as follows:
|
|
|
Business and Corporate Services (BCS) Using our fiber optic and satellite-based
networks in and between major metropolitan areas of Russia, Ukraine and other countries of
the CIS, we provide business and corporate services including voice and data services to
corporate clients across all geographical markets and all industry segments, other than
telecommunications operators; |
|
|
|
|
Carrier and Operator Services. Using our fiber optic and satellite-based networks in and
between major metropolitan areas of Russia, Ukraine and other countries of the CIS, we
provide a range of carrier and operator services including voice and data services to
foreign and Russian telecommunications and mobile operators; |
|
|
|
|
Consumer Internet Services. Using our fiber optic and satellite-based networks, we
provide Internet access to the consumer market and web content offered through a family of
Internet portals throughout Russia, Ukraine, Kazakhstan, and Uzbekistan; and |
|
|
|
|
Mobile Services. Using our mobile networks in Moscow, Kiev and Odessa we provide mobile
services with value-added features, such as voicemail, roaming and messaging services on a
subscription and prepaid basis. |
We intend, wherever possible, to offer all of our integrated telecommunication services under
the Golden Telecom brand, although, some services still carry local brands because of recent
acquisitions. Our dial-up Internet services are distributed under the ROL brand in Russia,
Kazakhstan and Uzbekistan and under the Svit-On-Line brand in Ukraine. In addition, we offer WiFi
services in Moscow under the Golden WiFi brand. We also offer broadband Internet access in Moscow,
St. Petersburg, Yaroslavl, Tula, and Kaluga under the Corbina Telecom brand.
Most of our revenue is derived from high-volume business customers and carriers. Our business
customers include large multi-national companies, local enterprises, financial institutions, hotels
and government agencies. We also believe that carriers derive a portion of their business from
high-volume business customers. Thus, we believe that the majority of our ultimate end-users are
businesses that require access to highly reliable and advanced telecommunications facilities to
sustain their operations.
Traditionally, we have competed for customers on the basis of network quality, customer
service and range of services offered. During the past several years, other telecommunications
operators have also introduced high-quality services to the segments of the business market in
which we operate. Competition with these operators is intense, and frequently results in declining
prices for some of our services, which adversely affect our revenues.
In the first half of 2007, we continued to experience growth in our main lines of business and
benefited from strong macro-economic growth in the markets where we operate. Despite being faced
with challenges of continued changes in the regulatory and telecommunications environment in Russia
and Ukraine, we remained focused on developing our business through organic growth, acquisitions,
and the expansion of our services.
23
Recent Acquisitions
We continue to pursue consolidation opportunities through selective acquisitions that will
allow us to expand our geographical reach, add to our service offerings, and improve our market
share while maintaining operational control.
In February 2007, we completed the acquisition of 65% ownership interest in Fortland Limited
(Fortland) from an entity, the principal shareholder of which is also a shareholder in two of our
other subsidiaries. Fortland owns Kolangon-Optim LLC (Kolangon), an early-stage digital video
broadcast enterprise in Russia. We acquired Fortland for approximately $49.7 million consisting of
cash consideration of $38.6 million, and a deferred payment of $11.1 million due in October 2007,
$0.2 million of direct transaction costs plus the assumption of a $1.8 million debt. The
acquisition of Fortland was accounted for as an asset purchase of television licenses through a
variable interest entity. We have consolidated the financial position and results of operations of
Fortland from February 1, 2007. On acquisition, we allocated approximately $72.1 million to
licenses, approximately $17.2 million to deferred tax liability, and approximately $15.0 million to
noncontrolling interest. The allocation of the purchase price is preliminary and will be finalized
upon completion of the valuation of the acquired intangible assets and minority interest. In
conjunction with this transaction, we also entered into agreement whereby we agreed to provide a
secured loan of $12.1 million to the seller. The loan, issued in April 1007, is secured
by a pledge
of a 15% interest in Fortland owned by the seller and matures in April 2011. In conjunction with
this transaction, we also entered into a put option agreement that, if exercised, would require us
to purchase the sellers remaining 35% interest in Fortland at fair market value. In conjunction
with this transaction, we also entered into a call option agreement that, if exercised, would
require the seller to sell the sellers remaining 35% interest in Fortland at fair market value.
The put and call options are exercisable on and after September 30, 2010.
In April 2007, we completed the acquisition of 100% ownership interest in ZAO
Telecommunications Agency (Atel), a fixed line alternative telecommunications operator in Perm,
Russia for approximately $4.5 million in cash consideration. We have consolidated the financial
position and results of operations of Atel from April 1, 2007.
On acquisition, we allocated $2.7
million to fixed assets and $1.8 million to goodwill. The allocation of the purchase price is
preliminary and will be finalized upon completion of the valuation of the acquired fixed and
intangible assets.
In May 2007, we completed the acquisition of 100% ownership interest in OOO ICA Center of
Commercial Real Estate (CKN), which owns 6,181 square meters of a building in Moscow. We acquired
CKN for approximately $9.8 million of cash consideration. The acquisition of CKN was accounted for
as an asset purchase of a building through a variable interest entity. On acquisition, we
allocated $12.0 million to fixed assets and $2.3 million to deferred tax liability. We have
consolidated the financial position and the results of operations of CKN from May 1, 2007.
In May 2007, we completed the acquisition of a 51% ownership interest in ZAO Cortec and its
subsidiaries (together Corbina) from Inure Enterprises Ltd. and Rambert Management Limited,
pursuant to a Stock Purchase Agreement. The total purchase price of approximately $196.8 million
consisted of approximately $142.1 million of our common stock, representing 3,193,219 shares, cash
consideration of $8.2 million, and direct transaction costs of approximately $1.4 million. In
addition, as part of the purchase price, we refinanced $45.0 million of debt that the seller owes
to OAO Vneshtorgbank. The refinancing was effected through our loan to Corbina. The purchase
consideration of our common stock, which was issued on May 25, 2007, was determined based on the
closing price of our common stock on December 20, 2006, when we announced that it had entered into
a binding Memorandum of Understanding with Dawn Key Limited to acquire a 51% ownership interest in Corbina.
Accordingly, our shares issued in consideration are valued based on the average closing price of
our common stock for the five consecutive trading days between December 18, 2006 and December 22,
2006, which was $44.51 per share. Management believes the acquisition of 51% of Corbina further
strengthens our position in the broadband strategy and positions us to realize future operating and
cost synergies. Corbina is an integrated telecommunications provider of telecommunications and
Internet services in Russia. We have consolidated the financial position of Corbina from May 31,
2007 and the results of operations of Corbina from June 1, 2007. On acquisition, we allocated
approximately $32.8 million to brand, $10.5 million to telecommunications service contracts
intangible assets, $7.6 million to contract-based customer relationship intangible assets, $0.1
million to licenses, and $0.4 million to other intangible
assets. We have recorded approximately $10.3 million of tax
contingencies related to the acquisition of Corbina. The allocation of the purchase
price is preliminary and will be finalized upon completion of the valuation of the acquired fixed
and intangible assets and resolving tax related contingencies. Corbina holds a
variable interest and is the primary beneficiary of Mircom Trading, Inc. (Mircom), a British
Virgin Islands registered wholesale telecommunications operator providing a range of carrier and
operator services to foreign telecommunications operators. Mircom is owned by a member of the
Board of Directors of Corbina. As of June 30, 2007, Mircom had net liabilities of approximately
$14.8 million. For the month ended June 30, 2007, Mircom had revenues of approximately $0.7
million and net loss of approximately $0.3 million. The creditors of Mircom have no recourse to our
general credit.
In June 2007, we completed the acquisition of 100% ownership interest in ZAO Direct Net
Telecommunications (DirectNet) and ZAO Satcom Tel (Satcomtel), fixed line alternative
telecommunications operators in Moscow and the assets of NDNT, Inc. and NDT (UK) limited, for
approximately $1.4 million in cash consideration, including the assignment of approximately $0.7
million of intercompany debt from the seller to us. We have consolidated the financial position
and the results of operations of DirectNet and Satcomtel from July 1, 2007. On acquisition, we
allocated $0.1 million to telecommunications services contracts intangible assets,
24
$0.1 million to other intangible assets, and approximately $1.9 million to goodwill. The
allocation of the purchase price is preliminary and will be finalized upon completion of the
valuation of the acquired fixed and intangible assets.
In June 2007, we completed the
acquisition of 75% ownership interest in OOO Alcar
(Alcar), an early stage WiFi enterprise in the Moscow
region of Russia,
from an entity, the principal shareholder of which is also a shareholder in three of our other
subsidiaries. We acquired Alcar for
approximately $1.9 million of cash consideration. The acquisition of Alcar was accounted for as an
asset purchase of WiFi and WiMAX frequencies through a variable interest entity. We have
consolidated the financial position and results of operations of Alcar from June 1, 2007. On
acquisition, we allocated approximately $3.1 million to licenses, approximately $0.7 million to
deferred tax liability, and approximately $0.8 million to noncontrolling interest. The allocation
of the purchase price is preliminary and will be finalized upon completion of the valuation of the
intangible assets and minority interest.
These acquisitions have enabled us to realize new opportunities in Russia by increasing our
customer base, increasing our access to critical infrastructure including last mile infrastructure
and digital video broadcast technology, and furthering our consumer markets strategy.
Regulatory Developments
On January 29, 2007, we launched domestic long distance / international long distance
(DLD/ILD) services using our Federal Transit Network (FTN). We believe that provision of
DLD/ILD services will allow us to preserve margins and to gain additional revenues from our
international and domestic long distance operations. We believe that our DLD/ILD license will
enable us to protect our relationship with our corporate clients and, in the long term, expand our
business into the residential long distance market. Under the previous regulation, the local
operators collected full tariffs for DLD/ILD calls and passed only a portion of the revenue to the
DLD/ILD operator. However, in the near term, we do not expect significant growth in our DLD/ILD
gross margins since we will incur additional costs payable to the incumbent OAO Svyazinvest
(Svyazinvest) companies in the form of compensatory fees and other surcharges. DLD/ILD carriers
will continue to pay this compensatory fee until local tariffs are raised to an economically viable
level. This increase in local tariffs is expected to be completed by the end of 2008. Under the new
system, the local operators may also act as agents for DLD/ILD carriers, billing clients for long
distance calls and collecting payments on behalf of the DLD/ILD operators. We incur additional
costs payable to the local operators acting as our agents in the form of commission fees. We
currently anticipate that our new license will result in an increase of DLD/ILD revenues since we
will begin to earn long distance revenue directly from end-users. However, the impact on our
DLD/ILD revenues is dependent on the contractual arrangements with the end-users. Historically,
local operators established the end-user tariffs for our DLD/ILD services within the limits we set
for local operators. However, in the future we may change this tariff setting policy and fix
end-user tariffs. We are still analyzing these future DLD/ILD revenues to determine the impact on
our business and how these will be classified for segment reporting
purposes. We
continue to report DLD/ILD revenues from local operators net of payments to these operators for
interconnection and agency fees, since the economic substance of our settlements with local
operators has not changed following the introduction of the new Interconnection Rules, and other
conditions that might otherwise require us to present those same revenues and costs on a gross
basis have not yet been fulfilled.
On March 6, 2007, Rossvyaznadzor, a governmental body that reports to the Ministry of
Information Technologies and Communications of the Russian Federation, warned EDN Sovintel LLC
(Sovintel) that it should remedy certain alleged violations in traffic routing. The allegation
followed an inspection by Rossvyaznadzor of an independent operator, OAO Arctel (Arctel).
Rossvyaznadzor believes that Sovintel inappropriately converted telephone traffic of Arctel into
IP-telephone traffic and then incorrectly routed this traffic abroad. Sovintel carried out a full
analysis of the routing of these calls. Following Sovintels review, the Company notified
Rossvyaznadzor that the Company believes that Sovintel has not violated its licenses. Sovintel
filed a lawsuit against Rossvyaznadzor and on May 17, 2007, the court turned down Sovintels
lawsuit for procedural reasons that the license in question had been annulled and that there were
no grounds for dispute. On May 29, 2007, Sovintel appealed this court decision and on June 26,
2007, Sovintel withdrew its appeal. On June 29, 2007, the court accepted Sovintels withdrawal of
the appeal and the case is now closed. We no longer use the license
in question.
In a letter dated December 20, 2006, several deputies of the State Duma wrote to the Russian
General Prosecutor alleging that Sovintel was illegally providing domestic and international
services prior to receipt of access codes. The letter stated that because Sovintel had not yet
received access codes to offer such services in the first, second and third quarter of 2006, then
Sovintel was operating illegally in this respect. Further, the letter requested that the Prosecutor
Generals office conduct an investigation of Sovintels activities and, if appropriate, charge
those Sovintel officials responsible for the activities. Sovintel received the access codes in
December 2006 and prior to construction of its FTN was operating under its previous licenses. We
believe that we were acting in accordance with Russian regulations and legislation and our
licenses.
In the third quarter of 2006, incumbent Svyazinvest operators started introducing new
settlement rules for local traffic. Prior to July 1, 2006, we paid fixed monthly fees for
interconnection lines with these operators. Under the new rules, the settlements will be based on
the actual volume of traffic. The switch to the new rules was not completed in the first half of
2007. As a result of these changes,
25
we expect an increase in cost of revenue which could be partially offset by additional revenue for
the traffic termination to our network.
On March 4, 2006, the Russian President approved amendments to the Russian Telecommunications
Law that introduced calling party pays rules (CPP Rules). Effective July 1, 2006, under the CPP
Rules, generally all incoming calls on fixed and mobile lines in Russia are free of charge and only
the fixed line or mobile operators originating the call may charge the customer for the call.
Subscribers of fixed line telephones did not pay for incoming calls and, therefore, the CPP Rules
will not have an impact on fixed-to-fixed line calls, but the CPP Rules impact the fixed-to-mobile
calls as mobile companies traditionally charged for incoming calls in Russia. For the six months
ended June 30, 2007, we have recorded approximately $42.9 million in additional revenue. However,
this increase in revenue was partially offset by approximately $30.1 million in additional cost of
revenue due to the introduction of termination charges to mobile networks.
Effective July 15, 2006, the Ukrainian National Commission of Communications Regulation
(NCCR) introduced new tariffs for provision of voice services to fixed line subscribers. As a
result of the tariff re-balancing policy, the tariffs for local calls and monthly fees increased
and tariffs for DLD/ILD calls decreased. Effective November 1, 2006, the NCCR continued the tariff
re-balancing process by increasing the tariffs for local calls and monthly fees and by decreasing
the tariffs for fixed-to-mobile calls. On October 28, 2006, the Verkhovna Rada approved the
amendments to the Ukrainian Law on Telecommunications which changed the list of the
telecommunication service tariffs subject to the public regulation. Under new regulation, tariffs
for DLD/ILD calls were excluded from the public regulation. The amendments also exclude
fixed-to-mobile calls from the public tariff regulation. As a result of these changes, we expect
increased competition from the incumbent operators in DLD/ILD services market.
Effective January 1, 2007, the NCCR introduced new interconnection settlement rules. During
2006, we paid fixed monthly fees for interconnection lines with other operators. However, under the
new rules the settlements will be based on the actual volume of traffic. As a result of these
changes, we experienced an increase in cost of revenue which was partially offset by additional
revenue for the traffic termination to our network.
Other Developments
In April 2007, the Compensation Committee of our Board of Directors recommended and the Board
of Directors approved an amendment to the 1999 Equity Participation Plan of Golden Telecom, Inc.
(the Equity Plan) to increase the number of shares available under the Equity Plan by 1,000,000.
The decision of the Board of Directors was ratified by our shareholders on May 17, 2007. Under the
Equity Plan not more than 5,320,000 shares of common stock (subject to anti-dilution and other
adjustment provisions) are authorized for issuance upon exercise of options or upon vesting of
restricted or deferred stock awards. There are 1,959,019 securities
remaining available for future issuance under the Companys
Equity Plan.
On June 27, 2007, the terms of the outstanding Stock Appreciation Rights (SARs) issued under
the Golden Telecom, Inc. 2005 SAR Plan (SARs Plan) and the EDN Sovintel 2005 SAR Bonus Plan
(Sovintel SARs Bonus Plan) were modified to cap the maximum of payout to the employee at the
closing sales per share of our common stock on the NASDAQ Global Select Market on June 27, 2007, or
$53.80. On June 27, 2007, the participants of the SARs Plan, the Sovintel SARs Bonus Plan, and the
SARs granted to our Chief Executive Officer outside of these plans, were granted 849,150 stock
options (one stock option for every capped SAR) with essentially the same terms as the capped SARs
with the exercise price of $53.80.
On June 28, 2007, our Board of Directors approved and we granted 606,870 options to senior
management and key employees. Under the terms of our Equity Plan the options were granted at a
share price which was the closing sales price per share of our common stock on the NASDAQ Global
Select Market on the date immediately preceding the date of grant, which was $53.80 (Option
Granting Share Price). Seventy-five percent of the options grant shall be subject to time
vesting, one-third of which shall be and become vested and nonforfeitable on each of the first
three anniversary dates from the grant date, provided that the employee remains continuously
employed by us until each such relevant date. The Option Granting Share Price shall increase by
five percent on each anniversary date after the grant date in association with the options that
shall be and become vested and nonforfeitable on each such anniversary date. Twenty-five percent
of the options granted are subject to market condition vesting upon our common stock achieving a an
average closing trading price of at least $82.15 per share for thirty consecutive days as
determined in our sole discretion of the Company. If the Companys stock does not achieve an
average closing trading price of at least $82.15 per share for thirty consecutive days within three
years of the date of grant, such portion of the options shall expire buy its own terms and shall
not be exercisable. The options have a contractual term of 5 years and are settled in stock
only .
We are currently engaged in litigation with a minority shareholder of Kubtelecom LLC
(Kubtelecom) in regard to the shareholders claim that the shareholders pre-emptive right to
acquire 74% ownership in Kubtelecom was breached. The first instance court ruled in favor of the
minority shareholder on December 4, 2006. The second instance court ruled in favor of Sovintel by
dismissing the minority shareholders claim on March 14, 2007. The minority shareholder appealed
this ruling and on April 18, 2007, the third instance court ruled in favor of Sovintel. The
shareholder appealed to the Supreme Arbitration Court of the Russian Federation and on July 11,
2007, the court turned down the claim. The shareholder may file a new claim based on other
grounds. We
26
do not consider an unfavorable outcome probable for this claim. However, in case of an unfavorable
outcome of this litigation, we may be forced to unwind the Kubtelecom acquisition.
We are
currently engaged in a regulatory dispute with the NCCR over
re-registration of the license, recorded at
approximately $13.3 million, for wireless broadband radio frequencies issued to S-Line LLC
(S-Line), our 75% owned Ukrainian subsidiary. The first instance court ruled in favor of S-Line
on April 18, 2007 obliging the NCCR to re-registered the license. NCCR appealed this decision and
on August 3, 2007 the second instance court ruled in favor of NCCR. On August 8, 2007, S-Line
filed an appeal of this decision to the Supreme Administrative Court of Ukraine. We consider the
re-registration of this license probable. While we await formal
re-registration, the license continues to be valid.
We are currently engaged in litigation with the Russian tax inspectorate in regard to claims
issued by the tax inspectorate on September 25, 2006. The Russian tax inspectorate claimed that
Sovintel owes taxes, fines and penalties in the amount of $21.9 million for the years ended
December 31, 2004 and 2005. On October 4, 2006, Sovintel filed a lawsuit against the tax
inspectorate disputing the claims. Court hearings were held between November 8, 2006 and March 19,
2007. The first instance court ruled in favor of Sovintel by dismissing the tax inspectorates
claim on April 3, 2007. On April 28, 2007 the tax inspectorate appealed this decision. The second
instance court ruled in favor of Sovintel by dismissing the tax inspectorates claim on July 16,
2007. We expect that the tax inspectorate will appeal this decision in the third instance court.
The term for appeal will expire on September 26, 2007. Currently, we do not consider an unfavorable
outcome probable for this claim. In October 2006, ZAO International Moscow Bank, a related party,
provided a bank guarantee for up to 518,000,000 Russian Rubles
(RUR), equivalent to $19.9 million, for Sovintels
obligation in connection with this claim.
In July 2007, we issued 392,988 unregistered shares of common stock, par value $0.01, to OAO
Rostelecom (Rostelecom) for cash consideration of approximately $20.4 million, or $51.95 per
share of common stock, the closing price on the NASDAQ Global Select Market on May 25, 2007.
Rostelecom had the right to acquire these shares under the Shareholders Agreement dated as of
August 19, 2003. This right became exercisable because of the shares issued as part of the
acquisition of Corbina.
In July 2007, TeliaSonera Acquisition Corp. acquired MCT Corp. (MCT) in a merger
transaction. GTS Mobile Services, Inc. (GMS), a wholly-owned subsidiary, owned approximately 22.8% of MCT. GMS has tendered
its shares in MCT and received cash consideration of approximately $38.6 million. GMS may receive
up to an additional $9.9 million upon the satisfaction of
certain conditions. Our investment in MCT had a carrying value of
zero, therefore the amount received will be recorded as a gain in the
consolidated statement of operations.
Highlights and Outlook
Since early 2000 we have witnessed a recovery in the Russian market, but downward pricing
pressures persist from increased competition and the global trend toward lower telecommunications
tariffs. In 2006 and during the first half of 2007, our traffic volume increases exceeded the
reduction in tariffs on certain types of voice traffic. This is a contributing factor to the
increases in our revenue in 2006 and during the first half of 2007. We expect that this trend of
year over year increases in traffic volume will continue as long as the Russian economy continues
to develop at its current pace. Although our revenue growth is strong, our overall margins
continue to be impacted by price increases for services received from monopolistic incumbent
operators and competition from other carriers.
In order to handle additional traffic volumes, we have expanded and will continue to expand
our fiber optic capacity along our heavy traffic and high cost routes to mitigate declines in
traffic margins, reduce our unit transmission costs and ensure sufficient capacity to meet the
growing demand for data and Internet services. We expect to continue to add additional transmission
capacity, which due to its fixed cost nature can initially depress margins, but will over time
allow us to improve or maintain our margins.
We continue to follow our strategy of regional expansion. The project for the construction of
the Russian inter-city fiber optic link that we launched in the middle of 2004 has continued into
the second quarter of 2007. To date, we have completed construction of the inter-city fiber optic
cable line from Moscow to Ufa through Nizhny Novgorod and Kazan under a commercial agreement with
OAO Vimpel-Communications (Vimpelcom). In addition, we have completed construction of the
Oktyabrsky to Samara through Togliatti, and from Samara to Saratov inter-city fiber optic links. We
have completed construction of the fiber optic link between Kamensk-Shakhtinsky in the southern
part of Russia and Lugansk in the eastern part of Ukraine. To date, we have invested approximately
$32.9 million in these projects. In September 2006, we entered into an agreement with Vimpelcom
which allows us to use the fiber optic cable line from Moscow to Krasnodar through Voronezh and
Rostov-on-Don constructed by Vimpelcom. In addition, in 2007 we started construction of the fiber
optic link from Ufa to Perm, and from Samara to Uralsk in the northern part of Kazakhstan. We
intend to connect our operations in the European part of Russia to this backbone network and plan
to invest a total of approximately $55.0 million in this and related backbone projects by the end
of 2007. In February 2007, we entered into a lease agreement for STM-1
fiber optic capacity from Ufa to Krasnoyarsk through Ekaterinburg, Chelyabinsk, Tyumen, Omsk and
Novosibirsk with an option to upgrade this line to STM-4 capacity. We have taken the possession of
this fiber optic capacity on April 1, 2007. This agreement will enable us to connect our operations
in the European part of Russia with our operations in Siberia.
27
In Ukraine, we have completed the construction of a national fiber optic STM-16
capacity network connecting 16 regional centers with cross border connections to Hungary and
Poland. We have completed construction of the fiber optic links from Uzhgorod to Lvov with
connection to the Hungarian border, from Lvov to Kiev through Lutsk, Rovno and Zhitomir, and from
Kiev to Kharkov through Chernigov and Sumy with connection to the Russian border. This network
became operational in the second quarter of 2007.
The fiber optic communication lines consist of new generation networks that will enable us to
provide high quality Internet access, data and voice services. Development of our fiber optic
network is part of our broadband access rollout strategy. In addition, it allows us to enter the
long distance communication market and take advantage of our DLD/ILD license. By launching our own
fiber optic communication lines, we will be able to optimize and reduce our expenditures associated
with the lease of trunk channels from other operators, offer competitive rates on Internet and
voice services to the end users in the regions, while maintaining traditionally high quality of the
services offered.
The rapid growth of the telecommunications market in Russia, Ukraine, and the CIS is fueled by
macroeconomic growth and the inflow of direct foreign investment. We anticipate that the economic
growth in these markets will create additional demand for telecommunications services.
Additionally, in line with worldwide trends, we are starting to observe new customer demands for
more sophisticated telecommunications and Internet services as well as for other new technologies.
We are responding to these customer demands by testing and implementing new technologies such as
WiFi, voice over Internet protocol (VoIP), Digital Video Broadcast-Terrestrial (DVB-T) wireless
local loop and high-speed consumer Internet. Such new technologies will remove some of the
barriers to access that some of our customers currently face. For example, with wireless local
loop, we can connect remote customers to our network by bypassing the incumbents wire network in
order to provide higher quality access.
We continue to seek growth opportunities organically, through selective acquisitions, and
through the development of new product lines. While our research indicates the telecommunications
services sector in business segments in the Moscow and St. Petersburg markets of fixed
telecommunications services will continue to grow, we believe that the bulk of our growth will come
from key regional cities. Following the acquisition of Atel, we currently have a commercial
presence in more than 80 cities including 18 out of the 20 largest Russian cities, representing
approximately half of the total fixed-line telecom market in Russia.
To minimize the impact of payments to the incumbent operators, we have received licenses to
provide zonal services in all the regions of the Russian Federation. During 2006 and the first half
of 2007, we started construction of zonal networks in 28 regions of the Russian Federation. To
date, we have completed construction of zonal networks in 16 regions, including among others
Moscow, St. Petersburg, Nizhny Novgorod, Kaliningrad, Samara, Sakhalin, Voronezh, Krasnodar, and
Krasnoyarsk. In total, we are planning to construct zonal networks in 28 to 30 regions by the end
of 2008. We expect to start generating revenues and cost savings from the operations of our zonal
networks in the second half of 2007.
We will continue to align the strategy of each of our business segments with market forces in
the countries where we operate. In BCS, our strategy is to defend and grow our market share
through attractive service offerings supported by excellent customer care. We are focused on
expanding into the regions as well as the fast growing small and medium-sized businesses (SMB)
and the small office / home office (SOHO) markets. In those cases where the potential SMB and
SOHO customer is not on our network, our ability to fully benefit from growth in these market
segments largely depends on the regulatory situation and our ability to get access to the copper
and other infrastructure of the incumbent operators under reasonable terms and conditions. The
acquisition of Corbina significantly increases our presence in the Moscow SMB/SOHO
telecommunications market.
Our recently constructed FTN and receipt of access codes will also present new opportunities
for growth. Our FTN provides us with a potential customer base across all geographic zones in the
Russian Federation of up to 2.2 million businesses, 143 million people, of which there are 32
million residential customers, in the 88 Russian regions. This is an increase from our previous
breadth of coverage which only allowed us to reach 25 regions in Russia with up to 0.3 million
businesses and a population of 77.1 million people. We launched our FTN-based DLD/ILD services in
January 2007, targeting mainly wholesale customers. We also started to offer DLD/ILD services to
corporate customers not directly connected to our network. In March 2007, we started offering
DLD/ILD services on a pre-paid basis to residential customers in
several regions of Russia. Due to existing client base, an effective marketing campaign and a
highly-skilled and experienced direct and indirect sales force, we
have captured approximately 20% market share of the total DLD/ILD market in Russia.
In Carrier and Operator Services, our strategy focuses on partnering with more operators in
the regions to enhance our traffic termination capabilities. We have also launched additional
value-added products for our carrier partners that strengthen our leading position in the Russian
and CIS markets. These new products are designed to offer best quality voice and data transport
to ensure greater customer loyalty while protecting margins.
In Consumer Internet Services, we recognize that new technologies are making their way into
Russia, Ukraine, and the CIS. We expect that broadband competition and substitution will increase
in the future, and that dial-up margins will continue to decline over time as the average revenue
per subscriber continues to decline and as a result of the introduction of origination fees.
Broadband rollout is a cornerstone of our strategy in Consumer Internet Services segment. We have
continued to develop our broadband service
28
offerings by deploying broadband solutions in major cities of Russia, Ukraine, Kazakhstan, and
Uzbekistan. We provide broadband services through our broadband networks based on such approaches
as, WiFi, Digital Subscriber Line (DSL), and fiber-to-the-building (FTTB). The broadband
development enables us to offer high quality services such as broadband Internet access, voice over
broadband packaged with our Aport Internet search engine to offer location-based search services.
As part of our broadband access strategy, we deployed one of the largest commercial WiFi
metropolitan networks in the world. Our WiFi network in Moscow consists of more than 7,630 indoor
and outdoor WiFi nodes. On March 1, 2007, we launched commercial operations of our WiFi network in
Moscow. To date, we have approximately 29,200 customers who use our paid WiFi services in Moscow.
On June 22, 2007, we launched commercial operations of
our WiFi network in St. Petersburg. Following the acquisition of S-Line in October 2006, we intend
to deploy wireless broadband networks in Kiev and other regions of Ukraine. In addition, we plan to
provide wireless broadband coverage in the biggest cities and areas such as Nizhny Novgorod,
Ekaterinburg, Krasnoyarsk, Sochi, Kazan, Krasnodar, and Tashkent.
We also continued the deployment of DSL in selected regions of Russia and the CIS where we
acquired copper last mile network. To date, we have
approximately 45,200 customers using our DSL
services in Russia and in the CIS.
In order to meet the growing demand for broadband services we plan to construct FTTB networks
in the top 65 cities of Russia with a combined population of 65 million people of which we will
target approximately 15.6 million households. The acquisition of Corbina strengthened our
position in the Moscow broadband Internet market. To date, Corbinas FTTB network covers
approximately 2.8 million households in Moscow, St. Petersburg, Yaroslavl, Tula, and Kaluga. In the
second quarter of 2007, Corbina started construction of FTTB networks in Rostov, Saratov and
Volgograd. By the end of 2007, we plan to complete deployment of FTTB networks in 12 cities of
Russia. To date, Corbina has approximately 218,108 active broadband Internet subscribers. By the
end of 2008, Corbina plans to achieve a subscriber base of more than 600,000 broadband subscribers.
The
Corbina acquisition enables us to offer quadric-play products to the mass market as we
bundle broadband Internet access, VoIP, internet protocol television, and mobile virtual network
based services. In April 2007, we started to offer WiFi access to the FTTB customers of Corbina at
a special rate. In June 2007, we started to offer Voice-over-WiFi services in Moscow. In July 2007,
Corbina launched the IPTV service in trial mode. The IPTV technology is based on a Microsoft
platform and allows greater flexibility and interactivity enabling video-on-demand, pay-per-view
and other value added services. We estimate that approximately 10,000 customers will sign up for
IPTV services by the end of 2007. Bundling of products will help to attract new users, and provide
new solutions to existing customers.
Our Mobile Services line of business allows us to provide additional services to our wireline
customers in Moscow and Ukraine. In the future, we expect to follow a marketing strategy aimed at
providing fixed-mobile convergent (FMC) services to our existing corporate customers. In April
2006, the NCCR issued a license for GSM-1800 radio frequency to GTU for an additional 22 out of the
remaining 25 regions of Ukraine we did not cover. This license provides us with a potential
customer base of 38.1 million people, or approximately 81% of the Ukrainian population, compared
with our previous coverage of 5.1 million people. Payment of the $5.5 million license fee was made
on May 10, 2006. In May 2006, we began using the frequencies and submitted registration documents
to UkrChastotNadzor, a Ukrainian governmental body that is responsible for the control and the
supervision of the radio frequencies. To date, we have complied with the license requirements
related to the use of allocated radio frequencies by launching operations in 4 out of 22 regions.
On July 13, 2006, we entered into an agreement with ZAO Ukrainian Radio Systems (URS), a
subsidiary of Vimpelcom, for the provision of roaming services. This agreement enables our mobile
customers to use the national roaming services of URS nationwide network. In addition, we plan to
provide mobile over broadband services in Ukraine. On October 5, 2006, we announced the
commencement of construction of our FMC network in Ukraine. The FMC network combines the advantages
of fixed-line and mobile communications and will be the first converging communications network in
Ukraine. To date, we have deployed the FMC network in Kiev and Odessa based on our existing
GSM-1800 networks and wireless segments of the FMC network in the Kiev region, Donetsk, Zaporozhye,
and Ivano-Frankovsk. In the second half of 2007, we plan to complete network testing and launch
commercial operations. By the end of 2007, we plan to deploy the FMC network in an additional 19
regions of Ukraine. However, we do not expect significant growth in mobile revenue from the
roaming agreement with URS until our FMC network is fully deployed. Corbina also provides mobile
services in Moscow using its DAMPS network. In August 2007, Corbina announced plans to migrate its
DAMPS customers onto GSM network by the end of October 2007. Corbina uses the network of Vimpelcom
to provide GSM services to its customers. To date, Corbina has approximately 20,800 DAMPS and
10,050 GSM active high-usage customers.
The acquisition of Fortland enhances our broadband expansion strategy and will enable us to
expand into the media market. Kolangon holds licenses and frequencies to provide digital television
services in Moscow and St. Petersburg. We also applied for the licenses in other major cities of
Russia. These licenses will be used to broadcast digital television channels with a higher quality
of picture and to provide pay-per-view services using the DVB-T standard in MPEG-4 coding. The
combination of access to DVB-T
29
technology with our wide geographical presence across Russia will provide us with a potential
market of up to 11 million households in 22 major Russian cities with a population of 35 million
people. The Fortland acquisition will enable us to deliver a Triple Play service package,
including high speed Internet access, digital television with about 50 channels, and VoIP. In June
2007, we started testing the DVB-T transmitter in Moscow. We plan to begin deployment of DVB-T
transmitters in the second half of 2007 in order to start broadcasting in the first quarter of
2008. We plan to consider cooperation with on of the leading Russian media companies to ensure availability
of the high quality content for our television services.
Critical Accounting Policies
The fundamental objective of financial reporting is to provide useful information that allows
a reader to comprehend our business activities. To assist that understanding, management has
identified our critical accounting policies. These policies have the potential to have a
significant impact on our 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, at a specific point in time, events which are continuous in
nature.
Revenue recognition policies; we recognize operating revenues as services are rendered or as
products are delivered to customers and installed. Under multiple-delivery contracts, involving a
combination of product delivery, installation and maintenance, connection and service fees,
revenues are recognized based on the relative fair value of the respective amounts. Elements are
grouped if they are inseparable or objective evidence of fair value does not exist. Certain
revenues, such as connection and installation fees, are deferred. We also defer direct incremental
costs related to connection fees, not exceeding the revenue deferred. Deferred revenues are
subsequently recognized over the estimated average customer lives, which are periodically
reassessed by us, and such reassessment may impact our future operating results. In determining the
recording of revenue, estimates and assumptions are required in assessing the expected conversion
of the revenue streams to cash collected. DLD/ILD and zonal revenues are recorded gross or net
depending on the economic substance of the relationship with the end-users. We recognize DLD/ILD
and zonal revenues from local operators net of payments to these operators for interconnection and
agency fees when local operators establish end-user tariffs and assume credit risk.
Allowance for doubtful accounts policies; the allowance estimation process requires management
to make assumptions based on historical results, future expectations, the economic and competitive
environment, changes in the creditworthiness of our customers, and other relevant factors. Changes
in the underlying assumptions may have a significant impact on the results of our operations. In
particular, we have certain amounts due to and from subsidiaries of a European telecommunications
operator who is currently subject to bankruptcy proceedings. The ultimate resolution of this matter
will be affected by a number of factors including the determination of legal obligations of each
party, the course of the bankruptcy proceedings, and the enforceability of any determinations. We
have recognized provisions based on our preliminary estimate of net exposure on the resolution of
these receivables and payables. If our assessment proves to be incorrect we may have to recognize
an additional provision of up to $1.9 million, net of tax, although management believes that the
possibility of such an adverse outcome is remote.
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 our total assets. Changes in technology or changes in our intended use of these assets
may cause the estimated period of use or the value of these assets to change. We perform 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 our long-lived assets require the exercise of managements
judgment and estimation based on certain assumptions concerning the expected life of any asset and
expected future cash flows from the use of an asset.
Goodwill and assessment of impairment; commencing from the adoption of Statement on Financial
Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, on January 1, 2002,
we perform goodwill impairment testing annually as of October 1 or whenever impairment indicators
exist. This test requires a significant degree of judgment about the future events and it includes
determination of the reporting units, allocation of goodwill to the reporting units and comparison
of the fair value with the carrying amount of each reporting unit. Based on the discounted cash
flow valuations performed in 2006, we concluded that for all reporting units the fair value is in
excess of the respective carrying amounts.
Valuation allowance for deferred tax asset; we record valuation allowances related to tax
effects of deductible temporary differences and loss carry forwards when, in the opinion of
management, it is more likely than not that the respective tax assets will not be realized.
Changes in our assessment of probability of realization of deferred tax assets may impact our
effective income tax rate.
Business segment information; we report four segments within the telecommunications industry:
Business and Corporate Services, Carrier and Operator Services, Consumer Internet Services and
Mobile Services. A significant portion of our cost structure, including
30
our investment in infrastructure, benefits multiple segments. As a result, we perform allocations
of certain costs in order to report business segment information for management and financial
reporting purposes. Applying different allocation techniques and parameters could impact the
reported results of individual business segments.
Functional currency; prior to the third quarter of 2006, the functional currency for all of
our foreign subsidiaries was the United States dollar (USD). In the second and the third
quarters of 2006, Sovintel introduced a semi-fixed USD RUR exchange rate for
settlements with a majority of its customers. This rate is applicable if the official USD exchange
rate set by the Central Bank of Russia (CBR) is below the fixed level. If the RUR depreciates
against the USD so that the CBR exchange rate exceeds the fixed level, Sovintel will resume
applying the CBR exchange rate, or floating rate, for settlements with its customers. As a result
of these changes, we re-evaluated the functional currency criteria under SFAS No. 52, Foreign
Currency Translation, and determined that, beginning July 1, 2006, the functional currency of our
subsidiaries domiciled in Russia is the RUR. The change was adopted prospectively beginning July
1, 2006 in accordance with SFAS No. 52. No restatement of comparative amounts was made for the
change in functional currency. Therefore, the financial statements of our subsidiaries domiciled
in Russia and Ukraine on June 30, 2007 were translated into USD using the current rate method.
Assets and liabilities were translated at the rate of exchange prevailing at the balance sheet
date. Stockholders equity was translated at the applicable historical rate. Revenue and expenses
were translated at the monthly average rates of exchange. Translation gains and losses were
included as part of accumulated other comprehensive income.
Stock-based compensation; effective January 1, 2006, we adopted SFAS No. 123R to account for
Share Based Payments. Under SFAS No. 123R, we are required to calculate and record the cost of
equity instruments, such as stock options or restricted stock, awarded to employees for services
received in the income statement. The cost of the equity instruments is to be measured based on
the fair value of the instruments on the date they are granted or, if the number of shares to be
issued or the exercise price is unknown, re-measured at each reporting date and is required to be
recognized over the period during which the employees are required to provide services in exchange
for the equity instruments. The fair value of a SAR and stock options is estimated using the Monte
Carlo simulation-based valuation model that incorporates the assumptions of the stock volatility,
risk-free interest rates, dividend yield, employee exercise patterns and forfeiture rates.
Critical Accounting Estimates
Accounting estimates are an integral part of the financial statements prepared by management
and are based upon managements current judgments. Certain accounting estimates are particularly
sensitive because of their significance to the financial statements and because of the possibility
that future events affecting them may differ markedly from managements current judgment. We
believe the following items represent such particularly sensitive accounting estimates:
Allowance for doubtful accounts; any changes in the underlying assumptions of recoverability
of accounts receivable by respective aging group or certain specific accounts that are excluded
from the specific and general allowances could have a material effect on our current and future
results of operations. We believe that the allowance for doubtful accounts is adequate to cover
estimated losses in our accounts receivable balances under current conditions.
Tax provisions; in the course of preparing financial statements in accordance with US GAAP, we
record potential taxes other than income tax loss provisions under the guidelines of SFAS No. 5,
Accounting for Contingencies. In general SFAS No. 5 requires loss contingencies to be recorded
when they are both probable and reasonably estimable. On January 1, 2007, we adopted
Interpretation No. 48 (FIN No. 48), Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109. FIN No. 48 carves out income taxes from SFAS No. 5. The
adoption of FIN No. 48 resulted in the cumulative-effect adjustment to the opening balance of
retained earnings as of January 1, 2007, of $8.5 million. In addition, we record other deferred tax
provisions under the guidelines of SFAS No. 109, Accounting for Income Taxes. Significant
judgment is required to determine when such provisions should be recorded, and when facts and
circumstances change, when such provisions should be released.
Useful lives of property and equipment and certain intangible assets; our network assets and
amortizable intangible assets are depreciated and amortized over periods generally ranging from
five to ten years. Any reduction or increase in the estimated useful lives for a particular
category of fixed assets or intangible assets could have a material effect on our future results of
operations.
Business combinations; SFAS No. 141, Business Combinations, requires us to recognize the
share in the assets of businesses acquired and respective liabilities assumed based on their fair
values. Our estimates of the fair value of the identified intangible assets of businesses acquired
are based on our expectations of future results of operations of such businesses.
31
Results of Operations
The results of our four business segments from the operations of our consolidated entities
combined with the non-consolidated entities where we are actively involved in the day-to-day
management, are shown in Note 11 Segment Information Line of Business Data to our
consolidated financial statements.
According to Russian government estimates, inflation in Russia was 9% in 2006, and 6% for the
six months ended June 30, 2007. The Russian government expects inflation to be approximately 7% to
8% in 2007. Although the rate of inflation has been declining, any return to heavy and sustained
inflation could lead to market instability, new financial crises, reduction in consumer buying
power and erosion of consumer confidence.
The discussion of our results of operations is organized as follows:
|
|
Consolidated Results. Consolidated Results of Operations for the Three
Months Ended June 30, 2007, compared to the Consolidated Results of
Operations for the Three Months Ended June 30, 2006 |
|
|
|
Consolidated Results. Consolidated Results of Operations for the Six
Months Ended June 30, 2007, compared to the Consolidated Results of
Operations for the Six Months Ended June 30, 2006 |
|
|
|
Consolidated Financial Position. Consolidated Financial Position at
June 30, 2007, compared to Consolidated Financial Position at December
31, 2006 |
Consolidated Results Consolidated Results of Operations for the Three Months Ended June 30,
2007, Compared to the Consolidated Results of Operations for the Three Months Ended June 30, 2006
Revenue
Our revenue increased by 51% to $297.7 million for the three months ended June 30, 2007 from
$197.0 million for the three months ended June 30, 2006. The breakdown of revenue by business group
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Consolidated Revenue |
|
|
Consolidated Revenue |
|
|
|
For the Three Months |
|
|
For the Three Months |
|
|
|
Ended June 30, 2006 |
|
|
Ended June 30, 2007 |
|
|
|
(in millions) |
|
REVENUE |
|
|
|
|
|
|
|
|
Business and Corporate Services |
|
$ |
113.0 |
|
|
$ |
167.2 |
|
Carrier and Operator Services |
|
|
69.2 |
|
|
|
113.3 |
|
Consumer Internet Services |
|
|
12.2 |
|
|
|
13.5 |
|
Mobile Services |
|
|
2.6 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
TOTAL REVENUE |
|
$ |
197.0 |
|
|
$ |
297.7 |
|
The breakdown of revenue by geographic regions was as follows:
|
|
|
|
|
|
|
|
|
|
|
Consolidated Revenue |
|
|
Consolidated Revenue |
|
|
|
For the Three Months |
|
|
For the Three Months |
|
|
|
Ended June 30, 2006 |
|
|
Ended June 30, 2007 |
|
|
|
(in millions) |
|
REVENUE |
|
|
|
|
|
|
|
|
Moscow |
|
$ |
121.7 |
|
|
$ |
194.3 |
|
Northwest region of Russia |
|
|
18.0 |
|
|
|
26.8 |
|
Other regions of Russia and CIS |
|
|
42.3 |
|
|
|
64.2 |
|
Ukraine |
|
|
19.4 |
|
|
|
25.2 |
|
Eliminations |
|
|
(4.4 |
) |
|
|
(12.8 |
) |
|
|
|
|
|
|
|
TOTAL REVENUE |
|
$ |
197.0 |
|
|
$ |
297.7 |
|
Business and Corporate Services. Revenue from Business and Corporate Services increased
by 48% to $167.2 million for the three months ended June 30, 2007 from $113.0 million for the three
months ended June 30, 2006. Macro-economic growth in Russia, Ukraine, and the CIS and continuing
demand for our telecommunications solutions as well as the
introduction of CPP, have continued to help us increase revenue in this line
of business. Our total number of contracts in this line of business increased from 192,689 on June
30, 2006, to 319,595 on June 30, 2007, an increase of 66%.
32
Revenue from the BCS division of Sovintel increased by 47% to $134.0 million for the three
months ended June 30, 2007, from $90.9 million for the three months ended June 30, 2006. In the
second quarter of 2007, Sovintel recorded approximately $12.7 million of additional revenue related
to the introduction of CPP.
BCS
revenue in Moscow, our largest market, increased by $27.3 million, or 40%, to $95.2
million in the second quarter of 2007 from $67.9 million in the second quarter of 2006. However, as
a percentage of total Sovintel BCS revenue, Moscow decreased from approximately 75% in the second
quarter of 2006 to approximately 71% of Sovintels total BCS revenue in the second quarter of 2007.
This decrease is the result of the expansion of Sovintels BCS business in the Russian regions. Our
BCS Moscow voice revenue continues to grow as we expand our client base and comprises over half of
our total BCS revenue in that market. In the second quarter of 2007, BCS Moscow revenue from data
and Internet services grew significantly not only due to an increase in our customer base, but also
due to increased business from existing customers. We expect our revenue from BCS Moscow to
continue to grow as the Moscow commercial real-estate market continues to experience significant
investment. Our ongoing relationships with Moscow real-estate developers should enable us to
continue to grow the number of trade and business centers where we provide services to end users.
Furthermore, we have implemented a key account program in Moscow to protect our relationships with
our largest clients and to foster cross selling. Additionally, we expect demand for call center and
data center services to continue to demonstrate strong growth in Moscow. Our revenue from call
centers and data centers increased by approximately $1.5 million, or 91%, in between the second
quarter of 2006 and 2007. These services now account for approximately $3.1 million in revenue in
BCS Sovintel. Refer to the table below for key operating statistics for BCS Moscow.
|
|
|
|
|
|
|
|
|
|
|
|
|
(in whole numbers) |
|
2006 |
|
|
2007 |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCS Moscow customer statistics on June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
Total clients |
|
|
23,559 |
|
|
|
23,799 |
|
|
|
1 |
% |
Business centers |
|
|
855 |
|
|
|
1,002 |
|
|
|
17 |
% |
Trade centers |
|
|
78 |
|
|
|
118 |
|
|
|
51 |
% |
Hotels |
|
|
51 |
|
|
|
55 |
|
|
|
8 |
% |
Direct inward dialing lines |
|
|
131,250 |
|
|
|
145,000 |
|
|
|
10 |
% |
Ethernet / Metropolitan Ethernet Network connections |
|
|
2,172 |
|
|
|
2,865 |
|
|
|
32 |
% |
High speed Internet active contracts |
|
|
694 |
|
|
|
1,378 |
|
|
|
99 |
% |
Sovintel regional BCS revenue increased by 69% to $38.8 million in the second quarter of
2007 from $23.0 million in the second quarter of 2006. As a percentage of total Sovintel BCS
revenue, regional BCS revenue increased from approximately 25% in the second quarter of 2006 to
approximately 29% of Sovintels total BCS revenue in the second quarter of 2007. Sovintel regional
BCS business continues to grow as we assist our customers in developing their businesses in Russian
regions outside of Moscow.
Revenue from the BCS division of GTU increased by 17% to $14.1 million for the three months
ended June 30, 2007, from $12.1 million for the three months ended June 30, 2006. This increase in
revenue was due to a 20% increase in the minutes of use resulting from a 43% increase in the number
of serviced voice lines, including a significant increase in the number of residential customers.
As of June 30, 2007, GTU had approximately 12,634 residential customers compared to approximately
6,837 residential customers as of June 30, 2006. Revenue from the local voice services increased by
18% following the introduction of regulated tariffs by the NCCR from July 2006 and tariff increases
effective from November 1, 2006. Partly offsetting these increasing factors was a decrease of the
newly regulated DLD/ILD tariffs due to the continuing tariff re-balancing process. Additionally,
data and Internet revenue increased by approximately $0.8 million due to increase in the number of
ports in service.
Our acquisition strategy also contributed to the overall BCS growth in the second quarter of
2007. Our revenue increased by approximately $5.3 million due to the acquisitions of Kubtelecom in
2006, and Atel, Corbina, and DirectNet in 2007. Our regional acquisition strategy has enabled us to
increase our access to last mile infrastructure, thus enabling us to expand our corporate client
base.
Carrier and Operator Services. Revenue from Carrier and Operator Services increased by 64% to
$113.3 million for the three months ended June 30, 2007, from $69.2 million for the three months
ended June 30, 2006. Our total number of contracts in this line of business grew by 40% to 2,942
as of June 30, 2007, from 2,101 as of June 30, 2006.
Carrier and Operator Services revenue from Sovintel increased by 64% to $102.4 million for the
three months ended June 30, 2007, from $62.5 million for the three months ended June 30, 2006. In
Sovintel, we expanded our operations with existing partners and added a number of new carriers in
the regions with high volumes of traffic. Additionally, our revenue from international traffic
increased as we carried larger volumes of lower-margin traffic destined to CIS countries. We also
observed a significant increase in Internet traffic. In the second quarter of 2007, Sovintel
recorded approximately $10.3 million of additional revenue related to the introduction of CPP. We
expect that our revenues in this line of business will continue to increase in future periods as we
expand our
33
termination capabilities and continue to develop our network. Following the introduction of
the new Interconnection Rules, we observed less competitive pressure on revenues.
Revenue for the Carrier and Operator Services division of GTU increased by 100% to $8.8
million for the three months ended June 30, 2007, from $4.4 million for the three months ended June
30, 2006. Carriers carrier revenue increased due to a 201% increase in transit traffic from local
operators following introduction of the new interconnection rules effective January 1, 2007, and a
527% increase in the incoming international minutes of use.
Carrier
and Operator Services revenue increased by approximately $2.5 million due to the
acquisition of Kubtelecom in 2006 and Corbina in 2007.
Consumer Internet Services. Revenue from Consumer Internet Services increased by 11% to $13.5
million for the three months ended June 30, 2007, from $12.2 million for the three months ended
June 30, 2006. Consumer Internet Services revenue increased by approximately $4.4 million due to
the acquisitions of Kubtelecom and Corus in 2006, and Atel and Corbina in 2007. Our revenue from
consumer dial-up Internet decreased by approximately $2.8 million between the second quarter of
2007 and 2006. The average revenue per dial-up Internet subscriber decreased from $6.87 per month
for the three months ended June 30, 2006, to approximately $6.37 per month for the three months
ended June 30, 2007, and the number of dial-up Internet subscribers decreased from 400,721 at June
30, 2006, to 268,659 at June 30, 2007. The demographics of our dial-up subscriber base continue to
change as we lose subscribers both in Moscow and in the regions. The consumer Internet market in
Russia has become more competitive due to the increasing availability of other Internet access
technologies, especially DSL-based services from incumbent Svyazinvest operators. We anticipate
that our revenue from consumer broadband will increase as we embark on our broadband access
rollout. Our current and past base of dial-up Internet subscribers in Moscow and throughout Russia
allows us to specifically target subscribers that currently use or have previously used our
Internet services. As of June 30, 2007, we had 267,131 broadband Internet subscribers, of which
203,984 are connected by Corbina with average revenue per subscriber of approximately $15.65 per month.
As of June 30, 2007, we had 23,722 subscribers of our newly launched WiFi services in Moscow with
average revenue per subscriber of approximately $12.91 per month.
Mobile Services. Revenue from Mobile Services increased by 42% to $3.7 million for the three
months ended June 30, 2007, from $2.6 million for the three months ended June 30, 2006. The
revenue increased by approximately $1.9 million due to the acquisition of Corbina in 2007. As of
June 30, 2007, Corbina had 33,456 active mobile subscribers with the average revenue per active
subscriber of approximately $69.50 per month. This increase was partly offset by the decline in
mobile revenue of GTU due to increased competition in the Ukrainian mobile market, and the lack of
network coverage, which has led to significant churn of high usage contract subscribers. Active
subscribers in Ukraine decreased from 50,602 at June 30, 2006, to 42,363 at June 30, 2007. The
average revenue per active subscriber in Ukraine decreased by 20% from approximately $17.66 per
month to approximately $14.06 per month primarily due to a decrease in the average subscription fee
and traffic revenue due to higher share of prepaid subscribers with lower usage compared to
contract subscribers.
Expenses
The following table shows our principal expenses for the three months ended June 30, 2007 and
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Consolidated Expenses |
|
|
Consolidated Expenses |
|
|
|
For the Three Months |
|
|
For the Three Months |
|
|
|
Ended June 30, 2006 |
|
|
Ended June 30, 2007 |
|
|
|
(in millions) |
|
COST OF REVENUE |
|
|
|
|
|
|
|
|
Business and Corporate Services |
|
$ |
48.0 |
|
|
$ |
75.2 |
|
Carrier and Operator Services |
|
|
48.4 |
|
|
|
83.1 |
|
Consumer Internet Services |
|
|
7.9 |
|
|
|
11.2 |
|
Mobile Services |
|
|
1.3 |
|
|
|
2.3 |
|
Corporate |
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
TOTAL COST OF REVENUE |
|
|
105.6 |
|
|
|
171.6 |
|
Selling, general and administrative |
|
|
33.5 |
|
|
|
44.8 |
|
Depreciation and amortization |
|
|
24.0 |
|
|
|
32.4 |
|
Equity in earnings of ventures |
|
|
(0.4 |
) |
|
|
(0.1 |
) |
Interest income |
|
|
(0.1 |
) |
|
|
(1.2 |
) |
Interest expense |
|
|
0.1 |
|
|
|
3.1 |
|
Foreign currency gain |
|
|
(0.7 |
) |
|
|
(1.3 |
) |
Minority interest |
|
|
1.0 |
|
|
|
1.4 |
|
Provision for income taxes |
|
|
11.4 |
|
|
|
14.7 |
|
34
Cost of Revenue
Our cost of revenue increased by 63% to $171.6 million for the three months ended June 30,
2007 from $105.6 million for the three months ended June 30, 2006.
Business and Corporate Services. Cost of revenue from BCS increased by 57% to $75.2 million,
or 45% of revenue, for the three months ended June 30, 2007 from $48.0 million, or 42% of revenue,
for the three months ended June 30, 2006. The increase in cost of revenue as a percentage of
revenue was mainly due to the switch to our new FTN, deployment of the zonal networks and
replacement of the existing rented intercity capacity.
Cost
of revenue for the BCS division of Sovintel increased by 56% to $60.2 million, or 45% of
revenue, for the three months ended June 30, 2007, from $38.7 million, or 43% of revenue, for the
three months ended June 30, 2006. The increase in cost of revenue as a percentage of revenue is
primarily due to an increased volume of lower margin products and continuing pressure on our
margins in this line of business from our existing customers. In addition, in the first quarter of
2007, we began utilizing our FTN thus bearing operational costs for two network structures while
phasing out redundant costs. We also incurred additional costs related to the deployment of the
zonal networks and implementation of the new capital lease agreements to replace existing rented
intercity channels. In the second quarter of 2007, Sovintel recorded approximately $6.1 million of
additional costs related to the introduction of CPP.
Cost
of revenue for the BCS division of GTU increased by 17% to $6.1 million, or 43% of
revenue, for the three months ended June 30, 2007, from $5.2 million, or 43% of revenue, for the
three months ended June 30, 2006. Cost of revenue remained unchanged as a percentage of revenue.
BCS
cost of revenue increased by approximately $3.1 million due to the acquisitions of
Kubtelecom in 2006, and Atel, Corbina, and DirectNet in 2007.
Carrier and Operator Services. Cost of revenue from Carrier and Operator Services increased by
72% to $83.1 million, or 73% of revenue, for the three months ended June 30, 2007, from $48.4
million, or 70% of revenue, for the three months ended June 30, 2006. We continue to observe
pressure on our operating margins in this line of business, attributable to competition and to a
change in our traffic mix.
Cost of revenue for the Carrier and Operator Services division of Sovintel increased by 76% to
$79.4 million, or 76% of revenue, for the three months ended June 30, 2007, from $45.2 million, or
72% of revenue, for the three months ended June 30, 2006. The increase in cost of revenue as a
percentage of revenue is primarily due to an increased volume of lower margin products and
continuing pressure on our margins in this line of business from our existing customers. In
addition, in the first half of 2007, we began utilizing our FTN thus bearing operational costs for
two network structures while phasing out redundant costs. We also incurred additional costs related
to the deployment of the zonal networks and implementation of the new capital lease agreements to
replace existing rented intercity channels. In the second quarter of 2007, Sovintel recorded
approximately $10.2 million of additional costs related to the introduction of CPP.
Cost of revenue for the Carrier and Operator Services division of GTU increased to $6.7
million, or 76% of revenue for the three months ended June 30, 2007, from $3.0 million, or 68% of
revenue for the three months ended June 30, 2006. Cost of revenue increased as a percentage of
revenue primarily due to introduction of the new interconnection rules effective January 1, 2007,
lower margin local transit and incoming international traffic accounting for a larger portion of
our total wholesale traffic in the second quarter of 2007.
Carrier
and Operator Services cost of revenue increased by approximately $0.8 million due to
the acquisitions of Kubtelecom in 2006 and Corbina in 2007.
Consumer Internet Services. Cost of revenue from Consumer Internet Services increased by 42%
to $11.2 million, or 83% of revenue, for the three months ended June 30, 2007, from $7.9 million,
or 70% of revenue, for the three months ended June 30, 2006. The increase in cost of revenue as a
percentage of revenue was mainly the result of the new settlement rules for interconnection with
other operators. As regional subscribers account for a larger portion of our
total subscriber base, margins in this line of business have decreased due to incremental network
costs incurred to provide access to regional customers. Furthermore, the impact of a decline in
subscribers in Moscow has not resulted in an immediate decline of network costs, which are more
fixed in nature. In addition, we incurred additional costs related to our WiFi network in Moscow
which became commercially operational only from March 1, 2007. We also incurred additional costs
related to the Corbinas deployment of the FTTB network which is not fully operational.
35
Consumer Internet Services cost of revenue increased by approximately $2.5 million due to the
acquisitions of Kubtelecom and Corus in 2006, and Corbina in 2007.
Mobile Services. Cost of revenue from Mobile Services increased by 77% to $2.3 million, or 62%
of revenue for the three months ended June 30, 2007, from $1.3 million, or 50% of revenue for the
three months ended June 30, 2006. Mobile cost of revenue increased by approximately $1.0 million
due to the acquisition of Corbina in 2007. The increase in cost of revenue as a percentage of
revenue is mainly due to the lower margin products of Corbinas mobile offerings and increased
network costs related to the FMC network development in Ukraine.
Selling, General and Administrative
Our selling, general and administrative expenses increased by 34% to $44.8 million, or 15% of
revenue, for the three months ended June 30, 2007, from $33.5 million, or 17% of revenue, for the
three months ended June 30, 2006. Ongoing employee related costs such as salaries, bonuses,
insurance and other benefits increased by approximately $9.0 million, or 50%, of which $2.1 million,
or 23%, was stock-based compensation costs, primarily due to
increased executive officer costs, ongoing salary increases, and a 93% increase in consolidated
headcount. Taxes,
other than income taxes, increased by $1.1 million between years due to an increase in property
taxes and non-recoverable VAT. Our rent expenses increased by $1.4 million, of which $0.7 million
was due to the acquisitions of Kolangon and Corbina in 2007.
Depreciation and Amortization
Our depreciation and amortization expenses increased by 35% to $32.4 million for the three
months ended June 30, 2007, from $24.0 million for the three months ended June 30, 2006.
Depreciation expense increased by $7.4 million, or 39%, primarily due to depreciation on capital
expenditures to further develop our network. Amortization expense also increased by $1.0 million,
or 19%, primarily due to amortization on intangible assets arising from acquisitions consummated in
the second half of 2006 and first half of 2007.
Equity in Earnings of Ventures
The earnings after interest and tax charges from our investments in non-consolidated ventures
decreased to $0.1 million for the three months ended June 30, 2007, from $0.4 million for the three
months ended June 30, 2006. The decrease in earnings is mainly due to the operations of ZAO Rascom
(Rascom). We acquired 54% of Rascom in the fourth quarter of 2005. We account for our investments
in Rascom under the equity method because the rights of the minority shareholder represent
substantive participating rights, and as result, such rights overcome the presumption that we
control Rascom.
Interest Income
Our interest income for the three months ended June 30, 2007, increased to $1.2 million from
$0.1 million for the three months ended June 30, 2006. The increase in interest income is due to
increased cash balances held in interest bearing accounts.
Interest Expense
Our interest expense for the three months ended June 30, 2007, increased to $3.1 million from
$0.1 million for the three months ended June 30, 2006. The increase in interest expense is due to
increased borrowings to finance acquisitions of Kolangon and Corbina.
Foreign Currency Gain
Our foreign currency gain for the three months ended June 30, 2007, increased to $1.3 million
from $0.7 million for the three months ended June 30, 2006. The increase in foreign currency gain
is due to the combination of movements in exchange rates and changes in the amount of net monetary
assets of the Russian subsidiaries that we have denominated in USD.
Minority Interest
Our minority interest was $1.4 million for the three months ended June 30, 2007, compared to $1.0
million for the three months ended June 30, 2006. Minority interest in our earnings increased due
to an increase in earnings and consolidation of recently acquired entities where our ownership
interest is less than 100%. In 2006, we acquired less than 100% of ZAO Tatar Intellectual
Communications and Kubtelecom. In 2007, we acquired less than 100% of Kolangon and Corbina.
36
Provision for Income Taxes
Our charge for income taxes was $14.7 million for the three months ended June 30, 2007,
compared to $11.4 million for the three months ended June 30, 2006. Our effective tax rate was 31%
for the three months ended June 30, 2007, down from 33% for the three months ended June 30, 2006.
The decrease is primarily due to decreased levels of tax losses incurred in our US subsidiaries. We
have recorded a full valuation allowance against the deferred tax assets related to these net
operating loss carry-forwards.
Net Income and Net Income per Share
Our net income for the three months ended June 30, 2007 was $32.3 million, compared to a net
income of $22.6 million for the three months ended June 30, 2006.
Our net income per share of common stock increased to $0.85 for the three months ended June
30, 2007, compared to a net income per share of $0.62 for the three months ended June 30, 2006. The
increase in net income per share of common stock was due to the increase in net income, offset by
an increase in the number of weighted average shares to 37,872,413 in the three months ended June
30, 2007, compared to 36,599,704 in the three months ended June 30, 2006. The increase in
outstanding shares was a direct result of the issuance of shares as a consideration for the Corbina
acquisition and the employee stock option exercises.
Our net income per share of common stock on a fully diluted basis increased to $0.85 for the
three months ended June 30, 2007, compared to a net income per common share of $0.62 for the three
months ended June 30, 2006. The increase in net income per share of common stock on a fully diluted
basis was due to the increase in net income, offset by an increase in the number of weighted
average shares assuming dilution to 37,983,412 in the three months ended June 30, 2007, compared to
36,716,196 in the three months ended June 30, 2006.
Consolidated Results Consolidated Results of Operations for the Six Months Ended June 30, 2007,
compared to the Consolidated Results of Operations for the Six Months Ended June 30, 2006
Revenue
Our revenue increased by 48% to $553.4 million for the six months ended June 30, 2007 from
$375.1 million for the six months ended June 30, 2006. The breakdown of revenue by business group
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Consolidated Revenue |
|
|
Consolidated Revenue |
|
|
|
For the Six Months |
|
|
For the Six Months |
|
|
|
Ended June 30, 2006 |
|
|
Ended June 30, 2007U |
|
|
|
(in millions) |
|
REVENUE |
|
|
|
|
|
|
|
|
Business and Corporate Services |
|
$ |
216.2 |
|
|
$ |
315.0 |
|
Carrier and Operator Services |
|
|
129.3 |
|
|
|
209.1 |
|
Consumer Internet Services |
|
|
24.4 |
|
|
|
23.8 |
|
Mobile Services |
|
|
5.2 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
TOTAL REVENUE |
|
$ |
375.1 |
|
|
$ |
553.4 |
|
The breakdown of revenue by geographic regions was as follows:
|
|
|
|
|
|
|
|
|
|
|
Consolidated Revenue |
|
|
Consolidated Revenue |
|
|
|
For the Six Months |
|
|
For the Six Months |
|
|
|
Ended June 30, 2006 |
|
|
Ended June 30, 2007 |
|
|
|
(in millions) |
|
REVENUE |
|
|
|
|
|
|
|
|
Moscow |
|
$ |
233.8 |
|
|
$ |
353.5 |
|
Northwest region of Russia |
|
|
34.5 |
|
|
|
52.5 |
|
Other regions of Russia and CIS |
|
|
80.6 |
|
|
|
120.9 |
|
Ukraine |
|
|
37.1 |
|
|
|
48.2 |
|
Eliminations |
|
|
(10.9 |
) |
|
|
(21.7 |
) |
|
|
|
|
|
|
|
TOTAL REVENUE |
|
$ |
375.1 |
|
|
$ |
553.4 |
|
Business and Corporate Services. Revenue from BCS increased by 46% to $315.0 million for
the six months ended June 30, 2007, from $216.2 million for the six months ended June 30, 2006.
Macro-economic growth in Russia, Ukraine, and the CIS and continuing demand for our
telecommunications solutions as well as the introduction of CPP, have continued to help us increase revenue in this line of business.
Revenue from the BCS division of Sovintel increased by 46% to $255.3 million for the six
months ended June 30, 2007, from $175.4 million for the six months ended June 30, 2006. In the
first half of 2007, Sovintel recorded approximately $22.1 million of additional revenue related to
the introduction of CPP. BCS revenue in Moscow, our largest market, increased by 39% to $181.1
37
million in the first half of 2007 from $130.7 million in the firsthalf of 2006. However, as a
percentage of total Sovintel BCS revenue, Moscow decreased from approximately 75% in the first half
2006 to approximately 71% of Sovintels total BCS revenue in the first half of 2007. This decrease
is the result of the expansion of Sovintels BCS business in the Russian regions. Our BCS Moscow
voice revenue continues to grow as we expand our client base. In the first half of 2007, BCS Moscow
revenue from data and Internet services grew significantly not only due to an increase in our
customer base, but also due to increased business from existing customers. In the first half of
2007, we experienced significant growth in our data and Internet service offerings.
Sovintel regional BCS revenue increased by 66% to $74.2 million in the first half of 2007 from
$44.7 million in the first half of 2006. As a percentage of total Sovintel BCS revenue, regional
BCS revenue increased from approximately 25% in the first half 2006 to approximately 29% of
Sovintels total BCS revenue in the first half of 2007. Sovintel regional BCS business continues to
grow as we assist our customers in developing their businesses in Russian regions outside of
Moscow.
Revenue from the BCS division of GTU increased by 16% to $27.6 million for the six months
ended June 30, 2007, from $23.7 million for the six months ended June 30, 2006. This increase in
revenue was due to a 20% increase in the minutes of use resulting from a 43% increase in the number
of serviced voice lines. Partly offsetting these increasing factors was a 21% decrease in the
average minutes of use per line per month due to more residential, SMB, and regional customers in
the client base. Additionally, data and Internet revenue increased by approximately $1.7 million
due to an increase in the number of ports in service and higher customers activity.
BCS revenue increased by approximately $6.2 million due to the acquisitions Kubtelecom in
2006, and Atel, Corbina, and DirectNet in 2007.
Carrier and Operator Services. Revenue from Carrier and Operator Services increased by 62% to
$209.1 million for the six months ended June 30, 2007, from $129.3 million for the six months ended
June 30, 2006.
Carrier and Operator Services revenue from Sovintel increased by 59% to $188.6 million for the
six months ended June 30, 2007, from $118.5 million for the six months ended June 30, 2006. In the
first half of 2007, Sovintel recorded approximately $17.1 million of additional revenue related to
the introduction of CPP. At Sovintel, we have expanded our operations with existing partners and
added a number of new carriers in the regions with increased volumes of traffic. Additionally, our
revenue from international traffic increased as we carried larger volumes of lower margin traffic
destined to CIS countries.
Revenue for the Carrier and Operator Services division of GTU increased by 105% to $16.0
million for the six months ended June 30, 2007, from $7.8 million for the six months ended June 30,
2006. Incoming international revenue increased by $4.1 million resulting from a 332% increase in
the incoming international minutes of use. Incoming international minutes of use increased due to
an increase in transit traffic from various international operators. In addition, carriers
carrier revenue increased by a $3.8 million due to a 240% increase in carriers carrier minutes of
use resulting from a rise in low margin transit traffic on mobile networks.
Carrier and Operator Services revenue increased by approximately $3.8 million due to the
acquisitions of Kubtelecom in 2006, and Corbina in 2007.
Consumer Internet Services. Revenue from Consumer Internet Services decreased by 2% to $23.8
million for the six months ended June 30, 2007, from $24.4 million for the six months ended June
30, 2006. Consumer Internet Services revenue increased by approximately $4.8 million due to the
acquisitions of Kubtelecom and Corus in 2006, and Atel and Corbina in 2007. Offsetting this
increase was a decrease in revenue from dial-up Internet.
Mobile Services. Revenue from Mobile Services increased by 6% to $5.5 million for the six
months ended June 30, 2007, from $5.2 million for the six months ended June 30, 2006. The revenue
increased by approximately $1.9 million due to the acquisition of Corbina in 2007. The increase in
revenue was partly offset by decline in mobile revenue of GTU primarily due to increased
competition on the Ukrainian mobile market, and the lack of network coverage, which has led to
significant churn of subscribers.
38
Expenses
The following table shows our principal expenses for the six months ended June 30, 2007 and
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
Consolidated Expenses |
|
|
Consolidated Expenses |
|
|
|
For the Six Months |
|
|
For the Six Months |
|
|
|
Ended June 30, 2006 |
|
|
Ended June 30, 2007 |
|
|
|
(in millions) |
|
COST OF REVENUE |
|
|
|
|
|
|
|
|
Business and Corporate Services |
|
$ |
92.0 |
|
|
$ |
142.4 |
|
Carrier and Operator Services |
|
|
88.5 |
|
|
|
154.7 |
|
Consumer Internet Services |
|
|
16.0 |
|
|
|
21.0 |
|
Mobile Services |
|
|
2.5 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
TOTAL COST OF REVENUE |
|
|
199.0 |
|
|
|
321.7 |
|
Selling, general and administrative |
|
|
67.4 |
|
|
|
93.8 |
|
Depreciation and amortization |
|
|
46.6 |
|
|
|
61.0 |
|
Equity in (earnings)/ losses
of ventures |
|
|
(0.7 |
) |
|
|
0.3 |
|
Interest income |
|
|
(0.8 |
) |
|
|
(1.4 |
) |
Interest expense |
|
|
0.2 |
|
|
|
3.1 |
|
Foreign currency gain |
|
|
(1.6 |
) |
|
|
(1.6 |
) |
Minority interest |
|
|
2.1 |
|
|
|
2.8 |
|
Provision for income taxes |
|
|
20.8 |
|
|
|
24.8 |
|
Cumulative effect of a change in
accounting principle, net of tax |
|
$ |
0.7 |
|
|
$ |
|
|
Cost of Revenue
Our cost of revenue increased by 62% to $321.7 million for the six months ended June 30, 2007
from $199.0 million for the six months ended June 30, 2006.
Business and Corporate Services. Cost of revenue from BCS increased by 55% to $142.4 million,
or 45% of revenue, for the six months ended June 30, 2007 from $92.0 million, or 43% of revenue,
for the six months ended June 30, 2006. The increase in cost of revenue as a percentage of revenue
was mainly due to the switch to our new FTN, deployment of the zonal networks and replacement of
the existing rented intercity capacity.
Cost of revenue for the BCS division of Sovintel increased by 54% to
$116.3 million, or 46% of
revenue, for the six months ended June 30, 2007, from $75.3 million, or 43% of revenue, for the six
months ended June 30, 2006. The increase in cost of revenue as a percentage of revenue is primarily
due to increased volume of lower margin products and continuing pressure on our margins in this
line of business from our existing customers. In the first half of 2007, Sovintel recorded
approximately $10.4 million of additional costs related to the introduction of CPP.
Cost of revenue for the BCS division of GTU increased by 13% to $11.8 million, or 43% of
revenue, for the six months ended June 30, 2007, from $10.4 million, or 44% of revenue, for the six
months ended June 30, 2006. Cost of revenue decreased as a percentage of revenue remained
unchanged.
BCS cost of revenue increased by approximately $3.3 million due to the acquisitions of
Kubtelecom in 2006, and Atel, Corbina and DirectNet in 2007.
Carrier and Operator Services. Cost of revenue from Carrier and Operator Services increased by
75% to $154.7 million, or 74% of revenue, for the six months ended June 30, 2007, from $88.5
million, or 68% of revenue, for the six months ended June 30, 2006. We continue to observe pressure
on our operating margins in this line of business, attributable to competition and to a change in
our traffic mix.
Cost of revenue for the Carrier and Operator Services division of Sovintel increased by 73% to
$146.8 million, or 78% of revenue, for the six months ended June 30, 2007, from $85.0 million, or
72% of revenue, for the six months ended June 30, 2006. The increase in cost of revenue as a
percentage of revenue is primarily due to a change in our traffic mix in favor of traffic
terminated in CIS countries, which have higher settlement rates, due to an increase in traffic
terminated to mobile networks, which typically have higher settlement rates than fixed networks. In
the first half of 2007, Sovintel recorded approximately $17.0 million of additional costs related
to the introduction of CPP.
Cost of revenue for the Carrier and Operator Services division of GTU increased by 130% to
$12.2 million, or 76% of revenue for the six months ended June 30, 2007, from $5.3 million, or 68%
of revenue for the six months ended June 30, 2006. Cost of revenue increased as a percentage of
revenue primarily due to lower margin incoming international traffic accounting for a larger
portion of our total wholesale traffic in the first half of 2007.
39
Carrier
and Operator Services cost of revenue increased by approximately $1.6 million due to
the acquisitions of Kubtelecom in 2006, and Corbina in 2007.
Consumer Internet Services. Cost of revenue from Consumer Internet Services increased by 31%
to $21.0 million, or 88% of revenue, for the six months ended June 30, 2007, from $16.0 million, or
68% of revenue, for the six months ended June 30, 2006. The increase in cost of revenue as a
percentage of revenue was mainly the result of the new settlement rules for interconnection with
other operators. As regional subscribers account for a larger portion of our total subscriber base,
margins in this line of business have decreased due to incremental network costs incurred to
provide access to regional customers. Furthermore, the impact of a decline in subscribers in Moscow
has not resulted in an immediate decline of network costs, which are more fixed in nature. In
addition, we incurred additional costs related to our WiFi network in Moscow which became
commercially operational only from March 1, 2007. We also incurred additional costs related to the
Corbinas deployment of the FTTB network which is not fully operational.
Consumer
Internet Services cost of revenue increased by approximately $2.7 million due to the
acquisitions of Kubtelecom and Corus in 2006, and Atel and Corbina in 2007.
Mobile Services. Cost of revenue from Mobile Services increased by 44% to $3.6 million, or 65%
of revenue for the six months ended June 30, 2007, from $2.5 million, or 48% of revenue for the six
months ended June 30, 2006. The increase in cost of revenue as a percentage of revenue is mainly
due to the lower margin products of Corbinas mobile offerings and increased network costs related
to the FMC network development in Ukraine.
Selling, General and Administrative
Our selling, general and administrative expenses increased by 39% to $93.8 million, or 17% of
revenue, for the six months ended June 30, 2007, from $67.4 million, or 18% of revenue, for the six
months ended June 30, 2006. Ongoing employee related costs such as salaries, bonuses, insurance and
other benefits increased by approximately $21.3 million, or 63%,
of which $9.1 million or 43%, was stock-based compensation costs, primarily due to an increase in
consolidated headcount, increased executive officer costs, ongoing salary and other compensation
increases. Our rent expenses
increased by $2.0 million mainly due to the acquisitions of Kolangon and Corbina in 2007. Bad debt
expense decreased by approximately $1.2 million compared to the six months ended June 30, 2006,
mainly due to the change in the cash collection trends. Taxes, other than income taxes, increased
by $1.9 million compared to the first half of 2006, due to an increase in property taxes and
provision for non-recoverable VAT receivables. Our advertising costs increased by $1.3 million due
to intensified marketing campaign of our new products. The remaining
$1.1 million net increase is
the result of other selling, general and administrative expenses increasing in line with the growth
in our business.
Depreciation and Amortization
Our depreciation and amortization expenses increased by 31% to $61.0 million for the six
months ended June 30, 2007, from $46.6 million for the six months ended June 30, 2006.
Depreciation expense increased by $12.9 million, or 35%, primarily due to depreciation on capital
expenditures to further develop our network. Amortization expense also increased by $1.5 million,
or 15%, due to amortization on intangible assets arising from acquisitions consummated in 2006 and
2007.
Equity in Earnings (Losses) of Ventures
The losses after interest and tax charges from our investments in non-consolidated ventures
increased to $0.3 million for the six months ended June, 2007 from earnings of $0.7 million for the
six months ended June 30, 2006. The increase is mainly due to an increase in losses of Rascom.
Interest Income
Our interest income for the six months ended June 30, 2007, increased to $1.4 million, from
$0.8 million for the six months ended June 30, 2006. The increase in interest income is due to
increased cash balances held in interest bearing accounts.
Interest Expense
Our interest expense for the six months ended June 30, 2007, increased to $3.1 million, from
$0.2 million for the six months ended June 30, 2006. The
increase in interest expense is due to
increased borrowings to finance acquisitions of Kolangon and Corbina.
Foreign Currency Gain
Our foreign currency gain for the six months ended June 30, 2007, remained unchanged at $1.6
million.
40
Minority Interest
Our minority interest was $2.8 million for the six months ended June 30, 2007, compared to
$2.1 million for the six months ended June 30, 2006. Minority interest in our earnings increased
due to an increase in earnings and consolidation of recently acquired entities where our ownership
interest is less than 100%. In 2006, we acquired less than a 100% ownership in Tatintelcom and
Kubtelecom. In 2007, we acquired less than a 100% ownership in Kolangon and Corbina.
Provision for Income Taxes
Our charge for income taxes was $24.8 million for the six months ended June 30, 2007, compared
to $20.8 million for the six months ended June 30, 2006. Our effective tax rate increased to 33%
for the six months ended June 30, 2007, compared to 32% for the six months ended June 30, 2006.
Cumulative Effect of a Change in Accounting Principle
In the first half of 2006, we recognized $0.7 million, net of tax, cumulative effect of a
change in accounting principle related to accounting for share-based payments upon adoption of SFAS
No. 123R on January 1, 2007.
Net Income and Net Income per Share
Our net income for the six months ended June 30, 2007, was $49.0 million, compared to a net
income of $41.4 million for the six months ended June 30, 2006.
Our net income per share of common stock increased to $1.31 for the six months ended June 30,
2007, compared to a net income per share of $1.13 for the six months ended June 30, 2006. The
increase in net income per share of common stock was due to the increase in net income, offset by
an increase in the number of weighted average shares to 37,276,862 in the six months ended June 30,
2007, compared to 36,537,163 in the six months ended June 30, 2006. The increase in outstanding
shares was a direct result of the issuance of shares as a consideration for the Corbina
acquisition, and the employee stock option exercises. In addition, during the six months ended June
30, 2006, we recorded the cumulative effect of a change in accounting principle related to
accounting for share-based payments of $0.02 per share of common stock.
Our net income per share of common stock on a fully diluted basis increased to $1.31 for the
six months ended June 30, 2007, compared to a net income per common share of $1.13 for the six
months ended June 30, 2006. The increase in net income per share of common stock on a fully diluted
basis was due to the increase in net income, offset by an increase in the number of weighted
average shares assuming dilution to 37,400,440 in the six months ended June 30, 2007, compared to
36,687,101 in the six months ended June 30, 2006.
Consolidated Financial Position Significant Changes in Consolidated Financial Position at June
30, 2007, compared to Consolidated Financial Position at December 31, 2006
Accounts Receivable
Accounts receivable increased by $51.1 million from $147.7 million at December 31, 2006, to
$198.8 million at June 30, 2007, as a result of increased revenue when comparing the month of June
2007 with the month of June 2006, and due to the changes in the settlements with local operators
following the introduction of the new Interconnection Rules and acquisitions.
Notes
Receivable
Our
notes receivable increased by $19.8 million from
$2.8 million at December 31, 2006, to $22.6 million at
June 30, 2007, due to loans made to the minority shareholder of
Fortland and to the entity from which we lease STM-1 fiber optic
capacity.
Intangible Assets
Our
intangible assets increased by $120.5 million from $116.5 million at December 31, 2006, to
$237.0 million at June 30, 2007, as a result of additional intangible assets recorded upon the
acquisition of Kolangon and Corbina, and the purchase of additional numbering capacity, partly
offset by amortization on continuing intangible assets of the consolidated subsidiaries.
41
Liability
for Acquisition
Liability
for acquisition increased by $7.8 million from $0.4 million
at December 31, 2006, to $8.2 million at June 30, 2007
due to the Corbina acquisition.
Minority Interest
Our
minority interest increased by $40.9 million from $31.3 million at December 31, 2006, to
$72.2 million at June 30, 2007, due to a $2.8 million minority interest in earnings for the six
months ended June 30, 2007, and consolidation of Kolangon and Corbina, which were acquired in the
first half of 2007, where our ownership interest is 65% and 51%, respectively.
Stockholders Equity
Shareholders
equity increased by $203.0 million from $817.2 million at December 31, 2006, to
$1,020.2 million at June 30, 2007, as a result of a $142.1 million share issuance for the Corbina
acquisition, our net income of $49.0 million in the six months ended June 30, 2007, and a $15.4
million increase in accumulated other comprehensive income, partly offset by an $8.5 million impact
of adoption of FIN No. 48 recorded as the cumulative-effect adjustment to the opening balance of
retained earnings as of January 1, 2007. Also, shareholders equity increased by $4.1 million due
to accounting for stock options granted to employees, $0.7 million due to stock option exercises
and $0.1 million due to vesting of restricted shares.
Income Taxes
Our effective rate of income tax differs from the US statutory rate due to the impact of the
following factors: (1) different income tax rates and regulations apply in the countries where we
operate; (2) expenses that are non-deductible on the income tax return; (3) write-offs of certain
assets that are not deductible for tax purposes; and (4) changes in the valuation allowance for
deferred tax assets. We currently have deferred tax assets arising from deductible temporary
differences in our non-US subsidiaries. Due to the continued profitability of these subsidiaries,
we anticipate that these deferred tax assets will be realized through deduction against future
taxable income. We also have deferred tax assets related to net operating loss carry-forwards and
deductible temporary differences for US federal income tax purposes. We have recorded a full
valuation allowance against these deferred tax assets due to our assessment of sources of future
taxable income in the United States. We have also recorded a deferred tax asset related to net
operating loss carry-forwards for Cyprus tax purposes. However, we have recorded a full valuation
allowance since we do not anticipate recognizing taxable income in our Cyprus entity in the
foreseeable future.
Liquidity and Capital Resources
The following table
shows our cash flows for the six months ended June 30, 2006 and 2007, respectively:
|
|
|
|
|
|
|
|
|
|
|
Consolidated Cash Flows |
|
|
Consolidated Cash Flows |
|
|
|
For the Six Months |
|
|
For the Six Months |
|
|
|
Ended June 30, 2006 |
|
|
Ended June 30, 2007 |
|
|
|
(in millions) |
|
CASH FLOWS |
|
|
|
|
|
|
|
|
Provided by operating activities |
|
$ |
81.2 |
|
|
$ |
109.7 |
|
Used in investing activities |
|
|
(99.2 |
) |
|
|
(245.4 |
) |
(Used in) provided by financing
activities |
|
|
(13.4 |
) |
|
|
212.5 |
|
Effect of exchange rate changes |
|
|
0.6 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents |
|
$ |
(30.8 |
) |
|
$ |
77.7 |
|
Our cash and cash equivalents was $96.1 million and $18.4 million as of June 30,
2007, and December 31, 2006, respectively. Our total restricted cash was $0.2 million as of June
30, 2007 and December 31, 2006, which was released in July 2007.
Net
cash provided by our operating activities increased by
$28.5 million to $109.7 million for
the six months ended June 30, 2007, from $81.2 million for the six months ended June 30, 2006. This
increase in net cash inflows from operating activities at June 30, 2007, is mainly due to the
faster collections from customers partly offset by the effects of changes in the settlements with
local operators following the introduction of the new interconnection rules effective January 1,
2006.
During the six months ended June 30, 2007, we received approximately $514.0 million in cash
from our customers for services and we paid approximately $400.9 million to suppliers and
employees. During the six months ended June 30, 2006, we received approximately $354.7 million in
cash from our customers for services and we paid approximately $251.5 million to suppliers and
employees.
We
used cash of $245.4 million and $99.2 million for investing activities for the six months
ended June 30, 2007, and 2006, respectively, which were principally attributable to building our
telecommunications networks and acquisitions. Network investing
activities totaled $110.2 million
for the six months ended June 30, 2007 and
42
included cash paid for capital expenditures principally attributable to building out our
telecommunications network. The majority of network investing activities related to the
construction of last mile access, the inter-city fiber optic network and network upgrades as a
result of increased customer connections. Network investing activities totaled $81.2 million for
the six months ended June 30, 2006.
We used
cash of $106.1 million for the six months ended June 30, 2007 for the acquisition of
Kolangon, Atel, CKN, Corbina, DirectNet, Satcomtel and Alcar. We used cash of $16.5 million for
the six months ended June 30, 2006, for the acquisition of
Tatintelcom, TTK and Kubtelecom. We used cash of $19.8 million during
the six month ended June 30, 2007 for loans made. In addition, we
placed $10.0 million in escrow in association with the Corbina
acquisition.
We paid no dividends during the six months ended June 30, 2007. We paid dividends of $14.6
million to shareholders during the six months ended June 30, 2006.
We had working capital of $71.1 million as of June 30, 2007 and $42.8 million as of December
31, 2006. Our working capital ratio (current assets divided by current liabilities) was 1.22 as of
June 30, 2007 and 1.23 as of December 31, 2006.
As part of our drive to increase our network capacity, reduce costs and improve the quality of
our service, we have leased fiber optic and satellite-based network capacity; the terms of these
leases are generally five years or more and can involve significant advance payments. As demand for
our telecommunication services increases we expect to enter into additional capacity agreements and
may make significant financial commitments, in addition to our existing commitments.
Approximately half of the capital expenditures, or approximately 10-12% of our revenues, is
necessary to sustain growth in line with the market growth rates and maintain, upgrade and develop
existing infrastructure. To gain additional market share we expect to invest additional 9-10% of
our revenues in new projects. We estimate that between 2007 and 2010 we will invest approximately
20% of our revenues in business development and construction of broadband networks. We expect
capital expenditures to decline as percentage of revenues once the deployment of broadband networks
is completed.
In
February 2007, we entered into a lease agreement for STM-1 fiber optic
capacity from Ufa to Krasnoyarsk. The lease has a term of five years and total payments of $9.8
million. We took possession of this STM-1 fiber optic capacity beginning April 1, 2007. In
conjunction with this transaction, we also entered into agreement whereby we agreed to provide a
loan of $9.8 million to the lessor. During the six months ended June 30, 2007, we disbursed $7.9
million to the lessor under the loan agreement. The loan matures in 2012 and carries interest at a
rate of 9% per annum.
Some of our operating companies have received debt financing through direct loans from
affiliated companies. In addition, certain operating companies have borrowed funds under a
back-to-back, seven-year credit facility for up to $22.7 million from ZAO Citibank (Citibank), a
Russian subsidiary of Citibank. Under this facility, we provide full cash collateral, held in
London, and recorded on our balance sheet as restricted cash, for onshore loans made by the bank to
our Russian registered joint ventures. In a second, similar facility, we provide full cash
collateral for a short term back-to-back, revolving, credit facility for up to $10.0 million from
the same bank for Sovintel. At June 30, 2007, there were no
amounts outstanding under these facilities.
In July 2006, GTU entered into one-year revolving, credit facility for up to $3.5 million plus
a cash coverage facility of up to $2.0 million with Calyon Bank Ukraine (Calyon). As of June 30,
2007, GTU had borrowed $3.7 under this credit facility. The credit facility carries interest at a
rate equal to the between LIBOR plus 2% to 8.5%. The credit facility requires GTU to maintain
accounts with Calyon in the currencies of the loan and ensure that the aggregate amount of incoming
payments credited to GTUs accounts with Calyon in any calendar month is equal to, or greater than
30% of the aggregate amount of the loans outstanding as of the last day of such month.
In October 2006, Sovintel entered into short term, revolving, credit facility for up to
518,000,000 RUR, equivalent to $20.1 million, with ZAO International Moscow Bank (IMB), a related
party. As of June 30, 2007, Sovintel had not borrowed funds under this facility. The credit
facility carries interest at a rate equal to the Moscow Prime Offered Rate plus 3%. The credit
facility requires Sovintel to maintain accounts with IMB in the currencies of the loan and ensure
that the aggregate amount of deposits credited to Sovintels accounts with IMB is at least
150,000,000 RUR, equivalent to $5.8 million, for each interest period during the term of the credit
facility.
In January 2007, we entered into a five-year term Facility Agreement (the Facility
Agreement) with banks, financial institutions and other institutional lenders, Citibank, N.A.
London Branch and ING Bank N.V. as mandated lead arrangers, and Citibank International plc as
agent. The Facility Agreement established an unsecured credit facility under which we, GTS Finance,
Inc., our wholly-owned subsidiary, and Sovintel may borrow up to an aggregate of $275.0 million.
The credit facility carries interest at a rate equal to LIBOR plus 1.5% per annum for the first
twenty-four months and LIBOR plus 2% per annum thereafter. Funds borrowed may be used for general
corporate purposes, including acquisitions, the payment of dividends and capital expenditures. The
Facility Agreement places various restrictions on us related to incurrence of debt, asset
disposals, mergers and acquisitions, and negative
43
pledges. The Facility Agreement also requires us to meet various financial and non-financial
covenants, including several restrictions related to financial condition. As of June 30, 2007, we
had $225.0 million outstanding under the Facility Agreement. During the six months ended June 30,
2007, we paid approximately $3.9 million of origination fees to the lead arrangers.
In the future, we may execute large or numerous acquisitions, which may require external
financing, most likely to be raised through secured or unsecured borrowings. However, we may also
raise the required funding through a dilutive equity issuance, through the divestment of non-core
assets, or combinations of the above. In case large or numerous acquisitions do not materialize, we
expect our current sources of funding to finance our capital requirements. The actual amount and
timing of our future capital requirements may differ materially from our current estimates because
of changes or fluctuations in our anticipated acquisitions, investments, revenue, operating costs,
technology and network expansion plans and access to alternative sources of financing on favorable
terms. Further, in order for us to compete successfully, we may require substantial capital to
continue to develop our networks and meet the funding requirements of our operations. We will also
require capital for other acquisition and business development initiatives. We expect to fund these
requirements through cash on hand, cash flow from operations, proceeds from additional equity and
debt offerings, and debt financing facilities.
As of June 30, 2007, our credit ratings were as follows:
|
|
|
|
|
|
Credit Rating Agency |
|
Rating |
|
Outlook |
|
Standard & Poors
|
|
BB
|
|
Stable |
|
Moodys
|
|
Ba3
|
|
Stable |
|
The cost of our borrowings is affected by our credit ratings. If our credit ratings
were downgraded, we could be required to pay higher interest rates on secured or unsecured
borrowings and could be subject to more restrictive financial covenants. We may not be able to
obtain additional financing on favorable terms. As a result, we may become subject to additional or
more restrictive financial covenants, our interest obligations may increase significantly and our
shareholders may be adversely diluted. Our failure to generate sufficient funds in the future,
whether from operations or by raising additional debt or equity capital, may require us to delay or
abandon some or all of our anticipated expenditures, to sell assets, or both, which could have a
material adverse effect on our operations.
For the six months ended June 30, 2007, we paid $16.8 million to our CEO, senior management,
and other employees to settle SARs granted in 2005 and 2006. In late 2007 and subsequent years, we
may incur significant cash outlays to settle SARs outstanding at June 30, 2007.
Contractual Obligations
As of June 30, 2007, we had the following contractual obligations, including long-term debt
arrangements, capital leases, commitments for future payments under non-cancelable lease
arrangements and purchase obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (3)(4) |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Less |
|
|
1-3 |
|
|
4-5 |
|
|
|
|
|
|
Total |
|
|
than 1 year |
|
|
years |
|
|
years |
|
|
Thereafter |
|
Long-term debt |
|
$ |
274,043 |
|
|
$ |
17,464 |
|
|
$ |
255,637 |
|
|
$ |
942 |
|
|
$ |
|
|
Capital lease obligations |
|
|
14,739 |
|
|
|
5,127 |
|
|
|
9,612 |
|
|
|
|
|
|
|
|
|
Non-cancelable lease
obligations |
|
|
43,078 |
|
|
|
12,702 |
|
|
|
24,174 |
|
|
|
5,491 |
|
|
|
711 |
|
Purchase obligations (1) |
|
|
95,155 |
|
|
|
31,210 |
|
|
|
38,864 |
|
|
|
17,100 |
|
|
|
7,981 |
|
Other long-term liabilities (2) |
|
|
2,510 |
|
|
|
|
|
|
|
2,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
429,525 |
|
|
$ |
66,503 |
|
|
$ |
330,797 |
|
|
$ |
23,533 |
|
|
$ |
8,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase obligations primarily include our contractual legal obligations for the future
purchase of equipment, interconnect, and satellite transponder capacity. |
|
(2) |
|
Other long-term liabilities primarily include obligations related to the SARs we have
granted. |
|
(3) |
|
Amounts include interest. |
|
(4) |
|
FIN No. 48 liabilities of $20.1 million are excluded from the Contractual Obligations
table because we are not able to make a reasonable reliable estimate of the period of cash
settlement with the respective taxing authority. |
44
Special Note Regarding Forward Looking Statements
Certain statements contained in Managements Discussion and Analysis of Financial Condition
and Results of Operations and other parts of this document, including, without limitation, those
concerning (i) future acquisitions and capital expenditures for such acquisitions, (ii) our plans
to enter the media market, (iii) allocation of purchase price on acquisitions, (iv) our views on
the validity of our licenses, including the re-registration of our S-Line license, (v) the expected
benefits from our DLD/ILD service offerings, including preserving margins and gaining additional
revenues, protecting our relationships with corporate clients and expansion of our business, (vi)
the effect of the CPP rules in Russia, (vii) existing and potential tax claims, (viii) the effects
of existing and potential litigation, including our belief that Sovintel has not violated its
licenses over traffic routing and the provision of domestic and international services, (ix)
projected traffic volumes, customer numbers, revenues and other growth indicators; (x) anticipated
revenues and expenses, including capital expenditures to implement our long distance licenses, and
federal transit network, (xi) our plans to provide new, more technologically advanced services to
customers, (xii) our competitive environment; (xiii) our intention to offer our services under the
Golden Telecom brand; (xiv) our plans to roll-out of our fixed-mobile convergent network in
Ukraine; (xv) our intentions to expand our fiber optic capacity in Russia, Ukraine and Kazakhstan
and add transmission capacity; (xiv) our expectations regarding revenues and cost savings from our
zonal networks, (xvi) the impact of critical accounting policies and estimates; (xvii) the growth
and development of our operations in key regions of Russia, (xviii) our growth strategy in our
business segments; (xix) the political, regulatory and economic situation in the markets in which
we operate and our expectations regarding the markets in which we operate, (xx) the effect, cost
and expected benefits of utilizing our intercity and international licenses, including the
implementation of our federal transit network, (xxi) expectations regarding deferred taxation, and
(xxii) the development and deployment of our broadband and related WiFi technology strategies
including the roll-out of our FTTB networks, are forward-looking and concern our projected
operations, economic performance and financial condition. These forward-looking statements are made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act of 1995. It is
important to note that such statements involve risks and uncertainties and that actual results may
differ materially from those expressed or implied by such forward-looking statements. Among the key
factors that have a direct bearing on the Companys results of operations, economic performance and
financial condition are the commercial and execution risks associated with implementing the
Companys business plan, our ability to enter the media market, the potential cost for possible
future acquisitions, the potential effect of the regulatory regime on our operations, the
utilization of our intercity and international licenses including development of our federal
transit network and the cost of such development, our ability to effectively operate our zonal
networks or interconnect with zonal operators, our ability to integrate recently acquired companies
into our operations, any adverse court rulings regarding licenses or other matters, the development
of our broadband and related WiFi technology strategies including the development of our FTTB
networks, our ability to roll out our fixed-mobile convergent network in Ukraine, our ability to
implement new technology, the political, economic and legal environment in the markets in which the
Company operates, increasing competitiveness in the telecommunications and Internet-related
businesses that may limit growth opportunities, and increased and intense downward price pressures
on some of the services that we offer. These and other factors are discussed herein under
Managements Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Report.
Additional information concerning factors that could cause results to differ materially from
those in the forward-looking statements are contained in the Companys filings with the United
States Securities and Exchange Commission and especially in the Risks Factor Sections therein,
including, but not limited to, the Companys report on Form 10-K, for the year ended December 31,
2006.
In addition, any statements that express, or involve discussions as to, expectations, beliefs,
plans, objectives, assumptions or future events or performance (often, but not always, through the
use of words or phrases such as will likely result, are expected to, estimated, intends,
plans, projection and outlook) are not historical facts and may be forward-looking and,
accordingly, such statements involve estimates, assumptions and uncertainties which could cause
actual results to differ materially from those expressed in the forward-looking statements.
Accordingly, any such statements are qualified in their entirety by reference to, and are
accompanied by, the factors discussed throughout this Report and investors, therefore, should not
place undue reliance on any such forward-looking statements.
Further, any forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors may emerge from time to time, and it is
not possible for management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the Companys business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements.
45
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the information provided in Item 7A of Part II of the
Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
On May 28, 2007, the Company
completed the acquisition of ZAO Cortec and its subsidiaries
(together Corbina). As permitted
by the rules of the SEC, the Company has decided to exclude the Corbina businesses from its
assessment of the effectiveness of its internal control over financial reporting for the year ended
December 31, 2007, the year of acquisition. The results of operations of Corbina have been
included in the consolidated financial statements of Golden Telecom
for the period from June 1, 2007 through June 30, 2007. Management continues to evaluate the
acquired companies internal
controls over financial reporting and has so far identified the following weaknesses in Corbinas
internal control that it believes rise to the level of material weaknesses in the Companys
internal control:
|
|
|
Revenue recognition; |
|
|
|
|
Financial statement close process; |
|
|
|
|
Inventory and fixed asset management; and |
|
|
|
|
Lack of qualified US GAAP finance personnel. |
The Company has also determined that there was a mathematical mistake made in the calculation
of the compensation expense for stock appreciation rights (SARs) for the three months ended March
31, 2007, which resulted in a $2.8 million overstatement of such expense for that three-month
period. The Company has filed with the SEC Amendment No. 1 to Form 10-Q/A to restate the
unaudited financial statements of the Company as of and for the three months ended March 31, 2007.
Management has concluded that this error reflected a material weakness in the controls over the
clerical accuracy of Golden Telecoms SARs stock-based compensation computations at March 31, 2007.
Under the supervision, and with the participation, of the Companys management, including the
Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of
the Companys disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of
the end of the period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure controls and procedures
are not effective to provide reasonable assurance that material information relating to Golden
Telecom, Inc. and its consolidated subsidiaries is made known to them as of June 30, 2007 because
of the material weaknesses described above.
To
address the material weaknesses described above, the Company has:
|
|
|
|
commenced a review of the revenue reporting, financial statement close and inventory
and fixed asset management practices followed at Corbina; and |
|
|
|
|
engaged independent consultants to assist management in identifying and resolving
issues. |
The Company is in the process of recruiting and hiring additional qualified staff. The
Company has also deployed Golden Telecom employees in the performance of more extensive procedures
in connection with the June 30, 2007 consolidated Golden Telecom financial statement close process
in response to the identified Corbina control weaknesses and to ensure the accuracy of Golden
Telecoms consolidated financial reporting. The Company also plans to increase its training
efforts for certain of its personnel. In addition, the Company has also implemented additional
manual controls and procedures over the computations made and recorded for its SAR compensation
expense.
Changes in internal controls over financial reporting.
Other than the matters described in this Item 4, there have been no significant changes in the
Companys internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
At the time of filing this Quarterly Report on Form 10-Q, management is in the process of
remediating the material weaknesses surrounding Corbina and the process for recording of
compensation expense for SARs as described above.
46
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may be involved in litigation relating to claims arising out of
our operations in the normal course of business. As of the date of this report, the Company is not
currently involved in any legal proceeding that the Company believes will have a material adverse
effect on the Companys business, financial condition or operating results.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and all other information contained in this Quarterly
Report on Form 10-Q and our Annual Report on Form 10-K filed with the SEC on March 16, 2007 before
purchasing our common stock. The risks and uncertainties described below are not the only ones
that we face. Additional risks and uncertainties of which we are unaware, or that we currently deem
immaterial, may also become important factors that affect us. Any of the following risks could
adversely affect our business, financial condition and results of operations. In such case, the
trading price of our common stock could decline, and you could lose some or all of your investment.
Failure to install our transmitter on Ostankino television tower in Moscow could disrupt our
television and media business plans
Russian Television and Radio Broadcasting Network (RTRS) is the Russian agency responsible
for regulating the operations of television towers in the Russian Federation. We are currently
negotiating with RTRS to install a transmitter on the Ostankino television tower. If we are
unable to successfully negotiate with RTRS to allow us to install the transmitter on the Ostankino
tower then we will need to search for alternative towers on which to install our transmitter.
Such searches may be time consuming and may force us to revise our business case for our television
and media business. Any such revision of our business plans for television and media could disrupt
our current business and future development plans for offering media and television services and
could have a negative impact on our future performance].
We may encounter difficulties in integrating Corbina into our operations and in further developing
the business
We recently completed the Corbina transaction. The Company views Corbina as a key factor in
the development of its broadband strategy. Our ability to successfully develop our broadband
strategy will depend on our ability to successfully integrate Corbinas business into our business
and to further develop fiber to the building services. The development of Corbinas business will
continue to depend on obtaining the necessary permits to install, upgrade and operate equipment and
to commission networks. Any difficulty or inability to fulfill such tasks could seriously disrupt
our broadband business and our ability to develop our broadband strategy. Our competitors may also
attempt to disrupt such activities through regulatory action or connections with regulatory
agencies. Further, we may have to make significant capital expenditures to develop Corbinas
networks and to integrate such networks with our own.
Our significant shareholders may have other interests which conflict with our own interests
Although we own 51% of Corbina we cannot assure you that the other shareholders in Corbina may
not have interests which conflict with ours. Further, some of our major shareholders have
commercial interests with other shareholders, including shareholders in Corbina. Although we
structure transactions so that they are at arms length, we cannot assure you that these
shareholders will not apply pressure on us to enter into transactions which may not be commercially
favorable to us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
47
Item 4. Submission of Matters to a Vote of Security Holders
On May 17, 2007, the Company held its annual meeting of shareholders. In connection with the
meeting, the Company solicited proxies pursuant to Regulation 14 under the Securities Exchange Act
of 1934 from holders of record of its common stock as of April 11, 2006. Each of the Companys ten
nominees for election to its Board of Directors was elected to a term ending at the Companys
annual meeting of shareholders to be held in 2008. A shareholder of the Company, OAO Rostelecom,
submitted a proposal under Rule 14(a)-8 of the SEC proxy rules and introduced Mr. Andrey Gaiduk to
serve as a director of the Company. Mr. Gaiduk was not elected to the Companys Board of
Directors. Two additional proposals were submitted to shareholders for approval and were approved.
|
|
|
(1) |
|
The votes cast for each of the Companys ten nominees for election to the Companys Board
of Directors and the shareholder nominee were as follows: |
|
|
|
|
|
|
|
|
|
Nominee |
|
For |
|
|
Withheld |
|
Petr Aven |
|
|
28,874,506 |
|
|
|
499,111 |
|
Vladimir Bulgak |
|
|
28,971,026 |
|
|
|
352,591 |
|
Patrick Gallagher |
|
|
28,971,026 |
|
|
|
352,591 |
|
Thor Halvorsen |
|
|
28,874,336 |
|
|
|
449,281 |
|
David Herman |
|
|
28,874,506 |
|
|
|
449,111 |
|
Kjell Johnson |
|
|
28,874,506 |
|
|
|
449,111 |
|
Oleg Malis |
|
|
27,484,102 |
|
|
|
1,839,515 |
|
Alexey Reznikovich |
|
|
28,696,906 |
|
|
|
626,711 |
|
David Smyth |
|
|
24,946,959 |
|
|
|
352,591 |
|
Jean-Pierre Vandromme |
|
|
28,796,426 |
|
|
|
527,191 |
|
Andrey Gaiduk |
|
|
5,844,093 |
|
|
|
23,454,005 |
|
|
|
|
(2) |
|
Ratification of selection of Ernst & Young LLC as the Companys independent auditors for
2007 FOR 29,151,733 shares; AGAINST 2,279 shares; ABSTAIN 169,505 shares. |
|
(3) |
|
To approve amendment to the Companys 1999 Equity Participation Plan FOR 28,802,465
shares; AGAINST 250,947 shares; ABSTAIN 170,205 shares. |
Item 5. Other Information
None
Item 6. Exhibits
|
|
|
Designation |
|
Description |
31.1
|
|
Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
GOLDEN TELECOM, INC. (Registrant) |
|
|
|
|
|
|
|
By:
|
|
/s/ BORIS SVETLICHNY |
|
|
|
|
|
|
|
Name:
|
|
Boris Svetlichny |
|
|
Title:
|
|
Senior Vice-President, Chief Financial Officer and Treasurer (Principal Financial Officer) |
|
|
|
|
|
|
|
By:
|
|
/s/ MICHAEL D. WILSON |
|
|
|
|
|
|
|
Name:
|
|
Michael D. Wilson |
|
|
Title:
|
|
Vice-President and Corporate Controller (Principal Accounting Officer) |
Date: August 14, 2007
49
EXHIBIT INDEX
|
|
|
Designation |
|
Description |
31.1
|
|
Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |