(TEAM GRAPHIC)
GOLDEN TELECOM, INC. ANNUAL REPORT 2002
(GRAPHIC)
GOLDEN TELECOM, INC.
ANNUAL REPORT 2002
(GOLDEN TELECOM LOGO)
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LETTER TO SHAREHOLDERS
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LETTER TO SHAREHOLDERS
Dear Shareholders,
2002 WAS TRULY
A REMARKABLE YEAR
IN GOLDEN TELECOM'S HISTORY
IT WAS the year in which we completed our biggest and most significant
acquisition to date: the purchase of the remaining 50% stake in Sovintel to
bring our ownership in Sovintel to 100%.
COMBINING our wholly-owned operations in Russia and the Commonwealth of
Independent States ("CIS") with those of Sovintel DOUBLES OUR SIZE in terms of
revenue and creates a more powerful company with unrivaled geographical reach,
integrated service offerings and a significant presence in the region's most
attractive markets.
ALTHOUGH we have dedicated the editorial section of this Annual Report to
explaining the various benefits this transaction brings to the company, allow us
to outline them briefly here.
WE LIKE to think of the Sovintel acquisition as something like putting together
a winning team of star athletes. The individual players do not duplicate each
other's abilities, but rather complement and enhance each others' talents, so
that together, they make an UNBEATABLE TEAM that can outperform all its
competitors.
SOVINTEL and Golden Telecom complement each other's resources and capabilities
in many aspects: Sovintel has the strongest market position in Moscow among
alternative providers, while Golden Telecom has a significant regional and CIS
presence; Sovintel works primarily in voice telephony, while Golden Telecom is a
prime provider of data networking and Internet access.
Over the past 10 years, Sovintel has built robust access networks in the Moscow
and St. Petersburg metropolitan areas, while Golden Telecom has assembled a
robust network in Kiev and vast intercity networks straddling the Eurasian
continent from Ukraine's border with Poland all the way to the Pacific Ocean in
Russia's Far East.
PUTTING Golden Telecom and Sovintel together creates THE LARGEST INDEPENDENT
PROVIDER in the region, with vast geographical coverage, a DOMINANT POSITION IN
ALL CORE MARKETS, and a wide range of services and considerable financial
strength that allows it to pursue even more ambitious goals.
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GTI ANNUAL REPORT 2002
THE ALTERNATIVE fixed-line telecommunications market is probably the most
promising in the industry after cellular. The leader in this market today is
Golden Telecom.
VEDOMOSTI, "The 'Telecom System' Bids for Leadership" by Yuri Granovsky, May 14,
2002
GOLDEN TELECOM stands out as one of Russia's most ambitious and potent telecoms
players. ECONOMIST INTELLIGENCE, (EIU ViewsWire), August 20, 2002
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LETTER TO SHAREHOLDERS
WE HAVE RETHOUGHT
OUR BUSINESS TO CREATE A MORE FOCUSED
AND CUSTOMER DRIVEN COMPANY.
WE HAVE rethought the fundamentals of our business and are restructuring our
internal operations to create a more focused and customer driven company. Now
that we have completed the Sovintel acquisition, we want to concentrate
our efforts on what we know best-FIXED LINE TELECOMMUNICATIONS.
WE HAVE restructured the Internet content part of our business to make it
operating cash flow neutral and to serve a support function for our primary
Internet product - consumer Internet access. We have also significantly reduced
investment in our mobile subsidiary, an established niche player in Ukraine, and
are now actively exploring various options to extract maximum value from this
asset.
WE HAVE now focused our efforts on what we like to refer to as the "THREE
PILLARS" of our business.
THE FIRST, and main, pillar is our SERVICES TO BUSINESS CUSTOMERS. This is the
core of our entire operation, a stable, profitable and growing business. It is
primarily for our business customers that we build and develop our networks. The
nature of this business requires us to make up front investments in the purchase
of large blocks of local numbering capacity and the installation of central
office switches. In addition, we usually elect to buy more long-distance or
interconnect capacity than our current traffic volumes require in order to
obtain deeper discounts from providers and to ensure the availability of
adequate infrastructure as we grow. Since we are constantly striving to maximize
our capacity utilization, we have developed new products to fill the capacity
not currently utilized by our services to business customers.
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GTI ANNUAL REPORT 2002
GOLDEN TELECOM is the only company whose primary business is in Russia (and the
CIS) while its shares (not depositary receipts) are traded on American stock
markets. This year's second quarter results...show an increase in the company's
net profits to $9 million -- nearly one and a half times more than in the
previous quarter, when the company earned $6.2 million. IZVESTIA, August 8, 2002
CONSOLIDATION of the assets of Golden Telecom and Sovintel could lead to a
doubling of Golden Telecom's receipts.
PRIMETASS, August 2, 2002
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LETTER TO SHAREHOLDERS
THIS IS where the other two pillars of our business come into play.
OUR SECOND pillar is the sale of various SERVICES TO OTHER TELECOM OPERATORS.
While this is decidedly a "wholesale" business, it is really quite different
from the high volume, low margin, volatile type of business one might expect it
to be.
OUR MAIN customers in this area are cellular operators. We have been selling
large blocks of our local numbering in Moscow to cellular operators since 1993.
For almost ten years, we have provided cellular customers with local as well as
domestic long-distance and international connectivity. This is a stable and
growing business with good margins. And we are constantly expanding our
services to cellular operators. At first, we provided only local numbering and
local and long-distance access, but now, we are building call center network
across Russia and base station networks in Moscow and St. Petersburg for some
of these companies.
WE ALSO resell excess international and domestic long-distance bandwidth that
we have leased for our business network to second-tier ISPs, in order to
provide them with IP-backbone access. We leverage our extensive "last mile" by
providing data networking services in Russia and the CIS to the multinational
customers of such international carriers as Sprint and Cable & Wireless. In
this case, we act as a distribution channel for their advanced Frame Relay
services in Russia. This business, too, has good margins and satisfactory rates
of growth.
AND FINALLY, we provide various long-distance voices and VoIP carrier services
to other operators. This is the traditional, price-sensitive, low-margin, high
volume part of the business. Here, we typically use the substantial outgoing
traffic generated by our business customers to attract and retain incoming
traffic streams.
THE THIRD pillar of our business is CONSUMER INTERNET ACCESS.
BEING PRINCIPALLY a business services network, we experience significantly
reduced traffic loads during off-peak non-business hours. Since the late '90s,
we experimented with a modest dial-up Internet offering, and discovered that
providing Internet access allows us to utilize capacity more efficiently, by
offsetting the reduced demand placed on our network by business customers during
off-peak hours with the higher traffic volumes from home users of dial-up
Internet service during the evening and nighttime hours. Our wide presence
across Russia and the CIS provided us with the opportunity to develop the
country's first truly nationwide Internet access system. Our subscriber base
grew from approximately 86,000 in 2000 to approximately 242,000 at the end of
2002 and we are now firmly established as a major player with our 24% nationwide
market share.
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GTI ANNUAL REPORT 2002
ACCORDING TO S&P (the Standard & Poor's agency) [Russian] companies are very
unenthusiastic about disclosing information on the remuneration of top managers.
The most open companies [in Russia] in this regard are MTS and Golden Telecom...
VEDOMOSTI, September 16, 2002
CONSIDERING fixed-line communications, a shining example is Golden Telecom,
which provides services in Kazakhstan (since 2000) and in Ukraine (since 1996).
KOMMERSANT, August 10, 2002
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LETTER TO SHAREHOLDERS
WE ARE POISED
FOR GROWTH IN UKRAINE.
EARLIER in the year, we were faced with an ongoing dispute between the former
management of our Ukrainian subsidiary (who were also our partners in the
venture) and the management of the state owned monopoly operator. As long as
these issues remained unresolved, we were unable to obtain additional
infrastructure in Ukraine, which in turn reduced our capacity roll-out plans and
adversely affected sales. We acted decisively and responsibly in this difficult
situation by replacing the management of the subsidiary and buying out our local
partners. After reestablishing a new working relationship with the monopoly
operator, we have been able to begin deploying additional infrastructure on
acceptable terms, and are now positioned to deliver growth in our Ukrainian
operations next year.
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GTI ANNUAL REPORT 2002
FROM THE POINT of view of a portfolio investor, Golden Telecom is a very
interesting company: it has diverse business operations, and is one of the two
market leaders in all of its lines of business. INFORMKURIERSVYAZ, October 2002
GOLDEN TELECOM has announced the merger of four subsidiaries. The combined
company, with annual sales of $6 million, will have up to 50% of the Nizhny
Novgorod Internet services market and will become the largest regional
telecommunications services provider after OAO Volga Telekom. VEDOMOSTI,
October 4, 2002
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LETTER TO SHAREHOLDERS
WE HAVE CONSOLIDATED
OUR BUSINESS IN NIZHNY NOVGOROD.
WE HAVE consolidated our business in Nizhny Novgorod into a single company,
creating a leading alternative provider in Russia's third-largest city. We made
two acquisitions in Nizhny Novgorod in 2000 and 2001. Last year, we merged the
acquired entities with our local subsidiary, thereby consolidating our market
position in this important market and creating a full-service operator and a
market leader in the corporate segment. Our projects in Nizhny Novgorod are
worth highlighting here for two reasons:
FIRST, our experience in Nizhny Novgorod is an excellent example of our
REGIONAL STRATEGY IN ACTION. Essentially, our regional strategy attempts to
take the successful Moscow CLEC model, as exemplified by Sovintel, and
replicate it in the most economically developed cities across Russia.
SOVINTEL'S success is based to a considerable extent on its high degree of
independence from local incumbents due to its direct ownership of both local
numbering (which allows interconnection to the PSTN) and customer access
infrastructure. To achieve the same level of independence from incumbents in
regional cities, we will need to ensure sufficient interconnection with the
local PSTN and an adequate access network.
WE CAN achieve this in one of three ways: through a "greenfield" operation, by
organically developing the necessary infrastructure through our existing local
subsidiaries or through the acquisition of other existing local
providers-whichever approach works best in a particular location. In Nizhny
Novgorod, for example, the circumstances were such that, rather than trying to
obtain local numbering for our existing subsidiary there, we found it more
efficient to buy a competing alternative provider that already had secured
numbering and PSTN interconnect and then merge it with our other subsidiaries.
In addition the acquired entity already had a substantial copper access network
of its own.
SECOND, THE REGIONAL SEGMENT IS A VERY HIGH-GROWTH SEGMENT OF OUR BUSINESS. Our
Nizhny Novgorod operations grew by more than 30% in 2002. We believe that our
long-term growth potential lays in the regions.
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GTI ANNUAL REPORT 2002
GOLDEN TELECOM provides telecommunications services to US delegation and White
House press corps during Russian-American summit.
HEADLINE FROM AGENCY OF BUSINESS NEWS (ABN), MAY 24, 2002
ROL will serve as the presenting sponsor of a concert by the legendary group
SCORPIONS in Nizhny Novgorod [and 14 other Russian cities]. REGION-INFORM,
OCTOBER 2, 2002
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LETTER TO SHAREHOLDERS
THE COMPANY'S
FINANCIAL PERFORMANCE
IN 2002 WAS EXCELLENT.
HERE are just a few highlights. We began consolidating Sovintel at the end of
the 3rd quarter, and this has boosted our consolidated revenue results.
CONSOLIDATED REVENUES INCREASED BY 42% COMPARED TO 2001.
THE RATIONALIZATION of our corporate structure has led to significant cost
savings. Together with Sovintel consolidation it has contributed to the
reduction in our selling. GENERAL AND ADMINISTRATIVE EXPENSES from 35% of
revenues in 2001 to 23% in 2002.
WE INCREASED our number POPs from 140 to 149, and have organically grown our
Internet subscriber base by 30%, from approximately 186,000 to 242,000
customers.
MOST IMPORTANTLY, 2002 was the first year that Golden Telecom has shown a
profit. In fact, WE WERE PROFITABLE IN EACH OF THE FOUR QUARTERS THIS YEAR.
We view these significant levels of profitability as a clear signal that the
strategic direction we have chosen for the company is the correct one. WE LOOK
INTO THE FUTURE WITH OUR CONFIDENCE AND OPTIMISM STRONGER THAN EVER BEFORE.
/s/ P. AVEN
P. AVEN
Chairman, Board of Directors, Golden Telecom, Inc.
/s/ A. VINOGRADOV
A. VINOGRADOV
President and CEO, Golden Telecom, Inc.
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GTI ANNUAL REPORT 2002
IN THE OPINION of telecommunications analysts, the Moscow-based operators with
the most highly developed regional networks are Golden Telecom (the TeleRoss
network) and Equant. In September, the President and CEO of Golden Telecom,
Alexander Vinogradov, declared his intention to expand the holding company's
presence in regional markets. VEDOMOSTI, October 24, 2002
GOLDEN TELECOM ADOPTED SOVINTEL
A TRANSACTION was concluded within the Russian telecommunications market which
will change the line-up of alternative operators forces. GAZETA, March 18, 2002
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LETTER TO SHAREHOLDERS
DIAL-UP INTERNET SUBSCRIBERS
(BAR CHART)
1998 4 261
1999 18 599
2000 85 833
2001 185 628
2002 242 155
CONSOLIDATED REVENUE (in millions)
(BAR CHART)
1998 $ 86.1
1999 $ 97.9
2000 $113.1
2001 $140.0
2002 $198.7
OPERATING CASH FLOW (in millions)
(BAR CHART)
1998 $ 1.3
1999 $16.4
2000 $18.1
2001 $24.5
2002 $50.7
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GTI ANNUAL REPORT 2002
(TEAM GRAPHIC)
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THE TEAM
"WE LIKE TO THINK OF THE SOVINTEL ACQUISITION AS SOMETHING LIKE PUTTING
TOGETHER A WINNING TEAM OF STAR ATHLETES. THE INDIVIDUAL PLAYERS DO NOT
DUPLICATE EACH OTHER'S ABILITIES, BUT RATHER COMPLEMENT AND ENHANCE EACH OTHERS'
TALENTS...FROM LETTER TO SHAREHOLDERS
THE FOLLOWING section explores the exceptional strategic fit between Golden
Telecom and Sovintel and shows how the various unique "talents" of these
individual players are being combined to create a team that is clearly greater
than the sum of its parts, capable of achieving much more than either company
could on its own.
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(PHOTO)
THE TEAM
WHAT EXACTLY DIFFERENTIATES
AN INCUMBENT OPERATOR?
WHAT EXACTLY differentiates an incumbent operator from an alternative one -
besides the obvious fact that the incumbent, by definition, was already present
in the market at the time the alternative entered? A typical incumbent
providing end-user services should also exhibit some or all of the following
features: it should enjoy a significant market share, own a broad array of
telecommunications licenses, have its own access lines to practically all of
its customers, own a segment of the national numbering plan, and have
interconnectivity with the public switched telephone network at various levels.
Taken individually, neither Golden Telecom nor Sovintel possessed all of these
resources, but when they are considered as a single entity, they do. Bringing
together Sovintel's operations with those Golden Telecom has created more than
just a bigger alternative operator. The size of the merged company, its market
position, the infrastructure it has developed over the past ten years, the
number and the scope of the licenses it holds, and its status as a part of the
PSTN make it evident that Golden Telecom should be described as an incumbent
operator with a focus on the corporate market, i.e. A CORPORATE INCUMBENT.
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(PHOTO)
THE TEAM
GEOGRAPHIC FOOTPRINT
GOLDEN TELECOM has a regional presence in 149 metropolitan areas throughout
Russsia and the CIS and a leading market position in Kiev, Ukraine. Sovintel
dominates in Moscow and has a strong foothold in St. Petersburg. The
combination of the two companies results in an entity with operations that span
from Ukraine's western border with Poland all the way to Vladivostok on the
Pacific Ocean in Russia's Far East, with a significant presence and leading
market position in each of the largest and economically most important
metropolitan areas in between - Kiev, Moscow, St. Petersburg, Nizhny Novgorod.
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(PHOTO)
THE TEAM
SERVICE RANGE
AND MARKET POSITION
GOLDEN TELECOM is an established leader in corporate data networking in Russia
and Ukraine, while Sovintel is the largest alternative voice services provider
in the region. Together, they are the biggest independent provider of
telecommunication services to corporations and carriers in Russia and the CIS,
with an exceptionally wide range of service offerings. In addition, precisely
because Golden Telecom and Sovintel are so different in their service
offerings, there are enormous cross-selling opportunities.
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(PHOTO)
THE TEAM
NUMBERING CAPACITY
AND LICENSES
GOLDEN TELECOM owns local numbering capacity in Moscow. Historically, some of
these numbers were resold to Sovintel, which, in its turn, marketed them to
end-users. Joining forces makes sound business sense, as a single entity now
owns the local numbers it sells. ON THE OTHER hand, while Sovintel does not have
local numbering capacity of its own, it does have close to 8 million numbers in
non-geographic area codes of the national public switched telephone network.
With Sovintel becoming part of Golden Telecom, its 8 million non-geographic
numbers can now be made available to Golden Telecom's regional customers. THE
COMBINED company thus has one of the most essential features of a true
incumbent - its own local numbering plan in its major centers of operation, as
well as the opportunity to further develop a nationwide presence using its 8
million numbers in the non-geographic area codes of the public switched
telephone network. GOLDEN TELECOM and Sovintel are also an exceptional fit in
regard to operating licenses, as Sovintel brings it extensive international
long-distance license to the broad portfolio of licenses already owned by
Golden Telecom.
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(PHOTO)
THE TEAM
INFRASTRUCTURE
GOLDEN TELECOM has assembled a formidable inter-city long-distance network
across eight CIS countries through various lease agreements, and has also built
up its own substantial transport capacity in Moscow, while Sovintel has
concentrated on developing access infrastructure within Moscow and St.
Petersburg.
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(PHOTO)
THE TEAM
MANAGEMENT TEAM
BY BRINGING executives from Sovintel and Teleross together to run the new Golden
Telecom, we have not only ensured the smooth integration of the operations of
the two companies, but have also created a truly international management team
that combines a Western style of management with a knowledge of the intricacies
of the local market environment.
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(PHOTO)
THE TEAM
FINANCIAL STRENGTH
BOTH Golden Telecom and Sovintel are very strong financially, and putting them
together does not simply combine their respective financial strengths, but
amplifies and leverages it even further. The group now anticipates access to
larger sources of capital - a distinctive advantage in a market that is
currently undergoing a dynamic process of consolidation.
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GTI ANNUAL REPORT 2002
34
FOR NOTES
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GTI ANNUAL REPORT 2002
(FINANCIAL REVIEW GRAPHIC)
36
FINANCIAL REVIEW
SELECTED FINANCIAL DATA
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The following selected historical consolidated financial data at December 31,
1998, 1999, 2000, 2001 and 2002, and for all of the years presented are derived
from consolidated financial statements of Golden Telecom, Inc which have been
audited by Ernst & Young (CIS) Limited, independent auditors. The data should be
read in conjunction with the consolidated financial statements, related notes,
and other financial information included in this document.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ....................................................... $ 86,086 $ 97,931 $113,089 $140,038 $198,727
Cost of revenues (excluding depreciation and amortization) ..... 43,574 40,516 50,954 63,685 91,189
Gross margin ................................................... 42,512 57,415 62,135 76,353 107,538
Selling, general and administrative (excluding depreciation
and amortization) ............................................ 45,327 41,011 45,420 48,935 46,147
Depreciation and amortization .................................. 16,709 28,143 31,851 41,398 29,961
Abandonment and restructuring charge ........................... -- 19,813 -- -- --
Impairment charge .............................................. -- -- -- 31,291 --
Income (loss) from operations .................................. (19,524) (31,552) (15,136) (45,271) 31,430
Equity in earnings (losses) of ventures ........................ 2,559 (6,677) (285) 8,155 4,375
Interest income (expense), net ................................. (3,003) 2,814 7,126 777 (667)
Foreign currency loss .......................................... (7,452) (2,739) (390) (647) (1,174)
Minority interest .............................................. (1,040) (1,477) (431) (117) (527)
Other non-operating expense .................................... -- -- (148) -- --
Provision for income taxes ..................................... 5,184 6,823 990 1,902 4,627
Net income (loss) before cumulative effect of change in
accounting principle ......................................... (33,644) (46,454) (10,254) (39,005) 28,810
Cumulative effect of change in accounting principle ............ -- -- -- -- 974
Net income (loss) .............................................. (33,644) (46,454) (10,254) (39,005) 29,784
Net income (loss) per share before
Cumulative effect of change in accounting principle -
basic (1) .................................................... (3.17) (3.38) (0.43) (1.65) 1.20
Cumulative effect of change in accounting principle ............ -- -- -- -- 0.04
Net income (loss) per share - basic (1) ........................ (3.17) (3.38) (0.43) (1.65) 1.24
Weighted average shares - basic (1) ............................ 10,600 13,736 24,096 23,605 24,102
Net income (loss) per share before cumulative effect of change
in accounting principle - diluted (1) ........................ (3.17) (3.38) (0.43) (1.65) 1.17
Cumulative effect of change in accounting principle ............ -- -- -- -- 0.04
Net income (loss) per share - diluted (1) ...................... (3.17) (3.38) (0.43) (1.65) 1.21
Weighted average shares - diluted (1) .......................... 10,600 13,736 24,096 23,605 24,517
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GTI ANNUAL REPORT 2002
AT DECEMBER 31,
------------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
BALANCED SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents ............................ $ 14,164 $162,722 $ 57,889 $ 37,404 $ 59,625
Investments available for sale ....................... -- -- 54,344 8,976 --
Property and equipment, net .......................... 52,186 62,176 82,377 98,590 166,121
Investments in and advances to ventures .............. 46,519 45,196 49,629 45,981 721
Goodwill and intangible assets, net .................. 71,924 53,467 70,045 57,146 127,669
Total assets ......................................... 235,849 366,624 348,456 300,384 435,810
Total debt, including current portion ................ 24,459 28,029 18,997 22,220 40,495
Minority interest .................................... 7,993 2,816 3,337 5,967 2,187
Shareholders' equity ................................. 168,783 288,552 283,193 220,844 307,458
(1) Per share amounts in this table were calculated based upon the assumption
that the 10,600,000 common shares issued in connection with the formation of
the Company are outstanding for all periods prior to September 30, 1999.
Refer to Note 3 to the Consolidated Financial Statements for descriptions of
recent acquisitions that impact the comparability of financial information.
Other business combinations not disclosed in the footnotes were as follows:
In February 1998, the Company acquired the remaining interest in Sovam Teleport
for cash consideration of $5.0 million. In July 1998, the Company acquired the
remaining interest in GTS Vox Ltd., the holding company for TCM, for cash
consideration of $37.0 million. In June 1998, the Company increased its
beneficial interest in Golden Telecom (Ukraine) to 56.75% for cash consideration
of approximately $9.8 million. The Company began consolidating Sovam in February
1998 and TCM and Golden Telecom (Ukraine) in July 1998. In August 1999, the
Company increased its beneficial ownership in TCM from 95% to 100% Goodwill in
the amount of $3.2 million was recorded by the Company.
An affiliate of ING Barings which indirectly owned 12.25% of Golden Telecom
(Ukraine), contributed its indirect interest in Golden Telecom (Ukraine) to a
wholly owned subsidiary of Golden Telecom, Inc., upon the consummation of the
offering on September 30, 1999 in exchange for 420,000 newly issued shares of
common stock of the Company. In accordance with the subscription agreement filed
with the SEC at the time of the Initial Public Offering, an additional 30,000
shares of common stock in the Company were issued in full and final settlement
to the affiliate of ING Barings. Our beneficial interest in Golden Telecom
(Ukraine) increased from 56.75% to 69% as the result of this transaction.
In June 1999, the Company acquired the assets of Glasnet, a Moscow based
Internet Services Provider ("ISP"). In July 1999, the Company acquired a 75%
interest in SA Telcom LLP, a telecommunications and data services provider in
Kazakhstan. In December 1999, the company acquired the assets of Nevalink, an
ISP, and of full-equity ownership of NevaTelecom. Both Nevalink and Neva-Telecom
provide telecom and Internet services to the St. Petersburg market. These
acquisitions were purchased for approximately $2.5 million in cash.
Refer to Note 2 to the Consolidated Financial Statements for a description of
the change in method of accounting for goodwill in 2002.
38
FINANCIAL REVIEW
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
--------------------------------------------------------------------------------
The following discussion and analysis relates to our financial condition and
results of operations of the Company for each of the years ended December 31,
2002, 2001 and 2000. This discussion should be read in conjunction with the
"Selected Historical Consolidated Financial Data" and the Company's Consolidated
Financial Statements and the notes related thereto appearing elsewhere in this
Report.
OVERVIEW
--------------------------------------------------------------------------------
We are a leading facilities-based provider of integrated telecommunications and
Internet services to businesses and other high-usage customers and
telecommunications operators in Moscow, Kiev, St. Petersburg, Nizhny Novgorod
and other major population centers throughout Russia and other countries of the
Commonwealth of Independent States ("CIS"). We organize our operations into the
four business groups, as follows:
o Competitive Local Exchange Carrier ("CLEC") Services. Using our local access
overlay networks in Moscow, Kiev, St. Petersburg and Nizhny Novgorod, we
provide a range of services including local exchange and access services,
international and domestic long distance services, data communications,
Internet access and the design of corporate networks;
o Data and Internet Services Using our fiber optic and satellite-based
networks, including 149 combined points of presence in Russia, Ukraine and
other countries of the Commonwealth of Independent States, we provide data
and Internet services including: (a) Business to Business services, such as
data communications, dedicated Internet access, web design, web hosting,
co-location and data-warehousing: and (b) Business to Consumer services,
such as dial-up Internet access and web content offered through a family of
Internet portals;
o Long Distance Services Using our fiber optic and satellite-based network, we
provide long distance voice services in Russia; and
o Mobile Services Using our mobile networks in Kiev and Odessa, Ukraine, we
provide mobile services with value-added features, such as voicemail,
roaming and messaging services on a subscription and prepaid basis.
We offer all of our integrated tele-communication services under the Golden
Telecom brand and our Internet services under the ROL brand in Russia.
Additionally, we hold a minority interest in MCT Corp ("MCT"), which in turn
has ownership interests in 18 mobile operations located throughout Russia and in
Uzbekistan and Tajikistan. We treat our ownership interest in MCT as an equity
method investment and are not actively involved in the day-to-day management of
the operations.
In July 2002, we merged the existing operations of Agentstvo Delovoi Svyazi
("ADS"), Commercial Information Network ("KIS") and TeleRoss Nizhny Novgorod to
create the leading corporate telecommunications provider in Russia's third
largest city, Nizhny Novgorod. This market is significantly less developed than
the Moscow market and we anticipate significant growth next year from this
entity. We previously owned 51% of ADS, 56% of KIS and 95% of TeleRoss Nizhny
Novgorod. As a result of the merger, we currently own 58% of the merged
operations.
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GTI ANNUAL REPORT 2002
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 believe
that the carriers, including mobile operators, which contribute a substantial
portion of our revenues, in turn 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.
We have traditionally competed for customers on the basis of network quality,
customer service and range of service offered. In 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 addition, some of our
competitors do not link their prices to the dollar/ruble exchange rate, so when
the ruble devalues, their prices effectively become relatively cheaper than our
prices. The ruble exchange rate with the dollar has become relatively stable
since early 2000 and price pressures associated with devaluation have eased
considerably. We cannot be certain that the exchange rate will remain stable in
the future and therefore we may experience additional price pressures.
Since early 2000, we have witnessed a recovery in the Russian market, but with
downward pricing pressures persisting. The downward pricing pressures result
from increased competition in Russia and the global trend toward lower
telecommunications tariffs. In 2001 and 2002 our traffic volume increases
exceeded the reduction in tariffs on certain types of voice traffic. This is a
contributory factor to the increases in our revenue in 2001 and 2002. 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 we expect competition to continue to force the general level of tariffs
downward, we expect to mitigate partially the effects of this pressure by
seeking, where possible, further reductions in the settlement and
interconnection rates that we pay to other telecommunications operators. In
general, over time we expect settlement and interconnection rates to continue to
decline broadly in line with tariffs.
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. As part of this strategy, we have acquired the
rights to use STM-16 fiber optic capacity on a Moscow to Stockholm route,
significantly reducing our unit cost per E-1 fiber optic link on this route. In
September 2001, we acquired rights to use up to VC-3 fiber optic capacity on
major routes within Russia to support the increase in our interregional traffic
and our regional expansion strategy. We expect to continue to add additional
transmission capacity, which due to its fixed cost nature can initially depress
margins, but will ultimately allow us to improve or maintain our margins.
During 2001, our mobile operations in Ukraine were under strong competitive
pressure and average revenue per subscriber declined. In the fourth quarter of
2001 we reassessed our plans for this business and as a result we recorded an
impairment charge of $10.4 million. In line with our expectations revenues have
generally continued to decline, although, at the same time, we have commenced
the implementation of a cost reduction program. We currently are working towards
refocusing our mobile operations as an additional service offered by business
services operations to corporate clients. Further significant declines are not
expected through the end of 2003.
In Kiev, Ukraine we continue to experience issues relating to obtaining
sufficient numbering capacity for our business services operations. In this
regard, we are continuing negotiations with Ukrtelecom, the state-owned
operator, for performance of obligations related to the provision of numbering
capacity and entered into an agreement for additional numbering capacity in the
third quarter of 2002.
40
FINANCIAL REVIEW
Our ability to grow our business services operations in Kiev will be limited if
we do not have access to numbering capacity.
During the past year, Golden Telecom (Ukraine) ("GTU") was involved in a number
of commercial disputes with Ukrtelecom and Ukrainian regulatory authorities. The
most significant disputes include routing of traffic and GTU's lease rights of
Ukrtelecom's technical premises. At the end of the fourth quarter of 2002, most
of these issues with Ukrtelecom were resolved. We continue to work with
Ukrtelecom to resolve the remaining outstanding issues.
We reassessed and suspended our incoming international traffic off-network
termination activities, pending the resolution of certain regulatory issues and
as a result we estimate a reduction of approximately $1.6 million in revenue in
the fourth quarter of 2001 and approximately $6.4 million in revenue for the
year ended December 31, 2002. On March 1, 2002 we became aware that the Kiev
City Prosecutor's Office had initiated an investigation into the activities of
our partners in GTU. The investigation appeared to concern alleged improprieties
in the manner in which GTU routed certain traffic through the state owned
monopoly carrier, Ukrtelecom. GTU received a letter dated July 17, 2002 from the
General Prosecutor of Ukraine stating that effective July 9, 2002 the
Prosecutor's Office withdrew all charges against GTU due to the absence of
grounds on which to prosecute. On October 7, 2002, the Kiev City Prosecutor's
Office notified GTU that the previous decision to close the investigation had
been revoked. In subsequent discussions with the Kiev City Prosecutor's Office,
the investigators advised the management of GTU that the Prosecutor's Office is
reviewing internal procedural requirements with the intent to close the
investigation again.
In February 2003, the Ukrainian Parliament overrode the President's veto and
adopted changes to existing regulations relating to mobile telecommunication
services in Ukraine. The new regulations stipulate the cancellation of
end-customer charges for incoming calls. These changes will come into force in
six-months time, unless superseded by a new Law on Communications or over-ruled
by a Constitutional Court decision. Because we expect that interconnect tariffs
for calls from the PSTN to mobile networks to be lower than current tariffs that
mobile operators charge customers for incoming calls, it is expected that mobile
operators will have to increase tariffs for outgoing calls and/or set higher
monthly fees to compensate for the expected decrease in revenue.
In addition to our traditional voice and data service provision, prior to 2002,
we were actively pursuing a strategy of developing non-traditional telecom
service offerings including those related to the Internet, such as web-hosting,
web design, and vertical and horizontal Internet portal development. In line
with experience outside of Russia, we did not see the rapid development of
Internet based services that were expected. Internet based advertising and
e-commerce revenues did not develop to significant levels and we reviewed our
long term strategy for Internet based products. As a result of this review, we
evaluated the future cash flows for this business, and we recorded an impairment
charge of $20.9 million in the fourth quarter of 2001. We expect to see some
growth in Internet based advertising and will continue to offer this service to
support our dial-up Internet service and be in a position to capitalize on any
upturn in demand for this service.
We have seen a significant year over year increase in our dial-up Internet
subscriber numbers and we expect the increase to continue, as our base of
regional subscribers expands. As additional dial-up capacity becomes available
in Moscow, we expect to increase our market share in the capital as well. In
June 2001 we completed the purchase of a leading Russian internet service
provider, Cityline, together with Uralrelcom, another inter-net service provider
and an infrastructure company, PTK, and together, these entities allowed us to
increase our regional dial-up Internet presence and increase our numbering
capacity and access lines in Moscow. The new Moscow capacity was initially
placed into service in July 2002. The Moscow numbering capacity and some of the
access lines provided by PTK are intended to support incremental CLEC Services
division end-user customers, with the majority of the access lines being
allocated to support planned increases in dial-up Internet subscribers in our
data and Internet Services division.
41
GTI ANNUAL REPORT 2002
We have continued to integrate our acquisitions and improve operational
efficiency while at the same time controlling costs. We expect to incur further
costs in connection with overall restructuring of our operations in 2003.
Our equity investee, MCT, is in default on a loan note that originally became
due on September 29, 2001. In December 2001, MCT signed a forbearance agreement
whereby the holder of the note agreed to forbear from selling the note or
exercising its rights under the original debt agreements and to extend the terms
of repayment until January 31, 2002. MCT did not make payment on the note prior
to January 31, 2002 and during April 2002 the holder of the loan note foreclosed
on the collateral related to the note and subsequently sold it to a third-party,
resulting in a substantial loss to MCT. We recorded a write-off of an amount
corresponding to our equity in MCT's losses during the second quarter of 2002.
The write-off did not exceed the carrying value of our investment in MCT. Total
equity in losses recognized by us related to our MCT investment were $3.9
million and $5.1 million for the years ended December 31, 2001 and 2002,
respectively. We have no further commitments to provide financial support to
MCT.
RECENT ACQUISITIONS
--------------------------------------------------------------------------------
In August 2002, we completed the purchase of the remaining approximately 31% of
GTU and now own 100% of GTU and have full operational and management control
over the Ukrainian operations.
In September 2002, we completed the purchase of the remaining 50% of EDN
Sovintel LLC ("Sovintel") previously held by Open Joint Stock Company
Rostelecom, bringing our ownership in Sovintel to 100%. The acquisition of the
remaining 50% of Sovintel will further strengthen our position in the key Moscow
and St. Petersburg communications markets, position us to realize future
operating and cost synergies, and allow us to offer a full suite of
telecommunication services across broad geographical markets in Russia and the
CIS. Sovintel provides worldwide communications services, principally to major
hotels, business offices and mobile communication companies through its
telecommunications network in Russia.
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. Certain revenues, such as
connection fees, are deferred in accordance with Staff Accounting Bulletin
("SAB") No. 101. In connection with recording revenue, estimates and assumptions
are required in determining the expected conversion of the revenue streams to
cash collected. In line with guidance in SAB No. 101, 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.
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 KPNQwest who are 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.
42
FINANCIAL REVIEW
We have recognized provisions based on our preliminary estimate of net exposure
in 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 $1.6
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 management's
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 SFAS No.
142, "Goodwill and Other Intangible Assets", on January 1, 2002, we will perform
a goodwill impairment testing annually 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
2002, 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
carryforwards 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.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------------------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations", and
No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized but are subject
to annual impairment tests in accordance with SFAS No. 142. Other intangible
assets continue to be amortized over their useful lives. Impairment losses that
arise due to the initial application of this standard are reported as a
cumulative effect of a change in accounting principle. We adopted SFAS No. 141,
"Business Combinations" which was effective for business combinations
consummated after June 30, 2001. We adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" on January 1, 2002 and discontinued amortization of goodwill
as of such date.
We completed the transitional impairment test for existing goodwill as of
January 1, 2002 during the second quarter of 2002. Based on comparison of the
carrying amounts of our reporting units with their fair values, it was
determined that no goodwill was impaired as of that date. Fair values of the
reporting units were established using the discounted cash flow method.
Upon the adoption of SFAS No. 142, we recorded a cumulative effect of a change
in accounting principle for negative goodwill (deferred credit) arising on our
equity method investments in the amount of $1.0 million. The impact of
non-amortization of goodwill on our net income for the twelve months ended
December 31, 2002 was an approximate $15.0 million increase, or $0.62 per share
of common stock - basic. We also reclassified to other intangible assets
approximately $1.3 million previously classified as goodwill. Amortization
expense for goodwill for the twelve months ended December 31, 2001 was $13.8
million.
43
GTI ANNUAL REPORT 2002
Amortization expense for intangible assets for the twelve months ended December
31, 2002 was $6.4 million. Amortization expense for the succeeding five years is
expected to be as follows: 2003 - $10.2 million, 2004 - $9.2 million, 2005 -
$8.2 million, 2006 - $7.3 million, and 2007 - $6.4 million. The pro forma impact
on net loss and net loss per share for the twelve months ended December 31, 2001
compared to actual results for the twelve months ended December 31, 2002 is as
follows:
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2001 2002
---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net income (loss) ........................... $ (39,005) $ 29,784
Goodwill amortization ................................ 13,846 --
Negative goodwill amortization on equity investee .... (243) --
---------- ----------
Adjusted net income (loss) ........................... $ (25,402) $ 29,784
========== ==========
Basic net income (loss) per share:
Reported net income (loss) ........................... $ (1.65) $ 1.24
Goodwill amortization ................................ 0.58 --
Negative goodwill amortization on equity investee .... (0.01) --
---------- ----------
Adjusted net income per share ........................ $ (1.08) $ 1.24
========== ==========
Diluted net income (loss) per share:
Reported net income (loss) ........................... $ (1.65) $ 1.21
Goodwill amortization ................................ 0.58 --
Negative goodwill amortization on equity investee .... (0.01) --
---------- ----------
Adjusted net income per share ........................ $ (1.08) $ 1.21
========== ==========
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement deals with the costs of closing facilities and
removing assets SFAS No. 143 requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period it is incurred.
This cost is initially capitalized and amortized over the remaining life of the
asset. Once the obligation is ultimately settled, any difference between the
final cost and the recorded liability is recognized as a gain or loss on
disposition. SFAS No. 143 is effective for years beginning after June 15, 2002.
The adoption of SFAS No. 143 will not have an impact on the Company's
consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
for the disposal of a segment of a business (as previously defined in that
opinion).
44
FINANCIAL REVIEW
This statement also amends Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The provisions of the
statement became effective for financial statements issued for fiscal years
beginning after December 15, 2001. We adopted this new standard from January 1,
2002. The adoption of the pronouncement did not have an effect on our results of
operations or financial position.
During the year ended December 31, 2002, the FASB issued several new accounting
standards including, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections", SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities". In
November 2002 the FASB also issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". These standards are not expected to have
a material impact on the financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This statement nullifies Emerging Issues Task Force No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring),"
which required that a liability for an exit cost be recognized upon the entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of the
provisions of SFAS No. 146 is not expected to have a material impact on our
results of operations, financial position or cash flow.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The disclosure
provisions of FIN 45 are effective for financial statements of annual periods
that end after December 15, 2002. The provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB No. 28, "Interim Financial Reporting", to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earrings per share in annual and interim financial
statements. While the Statement does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB No. 25. SFAS No. 148 disclosure provisions are effective for years
ending after December 15, 2002. We have adopted the amendments to SFAS No. 123
disclosure provisions required under SFAS No. 148 but we will continue to use
the intrinsic value method under APB No. 25 to account for stock-based
compensation. As such, the adoption of SFAS No. 148 will not have a significant
impact on our consolidated financial position or results of operations.
We apply the provisions of APB No. 25 in accounting for our stock options
incentive plans. The effect of applying SFAS No. 123 on the net income (loss) as
reported is not representative of the effects on reported net income (loss) in
future years due to the vesting period of the stock options and the fair value
of additional stock options in future years.
45
GTI ANNUAL REPORT 2002
TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss), as reported ............................................ $ (10,254) $ (39,005) $ 29,784
Deduct: total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects .. 8,432 8,278 7,937
---------- ---------- ----------
Pro forma net income (loss) ............................................... $ (18,686) $ (47,283) $ 21,847
========== ========== ==========
Net income (loss) per share:
Basic - as reported ..................................................... $ (0.43) $ (1.65) $ 1.24
Basic - pro forma ....................................................... $ (0.78) $ (2.00) $ 0.91
Diluted - as reported ................................................... $ (0.43) $ (1.65) $ 1.21
Diluted - pro forma ..................................................... $ (0.78) $ (2.00) $ 0.89
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN No. 46 defines the concept of "variable interests" and requires
existing unconsolidated variable interest entities to be consolidated into the
financial statements of their primary beneficiaries if the variable interest
entities do not effectively disperse risks among the parties involved. FIN No.
46 applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. If it is reasonably possible
that an enterprise will consolidate or disclose information about a variable
interest entity when FIN No. 46 becomes effective, the enterprise must disclose
information about those entities in all financial statements issued after
January 31, 2003. The interpretation may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years, with a
cumulative-effect adjustment as of the beginning of the first year restated. We
do not expect that the adoption of the provisions of FIN No. 46 will have a
material impact on our future results of operations, financial position or cash
flow.
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
GTI is a leading facilities-based provider of integrated telecommunications and
Internet services to businesses and other high-usage customers and
telecommunications operators in Moscow, Kiev, St. Petersburg, Nizhny Novgorod
and other major population centers throughout Russia and other countries of the
Commonwealth of Independent States. The results of our four business groups from
the operations of both our consolidated entities combined with the
non-consolidated entities where we are actively involved in the day-to-day
management, are shown in footnote 13 "Segment Information - Line of Business
Data" to our consolidated financial statements.
Our functional currency is the US dollar, as the majority of our cash flows are
indexed to, or denominated in US dollars. Through December 31, 2002, Russia has
been considered to be a highly inflationary environment. From January 1, 2003,
Russia will cease to be considered as a highly inflationary economy. As we
currently believe our functional currency is the US dollar, we do not expect
this change to have a material impact on our results of operations or financial
position.
46
FINANCIAL REVIEW
The discussion of our results of operations is organized as follows:
o Consolidated Results. Consolidated Results of Operations for the Year Ended
December 31, 2002 compared to the Consolidated Results of Operations for the
Year Ended December 31, 2001.
o Consolidated Financial Position. Consolidated Financial Position at December
31, 2002 compared to Consolidated Significant Financial Position accounts at
December 31, 2001
o Consolidated Results. Consolidated Results of Operations for the Year Ended
December 31, 2001 compared to the Consolidated Results of Operations for the
Year Ended December 31, 2000
CONSOLIDATED RESULTS. CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2002 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2001
REVENUE
--------------------------------------------------------------------------------
Our revenue increased by 42% to $198.7 million for the year ended December 31,
2002 from $140.0 million for the year ended December 31, 2001. The breakdown of
revenue by business group was as follows:
CONSOLIDATED REVENUE FOR THE YEAR CONSOLIDATED REVENUE FOR THE YEAR
ENDED DECEMBER 31, 2001 ENDED DECEMBER 31, 2002
--------------------------------- ---------------------------------
(IN MILLIONS)
REVENUE
CLEC Services ...................................... $ 45.1 $ 91.5
Data and Internet Services ......................... 63.2 78.9
Long Distance Services ............................. 18.4 18.7
Mobile Services .................................... 14.4 13.0
Eliminations ....................................... (1.1) (3.4)
------- ------
TOTAL REVENUE ........................................ $ 140.0 $198.7
CLEC Services. Revenue from CLEC Services increased by 103% to $91.5 million for
the year ended December 31, 2002 from $45.1 million for the year ended December
31, 2001.
The CLEC Services division of TeleRoss revenue increased by 10% to $30.7 million
for the year ended December 31, 2002 from $27.8 million for the year ended
December 31, 2001. This is mainly due to increases in monthly recurring charges
and traffic revenue due to an increase in numbering capacity in active service,
partly offset by pricing concessions made to its largest customer and a decrease
in equipment sales.
The CLEC Services division of Golden Telecom BTS revenue decreased by 18% to
$13.3 million for the year ended December 31, 2002 from $16.2 million for the
year ended December 31, 2001. The decrease in revenue was due to the suspension
of the termination of certain incoming traffic from the beginning of the fourth
quarter of 2001 that continued throughout 2002, partly offset by an increase in
other recurring revenues.
For ADS, acquired in September 2001, revenue from CLEC Services was $3.9 million
and $1.1 million for the years ended December 31, 2002 and 2001, respectively.
The acquisition of the remaining 50% ownership interest in Sovintel was
completed in the third quarter of 2002. We began consolidating Sovintel into our
results of operations from September 17, 2002. As a result of consolidating
Sovintel, revenue from CLEC Services increased by $42.1 million for the year
ended December 31, 2002.
47
GTI ANNUAL REPORT 2002
Sovintel's revenue increased by 29% to $149.2 million for the year ended
December 31, 2002 from $115.7 million for the year ended December 31, 2001.
Increases in traffic volumes, particularly incoming international traffic, more
than offset reductions in tariffs. Also, increases in recurring fees, equipment
sales and other service offerings contributed to the increase.
Data and Internet Services Revenue from Data and Internet Services increased by
25% to $78.9 million for the year ended December 31, 2002 from $63.2 million for
the year ended December 31, 2001. The increase is largely the result of
increases in Internet revenue from both dial-up and dedicated Internet
subscribers, increases in Internet traffic and other Internet related revenues.
Our dial-up Internet subscribers grew 30% from 185,628 at December 31, 2001 to
242,155 at December 31, 2002. Internet revenues have increased by the
acquisition of Cityline and Uralrelcom on June 1, 2001, however, Cityline's
subscribers were absorbed into TeleRoss operations during 2002 so we are not
able to identify the incremental impact of this acquisition on the year ended
December 31, 2002. Uralrelcom's revenue was $2.5 million for the year ended
December 31, 2002 as compared to $1.0 million for the year ended December 31,
2001.
Long Distance Services Revenue from Long Distance Services increased by 2% to
$18.7 million for the year ended December 31, 2002 from $18.4 million for the
year ended December 31, 2001. The increase is largely the result of increases in
recurring fees and traffic revenues due to an increasing end-user customer base
in Moscow and in many Russian regions, which more that offset tariff reductions.
The increase is partly offset by a decline in equipment sales in the year ended
December 31, 2002, as compared to the year ended December 31, 2001, due to a
large contract that was installed in the first half of 2001.
Mobile Services Revenue from Mobile Services decreased by 10% to $13.0 million
for the year ended December 31, 2002 from $14.4 million for the year ended
December 31, 2001. Active subscribers declined approximately 13% and the average
revenue per subscriber has declined by 8% to approximately $28.54 per month.
EXPENSES
--------------------------------------------------------------------------------
The following table shows our principal expenses for the year ended December 31,
2002 and December 31, 2001:
CONSOLIDATED EXPENSES FOR THE YEAR CONSOLIDATED EXPENSES FOR THE YEAR
ENDED DECEMBER 31, 2001 ENDED DECEMBER 31, 2002
---------------------------------- ----------------------------------
(IN MILLIONS)
COST OF REVENUE
CLEC Services ............................. $ 17.4 $ 41.3
Data and Internet Services ................ 30.2 36.8
Long Distance Services .................... 13.5 13.5
Mobile Services ........................... 3.7 3.0
Eliminations .............................. (1.1) (3.4)
------- -------
TOTAL COST OF REVENUE ....................... 63.7 91.2
Selling, general and administrative ....... 48.9 46.1
Depreciation and amortization ............. 41.4 30.0
Impairment charge ......................... 31.3 --
Equity in (earnings)/losses of ventures ... (8.2) (4.4)
Interest income ........................... (3.1) (1.6)
Interest expense .......................... 2.4 2.2
Foreign currency loss ..................... 0.6 1.2
Provision for income taxes ................ $ 1.9 $ 4.6
48
FINANCIAL REVIEW
COST OF REVENUE
--------------------------------------------------------------------------------
Our cost of revenue increased by 43% to $91.2 million for the year ended
December 31, 2002 from $63.7 million for the year ended December 31, 2001.
CLEC Services. Cost of revenue from CLEC Services increased to $41.3 million, or
45% of revenue, for the year ended December 31, 2002 from $17.4 million, or 39%
of revenue, for the year ended December 31, 2001.
The CLEC Services division of TeleRoss' cost of revenue increased by 25% to
$10.6 million, or 35% of revenue, for the year ended December 31, 2002 from $8.5
million, or 31% of revenue, for the year ended December 31, 2001. The increase
as a percentage of revenue resulted from settlements to other operators not
decreasing in line with the pricing concessions to customers.
The CLEC Services division of Golden Telecom BTS cost of revenue decreased by
28% to $6.1 million, or 46% of revenue, for the year ended December 31, 2002 and
was $8.5 million, or 52% of revenue, for the year ended December 31, 2001. Cost
of revenue decreased as a percentage of revenue due to the suspension of certain
lower margin incoming traffic.
For ADS, acquired in September 2001, cost of revenue from CLEC Services was $2.6
million and $0.4 million for the year ended December 31, 2002 and 2001,
respectively.
The acquisition of the remaining 50% ownership interest in Sovintel was
completed in the third quarter of 2002. We began consolidating Sovintel into our
results of operations from September 17, 2002. As a result of consolidating
Sovintel, cost of revenue from CLEC Services increased by $20.2 million for the
year ended December 31, 2002.
Sovintel's cost of revenue increased by 28% to $81.9 million, or 55% of revenue,
for the year ended December 31, 2002 from $63.9 million, or 55% of revenue, for
the year ended December 31, 2001. The increase in cost of revenue of 28% is
primarily a result of increases in operator settlements as a result of increases
in traffic related revenue.
Data and Internet Services. Cost of revenue from Data and Internet Services
increased by 22% to $36.8 million, or 47% of revenue, for the year ended
December 31, 2002 from $30.2 million, or 48% of revenue, for the year ended
December 31, 2001. The decrease as a percentage of revenue was mainly due to the
operational improvements in terms of efficient use of available network
resources.
Long Distance Services. Cost of revenue from Long Distance Services remained
unchanged at $13.5 million, or 72% of revenue, for the year ended December 31,
2002 and was 73% of revenue, for the year ended December 31, 2001. The
improvement in cost of revenue as a percentage of revenue is partly due to an
increase in end-users in the long distance traffic mix and the decrease in lower
margin equipment sales partly offset by additional satellite transponder costs
and higher settlement costs to other operators.
Mobile Services. Cost of revenue from Mobile Services decreased by 19% to $3.0
million, or 23% of revenue, for the year ended December 31, 2002 from $3.7
million, or 26% of revenue, for the year ended December 31, 2001. The cost of
revenue decreased as a percentage of revenue, mainly as a result of cost
controls and a change in the revenue mix from handset sales to traffic revenue.
SELLING, GENERAL AND ADMINISTRATIVE
--------------------------------------------------------------------------------
Our selling, general and administrative expenses decreased by 6% to $46.1
million, or 23% of revenue, for the year ended December 31, 2002 from $48.9
million, or 35% of revenue, for the year ended December 31, 2001. This decrease
in selling, general and administrative expenses was mainly due to reductions in
employee related costs, advertising, and other selling, general and
administrative expenses partially offset by increase in revenue related taxes.
The acquisition of the remaining 50% of Sovintel and subsequent consolidation
contributed $5.1 million for the year ended December 31, 2002 to selling,
general and administrative expenses.
49
GTI ANNUAL REPORT 2002
Sovintel's selling, general and administrative expenses increased by 31% to
$17.0 million, or 11% of revenue for the year ended December 31, 2002 from $13.0
million, or 11% of revenue for the year ended December 31, 2001. The increase
was largely due to a increases in employee related costs, increases in revenue
related taxes, and increases in sales and marketing expenses.
DEPRECIATION AND AMORTIZATION
--------------------------------------------------------------------------------
Our depreciation and amortization expenses decreased by 28% to $30.0 million for
the year ended December 31, 2002 from $41.4 million for the year ended December
31, 2001. The decrease is in part due to the adoption of SFAS No 142 which
requires that goodwill no longer be amortized effective from January 1, 2002 and
which reduced our amortization expense by approximately $11.8 million for the
year ended December 31, 2002 and also as a result of the impairment charges
recorded in the fourth quarter of 2001, which in turn reduced the level of
depreciation and amortization recorded for the year ended December 31, 2002 by
$7.2 million. These reductions were, in part, offset by depreciation on
continuing capital expenditures of the consolidated entities. The acquisition of
the remaining 50% of Sovintel and subsequent consolidation of Sovintel as of
September 17, 2002 into our results of operations contributed $3.9 million for
the year ended December 31, 2002 to depreciation and amortization.
IMPAIRMENT CHARGE
--------------------------------------------------------------------------------
In the fourth quarter of 2001 we recorded impairment charges totaling $31.3
million covering two aspects of our business. Severely reduced expectations in
demand for Internet advertising in Russia, as throughout western markets, had
impacted the value of our Internet portal assets and as a result we recorded an
impairment charge of $20.9 million. Operating difficulties had impacted our
mobile business in Ukraine and as a result we recorded an impairment charge of
$10.4 million. For further details of these charges, refer to Note 15 of the
Notes to the Consolidated Financial Statements. No impairment charge was
recorded for the year ended December 31, 2002.
EQUITY IN EARNINGS OF VENTURES
--------------------------------------------------------------------------------
The earnings after interest and tax charges from our investments in
non-consolidated ventures were $4.4 million for the year ended December 31, 2002
down from earnings of $8.2 million for the year ended December 31, 2001. We
recognized earnings at Sovintel of $9.6 million for the period from January 1 to
September 16, 2002, which more than offset our recognized losses in MCT of $5.1
million. For the year ended December 31, 2001, our recognized earnings at
Sovintel were $10.7 million, which more than offset our recognized losses in
MCT.
INTEREST INCOME
--------------------------------------------------------------------------------
Our interest income was $1.6 million for the year ended December 31, 2002 down
from $3.1 million for the year ended December 31, 2001. The decrease in interest
income mainly reflects lower interest rates earned on our cash and cash
equivalents.
INTEREST EXPENSE
--------------------------------------------------------------------------------
Our interest expense was $2.2 million for the year ended December 31, 2002 down
from $2.4 million for the year ended December 31, 2001. Interest expense mainly
reflects the effect of higher average balances of debt, including capital leases
offset by lower interest rates. Debt, excluding capital lease obligations, at
December 31, 2002 was $33.1 million, of this $30.0 million was added in December
2002, compared to $13.2 million at December 31, 2001.
FOREIGN CURRENCY LOSS
--------------------------------------------------------------------------------
Our foreign currency loss was $1.2 million for the year ended December 31, 2002,
compared to a $0.6 million loss for the year ended December 31, 2001. The
increase in foreign currency loss is due to a combination of movements in
exchange rates and changes in the amount of net monetary assets that we have
denominated in foreign currencies. The acquisition of the remaining 50% of
Sovintel and subsequent consolidation of Sovintel
50
FINANCIAL REVIEW
from September 17, 2002 into our results of operations contributed $0.3 million
for the year ended December 31, 2002 to foreign currency losses.
PROVISION FOR INCOME TAXES
--------------------------------------------------------------------------------
Our charge for income taxes was $4.6 million for the year ended December 31,
2002 compared to $1.9 million for the year ended December 31, 2001. The
acquisition of the remaining 50% of Sovintel and subsequent consolidation of
Sovintel from September 17, 2002 into our results of operations contributed $3.6
million for the year ended December 31, 2002 to income taxes. There were
increased levels of taxable profits being incurred in our Russian and Ukrainian
subsidiaries and a reduction in the income tax rates for the year ended December
31, 2002 as compared to the year ended December 31, 2001. There was a reduction
of deferred tax asset valuation reserves of $2.8 million relating to tax loss
carryforwards at TeleRoss and we recognized $0.8 million of current deferred tax
assets at GTU.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
--------------------------------------------------------------------------------
We adopted SFAS No. 142 "Accounting for Goodwill," effective from January 1,
2002. As a result, we recorded a cumulative effect of a change in accounting
principle for negative goodwill (deferred credit) arising on our equity method
investments in the amount of $1.0 million for the year ended December 31, 2002.
NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE
--------------------------------------------------------------------------------
Our net income for the year ended December 31, 2002 was $29.8 million, compared
to a net loss of $39.0 million for the year ended December 31, 2001.
Our net income per share of common stock increased to $1.24 for the year ended
December 31, 2002, compared to a net loss per share of $1.65 for the year ended
December 31, 2001. The increase in net income per share of common stock was due
to the increase in net income and offset by an increase in the number of
weighted average shares to 24,101,943 at December 31, 2002, compared to
23,604,914 at December 31, 2001.
Our net income per share of common stock on a fully diluted basis increased to
$1.21 for the year ended December 31, 2002, compared to a net loss per common
share of $1.65 in the year ended December 31, 2001. The increase in net income
per share of common stock on a fully diluted basis was due to the increase in
net income and offset by an increase in the number of weighted average shares
assuming dilution to 24,516,803 in the year ended December 31, 2002, compared to
23,604,914 in the year ended December 31, 2001.
CONSOLIDATED FINANCIAL POSITION
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL POSITION AT DECEMBER 31, 2002 COMPARED TO CONSOLIDATED
FINANCIAL POSITION AT DECEMBER 31, 2001
On September 17, 2002, we completed the acquisition of the remaining 50% of
Sovintel previously held by Rostelecom and began consolidating the results of
operations and financial position of Sovintel. Significant fluctuations in
certain balance sheet items as of December 31, 2002 as compared to December 31,
2001, were mainly due to the consolidation of Sovintel into our financial
position. The most significant fluctuations of certain balance sheet items
include accounts receivable, property and equipment, goodwill and intangible
assets, investments in and advances to ventures, accounts payable and accrued
expenses, deferred tax liabilities and shareholders' equity. Other significant
changes in balance sheet items, excluding the effect of consolidating Sovintel
are discussed below.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
--------------------------------------------------------------------------------
In addition to the effect of the consolidation of Sovintel, our allowance for
doubtful accounts increased from December 31, 2001 as compared to December 31,
2002 mainly due to provisions we made with respect to our preliminary estimate
of exposure relating to the bankruptcy of KPNQwest.
51
GTI ANNUAL REPORT 2002
DEBT OBLIGATIONS
--------------------------------------------------------------------------------
Our debt position increased from December 31, 2001 as compared to December 31,
2002 mainly due to ROL Holdings drawing upon the Citibank Credit Facility in the
fourth quarter of 2002 to retire $30.0 million of the $46.0 million non-interest
bearing promissory note issued to Rostelecom in connection with the acquisition
of the remaining 50% ownership interest in Sovintel previously held by
Rostelecom offset by a repayment of the $6.3 million of debt to GTS and partial
repayment of vendor financing to Motorola and Siemens.
MINORITY INTEREST
--------------------------------------------------------------------------------
The decrease in minority interest from December 31, 2001 as compared to December
31, 2002 primarily reflects our acquisition of the remaining 31% minority
interest of Golden Telecom (Ukraine) in August 2002.
STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
In addition to the increase in shareholders' equity resulting from shares issued
to acquire Sovintel, shareholders' equity also increased from December 31, 2001
to 2002 as a result of our net income of $29.8 million and proceeds of
approximately $5.9 million received from the exercise of stock options.
CONSOLIDATED RESULTS. CONSOLIDATED RESULTS OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 2001 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE
YEAR ENDED DECEMBER 31, 2000
REVENUE
--------------------------------------------------------------------------------
Our revenue increased by 24% to $140.0 million for the year ended December 31,
2001 from $113.1 million for the year ended December 31, 2000. The breakdown of
revenue by business group was as follows:
CONSOLIDATED REVENUE FOR THE YEAR CONSOLIDATED REVENUE FOR THE YEAR
ENDED DECEMBER 31, 2000 ENDED DECEMBER 31, 2001
---------------------------------- ----------------------------------
(IN MILLIONS)
REVENUE
CLEC Services ........................... $ 42.0 $ 45.1
Data and Internet Services .............. 41.5 63.2
Long Distance Services .................. 14.8 18.4
Mobile Services ......................... 17.5 14.4
Eliminations ............................ (2.7) (1.1)
------- ------
TOTAL REVENUE ............................. $ 113.1 $140.0
CLEC Services. Revenue from CLEC Services increased by 7% to $45.1 million for
the year ended December 31, 2001 from $42.0 million for the year ended December
31, 2000.
The CLEC Services division of TeleRoss revenue increased by 9% to $27.8 million
for the year ended December 31, 2001 from $25.5 million for the year ended
December 31, 2000. This is mainly due to increases in monthly recurring and
traffic revenue due to an increase in numbering capacity in active service. The
CLEC Services division of Golden Telecom BTS revenue decreased by 2% to $16.2
million for the year ended December 31, 2001 from $16.5 million for the year
ended December 31, 2000. The decrease in revenue was mainly due to a $1.6
million decrease in revenue in the fourth quarter of 2001, from the termination
of incoming international traffic from other carriers, partially offset by
increases in recurring revenues from an increased end user customer base.
52
FINANCIAL REVIEW
As a result of the acquisition of ADS in the third quarter of 2001, revenue from
CLEC Services increased in 2001 by $1.1 million.
Sovintel's revenue increased by 23% to $115.7 million for the year ended
December 31, 2001 from $93.9 million, for the year ended December 31, 2000.
Increases in traffic volumes, particularly incoming traffic, more than offset
reductions in tariffs. Also, increases in recurring fees, equipment sales and
other service offerings contributed to the increase in revenue.
Data and Internet Services. Revenue from Data and Internet Services increased by
52% to $63.2 million for the year ended December 31, 2001 from $41.5 million for
the year ended December 31, 2000. The increase is largely the result of
increases in Internet revenue from both dial-up and dedicated Internet
subscribers, increases in private line channel revenue, increases in Internet
traffic and other Internet related revenues Dial-up Internet revenues increased
by $4.0 million as a result of our acquisitions of Cityline and Uralrelcom in
2001. We acquired KIS in the second quarter of 2000.
Long Distance Services. Revenue from Long Distance Services increased by 24% to
$18.4 million for the year ended December 31, 2001 from $14.8 million for the
year ended December 31, 2000. Recurring fees and traffic revenues increased due
to an expanding end-user customer base in Moscow and our acquisition of
controlling interests in some of the TeleRoss regional ventures. Tariffs for
end-user long distance traffic were mainly flat during 2001, with traffic
increasing. These increases offset a decline in equipment sales.
Mobile Services. Revenue from Mobile Services decreased by 18% to $14.4 million
for the year ended December 31, 2001 from $17.5 million for the year ended
December 31, 2000. Despite an increase of approximately 9% in the number of
active subscribers at Golden Telecom GSM, pricing competition in Ukraine has
reduced average revenue per active subscriber by 29% to approximately $31 per
month. Additionally, $0.9 million of the decrease was attributable to Vostok
Mobile Novgorod no longer being consolidated in 2001 as a result of the MCT
transaction.
EXPENSES
--------------------------------------------------------------------------------
The following table shows our principal expenses for the year ended December 31,
2001 and December 31, 2000:
CONSOLIDATED EXPENSES FOR THE YEAR CONSOLIDATED EXPENSES FOR THE YEAR
ENDED DECEMBER 31, 2000 ENDED DECEMBER 31, 2001
---------------------------------- ----------------------------------
(IN MILLIONS)
COST OF REVENUE
CLEC Services ............................ $ 15.4 $ 17.4
Data and Internet Services ............... 21.9 30.2
Long Distance Services ................... 12.3 13.5
Mobile Services .......................... 4.1 3.7
Eliminations ............................. (2.7) (1.1)
------- -------
TOTAL COST OF REVENUE ...................... 51.0 63.7
Selling, general and administrative ...... 45.4 48.9
Depreciation and amortization ............ 31.9 41.4
Impairment charge ........................ -- 31.3
Equity in (earnings)/losses of ventures... 0.3 (8.2)
Interest income .......................... (10.4) (3.1)
Interest expense ......................... 3.3 2.4
Foreign currency loss .................... 0.4 0.6
Provision for income taxes ............... $ 1.0 $ 1.9
53
================================================================================
GTI ANNUAL REPORT 2002
COST OF REVENUE
--------------------------------------------------------------------------------
Our cost of revenue increased by 25% to $63.7 million for the year ended
December 31, 2001 from $51.0 million for the year ended December 31, 2000.
CLEC Services. Cost of revenue from CLEC Services increased to $17.4 million, or
39% of revenue, for the year ended December 31, 2001 from $15.4 million, or 37%
of revenue, for the year ended December 31, 2000.
The CLEC Services division of TeleRoss' cost of revenue increased by 13% to $8.5
million, or 31% of revenue, for the year ended December 31, 2001 from $7.5
million, or 29% of revenue, for the year ended December 31, 2000. The increase
as a percentage of revenue resulted from settlements to other operators not
decreasing in line with the pricing concessions to customers.
The CLEC Services division of Golden Telecom BTS cost of revenue increased by 8%
to $8.5 million, or 52% of revenue, for the year ended December 31, 2001 and was
$7.9 million, or 48% of revenue, for the year ended December 31, 2000. Cost of
revenue increased as a percentage of revenue due to settlements to other
operators not decreasing in line with pricing concessions to customers and a
lower margin on the carrier traffic carried.
Sovintel's cost of revenue increased by 29% to $63.9 million for the year ended
December 31, 2001 from $49.7 million for the year ended December 31, 2000. The
increase to 55% from 53% of revenue was primarily the result of increases in
lower margin traffic in the revenue mix.
Data and Internet Services. Cost of revenue from Data and Internet Services
increased by 38% to $30.2 million, or 48% of revenue, for the year ended
December 31, 2001 from $21.9 million, or 53% of revenue, for the year ended
December 31, 2000. The decrease as a percentage of revenue was mainly due to the
operational improvements in terms of reduced cost for fiber capacity and the
integration of our Internet acquisitions.
Long Distance Services. Cost of revenue from Long Distance Services increased by
10% to $13.5 million, or 73% of revenue, for the year ended December 31, 2001
from $12.3 million, or 83% of revenue, for the year ended December 31, 2000. The
improvement in cost of revenue as a percentage of revenue is partly due to an
increase in end-users in the long distance traffic mix and the decrease in low
margin equipment sales.
Mobile Services. Cost of revenue from Mobile Services decreased by 10% to $3.7
million, or 26% of revenue, for the year ended December 31, 2001 from $4.1
million, or 23% of revenue, for the year ended December 31, 2000. The cost of
revenue increased as a percentage of revenue due to increased competition, which
has in turn led to lower traffic and equipment margins.
SELLING, GENERAL AND ADMINISTRATIVE
--------------------------------------------------------------------------------
Our selling, general and administrative expenses increased by 8% to $48.9
million, or 35% of revenue, for the year ended December 31, 2001 from $45.4
million, or 40% of revenue, for the year ended December 31, 2000. There were
increases in employee related costs, largely due to acquisitions and bad debt
expense also increased, but the increases were partially offset by a reduction
in revenue related taxes.
Sovintel's selling, general and administrative expenses decreased by 23% to
$13.0 million, or 11% of revenue for the year ended December 31, 2001 from $16.8
million, or 18% of revenue for the year ended December 31, 2000. The decrease
was largely due to a reduction in the rate of revenue related taxes incurred,
also reductions in employee related costs and bad debt.
DEPRECIATION AND AMORTIZATION
--------------------------------------------------------------------------------
Our depreciation and amortization expenses increased by 30% to $41.4 million for
the year ended December 31, 2001 from $31.9 million for the year ended December
31, 2000. This increase is due to the continuing capital expenditures of the
consolidated entities and increased intangible assets and goodwill amortization
due to acquisitions.
54
FINANCIAL REVIEW
IMPAIRMENT CHARGE
--------------------------------------------------------------------------------
In the fourth quarter of 2001 we recorded impairment charges totaling $31.3
million covering two aspects of our business. Severely reduced expectations in
demand for Internet advertising in Russia, as throughout western markets, had
impacted the value of our Internet portal assets and as a result we recorded an
impairment charge of $20.9 million. Operating difficulties had impacted our
mobile business in Ukraine and as a result we recorded an impairment charge of
$10.4 million. For further details of these charges, refer to Note 15 of the
Notes to the Consolidated Financial Statements.
EQUITY IN EARNINGS/LOSSES OF VENTURES
--------------------------------------------------------------------------------
The earnings after interest and tax charges from our investments in
non-consolidated ventures were $8.2 million for the year ended December 31,
2001, and losses after interest and tax charges from our investment in
non-consolidated ventures were $0.3 million for the year ended December 31,
2000. We recognized earnings at Sovintel of $10.7 million for the year ended
December 31, 2001, which more than offset our recognized losses in MCT. In the
year ended December 31, 2000, our recognized earnings at Sovintel were $5.1
million, which were more than offset by our recognized losses of $5.6 million
from our Russian mobile ventures.
INTEREST INCOME
--------------------------------------------------------------------------------
Our interest income was $3.1 million for the year ended December 31, 2001 down
from $10.4 million for the year ended December 31, 2000. The decrease in
interest income mainly reflects the reduced balance of cash, cash equivalents
and investments available for sale following the use of a significant part of
the proceeds from our IPO for acquisitions and capital expenditure and the
reduction in interest rates during 2001.
INTEREST EXPENSE
--------------------------------------------------------------------------------
Our interest expense was $2.4 million for the year ended December 31, 2001 down
from $3.3 million for the year ended December 31, 2000. The decrease in interest
expense reflects the reduced level of debt in the company.
FOREIGN CURRENCY LOSS
--------------------------------------------------------------------------------
Our foreign currency loss was $0.6 million for the year ended December 31, 2001,
compared to a $0.4 million loss for the year ended December 31, 2000. The
increased loss, in part reflects the increased devaluation of the ruble, as
compared to the dollar, in the year ended December 31, 2001.
PROVISION FOR INCOME TAXES
--------------------------------------------------------------------------------
Our charge for income taxes was $1.9 million for the year ended December 31,
2001 compared to $1.0 million for the year ended December 31, 2000. The overall
increase in the provision for income taxes was due to the increase in tax
incurred at Golden Telecom Ukraine, as its brought-forward tax losses had been
fully utilized, and the increasing profitability at TeleRoss operating company.
TeleRoss operating company's provision for income taxes was reduced by a
deferred tax benefit relating to loss carry-forwards that are expected to be
utilized in 2002. Russia enacted a reduction in the tax rate effective January
1, 2002, from 35% to 24% There were no deferred tax liabilities impacted by
this reduction.
NET LOSS AND NET LOSS PER SHARE
--------------------------------------------------------------------------------
Our net loss for the year ended December 31, 2001 was $39.0 million, compared to
$10.3 million for the year ended December 31, 2000. The significant increase in
our net loss was due to the impairment charge of $31.3 million, together with
the other items discussed above.
Our net loss per share of common stock was $1.65 in the year ended December 31,
2001, compared to $0.43 in the year ended December 31, 2000. The increase in
loss per share of common stock was due to the increase in net loss and a
decrease in the number of weighted average shares to 23,604,914 in the year
ended December 31, 2001, compared to 24,095,884 in the year ended December 31,
2000. The decrease in weighted average shares largely resulted from a buy-back
of 2,272,727 shares of our common stock in July, 2001.
55
GTI ANNUAL REPORT 2002
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) amortization of goodwill and
certain acquired intangible assets is not deductible for income tax purposes;
and (3) in the year ended December 31, 2001 we recorded a $31.3 million
impairment charge that was not deductible for income tax purposes. We have not
recorded a tax benefit in relation to our US net operating loss carry-forward
amount as our taxable US income is largely comprised of interest income and
dividends which we do not expect to continue over the longer term. Prior to 2001
we have not recognized a tax benefit in relation to the deferred tax assets of
our Russian and Ukrainian entities due to uncertainty over the application and
future development of the tax regimes in the two countries. However, in 2001 and
2002, as a result of our Russian and Ukrainian subsidiaries profitability for
Russian and Ukrainian statutory purposes and reasonable certainty of future
profits, we recorded deferred tax asset in the appropriate Russian and Ukrainian
subsidiaries. In respect of the impairment charge, this created additional
deferred tax assets, against which we recorded valuation allowances as a result
of the uncertainties concerning future realization of the tax assets.
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
Our cash, cash equivalents and investments available for sale were $59.6 million
and $46.4 million as of December 31, 2002 and December 31, 2001, respectively.
Of these amounts, our cash and cash equivalents were $59.6 million and $37.4
million as of December 31, 2002 and December 31, 2001, respectively. We have
invested funds in money market instruments with an original maturity greater
than three months which are classified as investments available for sale. At
December 31, 2002 and 2001 our investments available for sale were none and $9.0
million, respectively.
Our total restricted cash was $1.5 million and $3.4 million as of December 31,
2002, and 2001, respectively. The restricted cash is maintained in connection
with certain of our debt obligations as described below.
During the twelve months ended December 31, 2002, we had net cash inflows of
$50.6 million from our operating activities. During the twelve months ended
December 31, 2001, we had net cash inflows of $24.5 million from our operating
activities. This increase in net cash inflows from operating activities at
December 31, 2002 is mainly due to the achievement of net income, increased
revenues, reduction of our operating expenses, and the consolidation of Sovintel
into our results of operations and financial position from September 17, 2002.
We used cash of $52.2 million and $12.6 million for investing activities for the
twelve months ended December 31, 2002 and 2001, respectively, which were
principally attributable to building our telecommunications networks and
acquisitions. Network investing activities totaled $29.4 million for the twelve
months ended December 31, 2002 and included capital expenditures principally
attributable to building out our telecommunications network. Network investing
activities totaled $27.9 million for the twelve months ended December 31, 2001
and included additional fiber optic capacity between Moscow and Stockholm, fiber
optic capacity on major routes within Russia, and the GSM network build out in
Odessa, Ukraine. We used cash of $51.2 million for the year ended December 31,
2002 for acquisitions principally attributable to acquiring the remaining 50% of
Sovintel. For the year ended December 31, 2001, we used cash of $33.4 million of
acquisitions, principally attributable to the acquisitions of Cityline, PTK and
Uralrelcom. For the year ended December 31, 2002, we recovered funds from escrow
of $3.0 million in association with our acquisition of PTK in June 2001. For the
year ended December 31, 2001, we received net proceeds from investments
available for sale of $45.4 million and for the year ended December 31, 2002, we
received net proceeds from investments available for sale of $9.0 million.
We had working capital of $56.5 million as of December 31, 2002 and $36.0
million as of December 31, 2001. At December 31, 2002, we had total debt,
excluding capital lease obligations, of approximately $33.1 million, of which
$9.0 million were current maturities. At December 31, 2001, we had total debt,
excluding capital lease obligations, of approximately
56
FINANCIAL REVIEW
$13.2 million, of which $9.9 million were current maturities. Total debt
included amounts that were fully collateralized by restricted cash. At December
31, 2001 $6.3 million of our short-term debt was at fixed rates. At December 31,
2002 none of our debt was at fixed rates.
In the first quarter of 2000, we entered into a lease for the right to use fiber
optic capacity, including facilities and maintenance, from Moscow to Stockholm.
The lease has an initial term of ten years with an option to renew for an
additional five years. The lease required full prepayments as the capacity
increased from an STM-1 to an STM-4 to full capacity of STM-16. Full prepayments
were made to the lessor in April 2000, August 2000 and February 2001. These
prepayments have been offset against the lease obligation in the financial
statements of the Company. We will continue to make payments for maintenance for
the term of the lease.
In July 2001, we completed a buy-back of $25.0 million, or approximately 2.3
million shares, of our common stock at $11.00 per share, from a subsidiary of
Global TeleSystems Inc. ("GTS"). After this sale, GTS continued to own
approximately 0.6 million shares, or approximately 2.6 percent, of our
outstanding common stock. To effect the buy-back, we acted as designated
purchaser and exercised the options held by Alfa Group ("Alfa"), Capital
International Global Emerging Markets Private Equity Fund L.P ("Capital"), and
investment funds managed by Barings Vostok Capital Partners ("Baring Vostok") to
acquire our common stock for $11.00 per share from GTS. Alfa, Capital, and
Baring Vostok acquired these options in conjunction with their acquisition of
$125.0 million in our common shares from GTS in May 2001. In October 2001, GTS
sold the remaining approximately 0.6 million shares of our common stock and is
no longer a stockholder in GTI. In the fourth quarter of 2002, we retired the
approximately 2.3 million shares of common stock held as treasury shares.
In September 2001, we entered into a five year lease for the right to use up to
VC-3 fiber optic capacity on major routes within Russia to support the increase
in our interregional traffic and regional expansion strategy. In December 2001,
we issued a $9.1 million loan to the company that provided the capital lease.
The loan has payment terms of 56 months, starting in January 2002, and carries
interest at the rate of 7 percent 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 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 two of our larger Russian operating companies.
The funding level as of December 31, 2002 for all these facilities totaled $1.4
million, of which $0.6 million was funded to our consolidated subsidiaries and
$0.8 million was funded to our non-consolidated entities.
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 and ventures, including possible losses from operations. We may also
require capital for our acquisition and business development initiatives. The
net proceeds from our IPO and our private placement have been applied to these
funding requirements. We also expect to fund these requirements through our cash
flow from operations, proceeds from additional equity and debt offerings that we
may conduct, and debt financing facilities.
In September 2002, TeleRoss LLC ("TeleRoss"), a wholly-owned Russian subsidiary,
issued a three month $46.0 million non-interest bearing note payable to
Rostelecom in partial settlement for the acquisition of the remaining 50%
ownership interest in Sovintel previously held by Rostelecom. The note issued by
TeleRoss was settled in full in December 2002.
In September 2002, ROL Holdings Limited ("ROLH"), a wholly-owned Cypriot
subsidiary, entered into a secured $30.0 million credit facility with ZAO
Citibank.
57
GTI ANNUAL REPORT 2002
ROLH drew upon the Citibank credit facility in the fourth quarter of 2002 and
loaned the funds to TeleRoss to enable TeleRoss to retire $30.0 million of the
$46.0 million non-interest bearing promissory note issued to Rostelecom in
connection with the acquisition of the remaining 50% ownership interest in
Sovintel previously held by Rostelecom. ROLH is required to make four quarterly
payments of $7.5 million each plus accrued interest beginning in December 2003.
The Citibank credit facility carries interest at a rate equal to the three month
USD LIBOR plus 4.35%. At the drawdown of the Citibank Credit Facility, GTI and
certain affiliates executed a number of agreements to secure repayment of the
Citibank Credit Facility, including a payment guarantee from GTI and Sovintel,
pledge of the 50% ownership interest in Sovintel the Company owned prior to the
purchase of the remaining 50% ownership interest in Sovintel, pledge of a 58%
ownership interest in TeleRoss, commitments of TeleRoss to route at least 90% of
TeleRoss' cash flows via accounts at ZAO Citibank, commitments of Sovintel to
route at least 60% of Sovintel's cash flows via accounts at ZAO Citibank, and
assignment of accounts receivable by TeleRoss and Sovintel.
In the ordinary course of business, we may enter into arrangements with
operators and vendors principally for access to telecommunication network and
equipment. In September 2002, we entered into a purchase commitment for
satellite transmission capacity. The agreement requires 60 monthly payments of
$0.1 million each.
In the future, we may execute especially large or numerous acquisitions, which
may require us to raise additional funds through a dilutive equity issuance,
through additional borrowings with collateralization and through the divestment
of non-core assets, or combinations of the above. In the case especially large
or numerous acquisitions do not materialize, we expect our current sources of
funding to finance our capital requirements for the next 12 to 18 months. 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 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 and ventures, including losses from operations.
We will also require capital for other acquisition and business development
initiatives. We expect to fund these requirements through our cash on hand, cash
flow from operations, proceeds from additional equity and debt offerings that we
may conduct, and debt financing facilities.
We may not be able to obtain additional financing on favorable terms. As a
result, we may be 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.
As part of our drive to increase our network capacity, reduce costs and improve
the quality of our service, we have leased additional 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.
As of December 31, 2002, we had the following contractual obligations, including
short- and long-term debt arrangements commitments for future payments under
non-cancelable lease arrangements and purchase obligations:
58
FINANCIAL REVIEW
PAYMENTS DUE BY PERIOD
------------------------------------------------------------
LESS THAN 1 - 3 4 - 5 THERE
TOTAL 1 YEAR YEARS YEARS AFTER
-------- --------- -------- -------- --------
Short- and long-term debt ............. $ 33,099 $ 8,988 $ 23,761 $ 350 --
Capital lease obligations ............. 8,756 2,388 6,368 -- --
Non-cancelable lease obligations ...... 3,654 1,790 1,699 165 --
Purchase obligations .................. 8,392 3,082 4,256 844 210
-------- --------- -------- -------- --------
Total contractual cash obligations .... $ 53,901 $ 16,248 $ 36,084 $ 1,359 $ 210
======== ========= ======== ======== ========
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK AND TREASURY AND
CURRENCY EXPOSURE MANAGEMENT
--------------------------------------------------------------------------------
Our treasury function has managed our funding, liquidity and exposure to
interest rate and foreign currency exchange rate risks. Our investment treasury
operations are conducted within guidelines that have been established and
authorized by our audit committee. In accordance with our policy, we do not
enter into any treasury management transactions of a speculative nature.
The ruble and the hryvna are generally non-convertible outside Russia and
Ukraine, respectively, so our ability to hedge against further devaluation by
converting to other currencies is significantly limited. Further, our ability to
convert rubles and hryvna into other currencies in Russia and Ukraine,
respectively, is subject to rules that restrict the purposes for which
conversion and the payment of foreign currencies are allowed.
Given that much of our operating costs are indexed to or denominated in US
dollars, including employee compensation expense, capital expenditure and
interest expense, we have taken specific steps to minimize our exposure to
fluctuations in the appropriate foreign currency. Although local currency
control regulations require us to collect virtually all of our revenue in local
currency, certain ventures generally either price or invoice in US dollars or
index their invoices and collections to the applicable dollar exchange rate.
Customer contracts may include clauses allowing additional invoicing if the
applicable exchange rate changes significantly between the invoice date and the
date of payment, favorable terms for early or pre-payments and heavy penalty
clauses for overdue payments. Maintaining the dollar value of our revenue
subjects us to additional tax on exchange gains.
Although we are attempting to match revenue, costs, borrowing and repayments in
terms of their respective currencies, we may experience economic loss and a
negative impact on earnings as a result of foreign currency exchange rate
fluctuations.
Our cash and cash equivalents are held largely in interest bearing accounts, in
US Dollars, however we do have bank accounts denominated in Russian rubles and
Ukrainian hryvna. Book value as at December 31, 2002 and 2001 approximates fair
value.
Cash in excess of our immediate operating needs is invested in US money market
instruments. In accordance with our investment policy, we maintain a diversified
portfolio of low risk, fully liquid securities. Our investments available for
sale were none and $9.0 million as of December 31, 2002 and 2001, respectively,
stated at fair value.
We are exposed to market risk from changes in interest rates on our obligations
and we also face exposure to adverse movements in foreign currency exchange
rates. We have developed risk management policies that establish guidelines for
managing foreign currency exchange rate risk and we also periodically evaluate
the materiality of foreign currency exchange exposures and the financial
instruments available to mitigate this exposure.
59
GTI ANNUAL REPORT 2002
The following table provides information (in thousands) about our cash
equivalents, investments available for sale, convertible loan, and debt
obligations that are sensitive to changes in interest rates.
THERE 2002 2001
2003 2004 2005 2006 2007 AFTER TOTAL TOTAL
-------- -------- -------- -------- -------- ----- -------- --------
Cash equivalents ............................ $ 59,625 $ -- $ -- $ -- $ -- $ -- $ 59,625 $ 37,404
Investments available for sale
Variable rate ............................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 8,976
Average interest rate ..................... -- -- -- -- -- -- -- 4.10%
Note receivable ............................. $ 1,840 $ 1,972 $ 2,116 $ 1,494 $ -- $ -- $ 7,422 $ 9,137
Fixed rate ................................ 7.00% 7.00% 7.00% 7.00% -- -- 7.00% 7.00%
Long-term debt, including current portion
Fixed rate ................................ $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 6,250
Average interest rate ..................... -- -- -- -- -- -- -- 14.00%
Long-term debt, including current portion
Variable rate ............................. $ 8,988 $ 23,561 $ -- $ 200 $ 350 $ -- $ 33,099 $ 6,956
Average interest rate ..................... 5.88% 5.81% -- 3.03% 3.03% -- -- --
The following table provides information about our financial instruments by
local currency and where applicable, presents such information in US dollar
equivalents (in thousands). The table summarizes information on instruments that
are sensitive to foreign currency exchange rates, including foreign currency
denominated debt obligations.
THERE 2002 2001
2003 2004 2005 2006 2007 AFTER TOTAL TOTAL
-------- -------- -------- -------- -------- ----- -------- --------
ASSETS
Current assets
Russian rubles ............................. $ 18,366 $ -- $ -- $ -- $ -- $ -- $ 18,366 $ 7,849
Average foreign currency exchange rate ... 31.78 -- -- -- -- -- -- --
Ukrainian hryvna ........................... $ 3,324 $ -- $ -- $ -- $ -- $ -- $ 3,324 $ 2,940
Average foreign currency exchange rate ... 5.33 -- -- -- -- -- -- --
Kazakhstan Tenge ........................... $ 40 $ -- $ -- $ -- $ -- $ -- $ 40 $ 15
Average foreign currency exchange rate ... 155.60 -- -- -- -- -- -- --
LIABILITIES
Current liabilities
Russian rubles ............................. $ 7,927 $ -- $ -- $ -- $ -- $ -- $ 7,927 $ 2,577
Average foreign currency exchange rate ... 31.78 -- -- -- -- -- -- --
Ukrainian hryvna ........................... $ 827 $ -- $ -- $ -- $ -- $ -- $ 827 $ 776
Average foreign currency exchange rate ... 5.33 -- -- -- -- -- -- --
Long-term debt, including current portion
US dollars
Variable rate .............................. $ 8,988 $ 23,561 $ -- $ 200 $ 350 $ -- $ 33,099 $ 6,956
Average interest rate .................... 5.88% 5.81% -- 3.03% 3.03% -- -- --
Fixed rate ................................. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 6,250
Average interest rate .................... -- -- -- -- -- -- -- --
Our interest income and expense are most sensitive to changes in the general
level of U.S. interest rates. In this regard, changes in U.S interest rates
affect the interest earned on our cash equivalents and short-term investments as
well as interest paid on debt.
60
FINANCIAL REVIEW
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
--------------------------------------------------------------------------------
Certain statements contained in "Management's 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
(II) projected traffic volumes and other growth indicators;
(III) anticipated revenues and expenses;
(IV) the Company's competitive environment and our stated intention to be the
largest independent communications operator in the markets where we offer
our services;
(V) the future performance of consolidated and equity method investments;
(VI) our ability to successfully merge TeleRoss and Sovintel;
(VII) the political, regulatory and financial situation in the markets in which
we operate, are forward-looking and concern the Company's 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 Company's
results of operations, economic performance and financial condition are the
commercial and execution risks associated with implementing the Company's
business plan, our ability to successfully merge Sovintel and TeleRoss, 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 "Management's 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 Form
10-K for the year ended December 31, 2002 filed with the US Securities &
Exchange Commission.
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 Company's 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.
61
GTI ANNUAL REPORT 2002
REPORT OF MANAGEMENT
--------------------------------------------------------------------------------
Management is responsible for the preparation of Golden Telecom, Inc.'s
consolidated financial statements and all related information appearing in this
Annual Report. The consolidated financial statements and notes have been
prepared in conformity with accounting principles generally accepted in the
United States of America and include certain amounts that are based estimates
based upon currently available information and management's judgment of current
conditions and circumstances.
To provide reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition and that accounting records are reliable for
preparing financial statements, management maintains a system of accounting and
other controls. Even an effective internal control system, no matter how well
designed, has inherent limitations, including the possibility the possible of
circumvention or overriding of controls, and therefore can provide only
reasonable assurance with respect to financial statement presentation. The
system of accounting and other controls is improved and modified in response to
change in business conditions and operations and recommendations made by the
independent auditors.
The Audit Committee of the Board of Directors, which is comprised of directors
who are not employees, meets periodically with management and independent
auditors to review the manner in which these groups are performing their
responsibilities and to carry out the Audit Committee's oversight role with
respect to auditing, internal controls and financial reporting matters. The
independent auditors periodically meet privately with the Audit Committee and
have access to its individual members.
Golden Telecom, Inc. engaged Ernst & Young (CIS) Limited, independent auditors,
to audit the consolidated financial statements in accordance with auditing
standards generally accepted in the United States of America, which include
consideration of the internal control structure. Their report is on the
following page.
/s/ A. VINOGRADOV
A. VINOGRADOV
CHIEF EXECUTIVE OFFICER
/s/ D. STEWART
D. STEWART
CHIEF FINANCIAL OFFICER
62
FINANCIAL REVIEW
AUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS AND SHAREHOLDERS GOLDEN TELECOM, INC.
We have audited the accompanying consolidated balance sheets of Golden Telecom,
Inc. as of December 31, 2001 and 2002, and the related consolidated statements
of operations, cash flows, and shareholders' equity for each of the three years
in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Golden Telecom,
Inc. at December 31, 2001 and 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 2 to the financial statements, in 2002 the Company changed
its method of accounting for goodwill.
/s/ ERNST & YOUNG (CIS) LIMITED
ERNST & YOUNG (CIS) LIMITED
MOSCOW, RUSSIA
MARCH 6, 2003
63
GTI ANNUAL REPORT 2002
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF US$, EXCEPT SHARE DATA)
DECEMBER 31,
-------------------
2001 2002
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................................ $ 37,404 $ 59,625
Investments available for sale ................................................... 8,976 --
Accounts receivable, net of allowance for doubtful accounts of
$3,800 and $8,686 at December 31, 2001 and 2002, respectively .................... 21,875 46,224
Prepaid expenses ................................................................... 6,356 7,811
Deferred tax asset ................................................................. 1,586 3,681
Other current assets ............................................................... 8,538 10,113
-------- --------
TOTAL CURRENT ASSETS ............................................................... 84,735 127,454
Property and equipment:
Telecommunications equipment ..................................................... 96,337 192,638
Telecommunications network held under capital leases ............................. 23,500 23,500
Furniture, fixtures and equipment ................................................ 11,844 17,477
Other property ................................................................... 6,502 9,977
Construction in progress ......................................................... 9,670 22,070
-------- --------
147,853 265,662
Accumulated depreciation ......................................................... 49,263 99,541
-------- --------
Net property and equipment ....................................................... 98,590 166,121
Investments in and advances to ventures ............................................ 45,981 721
Goodwill and intangible assets:
Goodwill, net of accumulated amortization of $51,213 as of December 31, 2001 ..... 18,723 71,703
Telecommunications service contracts, net of accumulated amortization
of $3,475 as of December 31, 2001 and $6,775 as of December 31, 2002 ............. 26,481 41,247
Contract-based customer relationships, net of accumulated amortization
of $216 as of December 31, 2001 and $811 as of December 31, 2002 ................. 3,651 7,511
Licenses, net of accumulated amortization
of $839 as of December 31, 2001 and $1,249 as of December 31, 2002 ............... 2,015 1,918
Other Intangible assets, net of accumulated amortization
of $3,084 as of December 31, 2001 and $5,583 as of December 31, 2002 ............. 6,276 5,289
-------- --------
Net goodwill and intangible assets ............................................... 57,146 127,668
Restricted cash .............................................................,,..... 3,369 1,515
Other non-current assets ........................................................... 10,563 12,331
-------- --------
TOTAL ASSETS ....................................................................... $300,384 $435,810
======== ========
The accompanying notes are an integral part of these financial statements.
64
FINANCIAL REVIEW
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF US$, EXCEPT SHARE DATA)
DECEMBER 31,
------------------------
2001 2002
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses .................................. $ 27,327 $ 48,268
Debt maturing within one year .......................................... 9,869 8,988
Current capital lease obligation ....................................... 1,618 1,775
Deferred revenue ....................................................... 2,554 3,970
Due to affiliates and related parties .................................. 180 1,999
Other current liabilities .............................................. 7,177 5,980
---------- ----------
TOTAL CURRENT LIABILITIES ................................................ 48,725 70,980
Long-term debt, less current portion ................................... 3,337 24,111
Long-term deferred tax liability ....................................... 6,294 12,406
Long-term deferred revenue ............................................. 3,274 7,334
Long-term capital lease obligations .................................... 7,396 5,621
Other non-current liabilities .......................................... 4,547 5,713
---------- ----------
TOTAL LIABILITIES ........................................................ 73,573 126,165
COMMITMENTS AND CONTINGENCIES
Minority interest ...................................................... 5,967 2,187
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value (10,000,000 shares authorized;
none issued and outstanding at December 31, 2001 and 2002) ............. -- --
Common stock, $0.01 par value (100,000,000 shares authorized;
24,790,098 shares issued and 22,517,371 shares outstanding at
December 31, 2001 and 27,021,415 shares issued and outstanding
at December 31, 2002) .................................................. 248 270
Treasury stock, at cost (2,272,727 shares as of December 31, 2001) ..... (25,000) --
Additional paid-in capital ............................................. 414,407 446,215
Accumulated deficit .................................................... (168,811) (139,027)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY ............................................... 220,844 307,458
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................... $ 300,384 $ 435,810
========== ==========
The accompanying notes are an integral part of these financial statements.
65
GTI ANNUAL REPORT 2002
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS OF US$, EXCEPT PER SHARE
DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 2001 2002
---------- ---------- ----------
REVENUE:
Telecommunication services .................................................... $ 102,492 $ 128,407 $ 189,680
Revenue from affiliates and related parties ................................... 10,597 11,631 9,047
---------- ---------- ----------
TOTAL REVENUE ................................................................. 113,089 140,038 198,727
OPERATING COSTS AND EXPENSES:
Access and network services (excluding depreciation and amortization) ....... 50,954 63,685 91,189
Selling, general and administrative (excluding depreciation
and amortization) ......................................................... 45,420 48,935 46,147
Depreciation and amortization ............................................... 31,851 41,398 29,961
Impairment charge ........................................................... -- 31,291 --
---------- ---------- ----------
TOTAL OPERATING EXPENSES ...................................................... 128,225 185,309 167,297
INCOME (LOSS) FROM OPERATIONS ................................................. (15,136) (45,271) 31,430
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Equity in earnings (losses) of ventures ..................................... (285) 8,155 4,375
Interest income ............................................................. 10,445 3,161 1,569
Interest expense ............................................................ (3,319) (2,384) (2,236)
Foreign currency losses ..................................................... (390) (647) (1,174)
Minority interest ........................................................... (431) (117) (527)
Other non-operating expense ................................................. (148) -- --
---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSES) ................................................. 5,872 8,168 2,007
---------- ---------- ----------
Net income (loss) before income taxes ......................................... (9,264) (37,103) 33,437
Income taxes .................................................................. 990 1,902 4,627
---------- ---------- ----------
Net income (loss) before cumulative effect of change in accounting principle .. (10,254) (39,005) 28,810
Cumulative effect of change in accounting principle ........................... -- -- 974
---------- ---------- ----------
NET INCOME (LOSS) ............................................................. $ (10,254) $ (39,005) $ 29,784
========== ========== ==========
Basic earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change in accounting principle .. (0.43) (1.65) 1.20
Cumulative effect of a change in accounting principle ....................... -- -- 0.04
---------- ---------- ----------
Net income (loss) per share - basic ......................................... $ (0.43) $ (1.65) $ 1.24
========== ========== ==========
Weighted average common shares outstanding - basic .......................... 24,096 23,605 24,102
========== ========== ==========
Diluted earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change in accounting principle .. (0.43) (1.65) 1.17
Cumulative effect of a change in accounting principle ....................... -- -- 0.04
---------- ---------- ----------
Net income (loss) per share - diluted ....................................... $ (0.43) $ (1.65) $ 1.21
========== ========== ==========
Weighted average common shares outstanding - diluted .......................... 24,096 23,605 24,517
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
66
FINANCIAL REVIEW
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF US$)
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 2001 2002
---------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss) ............................................. $ (10,254) $ (39,005) $ 29,784
Adjustments to Reconcile Net Loss to Net Cash Provided by
Operating Activities:
Depreciation .................................................. 15,133 18,685 23,560
Amortization .................................................. 16,718 22,713 6,401
Equity in (earnings) losses of ventures ....................... 285 (8,155) (4,375)
Impairment charge ............................................. -- 31,291 --
Minority interest ............................................. 431 117 527
Foreign currency losses ....................................... 390 647 1,174
Deferred tax benefit .......................................... -- (1,656) (4,213)
Other ......................................................... 1,169 1,274 (196)
Changes in assets and liabilities:
Accounts receivable ........................................... (8,558) 905 (3,358)
Accounts payable and accrued expenses ......................... 5,945 (1,390) (240)
Other assets and liabilities .................................. (3,145) (968) 1,582
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ....................... 18,114 24,458 50,646
INVESTING ACTIVITIES
Purchases of property and equipment and intangible assets ..... (37,115) (27,859) (29,431)
Acquisitions, net of cash acquired ............................ (24,309) (33,448) (51,214)
Loan received from equity investee ............................ -- -- 9,973
Cash received from escrow account ............................. -- -- 3,000
Restricted cash ............................................... 4,448 (850) 1,884
Purchase of investments available for sale .................... (53,080) (8,965) (2,000)
Proceeds from investments available for sale .................. -- 54,344 10,976
Convertible loan to affiliated company ........................ (9,000) 9,000 --
Dividend received from affiliated company ..................... 1,910 1,924 1,955
Loans made .................................................... -- (9,137) --
Other investing ............................................... 5,776 2,359 2,688
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES ........................... (111,370) (12,632) (52,169)
FINANCING ACTIVITIES
Proceeds from debt ............................................ 22,900 3,300 30,000
Repayments of debt ............................................ (31,540) (10,003) (10,107)
Purchase of treasury stock .................................... -- (25,000) --
Net proceeds from exercise of employee stock options .......... -- 382 5,904
Net proceeds from shareholder ................................. 32 -- --
Other financing ............................................... (2,815) (761) (1,618)
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITES .............. (11,423) (32,082) 24,179
Effect of exchange rate changes on cash and cash equivalents .... (154) (229) (435)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ............ (104,833) (20,485) 22,221
Cash and cash equivalents at beginning of period ................ 162,722 57,889 37,404
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 57,889 $ 37,404 $ 59,625
The accompanying notes are an integral part of these financial statements.
67
GTI ANNUAL REPORT 2002
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE
YEARS ENDED DECEMBER 31, 2000, 2001, AND 2002 (IN THOUSANDS OF US$)
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
---------------- ------------------ PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ -------- ---------- ----------- -------------
Balance at December 31, 1999 ........... 24,050 $ 241 -- $ -- $ 407,863 $ (119,552) $ 288,552
Compensatory restricted stock
grants ............................... -- -- -- -- 852 -- 852
Acquisition of GTS-Ukrainian
TeleSystems, LLC ....................... 30 -- -- -- 360 -- 360
Acquisition of Agama Limited ........... 400 4 -- -- 3,795 -- 3,799
Adjustment of shareholder
contribution ......................... -- -- -- -- (116) -- (116)
Net loss ............................... -- -- -- -- -- (10,254) (10,254)
------ ------ ------ -------- ---------- ----------- -------------
Balance at December 31, 2000 ........... 24,480 $ 245 -- -- $ 412,754 (129,806) $ 283,193
Compensatory restricted stock grants ... -- -- -- -- 636 -- 636
Compensatory common stock option
grants ............................... -- -- -- -- 453 -- 453
Issuance of common stock in relation
to restricted stock grants ............. 142 2 -- -- (2) -- --
Exercise of stock options .............. 43 -- -- -- 517 -- 517
Exercise of common stock warrants ...... 125 1 -- -- (1) -- --
Purchase of treasury shares ............ -- -- (2,273) (25,000) -- -- (25,000)
Other equity transactions .............. -- -- -- -- 50 -- 50
Net loss ............................... -- -- -- -- -- (39,005) (39,005)
------ ------ ------ -------- ---------- ----------- -------------
Balance at December 31, 2001 ........... 24,790 $ 248 (2,273) $(25,000) $ 414,407 $ (168,811) $ 220,844
Compensatory common stock grants ....... -- -- -- -- 340 -- 340
Exercise of stock options .............. 480 5 -- -- 5,822 -- 5,827
Retirement of treasury shares .......... (2,273) (23) 2,273 25,000 (24,977) -- --
Acquisition of EDN Sovintel LLC ........ 4,024 40 -- -- 50,623 -- 50,663
Net income ............................. -- -- -- -- -- 29,784 29,784
------ ------ ------ -------- ---------- ----------- -------------
Balance at December 31, 2002 ........... 27,021 $ 270 -- -- $ 446,215 $ (139,027) $ 307,458
The accompanying notes are an integral part of these financial statements.
68
FINANCIAL REVIEW
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1: NATURE OF BUSINESS OPERATIONS
Golden Telecom, Inc. ("GTI", "Golden Telecom" or the "Company") is a provider of
a broad range of telecommunication 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 operation in Ukraine. Golden Telecom was incorporated in
Delaware on June 10, 1999 for the purpose of acting as a holding company for
Global TeleSystems, Inc.'s ("GTS") operating entities within the CIS and
supporting non-CIS holding companies (the "CIS Entities"). On September 29,
1999, GTS transferred its ownership rights in the CIS Entities to the Company in
anticipation of the Company's initial public offering which closed on October 5,
1999.
The CIS Entities were subsidiaries of GTS prior to the transfer of ownership
rights of the CIS Entities to the Company, and after the IPO, GTS retained an
approximately 67% interest in the Company. On May 11, 2001, GTS completed the
sale of approximately 12.2 million shares, or approximately 50%, of GTI's common
stock to a group of investors led by Alfa Group, a leading Russia-based
financial and industrial concern ("Alfa"), and two of the Company's previously
existing major shareholders, Capital International Global Emerging Markets
Private Equity Fund L.P. ("Capital") and investment funds managed by Barings
Vostok Capital Partners ("Baring Vostok").
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEW ACCOUNTING
PRONOUNCEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
--------------------------------------------------------------------------------
Wholly owned subsidiaries and majority owned ventures where the Company has
operating and financial control are consolidated. Those ventures where the
Company exercises significant influence, but does not exercise operating and
financial control are accounted for by the equity method. The Company had
certain majority-owned ventures that were accounted for by the equity method as
a result of minority shareholders possessing substantive participating rights
that prevented the Company from obtaining control of the ventures, but these
ventures were acquired by MCT Corp. ("MCT") in December 2000. All significant
inter-company accounts and transactions are eliminated upon consolidation.
The Company recognizes profits and losses in accordance with its underlying
ownership percentage or allocation percentage as specified in the agreements
with its partners; however, the Company recognizes 100% of the losses in
ventures and majority owned subsidiaries where the Company bears all of the
financial risk. When such ventures and subsidiaries become profitable, the
Company recognizes 100% of the profits until such time as the excess losses
previously recognized have been recovered. The results of operations of the
abandoned cellular ventures are excluded from GTI's results of operations from
August 31, 1999, the date of abandonment, through to disposition in December
2000.
Results of subsidiaries acquired and accounted for by the purchase method have
been included in operations from the relevant date of acquisition.
69
GTI ANNUAL REPORT 2002
FOREIGN CURRENCY TRANSLATION
--------------------------------------------------------------------------------
The Company's functional currency is the US dollar because the majority of its
revenues, costs, property and equipment purchased, and debt and trade
liabilities are either priced, incurred, payable or otherwise measured in US
dollars. Each of the legal entities domiciled in the CIS maintains its records
and prepares its financial statements in the local currency (principally either
Russian rubles or Ukrainian hryvna) in accordance with the requirements of
domestic accounting and tax legislation. The accompanying financial statements
differ from the financial statements used for statutory purposes in the CIS and
other non-US jurisdictions in that they reflect certain adjustments, recorded on
the entities' books, which are appropriate to present the financial position,
results of operations and cash flows in accordance with accounting principles
generally accepted in the United States of America ("US GAAP"). The principal
adjustments are related to revenue recognition, foreign currency translation,
deferred taxation, consolidation, and depreciation and valuation of property and
equipment and intangible assets.
The Company follows a translation policy in accordance with Statement of
Financial Accounting Standard ("SFAS") No 52, "Foreign Currency Translation,"
(as amended by SFAS No 130, "Reporting Comprehensive Income"). The temporal
method for translating assets and liabilities is used for translation of the
Company's legal entities domiciled in the CIS and other non-US jurisdictions.
Accordingly, monetary assets and liabilities are translated at current exchange
rates while non-monetary assets and liabilities are translated at their
historical rates. Income and expense accounts are translated at average monthly
rates of exchange. The resultant translation adjustments are included in the
operations of the subsidiaries and ventures Generally, the ruble is not
convertible outside of Russia. The official exchange rate which is established
by the Central Bank of Russia is a reasonable approximation of market rate. The
official exchange rates which are used for translation in the accompanying
financial statements were 30.14 and 31.78 rubles per US dollar as of December
31, 2001 and 2002, respectively.
All foreign currency gains and losses recognized in the operations of
consolidated subsidiaries are included in the Company's statement of operations
as "foreign currency losses." The Company's proportionate share of all foreign
currency gains and losses recognized in the operations of ventures accounted for
by the equity method of accounting are recognized in the Company's statement of
operations as "equity in earnings of ventures".
The translation of local currency denominated assets and liabilities into US
dollars for the purpose of these financial statements does not indicate that the
Company could realize or settle in US dollars the reported values of the assets
and liabilities. Likewise, it does not indicate that the Company could return or
distribute the reported US dollar value of capital to its shareholders.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
--------------------------------------------------------------------------------
The Company classifies cash on hand and deposits in banks, including commercial
paper, money market accounts, and any other investments with an original
maturity of three months or less from the date of purchase, that the Company may
hold from time to time, as cash and cash equivalents. Restricted cash is
primarily related to cash held in escrow at a financial institution for the
collateralization of debt obligations that certain of the Company's consolidated
subsidiaries and equity ventures have borrowed from such financial institution.
INVESTMENTS AVAILABLE FOR SALE
--------------------------------------------------------------------------------
The Company classifies its investments in debt securities, which do not qualify
as cash equivalents due to their extended maturities, as investments available
for sale. Investments available for sale consisted of money market instruments
such as certificates of deposit and commercial paper, and the contractual
maturity of the entire balance was less than one year at December 31, 2001.
Investments available for sale are stated at fair value which approximates cost
plus accrued interest income. Accordingly, there are no unrecognized gains or
losses as of December 31, 2001 and 2002.
70
FINANCIAL REVIEW
ACCOUNTS RECEIVABLE, NET
--------------------------------------------------------------------------------
Accounts receivable are shown at their net realizable value which approximates
their fair value.
INVENTORIES
--------------------------------------------------------------------------------
Inventories, which are classified as other current assets, are stated at the
lower of cost or market. Cost is computed on either a specific identification
basis or a weighted average basis.
PROPERTY AND EQUIPMENT
--------------------------------------------------------------------------------
Property and equipment is stated at cost. Depreciation is calculated on a
straight-line basis over the lesser of the estimated lives, ranging from five to
ten years for telecommunications equipment and three to five years for
furniture, fixtures and equipment and other property, or their contractual term.
Construction in process reflects amounts incurred for the configuration and
build-out of telecommunications equipment not yet placed into service.
Maintenance and repairs are charged to expense as incurred. The Company has
included in property and equipment, capitalized leases in the amount of $23.5
million at December 31, 2001 and 2002, with associated accumulated depreciation
of $2.6 million and $5.9 million as of December 31, 2001 and 2002, respectively.
Amortization of assets recorded under capital leases is included with
depreciation expense for the year ended December 31, 2001 and 2002.
GOODWILL AND INTANGIBLE ASSETS
--------------------------------------------------------------------------------
Goodwill represents the excess of acquisition costs over the fair value of the
net assets of acquired businesses, and was amortized on a straight-line basis
over its estimated useful life, five years until December 31, 2001. Intangible
assets, which are stated at cost, consists principally telecommunications
service contracts, licenses, software and content are amortized on a
straight-line basis over the lesser of their estimated useful lives, generally
five to seven years, or their contractual term. In accordance with Accounting
Principles Board ("APB") Opinion No 17, "Intangible Assets" and SFAS No. 142
"Goodwill and Other Intangible Assets", the Company continues to evaluate the
amortization period to determine whether events or circumstances warrant revised
amortization periods. Additionally, the Company considers whether the carrying
value of such assets should be reduced based on the future benefits of its
intangible assets.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations", and No. 142, "Goodwill and Other Intangible
Assets", effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests in accordance with
SFAS No. 142 Other intangible assets continue to be amortized over their useful
lives. Impairment losses that arise due to the initial application of this
standard are reported as a cumulative effect of a change in accounting
principle. The Company has adopted SFAS No. 141, "Business Combinations" which
was effective for business combinations consummated after June 30, 2001. The
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" on January
1, 2002 and discontinued amortization of goodwill as of such date.
The Company completed the transitional impairment test for existing goodwill as
of January 1, 2002 during the second quarter of 2002. Based on comparison of the
carrying amounts of the Company's reporting units with the fair values of the
reporting units, the Company determined that no goodwill was impaired as of that
date. Fair values of the reporting units were established using the discounted
cash flow method.
Upon the adoption of SFAS No. 142, the Company recorded a cumulative effect of a
change in accounting principle for negative goodwill (deferred credit) arising
on the Company's equity method investments in the amount of $1.0 million. The
impact of non-amortization of goodwill on the Company's net income for the
twelve months ended December 31, 2002 was approximately $15.0 million increase,
or $0.62 per share of common stock - basic. The Company also reclassified to
other intangible assets approximately $1.3 million previously classified as
goodwill. Amortization expense for goodwill for the twelve months ended December
31, 2001 was $13.8 million.
71
GTI ANNUAL REPORT 2002
Amortization expense for intangible assets for the twelve months ended December
31, 2002 was $6.4 million. Amortization expense for the succeeding five years is
expected to be as follows: 2003 - $10.2 million, 2004 - $9.2 million, 2005 -
$8.2 million, 2006 - $7.3 million, and 2007 - $6.4 million. The total gross
carrying value and accumulated amortization of the Company's intangible assets
by major intangible asset class is as follows:
AS OF DECEMBER 31, 2001 AS OF DECEMBER 31, 2002
------------------------ ------------------------
(IN THOUSANDS)
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
-------- ------------ -------- ------------
Amortized intangible assets:
Telecommunications service contracts .......... $ 29,956 $ (3,475) $ 48,022 $ (6,775)
Contract-based customer relationships ......... 3,867 (216) 8,322 (811)
Licenses ...................................... 2,854 (839) 3,167 (1,249)
Other intangible assets ....................... 9,360 (3,084) 10,872 (5,583)
-------- -------- -------- ---------
Total ......................................... $ 46,037 $ (7,614) $ 70,383 $ (14,418)
======== ======== ======== =========
Other intangible assets include software, Internet software and related content,
as well as other intangible assets.
The changes on the carrying amount of goodwill for the year ended December 31,
2002, are as follows:
DATA &
CLEC INTERNET
SEGMENT SEGMENT TOTAL
------- -------- --------
(IN THOUSANDS)
Balance as of December 31, 2001 .................... $15,589 $ 3,134 $ 18,723
Goodwill acquired during the year .................. 54,299 -- 54,299
Goodwill reclassified to intangible assets ......... -- (1,319) (1,319)
------- ------- --------
Balance as of December 31, 2002 .................... $69,888 $ 1,815 $ 71,703
======= ======= ========
The pro forma impact of the change in accounting method for goodwill on net loss
and net loss per share for the twelve months ended December 31, 2001 compared to
actual results for the twelve months ended December 31, 2002 is as follows:
72
FINANCIAL REVIEW
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2001 2002
--------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Reported net income (loss) ....................................... $ (39,005) $ 29,784
Goodwill amortization ............................................ 13,846 --
Negative goodwill amortization on equity investee ................ (243) --
--------- ---------
Adjusted net income (loss) ....................................... $ (25,402) $ 29,784
========= =========
Basic net income (loss) per share:
Reported net income (loss) ....................................... $ (1.65) $ 1.24
Goodwill amortization ............................................ 0.58 --
Negative goodwill amortization on equity investee ................ (0.01) --
--------- ---------
Adjusted net income (loss) per share ............................. $ (1.08) $ 1.24
========= =========
Diluted net income (loss) per share:
Reported net income (loss) ....................................... $ (1.65) $ 1.21
Goodwill amortization ............................................ 0.58 --
Negative goodwill amortization on equity investee ................ (0.01) --
--------- ---------
Adjusted net income (loss) per share ............................. $ (1.08) $ 1.21
========= =========
GOODWILL IMPAIRMENT ASSESSMENT
--------------------------------------------------------------------------------
Goodwill is reviewed annually for impairment or whenever it is determined that
impairment indicators exits. The Company determines whether an impairment has
occurred by assigning goodwill to the reporting units identified in accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets", and comparing the
carrying amount of the reporting unit to the fair value of the reporting unit.
If a goodwill impairment has occurred, the Company recognizes a loss for the
difference between the carrying amount and the implied fair value of goodwill.
LONG-LIVED ASSETS
--------------------------------------------------------------------------------
Long-lived assets to be held and used by the Company are reviewed to determine
whether an event or change in circumstances indicates that the carrying amount
of the asset may not be recoverable. For long-lived assets to be held and used,
the Company bases its evaluation on such impairment indicators as the nature of
the assets, the future economic benefit of the assets, any historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such impairment indicators are present or other
factors exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred through
the use of an undiscounted cash flows analysis of assets at the lowest level for
which identifiable cash flows exist. If impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the fair
value of the asset. The fair value of the asset is measured using discounted
cash flow analysis or other valuation techniques.
73
GTI ANNUAL REPORT 2002
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
for the disposal of a segment of a business (as previously defined in that
opinion). This statement also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
the statement became effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company adopted this new standard from
January 1, 2002. The adoption of the pronouncement did not have an effect on the
Company's results of operations or financial position.
INCOME TAXES
--------------------------------------------------------------------------------
The Company uses the liability method of accounting for income taxes. Deferred
income taxes result from temporary differences between the tax bases of assets
and liabilities and the bases 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 our partner requests that a dividend be paid, the amounts are not
expected to have a material impact on the Company's income tax liability. It is
not practical to determine the amount of unrecognized deferred tax liability for
such reinvested earnings.
REVENUE RECOGNITION
--------------------------------------------------------------------------------
The Company records as revenue the amount of telecommunications and Internet
services rendered, as measured primarily by the minutes of traffic processed,
after deducting an estimate of the traffic that are partial minutes and test
traffic which will be neither billed nor collected, and the time spent online.
Revenue from service contracts is accounted for when the services are provided.
Billings received in advance of service being performed are deferred and
recognized as revenue as the service is performed. Revenues are stated net of
any value-added taxes ("VAT") charged to customers. Certain other taxes that are
based on revenues earned were incurred at a rate of 4% during 2000 and 1% during
2001 and 2002, and have been included in operating expenses since these taxes
are incidental to the revenue cycle.
In accordance with the provisions of the Securities and Exchange Commission
Staff Accounting Bulletin No 101, the Company has deferred telecommunication
connection fees and capitalized direct incremental costs related to connection
fees, not exceeding the revenue deferred. The deferral of revenue and
capitalization of cost of revenue will be recognized over the estimated life of
the customer. The total amount of deferred revenue was $5.9 million and $11.3
million as of December 31, 2001 and 2002, respectively. The total amount of
deferred cost of revenue was $2.7 million and $4.4 million as of December 31,
2001 and 2002, respectively.
In the fourth quarter of 2002, the Company re-assessed the average life of the
customer and concluded that the average life of the customer increased from
three to five years except for GTU which remained at two years for customers in
the CLEC Services and Data and Internet Services Division's and eighteen months
for customers in the Mobile Services division. The impact of increasing the
average life of the customer from three to five years was approximately $0.7
million reduction in revenue and $0.4 million decrease in cost of revenue in the
fourth quarter of 2002. The impact of this change in customer life was $0.3
million reduction on net income and $0.01 per common share - basic for the year
ended December 31, 2002.
The Company recognizes revenue from equipment sales when title to the equipment
passes to the customer. The Company defers the revenue on installed equipment
until installation and testing are completed and accepted by the customer.
74
FINANCIAL REVIEW
ADVERTISING
--------------------------------------------------------------------------------
The Company expenses the cost of advertising as incurred. Advertising expenses
for the year ended December 31, 2000, 2001 and 2002 were $5.0 million, $4.6
million and $3.7 million, respectively.
NET INCOME (LOSS) PER SHARE
--------------------------------------------------------------------------------
The Company's net loss per share calculation (basic and diluted) at December 31,
2001 is based upon the Company's weighted average common shares outstanding.
There are no reconciling items in the numerator or denominator of the Company's
net loss per share calculation at December 31, 2001 and 2002. Warrants and stock
options have been excluded from the net loss per share calculation at December
31, 2001 because their effect would have been antidilutive.
Basic earnings per share at December 31, 2002 is computed on the basis of the
weighted average number of common shares outstanding. Diluted earnings per share
at December 31, 2002 is 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 in
2002 was 352,261 stock options.
The components of basic and diluted earnings per share were as follows:
TWELVE MONTHS ENDED
DECEMBER 31, 2002
-------------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Income before cumulative effect of a change in accounting principle .............. $ 28,810
========
Weighted average outstanding of:
Common stock shares .............................................................. 24,102
Dilutive effect of:
Employee stock options ........................................................... 415
--------
Common stock and common stock equivalents ........................................ 24,517
========
Earnings per share before cumulative effect of a change in accounting principle:
Basic .......................................................................... $ 1.20
========
Diluted ........................................................................ $ 1.17
========
GOVERNMENT PENSION FUNDS
--------------------------------------------------------------------------------
The Company contributes to the Russian and Ukrainian state pension funds and
social funds, on behalf of all its Russian and Ukrainian employees. In Russia,
starting from January 1, 2001 all social contributions (including contributions
to the Pension fund) were substituted with a unified social tax ("UST")
calculated by the application of a regressive rate from 35.6% to 5% to the
annual gross remuneration of each employee. The company allocates UST to three
social funds (including the Pension fund) where the rate of contributions to the
Pension fund vary from 28% to 5% respectively depending on the annual gross
salary of each employee. The contributions are expensed as incurred.
75
GTI ANNUAL REPORT 2002
FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------------------------
The carrying amounts for cash and cash equivalents, investments held for sale,
accounts receivable, accounts payable, accrued liabilities, and short-term debt
approximate their fair value. The fair value of debt to GTS was $6.5 million at
December 31, 2001 and was paid in May 2002. The fair value of notes receivable,
including the long-term portion was $9.1 million and $7.6 million at December
31, 2001 and 2002, respectively. The fair value of debt to Citibank approximates
the carrying value of $30.0 million at December 31, 2002. At December 31, 2002,
the Company held no debt at fixed rates.
COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
Comprehensive income is defined as the change in equity of a business enterprise
during a period from non-owner sources. For the years ended December 31, 2000,
2001 and 2002, comprehensive income for the Company is equal to net income
(loss).
OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
--------------------------------------------------------------------------------
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of cash, cash equivalents, investments held for
sale and accounts and notes receivable. Of the $37.4 million of cash and cash
equivalents and $9.0 million of investments available for sale held at December
31, 2001 and the $59.6 million of cash and cash equivalents held at December 31,
2002, $38.3 million and $45.8 million was held in US money market instruments in
US financial institutions at December 31, 2001 and 2002, respectively. The
remaining balance is being maintained in US-owned and, to a lesser extent, local
financial institutions within the CIS. The Company extends credit to various
customers, principally in Russia and Ukraine, and establishes an allowance for
doubtful accounts for specific customers that it determines to have significant
credit risk. The Company generally does not require collateral to extend credit
to its customers. In 2001, the Company granted an unsecured loan to a party in a
lease agreement, as disclosed in Note 6.
STOCK-BASED COMPENSATION
--------------------------------------------------------------------------------
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," for its Equity Participation Plan SFAS No. 123 establishes a fair
value method of accounting for employee stock options and similar equity
instruments. The fair value method requires compensation cost to be measured at
the grant date based on the value of the award and to be recognized over the
service period. SFAS No. 123 generally allows companies to either account for
stock-based compensation under the fair value method of SFAS No. 123 or under
the intrinsic value method of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees." The Company has elected to account
for its stock-based compensation in accordance with the provisions of APB No. 25
and present pro forma disclosures of results of operations as if the fair value
method had been adopted. The Company recognizes compensation expense for stock
options granted to employees of its equity method investees based on the fair
value of options, as determined using the Black-Sholes valuation model, over the
respective option vesting period.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB No. 28, "Interim Financial Reporting", to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earrings per share in annual and interim financial
statements. While the Statement does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB No. 25. SFAS No. 148 disclosure provisions are effective for years
ending after December 15, 2002.
76
FINANCIAL REVIEW
The Company has adopted the amendments to SFAS No. 123 disclosure provisions
required under SFAS No. 148 but will continue to use the intrinsic value method
under APB No. 25 to account for stock-based compensation. As such, the adoption
of SFAS No. 148 will not have a significant impact of the Company's consolidated
financial position or results of operations.
The Company applies the provisions of APB No. 25 in accounting for its stock
options incentive plans. The effect of applying SFAS No. 123 on the net income
(loss) as reported is not representative of the effects on reported net income
(loss) in future years due to the vesting period of the stock options and the
fair value of additional stock options in future years.
TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss), as reported ............................. $ (10,254) $ (39,005) $ 29,784
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects ................................. 8,432 8,278 7,937
---------- ---------- ----------
Pro forma net income (loss) ................................ $ (18,686) $ (47,283) $ 21,847
========== ========== ==========
Net income (loss) per share:
Basic - as reported ........................................ $ (0.43) $ (1.65) $ 1.24
Basic - pro forma .......................................... $ (0.78) (2.00) 0.91
Diluted - as reported ...................................... $ (0.43) (1.65) 1.21
Diluted - pro forma ........................................ $ (0.78) (2.00) 0.89
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
The preparation of these consolidated financial statements, in conformity with
US generally accepted accounting principles, requires management to make
estimates and assumptions that affect amounts in the financial statements and
accompanying notes and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
ASSET RETIREMENT OBLIGATIONS
--------------------------------------------------------------------------------
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement deals with the costs of closing facilities and
removing assets. SFAS No. 143 requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period it is incurred.
This cost is initially capitalized and amortized over the remaining life of the
asset.
Once the obligation is ultimately settled, any difference between the final cost
and the recorded liability is recognized as a gain or loss on disposition. SFAS
No. 143 is effective for years beginning after June 15, 2002. The adoption of
SFAS No. 143 will not have an impact on the Company's consolidated financial
position or results of operations.
RESCISSION AND AMENDMENTS OF CERTAIN FASB STATEMENTS
--------------------------------------------------------------------------------
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishments of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers."
77
GTI ANNUAL REPORT 2002
This statement amends SFAS No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-lease-back transactions.
This statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The provisions of this statement became effective for
financial statements issued on or after May 15, 2002. The Company adopted this
new standard from May 15, 2002. The adoption of the pronouncement did not have
an effect on the Company's results of operations or financial position.
EXIT OR DISPOSAL ACTIVITIES
--------------------------------------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred. This statement nullifies Emerging Issues Task Force No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring),"
which required that a liability for an exit cost be recognized upon the entity's
commitment to an exit plan. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The adoption of the
provisions of SFAS No. 146 is not expected to have a material impact on the
Company's results of operations, financial position or cash flow.
FINANCIAL GUARANTEES
--------------------------------------------------------------------------------
In November 2002, the FASB issued FASB Interpretation No. 45,"Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon
issuance of a guarantee, the guarantor must recognize a liability for the fair
value of the obligation it assumes under that guarantee. The disclosure
provisions of FIN 45 are effective for financial statements of annual periods
that end after December 15, 2002. The provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
--------------------------------------------------------------------------------
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN No. 46 defines the concept of "variable interests" and requires
existing unconsolidated variable interest entities to be consolidated into the
financial statements of their primary beneficiaries if the variable interest
entities do not effectively disperse risks among the parties involved. FIN No.
46 applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. If it is reasonably possible
that an enterprise will consolidate or disclose information about a variable
interest entity when FIN No. 46 becomes effective, the enterprise must disclose
information about those entities in all financial statements issued after
January 31, 2003. The interpretation may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years, with a
cumulative-effect adjustment as of the beginning of the first year restated. The
Company does not expect that the adoption of the provisions of FIN No. 46 will
have a material impact on the Company's future results of operations, financial
position or cash flow.
COMPARATIVE FIGURES
--------------------------------------------------------------------------------
Certain 2000 and 2001 amounts have been reclassified to conform to presentation
adopted in the current year.
NOTE 3: BUSINESS COMBINATIONS AND VENTURE TRANSACTIONS
The Company has continually increased its ownership interest in several of its
previously existing ventures by either buying all or part of the minority
shareholders' interest in these ventures. These transactions have enabled the
Company to consolidate certain ventures that were previously
78
FINANCIAL REVIEW
accounted for following the equity method of accounting. The Company has
executed these transactions by paying cash and has accounted for these
transactions under the purchase method of accounting, and as such, any purchase
price paid over net tangible and intangible assets acquired has been reflected
as goodwill, which was amortized on a straight-line basis for a period of five
years prior to December 31, 2001.
ACQUISITIONS IN 2000
--------------------------------------------------------------------------------
In February 2000, Golden Telecom Ukraine, a majority owned subsidiary, acquired
99% of Sovam Teleport Ukraine, including a 51% interest previously held by third
parties. Sovam Teleport Ukraine is a provider of data and Internet services to
Ukraine-based business. In March 2000, the Company acquired the assets of
Referat.ru and Absolute Games, two leading vertical Internet portals in the
education and computer gaming categories of the Russian Internet. In April 2000,
the Company acquired the assets of Fintek, a prominent Moscow-based Web design
studio and 51% of Commercial Information Networks ("KIS"), the largest Internet
service provider in Nizhny Novgorod. In September 2000, SFMT-Rusnet, Inc., a
wholly-owned subsidiary, acquired 25% of SA Telcom LLP, a telecommunications and
data services provider in Kazakhstan, bringing its ownership interest in this
company up to 100%. The combined purchase price was less than $3.0 million in
cash.
In October 2000, the Company acquired the assets of IT INFOART STARS
("InfoArt"), a leading horizontal Russian and English language Internet portal,
for approximately $8.3 million in cash. InfoArt provides Internet users with a
wide variety of content from leading Russian news agencies and publications.
In December 2000, the Company acquired Agama Limited ("Agama") that owns the
Agama family of web properties for approximately $13.1 million in cash and the
issuance of 399,872 shares of the Company's common stock valued at $3.8 million,
including 79,974 shares that were subject to a holdback and were placed in
escrow relating to personnel retention and payment of potential liability. These
shares were released from escrow in December 2001 The Agama family of Russian
web properties include Aport, Atrus ("@Rus"), and Omen.
The Company has executed the above transactions by paying cash and issuing
shares of the Company's common stock. These transactions have been accounted
under the purchase method of accounting, and as such, any purchase price paid
over net tangible and intangible assets acquired has been reflected as goodwill.
No adjustments have been made to the assets and liabilities acquired, since
their carrying values approximated their fair market values on the date of the
transactions.
In December 2000, the Company acquired an ownership interest in MCT in exchange
for the Company's 100% ownership of Vostok Mobile B.V., a Netherlands registered
private limited holding company that owned the Company's Russian mobile
operations. Initially, the Company acquired approximately 24% of the outstanding
common stock of MCT and the Company expected to be diluted to not less than 18%
as a result of equity offerings planned by MCT. As part of the transaction, the
Company also acquired $9.0 million of MCT debt convertible into equity
securities for cash, which was fully repaid in November 2001.
The Company accounted for the exchange of the subsidiary Vostok Mobile B.V for
an equity interest of approximately 24% in MCT at book value since the related
fair values were not readily determinable, accordingly, no gain or loss was
recognized on the exchange. Concurrent with the exchange of ownership interests,
certain assets and rights to certain obligations of the Company's Russian mobile
ventures were assigned to MCT. Prior to the transaction, the book value of the
Company's interest was adjusted for the effect of these concurrent transactions
and the remaining portion of the abandonment and restructuring reserve (see Note
15). At December 31, 2002, the Company's equity interest in MCT was
approximately 23%.
ACQUISITIONS IN 2001
--------------------------------------------------------------------------------
In June 2001, the Company acquired ISP ZAO Cityline ("Cityline"), 51% of ISP OOO
Uralrelcom ("Uralrelcom") and infrastructure company ZAO First
79
GTI ANNUAL REPORT 2002
Telecommunications Company ("PTK") for cash consideration of approximately $29.0
million, including $6.0 million that was held in escrow. At the time of
acquisition, local access capacity to be delivered by a third party to PTK was
not yet operational nor placed in service. The purchase and sale agreement
provided that until such capacity became fully operational, $6.0 million of
purchase consideration would be held in escrow. The Company's interim financial
statements reflected the preliminary purchase price allocation, principally
assigning such costs to intangible assets. In the fourth quarter of 2001, the
Company became aware that such original local access capacity would not become
available. As a result, the Company negotiated a full recovery of the funds held
in escrow and the Company received alternative local access capacity pursuant to
the original terms of the PTK third-party contract. Accordingly, as of December
31, 2001, the recovery of the funds held in escrow of $6.0 million was recorded
as a reduction in the carrying amount of the acquired intangible assets. In
addition, the Company incurred approximately $0.9 million in consulting fees
related to these investment transactions from an affiliate of Alfa, a
shareholder of the Company.
The following unaudited pro forma combined results of operations for the Company
give effect to the Cityline, Uralrelcom and PTK business combinations as if they
had occurred at the beginning of 2001, along with pro forma comparable results
for 2000. For the twelve months ended December 31, 2000 and 2001, pro forma
revenue would have been approximately $118.3 million and $142.9 million,
respectively. The pro forma net loss would have been approximately $11.9
million, or $0.49 per common share for the twelve months ended December 31, 2000
and approximately $40.9 million, or $1.73 per common share, for the twelve
months ended December 31, 2001. These 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.
In September 2001, the Company acquired 51% of ADS, a CLEC operating primarily
in Nizhny Novgorod, for cash consideration of approximately $2.9 million. The
impact of this acquisition on the operating results of the Company for 2000 and
2001, if presented on a pro-forma basis, would not have been material.
The following is a condensed balance sheet of ADS as of the acquisition date,
reflecting purchase price accounting adjustments to the net assets acquired:
SEPTEMBER 1, 2001
-----------------
(IN THOUSANDS)
ASSETS
Current assets ....................... $ 572
Property and equipment ............... 3,487
Goodwill ............................. 51
Intangible assets .................... 1,972
Other assets ......................... 117
-------
Total assets ........................... $ 6,199
LIABILITIES:
Current liabilities .................. $ 1,694
Non-current liabilities .............. 314
Minority interest .................... 1,294
-------
Net assets ............................. $ 2,897
-------
Total purchase consideration ........... $ 2,897
=======
80
FINANCIAL REVIEW
The results of operations of Cityline, Uralrelcom and PTK have been included in
the Company's consolidated operations since June 1, 2001. The results of
operations of ADS have been included in the Company's consolidated operations
since September 1, 2001.
ACQUISITIONS IN 2002
--------------------------------------------------------------------------------
In August 2002, the Company acquired approximately 31% of Golden Telecom
(Ukraine) ("GTU") for cash consideration of approximately $5.2 million,
including $3.7 million recorded as a liability, net of $0.3 million discount
(determined at the rate of 6.11%). The Company now owns 100% of GTU. The
acquisition was accounted for as a purchase business combination under US GAAP.
The Company's financial statements reflect the preliminary allocation of the
purchase price, and as such, the Company has recorded approximately $1.8 million
of contract-based customer relationship intangible assets that will be amortized
over a period of approximately 5 years. There was no goodwill recorded as a
result of this transaction.
In September 2002, subsidiaries of the Company completed the acquisition of 50%
of EDN Sovintel LLC ("Sovintel") that the Company did not own from Open Joint
Stock Company Rostelecom ("Rostelecom"), pursuant to an Ownership Interest
Purchase Agreement, dated March 13, 2002, by and among subsidiaries of the
Company and Rostelecom, bringing the Company's ownership in Sovintel to 100%.
The total purchase price of approximately $113.1 million consisted of
approximately $50.7 million in GTI's common stock, representing 4,024,067
shares, $10.0 million in cash consideration, $46.0 million in promissory note
consideration (see discussion below), and direct transaction costs of
approximately $7.1 million, including an investment banking fee of approximately
$3.3 million paid to an affiliate of Alfa Telecom Limited, a shareholder of the
Company. The value of the common stock which was issued on August 28, 2002 was
determined based on the closing price of the Company's common stock on September
3, 2002. The acquisition of the remaining 50% of Sovintel will further
strengthen the Company's position in the key Moscow and St Petersburg
communications markets, position the Company to realize future operating and
cost synergies, and allow GTI to offer a full suite of telecommunication
services across broad geographical markets in Russia and the CIS. Sovintel
provides worldwide communications services, principally to major hotels,
business offices and mobile communication companies through its
telecommunications network in Russia. The Company intends to use the assets of
Sovintel in the manner in which they were previously used The Company began
consolidating the results of operations of Sovintel on September 17, 2002.
In September 2002, TeleRoss LLC ("TeleRoss"), a wholly-owned Russian subsidiary
of the Company, issued a three month $46.0 million non-interest bearing note
payable to Rostelecom in partial settlement of the acquisition of the remaining
50% ownership interest in Sovintel previously held by Rostelecom. TeleRoss was
required to and settled the note, in full, in December 2002. This non-interest
bearing note payable was recorded net of $0.7 million discount representing
imputed interest.
The acquisition of the remaining 50% of Sovintel was accounted for as a purchase
business combination in accordance with US GAAP. As the transaction reflected
acquisition of the remaining 50% interest in Sovintel which was not previously
owned by the Company, the Company has recorded the net assets acquired at 50% of
estimated fair value and 50% of historical US GAAP carrying values. The
following is a condensed balance sheet of Sovintel as of the acquisition date,
reflecting purchase accounting adjustments to the net assets acquired:
81
GTI ANNUAL REPORT 2002
SEPTEMBER 17, 2002
------------------
(IN THOUSANDS)
ASSETS:
Current assets ......................................................................... $ 43,223
Property and equipment, net ............................................................ 64,124
Telecommunications service contracts intangible assets, net ............................ 14,742
Contract based customer relationship intangible assets, net ............................ 6,350
Licenses, net .......................................................................... 562
Other intangible assets, net ........................................................... 300
Goodwill ............................................................................... 54,262
Other assets ........................................................................... 11,114
----------
Total assets ........................................................................... $ 194,677
LIABILITIES:
Current liabilities .................................................................... $ 23,774
Non-current liabilities ................................................................ 8,514
----------
Net assets ............................................................................. $ 162,389
Less: previous carrying value of the Company's equity method investment in Sovintel .... (49,283)
----------
Total purchase consideration and acquisition costs ..................................... $ 113,106
==========
Consideration and acquisition costs:
Cash consideration ..................................................................... $ 10,000
Promissory note consideration, net of discount ......................................... 45,307
GTI shares consideration ............................................................... 50,663
Direct transaction costs ............................................................... 7,136
----------
Total purchase consideration and acquisition costs ....................................... $ 113,106
==========
The Company's financial statements reflect the allocation of the purchase price
to assets acquired and liabilities assumed based on their fair values, and as
such, the Company has assigned approximately $14.7 million to telecommunications
service contracts intangible assets which will be amortized over a weighted
average of approximately 9 years, approximately $6.4 million to contract based
customer relationship intangible assets which will amortized over a weighted
average of approximately 5 years, approximately $0.6 million to licenses which
will be amortized over a weighted average of 5 years, and approximately $0.3
million to other identified intangible assets which will amortized over 5 years.
Property and equipment was adjusted to fair value using a net current
replacement cost valuation method. The excess purchase price over the fair value
of the net tangible and intangible assets acquired of approximately $54.3
million has been assigned to goodwill and is not deductible for tax purposes.
This goodwill has been assigned to the CLEC Services business 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 the remaining 50% of Sovintel.
The goodwill will be tested for impairment at least annually.
The following unaudited pro forma combined results of operations for the Company
give effect to the Sovintel business combination as if it had occurred at the
beginning of 2001 and 2002. These 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.
82
FINANCIAL REVIEW
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2001 2002
---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue ............................................................................. $ 239,128 $ 286,998
Income (loss) before cumulative effect of a change in accounting principle .......... (30,688) 36,587
Cumulative effect of a change in accounting principle ............................... -- 974
---------- ----------
Net income (loss) ................................................................... $ (30,688) $ 37,561
========== ==========
Basic earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change in accounting principle ........ $ (1.11) $ 1.36
Cumulative effect of a change in accounting principle ............................. -- 0.04
---------- ----------
Net income (loss) per share - basic ............................................... $ (1.11) $ 1.40
========== ==========
Weighted average common shares - basic .............................................. 27,629 26,748
========== ==========
Diluted earnings (loss) per share of common stock:
Income (loss) before cumulative effect of a change in accounting principle ........ $ (1.11) $ 1.34
Cumulative effect of a change in accounting principle ............................. -- 0.04
---------- ----------
Net income (loss) per share - diluted ............................................. $ (1.11) $ 1.38
========== ==========
Weighted average common shares - diluted ............................................ 27,629 27,163
========== ==========
NOTE 4: INVESTMENTS IN AND ADVANCE TO VENTURES
--------------------------------------------------------------------------------
The Company has various investments in ventures that are accounted for by the
equity method. The Company's ownership percentages in its equity method
investments, in the periods shown, range from approximately 23% to 50%.
The components of the Company's investments in and advances to ventures are as
follows:
DECEMBER 31,
------------------------
2001 2002
---------- ----------
(IN THOUSANDS)
Equity in net assets acquired ................................................................. $ 12,348 $ 12,348
Excess of equity in net assets acquired over investment cost net of amortization of $243 at
December 31, 2001 ............................................................................. (974) --
Accumulated earnings recognized, net of losses ................................................ 40,139 44,954
Dividends ..................................................................................... (4,477) (4,532)
Cash advances and other ....................................................................... (1,055) (11,663)
Effects of consolidating equity method companies .............................................. -- (40,386)
---------- ----------
Total investments in and advances to ventures ............................................... $ 45,981 $ 721
========== ==========
83
GTI ANNUAL REPORT 2002
The Company has financed the operating and investing cash flow requirements of
several of the Company's ventures in the form of cash advances. The Company
aggregates all of the receivable and payable balances with the ventures in the
Company's investments in and cash advances to the ventures.
The changes in the investments in and advances to ventures are as follows:
DECEMBER 31,
------------------------
2001 2002
---------- ----------
(IN THOUSANDS)
Balance, at beginning of period ..................................................... $ 49,629 $ 45,981
Equity in net assets acquired ..................................................... 715 --
Dividends ......................................................................... (2,024) (55)
Convertible loan to MCT ........................................................... (9,000) --
Cash advances (repayments) and other .............................................. (768) (10,608)
Effect of consolidating equity method investees ................................... (1,277) (40,386)
---------- ----------
(12,354) (51,049)
Equity ownership in earnings ...................................................... 7,256 4,815
Cumulative effect of change in accounting principle ............................... -- 974
Excess gains (losses) recognized over amount attributable to ownership interest ... 213 --
Interest income on advances ....................................................... 994 --
Amortization of excess of equity in net assets acquired over investment cost ...... 243 --
---------- ----------
Balance, at end of period ........................................................... $ 45,981 $ 721
========== ==========
For all periods presented through December 31, 2002, the significant investments
accounted for under the equity method and the percentage interest owned consist
of the following:
EQUITY METHOD ENTITIES
--------------------------------------------------
PERIOD OWNERSHIP
------ ---------
EDN Sovintel Through September 16, 2002 50%
Other TeleRoss Ventures All 50%
TeleRoss Nizhny Novgorod Through August 2001 50%
TeleRoss Ufa Through March 2001 50%
TeleRoss Arkhangelsk Through December 2000 50%-100%
TeleRoss Komi Through December 2000 50%-75%
TeleRoss Khabarovsk Through December 2000 50%-100%
TeleRoss Samara Through June 2002 50%
Vostok Mobile Ventures Through December 2000 50%-70%
MCT Corp From December 2000 22%-24%
TeleRoss Nizhny Novgorod, TeleRoss Ufa, TeleRoss Arkhangelsk, TeleRoss Komi,
TeleRoss Khabarovsk, TeleRoss Samara and EDN Sovintel are all accounted for
using the consolidation method subsequent to the dates indicated above.
84
FINANCIAL REVIEW
The following table presents summarized income statement and balance sheet
information from the Company's significant equity investee, Sovintel, for the
year ended December 31, 2001 and the period January 1, 2002 to September 16,
2002. Effective September 17, 2002, the company began consolidating the results
of operations of Sovintel as a result of the acquisition of the 50% interest not
controlled previously.
PERIOD FROM
YEAR ENDED JANUARY 1 TO
DECEMBER 31, SEPTEMBER 16,
2001 2002
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue ................. $ 115,706 $ 101,261
Gross margin ............ 51,797 45,248
Operating income ........ 29,747 25,875
Net income .............. 22,211 19,115
Current assets .......... 45,319 --
Total assets ............ 108,513 --
Current liabilities ..... 21,893 --
Total liabilities ....... 25,065 --
Net assets .............. 83,448 --
The Company's equity investee, MCT, is in default on a loan note that originally
became due on September 29, 2001. In December 2001, MCT signed a forbearance
agreement whereby the holder of the note agreed to forbear from selling the note
or exercising its rights under the original debt agreements and to extend the
terms of repayment until January 31, 2002. MCT did not make payment on the note
prior to January 31, 2002 and during April 2002 the holder of the loan note
foreclosed on the collateral related to the note and subsequently sold it to a
third-party, resulting in a substantial loss to MCT. The Company recognized the
corresponding amount of the Company's equity in MCT's losses during the second
quarter of 2002, not exceeding the carrying value of the Company's investment in
MCT. Total equity in losses recognized by the Company related to our MCT
investment were $3.9 million and $5.1 million for the years ended December 31,
2001 and 2002, respectively. The Company has no further commitments to provide
financial support to MCT.
85
GTI ANNUAL REPORT 2002
NOTE 5: SUPPLEMENTAL BALANCE SHEET INFORMATION
DECEMBER 31,
-------------------------
2001 2002
---------- ----------
(IN THOUSANDS)
Other current assets consist of:
Inventory ........................................... $ 1,779 $ 3,401
Notes receivable .................................... 1,786 1,840
Other current assets ................................ 4,973 4,872
---------- ----------
Total other current assets .......................... $ 8,538 $ 10,113
========== ==========
Other non-current assets consist of:
Notes receivable .................................... $ 7,422 $ 5,582
Other non-current assets ............................ 3,141 6,749
---------- ----------
Total other non-current assets ...................... $ 10,563 $ 12,331
========== ==========
Accounts payable and accrued expenses consists of:
Accounts payable .................................... $ 11,743 $ 31,841
Interest payable .................................... 472 58
Accrued compensation ................................ 2,231 1,643
Accrued other taxes ................................. 4,273 5,474
Accrued access and network services ................. 2,958 3,031
Other accrued expenses .............................. 5,650 6,221
---------- ----------
Total accounts payable and accrued expenses ......... $ 27,327 $ 48,268
========== ==========
Other current liabilities consists of:
Liabilities to GTS .................................. $ 5,470 $ 2,904
Other current liabilities ........................... 1,707 3,076
---------- ----------
Total other current liabilities ..................... $ 7,177 $ 5,980
========== ==========
86
FINANCIAL REVIEW
NOTE 6: DEBT OBLIGATIONS AND CAPITAL LEASES
Company debt consists of:
DECEMBER 31,
-------------------------
2001 2002
---------- ----------
(IN THOUSANDS)
Citibank General Credit Agreement ...... $ 2,225 $ 550
Citibank Credit Facility ............... -- 30,000
Motorola Equipment Agreement ........... 2,181 849
Note payable to GTS .................... 6,250 --
Siemens Loan Agreement ................. 2,550 1,700
---------- ----------
13,206 33,099
Less: debt maturing within one year .... 9,869 8,988
---------- ----------
Total long-term debt ................. $ 3,337 $ 24,111
========== ==========
Aggregate maturities of debt, as of December 31, 2002, are as follows: 2003 -
$9.0 million, 2004 - $23.6 million, 2005 - none, 2006 - $0.2 million, 2007 -
$0.3 million, and thereafter - none.
The Company paid interest of $2.9 million, $2.2 million and $4.8 million in
2000, 2001, and 2002, respectively.
Some of the Company's operating companies have received debt financing through
direct loans from affiliated companies. In addition, certain operating companies
have borrowed funds under a $22.7 million back-to-back, seven-year credit
facility from a Russian subsidiary of Citibank. Under this facility, the Company
provides full cash collateral, held in London and recorded on our balance sheet
as restricted cash, for onshore loans made by the bank to the Company's Russian
registered joint ventures. In a second, similar facility, the Company provides
full cash collateral for a $10.0 million short term back-to-back, revolving,
credit facility from the same bank for two of the Company's larger Russian
operating companies. The funding level as of December 31, 2002 for all these
facilities totaled $1.4 million, of which $0.6 million was funded to the
Company's consolidated subsidiaries and $0.8 million was funded to the Company's
affiliates. The loan facilities carry interest at a rate equal to the
three-month London Inter-Bank Offering Rate ("LIBOR") plus 1.0 percent per annum
(equivalent to approximately 3.39%, on average for loans outstanding, at
December 31, 2002) and mature between December 2006 and January 2007.
In June 1996, Golden Telecom (Ukraine) entered into an agreement with Motorola
Corporation (the "Motorola equipment agreement") whereby Golden Telecom
(Ukraine) could purchase up to $20.0 million of certain equipment from Motorola.
Through December 31, 2002, the Company had purchased $13.7 million of equipment
under this agreement. Golden Telecom (Ukraine) is required to make 15 semiannual
payments plus accrued interest beginning six months after completion of
installation of such equipment, starting on June 25, 1997. Amounts outstanding
under this agreement totaled $0.8 million at December 31, 2002. The agreement
carries interest at a rate equal to the USD LIBOR rate plus 3.0 percent per
annum (equivalent to 5.40% at December 31, 2002). Amounts outstanding under the
agreement have been covered by the GTS Parent Guarantee. At present, the GTS
Parent Guarantee is being transferred to GTI.
87
GTI ANNUAL REPORT 2002
In October 2000, Golden Telecom (Ukraine) entered into a four year supplier loan
agreement with Siemens AG (the "Siemens Loan Agreement") whereby Siemens AG
provided to Golden Telecom (Ukraine) a loan of $3.4 million for the purchase
from Siemens AG of network equipment and services for use in the GSM 1800
network in Odessa, Ukraine, deployed in the third quarter of 2000. In accordance
with the terms of the Siemens Loan Agreement, Golden Telecom (Ukraine) is
required to make eight semiannual payments plus accrued interest beginning May
15, 2001. Principal outstanding under this agreement totaled $1.7 million at
December 31, 2002. The agreement carries interest at a rate equal to the six
month USD LIBOR plus 4.9% (equivalent to 6.96% at December 31, 2002). The
Siemens Loan Agreement became effective with the execution of a payment
guarantee by Golden Telecom, Inc.
The sale by GTS of approximately 12.2 million, or approximately 50%, of the
Company's common stock, in May 2001, triggered an acceleration of $6.0 million,
including accrued interest, of our long-term debt, under change of control
provisions in promissory notes. In July 2001, this long-term debt was paid to
the vendor of telecommunications equipment in full in final settlement of the
Vendor Settlement Agreement. As part of the GTS transaction, an additional $6.3
million of pre-existing long-term debt due from GTI to GTS became payable in May
2002. The long-term debt, plus accrued interest was paid to GTS in May 2002. For
other third party debt agreements, held at the subsidiary level, the lenders
have agreed that this transaction will not affect the terms of those agreements,
other than transfer of guarantees.
In the first quarter of 2000, the Company entered into a lease for fiber
capacity, including facilities and maintenance, from Moscow to Stockholm. The
lease has a term of ten years with an option to renew for an additional five
years. Prepayments were made to the lessor in April 2000, August 2000 and
February 2001. These prepayments have been offset in the balance sheet against
the capital lease obligation.
In September 2001, the Company entered into a five year lease for the right to
use up to VC-3 fiber optic capacity on major routes within Russia to support the
increase in the Company's interregional traffic and regional expansion strategy.
The lease is classified as a capital lease in the balance sheet. In December
2001, GTI issued a $9.1 million loan to the same company that has provided the
lease. The loan has payment terms of 56 months, which started in January 2002,
and carries interest at the rate of 7 percent per annum. The following table
presents minimum lease payments under the capital lease:
LEASE PAYMENTS
--------------
(IN THOUSANDS)
2003 .............................. $ 2,388
2004 .............................. 2,388
2005 .............................. 2,388
2006 .............................. 1,592
--------------
8,756
Less: interest .................... 1,360
--------------
Total principal payments ........ $ 7,396
==============
88
FINANCIAL REVIEW
In September 2002, ROL Holdings Limited ("ROLH"), a wholly-owned Cypriot
subsidiary of the Company, entered into a secured $30.0 million credit facility
with ZAO Citibank ("Citibank Credit Facility"). ROLH drew upon the Citibank
Credit Facility in the fourth quarter of 2002 to fund the repayment of $30.0
million of the $46.0 million non-interest bearing promissory note issued to
Rostelecom by TeleRoss in connection with the acquisition of the remaining 50%
ownership interest in Sovintel previously held by Rostelecom. ROLH is required
to make four quarterly payments of $7.5 million each plus accrued interest
beginning December 2003. The Citibank Credit facility carries interest at a rate
equal to the three month USD LIBOR plus 4.35% (equivalent to 5.75% at December
31, 2002). At the drawdown of the Citibank Credit Facility, GTI and certain
affiliates executed a number of agreements to secure repayment of the Citibank
Credit Facility, including a payment guarantee from GTI and Sovintel, pledge of
the 50% ownership interest in Sovintel the Company owned prior to the purchase
of the remaining 50% ownership interest in Sovintel, pledge of a 58% ownership
interest in TeleRoss, commitments of TeleRoss to route at least 90% of TeleRoss'
cash flows via accounts at ZAO Citibank, commitments of Sovintel to route at
least 60% of Sovintel's cash flows via accounts at ZAO Citibank, and assignment
of accounts receivable by TeleRoss and Sovintel. Among other covenants, the
Citibank Credit Facility contains certain financial covenants including limits
on capital expenditures, limits on investments, and limits on leverage and debt
service coverage.
NOTE 7: SHAREHOLDERS' EQUITY
COMMON STOCK
--------------------------------------------------------------------------------
On September 30, 1999, the Company issued 420,000 shares of $0.01 par common
stock to an affiliate of ING Barings as partial consideration for its ownership
interest in GTS-Ukrainian TeleSystems LLC. In accordance with the subscription
agreement filed with the SEC at the time of the Company's Initial Public
Offering, an additional 30,000 shares of the Company's common stock were issued
on March 1, 2000 to an affiliate of ING Baring's in full and final settlement
for its ownership interest in Golden Telecom Ukraine.
On May 17, 2000, the Company's shareholders approved an increased Company's
authorized common stock from 50 million to 100 million shares.
On June 30, 2000, the Company filed a Registration Statement on Form S-1 with
the SEC to register 2,145,633 shares of Common Stock held by Capital
International Global Emerging Markets Private Equity Fund, L.P and affiliates
of ING Barings.
In May 2001, GTS completed the transaction contemplated by the Share Purchase
Agreement (the "Share Purchase Agreement"), entered into in April 2001 with
Alfa, Capital, and Baring Vostok, (collectively, the "Purchasers") with respect
to the sale to the Purchasers by GTS of approximately 12.2 million shares of
common stock, par value $0.01 per share of GTI. The aggregate purchase price
paid by the Purchasers for the common stock was $125.0 million. In addition, as
specified in the Share Purchase Agreement, at the time of the consummation of
the sale and purchase, the Purchasers entered into separate stock option
agreements with GTS which gave the Purchasers an option to purchase up to
approximately 2.3 million of the remaining approximately 2.9 million shares of
common stock beneficially owned by GTS at the purchase price of $11.00 per share
during the 60-day period after the closing of the transaction. In addition, if
certain other conditions are met, during the twelve-month period after the
closing, the Purchasers had an option to purchase the remaining shares of common
stock beneficially owned by GTS at a purchase price equal to the greater of
$11.00 per share or 120% of the average closing share price for the 60-day
period preceding the purchase date. As part of the transaction, the Purchasers
and the Company entered into a Standstill Agreement and a Shareholders
Agreement. Generally, the Standstill Agreement provides that for a period of two
years from the date of closing the transaction, neither Alfa nor GTS may acquire
over 49% of GTI's outstanding stock. The Shareholder Agreement includes a voting
arrangement between the Purchasers for the election of certain nominees to the
Company's Board of Directors, among other provisions.
89
GTI ANNUAL REPORT 2002
In July 2001, the Company completed a buy-back of $25.0 million, or
approximately 2.3 million shares, of the Company's common stock at $11.00 per
share, from a subsidiary of GTS. After this sale, GTS continued to own
approximately 0.6 million shares, or approximately 2.6 percent, of GTI's
outstanding common stock. To effect the buy-back, GTI acted as designated
purchaser and exercised the options held by Alfa, Capital, and Baring Vostok to
acquire GTI common stock for $11.00 per share from GTS. In October 2001, GTS
sold the remaining approximately 0.6 million shares of GTI's common stock
Accordingly, GTS is no longer an affiliate of the Company. In the fourth quarter
of 2002, the Company retired the approximately 2.3 million of the Company's
common stock held in treasury.
In September 1999, the Company issued certain warrants to a vendor of
telecommunications equipment as part of a Settlement Agreement to debt
restructuring. The terms of the warrants allowed the vendor to purchase 126,050
shares of the GTI's common stock at an exercise price of $0.10 per share. In
December 2001, the vendor exercised the warrants in a cashless transaction and
received 125,040 shares of GTI's common stock.
In March 2001, 141,961 restricted shares of the Company's common stock were
issued to senior management and employees to be held in escrow by the Company.
The restricted shares were issued in accordance with restricted stock agreements
dated October 1, 1999 concluded as part of the Company's IPO and were held in
escrow by the Company until such restriction lapsed on October 1, 2001.
In August 2002, the Company issued 4,024,067 shares of common stock to
Rostelecom in partial settlement of the purchase price for the acquisition of
the remaining 50% ownership interest in Sovintel, previously held by Rostelecom.
The Company's outstanding shares of common stock increased by 43,100 shares and
479,977 shares in the twelve months ended December 31, 2001 and 2002,
respectively issued in connection with the exercise of employee stock options.
The Company has reserved 3,654,962 shares of common stock for issuance to
certain employees and directors in connection with the 1999 Equity Participation
Plan.
PREFERRED STOCK
--------------------------------------------------------------------------------
On May 17, 2000, the Company's shareholders authorized the creation of 10
million shares of preferred stock, none of which have been issued.
NOTE 8: STOCK OPTION PLANS
Prior to the formation of the Company, certain employees participated in one or
more of the stock option plans of GTS. At the time of the IPO certain employees
that had been granted GTS options that would vest during the year 2000,
surrendered those options and received restricted shares in Golden Telecom,
Inc., which vested on the second anniversary of the IPO. The maximum number of
restricted shares to be issued under this arrangement was 141,961. The total
cost of this restricted share program to the Company was $1.7 million (grant
date fair value) of which $0.9 million and $0.6 million was recorded in the
years ended December 31, 2000 and 2001, respectively.
The Company has established the 1999 Equity Participation Plan of Golden
Telecom, Inc., (the "Option Plan"). The Company has granted and intends to offer
stock options to key employees, members of the Board of Directors of the
Company, and employees of its equity method investees. No charge to operations
is expected to result from options issued under this plan except for options
issued to the employees of equity method investees. The Company recognized $0.3
million and $0.5 million in compensation expense in the years ended December 31,
2001 and 2002, respectively in connection with options granted to employees of
the Company's equity investees. The Company's sole shareholder, at that time,
and the board of directors approved the Option Plan on September 30, 1999. The
plan was ratified at the annual meeting of shareholders May 17, 2000. Under the
Option Plan not more than 4,023,551 shares of common stock (subject to
anti-dilution and other adjustment provisions)
90
FINANCIAL REVIEW
were authorized for issuance upon exercise of options or upon vesting of
restricted or deferred stock awards. On July 17, 2000, the Company filed with
the SEC a registration Statement on Form S-8 to register the 4,023,551 Common
Shares available under the Option Plan. Options granted under the Option Plan
vest over a three-year term from the date of grant with one-third vesting after
one year and one thirty-sixth vesting each month thereafter and expire ten years
from the date of grant.
When the Option Plan was adopted, the number of shares available for issuance
under the Option Plan was calculated as 15% of the issued and outstanding shares
on a fully diluted basis. In March 2001, the Compensation Committee of the Board
of Directors approved an increase in shares available for issuance under the
Equity Plan from 4,023,551 to 4,320,000 in order to preserve the 15% ratio
referenced above. The decision of the Compensation Committee of the Board of
Directors was ratified by GTI shareholders on June 26, 2001.
In March 2001, in connection with the finalization of the MCT Corp ("MCT")
transaction, the Compensation Committee of the Board of Directors adopted a
resolution providing that the Stock Option Award Agreements executed by the
Company and certain terminated employees shall be amended to provide that the
term of the options held by the employees that transferred from GTI to MCT shall
be extended from ninety days after the employees termination date to one year
after the termination date of the employees or until their termination date with
MCT, whichever occurs earlier. The fair value of the options for employees
transferred to MCT was not material at the date of modification. In April 2001,
in accordance with the Equity Plan, the Compensation Committee of the Board of
Directors adopted a resolution whereby the Stock Option Award Agreements issued
by the Company to employees were amended to provide that the term of the options
held by the employees shall be extended from ninety days after the employees
termination date to eighteen months after the termination date. No expense was
recognized as a result of this modification since the intrinsic value of the
outstanding options was zero on the measurement date.
The Company applies the provisions of APB No. 25 in accounting for its stock
options incentive plans. The effect of applying SFAS No. 123 on the net income
(loss) as reported is not representative of the effects on reported net income
(loss) in future years due to the vesting period of the stock options and the
fair value of additional stock options in future years.
TWELVE MONTHS ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss), as reported ............................................ $ (10,254) $ (39,005) $ 29,784
Deduct: total stock-based employee compensation
expense determined under fair value based method for all awards, net
of related tax effects .................................................. 8,432 8,278 7,937
---------- ---------- ----------
Pro forma net income (loss) ............................................... $ (18,686) $ (47,283) $ 21,847
========== ========== ==========
Net income (loss) per share:
Basic - as reported ..................................................... $ (0.43) $ (1.65) $ 1.24
Basic - pro forma ....................................................... $ (0.78) (2.00) 0.91
Diluted - as reported ................................................... $ (0.43) (1.65) 1.21
Diluted - pro forma ..................................................... $ (0.78) (2.00) 0.89
91
GTI ANNUAL REPORT 2002
The fair value of options granted under the GTI Option Plan in 2001 and 2002 are
estimated to be between $7.31 and $8.89, and $8.77 per common share,
respectively, on the date of grant using the Black Scholes option pricing model
with the following assumptions:
TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
2001 2002
---------- ----------
Risk free .............................. 4.84% 4.71%
Dividend yield ......................... 0.0% 0.0%
Expected life (years) .................. 3.0 3.0
Volatility ............................. 125% 123%
Additional information with respect to stock options activity is summarized as
follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2002
-------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ---------- ----------
Outstanding at beginning of year ....... 3,371,694 $ 13.06 3,241,906 $ 12.75
Options granted ........................ 321,000 11.97 125,000 12.00
Options exercised ...................... (43,100) 12.00 (479,977) 12.14
Options expired ........................ (38,536) 12.85 (12,438) 13.00
Options forfeited ...................... (369,152) 14.95 (217,418) 13.66
---------- ----------
Outstanding at end of year ............. 3,241,906 12.75 2,657,073 12.75
========== ==========
Options exercisable at end of year ..... 2,113,509 $ 12.52 2,230,147 $ 12.72
The following table summarizes information about stock options outstanding:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
EXERCISE PRICES NUMBER LIFE EXERCISE NUMBER EXERCISE
AT DECEMBER 31, 2002: OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
--------------------- ----------- ----------- -------- ----------- --------
$ 9.88 2,500 0.1 $ 9.88 2,500 $ 9.88
12.00 2,212,482 5.6 12.00 1,887,812 12.00
15.63 412,925 6.5 15.63 312,058 15.63
19.88 10,000 0.1 19.88 10,000 19.88
33.25 to 36.00 19,166 4.2 34.57 17,777 34.67
92
FINANCIAL REVIEW
NOTE 9: EMPLOYEE BENEFIT PLAN
Prior to the formation of the Company, certain employees participated in the GTS
401(k) retirement savings plan (the "GTS Savings Plan") covering all US citizen
employees. The Company's expense under the GTS Savings Plan for the Company's
employees was approximately $0.04 million for the year ended December 31, 2000.
Neither GTS nor the Company made any discretionary (non-matching) contributions
for the year ended December 31, 2000.
In November 2001, the Company implemented a 401(k) retirement savings plan (the
"GTI Savings Plan") covering all U.S citizen employees. The Savings Plan
qualifies under section 401(k) of the Internal Revenue Code and as such,
participants may defer pretax income in accordance with federal income tax
limitations. The Company provides a 50% matching contribution on the amount
contributed by the employees. Both the matching and non-matching contributions
by the Company vest after three years of service. The Company's expense under
the GTI Savings Plan was approximately $0.1 million and $0.05 million for the
year ended December 31, 2001 and 2002, respectively.
NOTE 10: INCOME TAXES
The Company accounts for income taxes using the liability method required by
FASB Statement No 109 "Accounting for Income Taxes".
The components of income (loss) before income taxes and minority interest were
as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS)
Pretax income (loss):
Domestic ..................... $ (2,853) $ (16,121) $ 5,823
Foreign ...................... (5,980) (20,865) 28,141
---------- ---------- ----------
$ (8,833) $ (36,986) $ 33,964
========== ========== ==========
The following is the Company's significant components of the provision for
income taxes attributable to continuing operations:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS)
Domestic - current ........... $ 142 $ 193 $ 16
Foreign - current ............ 848 3,365 8,824
Foreign - deferred ........... -- (1,656) (4,213)
---------- ---------- ----------
$ 990 $ 1,902 $ 4,627
========== ========== ==========
The Company paid income taxes of $1.1 million, $2.7 million and $8.5 million
2000, 2001 and 2002, respectively.
93
GTI ANNUAL REPORT 2002
United States ("US") taxable income or losses recorded are reported on the
Company's consolidated US income tax return. The Company was allocated its
proportionate share, $23.6 million, of GTS' US net operating loss carry-forwards
in 1999. A valuation allowance has been established by the Company for the
associated deferred tax asset, due to management's estimate of the future
benefits of these amounts that are not likely to be realized. Accordingly, there
was no impact in the accompanying financial statements.
As of December 31, 2002, the Company had net operating loss carry-forwards for
US federal income tax purposes of approximately $11.4 million expiring in fiscal
years 2010 through 2019. Because of the "change in ownership" provisions of the
Tax Reform Act of 1986, the utilization of the Company's net operating loss
carry-forwards are limited to a maximum of $7.5 million per year on a cumulative
basis. As a result, $11.4 million of cumulative net operating losses are
available for use during 2003.
The reconciliation of the US statutory federal tax rate of 35.0% to the
Company's effective tax rate is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 2001 2002
-------- -------- --------
Tax benefit (expense) at US statutory rates ...... 35.0% 35.0% (35.0)%
Non-deductible expenses:
Amortization ................................... (59.8) (11.4) (0.7)
Equity in (losses) earnings .................... (1.1) 7.7 5.8
Foreign exchange differences ..................... (1.6) (0.6) (1.2)
Different foreign tax rates ...................... 1.7 (15.6) 7.7
Change in valuation allowance .................... 35.4 (2.2) 15.1
Other permanent differences ...................... (20.8) (18.1) (5.3)
-------- -------- --------
Tax expense ...................................... (11.2)% (5.2)% (13.6)%
======== ======== ========
Deferred tax assets and liabilities are recorded based on temporary differences
between book bases of assets and liabilities and their bases for income tax
purposes. The following table summarizes major components of the Company's
deferred tax assets and liabilities:
DECEMBER 31,
--------------------------
2001 2002
---------- ----------
(IN THOUSANDS)
Deferred Tax Assets:
Net operating loss carry-forwards ......... $ 8,775 $ 7,534
Accrued expenses .......................... 2,145 2,035
Deferred revenue .......................... 2,110 3,440
Fixed assets .............................. 6,732 4,386
Other deferred tax assets ................. 521 1,312
Valuation allowance ....................... (14,495) (9,380)
---------- ----------
Total deferred tax asset .................... $ 5,788 $ 9,328
========== ==========
94
FINANCIAL REVIEW
Deferred Tax Liabilities:
Accrued revenue ........................... $ 816 $ 756
Deferred expenses ......................... 788 1,575
Intangible assets ......................... 6,527 10,846
Other deferred tax liabilities ............ 2,599 2,916
---------- ----------
Total deferred tax liability ................ $ 10,730 $ 16,093
========== ==========
Net deferred tax asset/liability ............ $ (4,942) $ (6,765)
========== ==========
The following table presents the Company's deferred tax assets and liabilities
as of December 31, 2001 and 2002 attributable to different tax paying components
in different tax jurisdictions:
DECEMBER 31,
--------------------------
2001 2002
---------- ----------
(IN THOUSANDS)
Deferred Tax Assets:
US tax component .......................... $ 7,754 $ 4,102
Foreign tax component ..................... 12,529 14,606
Valuation allowance ....................... (14,495) (9,380)
---------- ----------
Total deferred tax asset .................... $ 5,788 $ 9,328
========== ==========
Deferred Tax Liability:
US tax component .......................... $ -- $ --
Foreign tax component ..................... 10,730 16,093
---------- ----------
Total deferred tax liability ................ $ 10,730 $ 16,093
========== ==========
Net deferred tax asset/liability .......... $ (4,942) $ (6,765)
========== ==========
Certain of the Company's consolidated subsidiaries have foreign tax loss
carry-forwards in excess of $13.0 million. These tax loss carry-forwards are
typically denominated in the local currency, subject to annual limitations and
expire in fiscal years 2003 through 2009. In 2002, the Company has recorded a
deferred tax benefit in the amount of $2.8 million associated with the tax loss
carry-forwards.
GTS' investment in EDN Sovintel has historically been treated for US tax
purposes as a partnership and, therefore, GTS' share of EDN Sovintel's income
had flowed through to the GTS consolidated federal income tax return on a
current basis. However, as part of the formation of the Company and the transfer
of ownership rights in EDN Sovintel to the Company, the Company elected to treat
its ownership in EDN Sovintel as a corporation for US tax purposes. This had
been in effect until September 17, 2002 when the Company completed the
acquisition of the remaining 50% ownership interest in Sovintel previously held
by Rostelecom, increasing the Company's ownership in Sovintel to 100%.
95
GTI ANNUAL REPORT 2002
NOTE 11: COMMITMENTS AND CONTINGENCIES
LEASES
--------------------------------------------------------------------------------
The Company has various cancelable and non-cancelable operating lease agreements
for equipment and office space with terms ranging from one to five years. Rental
expense for operating leases aggregated $3.3 million, $4.2 million, and $4.9
million for the years ended December 31, 2000, 2001 and 2002, respectively.
Future minimum lease payments under non-cancelable operating leases with terms
of one year or more, as of December 31, 2002, are as follows: 2003 -- $1.8
million, 2004 -- $0.9 million, 2005 -- $0.6 million, 2006 -- $0.2 million, 2007
-- $0.2 million, and thereafter -- none.
OTHER COMMITMENTS AND CONTINGENCIES
--------------------------------------------------------------------------------
The Company has future purchase commitments of $1.1 million and $8.4 million as
of December 31, 2001 and 2002, respectively.
In the ordinary course of business, the Company has issued financial guarantees
on debt for the benefit of certain of its non-consolidated ventures, which is
all collateralized by cash as described in Note 6. The total amount guaranteed
at December 31, 2002 was $0.8 million. The Company expects that all the
collateralized debt will be repaid by the ventures.
MAJOR CUSTOMERS
--------------------------------------------------------------------------------
The Company had one major customer in the CLEC reporting segment, representing
$18.4 million, or 16%, of total revenues in 2000, $18.9 million, or 14%, of
total revenues in 2001 and $23.1 million, or 12%, of total revenue in 2002.
TAX MATTERS
--------------------------------------------------------------------------------
The Company's 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 the Commonwealth of
Independent States Taxes ("CIS Taxes"), the Company's final CIS Taxes may be in
excess of the estimated amount expensed to date and accrued at December 31, 2001
and 2002. It is the opinion of management that the ultimate resolution of the
Company's 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 Company's
future results of operations or cash flows could be materially affected in a
particular period.
RUSSIAN ENVIRONMENT AND CURRENT ECONOMIC SITUATION
--------------------------------------------------------------------------------
The Russian economy, while deemed to be of market status beginning in 2002,
continues to display certain traits consistent with that of a market in
transition. These characteristics have in the past included higher than normal
historic inflation, lack of liquidity in the capital markets, and the existence
of currency controls which cause the national currency to be illiquid outside of
Russia. The continued success and stability of the Russian economy will be
significantly impacted by the government's continued actions with regard to
supervisory, legal, and economic reforms.
OTHER MATTERS
--------------------------------------------------------------------------------
During the past year, GTU was involved in a number of commercial disputes with
Ukrtelecom and Ukrainian regulatory authorities. The most significant disputes
include routing of traffic and GTU's lease rights of Ukrtelecom's technical
premises. In the second and third quarter of 2002, GTU resolved several of these
issues with Ukrtelecom. If the remaining disputes are not resolved amicably in
the near term, they may have an adverse impact on the financial condition,
results of operations and liquidity of the Company. The risks of an adverse
impact are assessed by management as possible but not quantifiable.
96
FINANCIAL REVIEW
On March 1, 2002, the Company became aware the Kiev City Prosecutor's Office had
initiated an investigation into the activities of the Company's management in
GTU. GTU received a letter dated July 17, 2002 from the General Prosecutor of
Ukraine stating that effective July 9, 2002 the Prosecutor's Office withdrew all
charges against management due to the absence of grounds on which to prosecute.
On October 7, 2002, the Kiev City Prosecutor's Office notified GTU that the
previous decision to close the investigation had been revoked. In subsequent
discussions with the Kiev City Prosecutor's Office, the investigators advised
the management of GTU that the Prosecutor's Office is reviewing internal
procedural requirements with the intent to close the investigation again.
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 Company's 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.
NOTE 12: RELATED PARTY TRANSACTIONS
The Company entered into an administrative services agreement with GTS. Pursuant
to this agreement, GTS had provided the Company with certain accounting, tax and
financial management and budgeting services, legal and regulatory services and
human resources services. The amount paid under this agreement in 2000 was $0.1
million. In 2000, this agreement was amended to include only the legal and
regulatory services and human resources services and in 2001, this agreement was
cancelled.
Transactions with the Company's equity investees, GTS, Alfa affiliates and
Rostelecom were as follows, for the years ended December 31:
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS)
Revenue from equity investees ............... $ 9,960 $ 9,029 $ 7,499
Revenue from GTS affiliates ................. 637 2,475 --
Revenue from Rostelecom ..................... -- -- 446
Revenue from Alfa affiliates ................ -- 127 1,102
---------- ---------- ----------
$ 10,597 $ 11,631 $ 9,047
========== ========== ==========
Cost of revenue from equity investees ....... 9,001 10,056 8,527
Cost of revenue from GTS affiliates ......... 1,551 850 --
Cost of revenue from Rostelecom ............. -- -- 5,154
---------- ---------- ----------
$ 10,552 $ 10,906 $ 13,681
========== ========== ==========
The revenue and cost of revenue from GTS affiliates included in the income
statement represents revenue and cost of revenue through October 2001. GTS
ceased to be a shareholder of GTI after this date.
The revenue from Alfa affiliates included in the income statement represents
revenue and cost of revenue from May 2001, the date Alfa became a shareholder.
97
GTI ANNUAL REPORT 2002
The revenue and cost of revenue from Rostelecom included in the income statement
represents revenue and cost of revenue from September 2002, the date Rostelecom
became a shareholder.
Included in Other Current Assets at December 31, 2001 and 2002 is $0.1 million
and $0.3 million, respectively of intercompany accounts receivable from Alfa
affiliates.
The Company maintains bank accounts with Alfa, which act as a clearing agent for
the payroll of the Russian staff of the Company. The balances at these bank
accounts were minimal at December 31, 2001 and 2002. In addition, certain of the
Company's Russian subsidiaries maintain current accounts with Alfa. The amounts
on deposit were minimal at December 31, 2001 and approximately $0.7 million at
December 31, 2002.
The Company incurred approximately $0.9 million in consulting costs from an
affiliate of Alfa in relation to investment transactions in Cityline,
Uralrelcom, and PTK during 2001 and approximately $3.3 million in consulting
costs from an affiliate of Alfa in relation to the purchase of the remaining 50%
of Sovintel previously held by Rostelecom.
In September 2002, several Russian subsidiaries of the Company entered into a
one year agreement with OOO Alfa Insurance, an affiliate of Alfa, to provide the
Company's Russian employees with medical and dental insurance services. The
amount payable under this agreement is approximately $0.3 million per annum. In
December 2002, the Company entered into a one year agreement with OOO Alfa
Insurance, an affiliate of Alfa, to provide the Company with property and
equipment liability insurance. The amount payable under this agreement is
approximately $0.2 million per annum.
NOTE 13: SEGMENT INFORMATION
LINE OF BUSINESS DATA
--------------------------------------------------------------------------------
The Company operates in four segments within the telecommunications industry.
The four segments are: CLEC Services using our local access overlay networks in
Moscow, Kiev, St Petersburg and Nizhny Novgorod; Long Distance Services using
our fiber optic and satellite-based network throughout the CIS; Data and
Internet Services using our fiber optic and satellite-based network; and Mobile
Services consisting of mobile networks in Kiev and Odessa, Ukraine. The
following table presents financial information for both consolidated ventures
and equity investee ventures, excluding MCT, segmented by the Company's lines of
businesses for the periods ended December 31, 2000, 2001, and 2002. 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.
DATA & BUSINESS
INTERNET LONG MOBILE CORPORATE & SEGMENTS CONSOLIDATED
CLEC SERVICES DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS
---------- ------------ ---------- ------------ ------------ ------------ ------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2000
Revenue ......................... $ 125,962 $ 41,144 $ 15,484 $ 35,365 $ (7,174) $ 210,781 $ 113,089
Depreciation and amortization ... 11,836 3,475 5,415 14,065 15,815 50,606 31,851
Operating income (loss) ......... 36,194 (404) (5,105) (3,523) (26,174) 988 (15,136)
Identifiable assets ............. 122,175 43,511 25,109 24,984 216,846 432,625 348,456
Capital expenditures ............ 18,755 19,428 3,109 10,726 565 52,583 40,515
98
FINANCIAL REVIEW
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
----------------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
----------- -----------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2000
Revenue ................................ $ (116,339) $ 18,647
Depreciation and amortization .......... (18,755) --
Operating income (loss) ................ (16,222) 98
Identifiable assets .................... (84,169) --
Capital expenditures ................... (12,068) --
DATA & BUSINESS
INTERNET LONG MOBILE CORPORATE & SEGMENTS CONSOLIDATED
CLEC SERVICES DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS
-------- -------- -------- -------- ------------ ------------ ------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001
Revenue ......................... $149,945 $ 63,192 $ 18,819 $ 14,361 $ (5,295) $ 241,022 $ 140,038
Depreciation and amortization ... 13,576 13,216 6,199 5,217 12,900 51,108 41,398
Impairment charge ............... -- 20,886 -- 9,931 474 31,291 31,291
Operating income (loss) ......... 46,755 (23,344) (3,683) (10,915) (23,177) (14,364) (45,271)
Identifiable assets ............. 184,081 93,051 27,661 10,264 97,585 412,642 300,384
Capital expenditures ............ 24,400 24,415 4,778 1,278 133 55,004 37,359
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
------------------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
------------ ------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001
Revenue ................................ $ (119,958) $ 18,974
Depreciation and amortization .......... (9,710) --
Impairment charge ...................... -- --
Operating income (loss) ................ (30,907) --
Identifiable assets .................... (112,258) --
Capital expenditures ................... (17,645) --
99
GTI ANNUAL REPORT 2002
DATA & BUSINESS
INTERNET LONG MOBILE CORPORATE & SEGMENTS CONSOLIDATED
CLEC SERVICES DISTANCE SERVICES ELIMINATIONS TOTAL RESULTS
-------- -------- -------- -------- ------------ ---------- ------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2002
Revenue ........................... $182,944 $ 78,859 $ 19,283 $ 13,001 $ (5,507) $ 288,580 $ 198,727
Depreciation and amortization ..... 17,754 10,916 6,065 2,686 738 38,159 29,961
Operating income (loss) ........... 53,297 12,187 (4,245) 3,553 (6,511) 58,281 31,430
Identifiable assets ............... 279,420 97,861 28,383 9,383 24,315 439,362 435,810
Capital expenditures .............. 33,694 9,805 4,201 449 222 48,371 29,430
ADJUSTMENTS TO RECONCILE
BUSINESS SEGMENT TO
CONSOLIDATED RESULTS
----------------------------
EQUITY
METHOD AFFILIATE
VENTURES ADJUSTMENTS
------------ ------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2002
Revenue ................................ $ (105,861) $ 16,008
Depreciation and amortization .......... (8,198) --
Operating income (loss) ................ (26,851)
Identifiable assets .................... (3,552) --
Capital expenditures ................... (18,941) --
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 December
31, 2001 and 2002 is as follows:
CORPORATE,
OTHER
COUNTRIES & CONSOLIDATED
RUSSIA UKRAINE ELIMINATIONS RESULTS
------------ ------------ ------------ ------------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 2001
Revenue .............................. $ 104,461 $ 37,954 $ (2,377) $ 140,038
Long-lived assets .................... 177,757 26,318 783 204,858
YEAR ENDED DECEMBER 31, 2002
Revenue .............................. $ 166,319 $ 35,488 $ (3,080) $ 198,727
Long-lived assets .................... 275,209 24,541 1,512 301,262
100
FINANCIAL REVIEW
NOTE 14: SUPPLEMENTAL CASH FLOW INFORMATION
The following table summarizes significant non-cash investing and financing
activities for the Company.
TWELVE MONTHS ENDED
DECEMBER 31,
-----------------------
2001 2002
---------- ----------
(IN THOUSANDS)
Issuance of common stock in connection with acquisitions ........ $ -- $ 50,663
Amounts payable in connection with business acquisitions ........ 200 3,500
Capitalized lease obligations ................................... 9,500 --
Consulting fee to Alfa .......................................... 180 --
NOTE 15: OTHER TRANSACTIONS
ABANDONMENT AND RESTRUCTURING
--------------------------------------------------------------------------------
In December 2000, the Company acquired an ownership interest in MCT in exchange
for the Company's 100% ownership of Vostok Mobile B.V., a Netherlands registered
private limited holding company that owns the Company's Russian mobile
operations, including the abandoned ventures. Initially, the Company acquired
approximately 24% of the outstanding common stock of MCT and the Company
expected to be diluted to not less than 18% as a result of equity offerings
planned by MCT. At December 31, 2001 and 2002 the Company owned approximately
23% of MCT.
The acquisition of the equity interest in MCT effectively completes a major part
of the Company's formal plan of restructuring, initiated when it abandoned
certain mobile business operations in Russia, as approved by the Board of
Directors of GTS in the third quarter of 1999. As part of this plan of
restructuring, the Company had been seeking to dispose of the ownership
interests in these operations and the intended not to provide any additional
financial assistance to such businesses, other than debts assumed.
The Company took a charge to earnings of $18.5 million in the third quarter of
1999, of which approximately $8.3 million was recorded as a liability.
Additionally, in the third quarter of 1999, the Company recorded a charge and
liability of $1.3 million relating to the cancellation of certain network
capacity. There were no amounts charged against these liabilities in the year
ended December 31, 1999. In the year ended December 31, 2000, $5.6 million was
charged against these liabilities including, $4.0 million in relation to
collateral attached by a third-party lender, $1.1 million in cancellation of
certain network capacity and $0.5 million in disposition related costs.
The Company accounted for the exchange of the subsidiary Vostok Mobile B.V. for
an equity interest of approximately 24% in MCT at book value since the fair
values were not readily determinable, accordingly, no gain or loss was
recognized. Concurrent with the exchange of ownership interests certain assets,
which were comprised of restricted cash held as collateral on a back-to-back
loan facility and intercompany debt and interest receivable, and rights to
certain obligations of the Russian mobile ventures owed by such ventures in
regard to a credit facility, were assigned to MCT. Prior to the transaction the
book value of the Company's interest was adjusted for the effect of the
concurrent transactions and the remaining portion of the abandonment and
restructuring reserve.
101
GTI ANNUAL REPORT 2002
IMPAIRMENT
--------------------------------------------------------------------------------
In the fourth quarter of 2001, the Company recorded an impairment charge in the
amount of $10.4 million in association with the Company's mobile operations in
Ukraine. In 2001, the mobile operation in Ukraine became subject to strong
competitive and regulatory pressures, the Company's average revenue per user
("ARPU") declined significantly and the mobile operations business segment
recorded an operating loss for the first time. The undiscounted cash flow
analysis performed by the Company indicated that carrying value of the mobile
long-lived assets was not recoverable. The Company recognized the loss as an
impairment charge, calculated as the difference between the carrying amount and
the fair value of the assets. Fair value was assessed by discounting the future
cash flows associated with the assets. The components of the impairment charge
includes a write-down of net property, plant and equipment by $8.4 million, net
licenses by $1.5 million and net goodwill associated with the mobile operations
of $0.5 million.
In addition to the traditional voice and data service provision, GTI has been
actively pursuing a strategy of developing non-traditional telecom service
offerings including those related to the Internet, such as web hosting, web
design, and vertical and horizontal Internet portal development.
To this end, GTI acquired InfoArt Stars and the Agama family of Web properties
to add to the Russia-On-Line Internet portal, which also incorporates some of
the other acquisitions made in the year ended December 31, 2000, referat.ru,
Absolute Games and Fintek. In line with experience outside of Russia, the
Company has not seen the rapid development of Internet based services that was
expected. During 2001, Internet based advertising and e-commerce revenues have
not developed to significant levels. The undiscounted cash flow analysis, based
on the 5-year business plan approved in the fourth quarter of 2001, performed by
the Company indicated that carrying value of the long-lived portal assets was
impaired. The Company recognized the loss as an impairment charge, calculated as
the difference between the carrying amount and the fair value of the assets.
Fair value was assessed by discounting the future cash flows associated with the
assets. As a result, GTI recorded an impairment charge of $20.9 million. The
impairment charge represents a write-down of Internet Content and Related
Software, which was classified as Other Intangible Assets in the balance sheet
and was included in the operating results of the Company's Data and Internet
business segment.
NOTE 16: QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
ACTUAL FOR THE THREE MONTHS ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
------------ ------------ -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ......................................... $ 32,320 $ 33,891 $ 37,067 $ 36,760
Cost of Revenues ................................. 14,686 15,980 16,923 16,096
Gross Margin ..................................... 17,634 17,911 20,144 20,664
Selling, general and administrative .............. 12,707 12,799 12,787 10,642
Impairment charge ................................ -- -- -- 31,291
Net loss ......................................... (3,910) (3,534) (1,873) (29,688)
Net loss per share(1) ............................ $ (0.16) $ (0.14) $ (0.08) $ (1.33)
102
FINANCIAL REVIEW
ACTUAL FOR THE THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2002 2002 2002 2002
------------ ------------ -------------- ------------
(IN THOUSANDS, EXCEPER SHARE DATA)
Revenues ......................................... $ 36,350 $ 39,217 $ 46,376 $ 76,784
Cost of Revenues ................................. 15,370 17,556 21,617 36,646
Gross Margin ..................................... 20,980 21,661 24,759 40,138
Selling, general and administrative .............. 9,687 10,237 10,792 15,431
Net income ....................................... 6,206 2,754 7,879 12,945
Net income per share(1) .......................... $ 0.28 $ 0.12 $ 0.32 $ 0.48
(1) The sum of the earnings per share for the four quarters will generally not
equal earnings per share for the total year due to changes in the average
number of common shares outstanding.
103
GTI ANNUAL REPORT 2002
MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
Our common stock has traded on the Nasdaq National Market since September 30,
1999 under the symbol "GLDN". The following table sets forth, for the periods
indicated, the high and low closing prices per share for our common stock, as
reported on the Nasdaq National Market. We have not paid any cash dividends on
our common stock. The Board of Directors reviews the Company's policy on
dividends annually. Although the Company had significant cash flows for 2002,
the Board of Directors did not declare and pay a dividend for 2002. Although we
expect strong cash flows in 2003, we cannot assure you that the Company will pay
dividends in 2003 or the foreseeable future.
HIGH LOW
------ -----
2001:
First quarter .................................. 12.25 5.69
Second quarter ................................. 14.10 8.00
Third quarter .................................. 14.15 6.90
Fourth quarter ................................. 13.90 7.49
2002:
First quarter .................................. 16.67 11.59
Second quarter ................................. 18.00 14.27
Third quarter .................................. 17.42 12.00
Fourth quarter ................................. 16.01 10.28
As of March 21, 2003, there were approximately 17 holders of record of our
common stock.
104
BOARD OF DIRECTORS
PETR AVEN President, Alfa Bank, Chairman
STAN ABBELOOS Senior Vice President, Chief Operating Officer, Golden Telecom, Inc.
VLADIMIR ANDROSIK Deputy General Director /Finance Director, Rostelecom
MICHAEL CALVEY Managing Partner, Baring Vostok Capital Partners
ASHLEY DUNSTER Vice President,Capital Research International, Inc.
DAVID HERMAN Vice President Emeritus, General Motors, Inc.
ANDREI KOSOGOV First Deputy Chairman of the Executive Board, Alfa Bank
MICHAEL NORTH Managing Director, Eurokapital Verwaltungs GmbH
ALEXANDER VINOGRADOV President, Chief Executive Officer, Golden Telecom, Inc.
OFFICERS
ALEXANDER VINOGRADOV President, Chief Executive Officer
STAN ABBELOOS Senior Vice President, Chief Operating Officer
DAVID STEWART Senior Vice President, Chief Financial Officer
JEFF RIDDELL Senior Vice President, General Counsel and Corporate Secretary
APPENDIX
------------------------------------
INDEPENDENT GENERAL
AUDITORS INFORMATION
Ernst & Young (CIS) Limited General information about the
company may be obtained by
STOCKHOLDER contacting Investor Relations:
INFORMATION
TELEPHONE: +7 (501) 797-9309
ANNUAL MEETING The Annual FACSIMILE: +7 (501) 797-9332
Meeting of Golden Telecom, Inc. will E-MAIL: InvestorRelations@gti.ru
be held on May 20th, 2003 in Vienna, INTERNET: www.goldentelecom.com
Austria, Imperial Hotel, Kartner Ring
16, A-1015 in Ringstrassensalon Consolidated financial statements
beginning at 12:30 pm. A formal for Golden Telecom, Inc. for the
notice, together with the proxy form, fiscal year ended December 31, 2002
will be mailed in advance of the are contained in Form 10-K filed
meeting to all stockholders with the United States Securities
of record entitled to vote. and Exchange Commission
on or about March 28, 2003.
REGISTER AND TRANSFER AGENT
Correspondence concerning Golden
Telecom, Inc. stock holdings or
changes of address should be
directed to: Mellon Investor Services
LLC, 85 Challenger Road, Ridgefield
Park, NJ 07660.
TELEPHONE: 201-329-8127
F ACSIMILE: 201-329-8967
INTERNET: www.mellon-investor.com