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Authorised by General shareholders meeting
held on 19th of June 2004
Public Joint Stock The Company «Moscow City Telephone Network»
Annual Report for 2003
Moscow, 2004
2
Contents
Page 2003 Corporate events ……………………………………………………………………….. 5 Dynamics of PJSC MGTS major financial and business performance indicators for the years 1999 through 2003 ………………………………………………………………… 6 Public Joint Stock The Company “Moscow City Telephone Network” – General Information ………………………………………………………………………. 7 PJSC MGTS in the Moscow local telecom market in 1999-2003 ………………………….. 8 1. PJSC MGTS financial and business activities in 2003. ……………………………….. 10
1.1. Development and condition of communications facilities …………………………... 10 1.2. Quality of Telecom Services ………………………………………………………… 12 1.3. Tariff Policy …………………………………………………………………………. 12 1.4. Social Benefits………………..…………………………………………………….… 14 1.5. Technological policy and future development ………………………………………. 17 1.6. Human Resources Policy ……………………………………………………………. 20 1.7. Environmental Policy ………………………………………………………………… 22
2. Financial Analysis of AO MGTS Operations for 2003 ………………………………... 23 2.1. Revenues from and Sales of Telecommunications Services …………………………. 23 2.2. Production and selling expenses ……………………………………………………… 27
2.3. Financial Performance ……………………………………………………………….. 29 2.4. Primary Objectives of Financial Policy ……………………………………………... 30 2.5. Capital Investments ………………………………………………………………….. 37
3. Management of the Company ………………………………………………………….. 41 3.1. The structure of governing bodies of PJSC MGTS ………………………………….. 41 3.2. The Board of Directors activity………………………………………………………...56 3.3. The Board of Directors The Company’s business development report …………….…57 3.4. The activity of PJSC MGTS Management Council ………………………………….. 61 3.5 Information on the Company’s following to the Code of corporate behaviour ………. 65 3.6. Report of large and related party transactions ………………………………………... 66 3.7. Report of large and related party transactions …………………………………………70 4. Financial Overview for 5 years period ………………………………………………… 74 5. Financial statements of PJSC MGTS for the year 2003 prepared in accordance with Russian Accounting Standards …………………………………………………… 78 5.1. Balance sheet for the year 2003 ………………………………………………………. 78 5.2. Appendix to the Balance sheet for the year 2003 …………………………………….. 87 5.2.1. Accounting policies ……………………………………………………………. 92 5.2.2. Important Indicators ………………………………………………………….. 101 5.2.3. Additional notes to financial reporting ……………………………………….. 112 6. Independent auditor’s opinion ………………………………………………………... 116 7. Opinion of the audit committee ………………………………………………………. 118 8. Consolidated financial statements. Years Ended December 31, 2003, 2002 and 2001 ……………………………………………...…………………………………. 119 9. Subsidiaries and affiliates ……………………………….…………………………….. 155 10. Financial statistics ……………………………………………………………………... 158 11. MGTS dividend policy ………………………………………………………………… 160 12. PJSC MGTS Securities ……………………………………………………………….. 162 13. Information for Shareholders ………………………………………………………… 166
3
Dear shareholders,
Another year has passed in the history of the Open Joint-Stock The Company Moscow
City Telephone Network, a the Company with more than a hundred year history, corporate
traditions and customs, which help not only to preserve the experience of generations of
workers, but also to enrich it with new creative ideas.
The modern period of history began in the year of 1993, when the whole country was
going through a privatization boom. PJSC MGTS was enabled to develop rapidly relying on the
support of its shareholders, personnel, on the world development of telecom industry and its
disposable financial resources.
The reporting year 2003 was a year of a stable growth:
- the income of the Company exceeded RUR 12 billion (26,5% growth as
compared to the last year),
- the received profit was RUR 1,9 billion,
- the capital investments amounted RUR 2,6 billion,
- 71 370 new telephone numbers were put into operation,
- a large-scale reconstruction began.
The Company’s energetic current, investment and financial activity let us not only maintain the
position on Moscow market of communications services, but also make next steps towards new
telephone subscribers, widen the range of communications services using as well the
advantages of fruitful business cooperation with our subsidiaries and affiliates.
Keeping the pace of capital spending in order to support and develop the business, the
Company conducts a balanced financial policy controlling the short-term and long-term
liabilities, reducing the cost of borrowings. The Company continues to play on the bond market
in an effective way. In the reporting year it floated a 2-year bond issue amounted RUR 1
billion. On the share market we achieved new rate of capitalization: the ordinary share price
increased from 6 to 12,3 USD during the year.
The results of the reporting year provided the essential start for a development of the main
activities of the Company for next five years:
- in the sphere of the current activity – widening of communications services as
in respect to the range of the services so in respect to the entire elimination of
the deficit of communications services,
- in the sphere of investment activity – a full-scale reconstruction of the fixed
assets,
4
- in the sphere of financial activity – the use of diverse financial instruments in
order to secure capital investments.
The growth of the Company’s net profit allows as a result of the reporting year offering
the shareholders RUR 290,5 million dividends, that is 74% higher than the sum provided for
that purpose in the year of 2002.
Working on Moscow communications services market, being the major communication
provider, the Company in the long run is guided by its shareholders’ interests as in the near
perspective so in the distant one. The Company offers technical and economic solutions that
allow us to increase the quality of the services, to keep and broaden the market niche, to raise
the price of the Company. The support of the shareholders in its turn provides the necessary
stability of the Company, reduces business risks, and maintains a creative spirit.
Faithfully yours, with best regards,
Director General M.A. Smirnov
5
2003 Corporate events
January 1, 2003 PJSC MGTS made federal numbers calls available from its payphone
network
February 5, 2003 The Company’s 3-rd RUR denominated bond issue with its nominal
value of RUR 1 billion to mature in February 2005 was rated “ruBBB+”
by “Standard & Poors”
February 11, 2003 The Company placed on Moscow Interbank Currency Exchange its third
RUR denominated bond issue with its nominal value of RUR 1 billion.
March 18, 2003 National rating agency “Expert RA” raised The Company’s series A1 and
A2 RUR denominated bonds rating up to “A” simultaneously ranking
MGTS 3-rd bond issue at the same risk level
June 7, 2003 General Shareholders Meeting was held
August 13, 2003 The Company put into operation its first “6” prefix telephony switch
August 15, 2003 Mikhail Alekseevich Smirnov was elected PJSC MGTS Director General
by The Company’s Shareholders Meeting.
November 18, 2003 PJSC MGTS received “Russian National Olympus” award in “Real estate
development, telecommunications, transportation” nomination
December 11, 2003 PJSC MGTS was declared “The Company of the Year 2003” Competition
winner in “Telecom” nomination
December 16-29, 2003 in conformity to its Network Reconstruction Programme The Company
digitalised 35 600 existed analogue numbers in its Zamoskvoretsky
Branch
January 15, 2004 PJSC MGTS energetic and effective efforts in accounting practices
implementation in Russian Federation were distinguished by “The Best
Accounting Practices The Company” award at “Global Expertise and
Russian Economy” International Forum
February 17, 2003 PJSC MGTS annual report won “Expert” magazine running “The
Best 2002 Annual Report” award in “Classics” and “Information
Transparency” nominations
6
Dynamics of PJSC MGTS major financial and business
performance indicators for the years 1999 through 2003
Revenue and Expenses
2002200120001999 2003
7,494,157
6,082,4184,091,044
3,080,080
9,039,573
10,101,968
7,937,492
6,077,387
4,453,285
12,775,162
RU
R'0
00
Net Profit
2003200220012000
1999
1,936,894
1,126,418
366,433
781,018
-96,086
RU
R'0
00
4 127 791
3 888 0373 949 769
3 996 586
4 084 482
1999 2000 2001 2002 2003
Number of the main telephone units
Capital Expenditure
20032002200120001999
2,621,039
2,391,9352,348,784
2,471,076
2,084,038
RU
R'0
00
Net Operating Cash Flow
1999 2000 2001 2002 2003
2,714,044
3,040,658
4,290,998
4,615,558
1,972,402
RU
R'0
00
Profit from Sales
20031999 2000 2001 2002
3,735,590
1,373,205
1,986,343
1,855,074
2,607,811
RU
R'0
0
7
Public Joint Stock The Company “Moscow City Telephone Network” –
General Information
Public Joint Stock The Company “Moscow City Telephone Network” (PJSC
MGTS) is the major telecom operator in Moscow, the capital of the Russian Federation. PJSC
MGTS provides local telephone services, inquiry and information services, and long-distance
and international telephone services using its payphone network. Its customers include Moscow
residents, authorities and management bodies, and companies and organisations located in
Moscow.
Possessing city’s telecommunications infrastructure, which includes engineering
constructions and underground facilities The Company provides other operators with access to
its resources and public telecommunication network on a contractual basis.
PJSC MGTS was established on 1 (13) July 1882, the day when the first telephone
Moscow switchboard was commissioned, which has the capacity of 800 telephone lines.
Presently, PJSC MGTS owns 571 automatic telephone exchanges (90 of which are digital) with
4,367,102 telephone lines, 94,000 km cable network, about 18,568 payphones. PJSC MGTS
inquiry service centre fulfils 45 million requests for information annually. There are 52.2
telephone sets per 100 Muscovites, this ratio being three times as high as the similar average
ratio throughout Russia.
On 1 June 1994 the state-owned the Company Moscow City Telephone Network was
privatised and became a public joint stock the Company.
As at 3 May 2004, the total number of PJSC MGTS shareholders recorded in the
shareholders register was 9,693.
The number of shareholders that own voting shares entitling them to participate in the
annual general shareholders’ meeting is 1,562, including:
Individuals 1,444,
legal entities 118.
The Company’s total average number of employees for 2003 is 20,304.
Closed Joint Stock The Company “Deloitte and Touche” was appointed as the
Company’s Auditor for the year 2003.
An independent registrar “Reestr-Sviaz”, an affiliate branch of Public Joint Stock
The Company “Reestr”, maintains the register of AO MGTS’ shareholders.
8
PJSC MGTS in the Moscow local telecom market in
1999-2003.
In accordance to Moscow Statistics Committee data in 2003 the total sales of telecom
services in Moscow amounted RUR 157 billion, including the sales of local telecommunication
services that amounted RUR 20.2 billion. The market share of alternative operators is
estimated to be RUR 8.9 billion. The operating revenues of PJSC MGTS for 2002 amounted to
RUR 11.3 billion. Together with its subsidiaries PJSC MGTS provided local telecom services
amounted RUR 16.5 billion.
In 2003 in Moscow there were 5.41 million main telephone sets 76.2% of which is
owned by PJSC MGTS. PJSC MGTS is presented on the cellular telephony and data transfer
markets with its subsidiaries (JSC Comstar, JSC “MTU-Inform” The Company”, JSC Telmos,
JSC “AMT”, JSC “Golden Line”) and additionally controls 10% of telephone units in
Moscow.
MGTS and its subsidiaries consolidated revenue share on Moscow fixed line telecom market in 2000-2003.
81,9% 79,3% 83,6% 81,6%
2000 2001 2002 2003
MGTS share Alternative operators
Main telephone units destribution in Moscow 2002-2003
23,9%
76,1%
23,8%
PJSC MGTS76.2%
2002
2003
9
Tight competition occurs over the corporate clientele market segment. The Company
actively cooperates to its subsidiaries in order to fully satisfy business sector demands for new
services. 1.9 million telephone sets which accounts for 35.4% the total capacity installed in the
city distributed among business users. 37% of that number belongs to PJSC MGTS.
The aggregate share of the alternative telecom operators in the resident sector was about
2.5% and remains stable over the past years. The remaining 97.5% share is held by PJSC
MGTS.
According to PJSC MGTS the demand for new line instalments at the end of the year
amounted 55,000 units.
In 2003 the expected volume of local telecom sales in Moscow will amount to
approximately RUR 23.0 billion, 50% of which will be gained by PJSC MGTS.
Currently, the major portion of the Company’s revenues (88%) is generated from
provision of local telephony services, including sales of telecom resources to alternative
operators. In future The Company plans to receive sufficient portion of additional revenue as it
develops its Public data transmission network (PDTN) project. PJSC MGTS will be actively
developing high-speed Internet market (ADSL-services) operating its Public Data Transmission
Network that by now integrates 215 Internet access nodes positioned all the city. Moscow
ADSL-services market capacity estimated to about 400,000 subscribes.
ADSL-services are provided in conjunction to JSC “MTU-Intel” the leading broad band
access operator for corporate customers having 7,000 subscribers which amounts for
approximately 40% of the market.
Business sector main telephone units dynamics in Moscow (units in '000)
1,351.41,747.6 1,908.8 1,918.6
701.0 709.3 715.4 717.4
2000 2001 2002 2003
PJSC MGTS
10
1. PJSC MGTS financial and business activities in 2003
1.1. Development and condition of communications facilities
PJSC MGTS is one of the largest telephone companies not only in Russia but also in
Europe. It comprises 571 telephone exchanges with the total capacity of 4,3 million telephone
numbers, 18 568 payphones, enquiry service.
As at the end of the reporting year the number of its subscribers (main telephone sets)
amounted to 4,127,791, addition in the year – 43,309.
Table 1.1.1.
Production capacity and network development
At the end of the reporting year N Description
2002 2003
1. Local telephony
1.1. Installed capacity, # of telephone numbers, including:
Digital exchanges, # of telephone numbers
4 334 862
715 954
4 367 102
783 934
1.2. Capacity utilisation factor, # of telephone numbers 4 142 168 4 187 679
1.3. Numbering capacity usage ratio, % 95,55 95,89
1.4. Commissioned capacity for calendar year, # of tel. sets
86 619 71 370
1.5. Commissioned capacity for calendar year, # of tel. sets 51,72 52,15
2. Data transmission
2.1. Installed capacity, #subscribers: 5 922 15 500
During 2003 PJSC MGTS installed capacity raised by 0.7% and reached 4,367,102
units, including 783,934 digital numbers. Digitalisation of the Company’s net capacity is 18%.
The Company put into operation 71,370 lines and 14,200 commutation units. 35,600
Automatic Telephone Switch Structure
20,500 20,500
715,954 783,934929,560 926,820
2,668,848 2,635,848
31.12.2002 31.12.2003
Quasi-digital Digital Decde Coordinated
11
lines and 8,200 commutation units were applied to digitalise existed capacity.
In 2003 PJSC MGTS kept developing its Public Data Transmission Network (PDTN)
introducing new telecom services (IP-telephony, multimedia services etc.).
In the reporting year The Company earned RUR 452.4 million from data transmission
increasing the number of its PDTN in 2.6 times up to 15,500 users. The Company’s PDTN
enables PJSC MGTS to provide to its customers the range of up-to-date telecommunication
services.
PJSC MGTS keeps the high rate of the new instalments. In 2003 new telephone
exchanges were put into operation in newly developed districts.
The average phone instalment waiting period in 2003 amounted 1.6 years that is 6
month shorter than in the previous year (2.1 years).
At the end of the reporting year the number of The Company’s subscribers (main
telephone sets) amounted to 4,127,791.
In 2002 The Company continued to modernise and reconstruct its payphone network.
Comparing to the previous year the total number of payphone decreased by 3.108 units and
amounted to 18,56. At the same time the number of the card payphones increased in the
reporting period by 1,103 amounting 13,256 which accounts for 71.4% of the total capacity.
PJSC MGTS Clientele destribution in 2003
Budget financed entities5,7%
Corporate subscribers11,7%
Households82,6%
12
1.2. Quality of Telecom Services.
The primary objective of AO MGTS is to maintain high performance capability of its
network to provide high quality services to all categories of its subscribers.
In 2003, The Company continued to reconstruct and modernise its network equipment,
performed repair work using new technologies and materials aimed to lower the risk of
emergencies.
It allowed the Company to improve the overall quality of telecom facilities operation as
compared to the previous year. Thus, the number of complaints per 100 telephone sets
amounted to 78 decreasing by 1% as compared to that for the previous year. The percentage of
complaints fixed within the established standard term period stayed at the last year level of
97.9%. High performance of PJSC MGTS network and quality of its services is proven by the
stable dynamics of the following key indicators:
The average percentage of connection faults for the analogue network in 2003 fall by
0,2% and amounted 1.8% that fills the interconnection fault standard of 5%.
Efficient network use coefficient amounted 52% that complies to the average level of
such an indicator.
1.3. Tariff Policy
PJSC MGTS attempts to diversify its tariff policy in order to provide the best pay terms
to every market segment of its clientele.
PJSC MGTS tariff policy in 2003 was aimed to maintain its market position
simultaneously gradually increasing its fees to budget financed organisations and households.
Tariffs in 2003.
The Company’s tariffs in 2003 have been, as in the previous years, subject to
government regulatory antimonopoly policy. The principle objective of The Company was to
bring its households’ fees to a profit-loss break point level and to minimise existed cross-
financing between loss generating households’ and budget financed organisations’ tariffs and
profitable tariffs for commercial entities.
In 2003 The Company twice has been reviewing its fees for household and budget
financed organisations. From June 1, 2003 it has risen its monthly subscription fee up to RUR
126 per month. In August it brought this fee up to RUR 140 per month.
In the reporting year The Company didn’t change its tariffs for its corporate subscribers.
13
In average, through the reporting year The Company’s subscription fees have risen by
1.4 times including 47% rise of the households tariffs as well as 26% rise of budget financed
organisations’ fees.
In the reporting year installation fees and per-minute charges were kept unchanged, that
encouraged customers’ demand and strengthen The Company’s market position.
Table 1.3.1.
2003 Year end PJSC MGTS local telephony tariffs
* - tariff includes VAT;
** - Monthly free time limit - 613 minutes included in line subscription fee.
In 2003 tariffs for non-regulated services were influences by market conditions,
competitors prices as well as additional financing sources generated from regulated services.
Description Tariff in RUR Date of
implementation
I. Local telephony connection
1. At the subscription payment terms:
Monthly line subscription fee
Households* 140,0 01.08.2003
Budget financed organizations 140,0 01.08.2003
Corporate clients 165,0 01.05.1999
2. At the per time payment terms:
2.1. Monthly line subscription fee
Budget financed organizations 140,0 01.08.2003 Corporate clients 165,0 01.05.1999
2.2. Per minute charge (The Company charges every minute of call above the given monthly free
time limit)
Budget financed organizations 0,14 01.02.2001
Corporate clients 0,40 01.05.1999
II. Installation
Households* 6 000 01.11.2001
Budget financed organizations 9 000 01.11.2001 Corporate clients 9 000 01.11.2001
14
Tariff policy development outlook.
State regulative policy main targets are to grant an active reconstruction of national
telecommunication industry, encourage investors and to balance supply and demand for
telecom services.
At the end of 2003 state regulative body established economically justified costs as a
main method for the tariff price evaluation. The Company’s tariffs are formed for the
Company to obtain operating revenue sufficient to cover its economically justified expenditure
and to receive an operating income.
To put the given tariff evaluation method in to practice PJSC MGTS plans to determine
its economically justified operating income margin using its newly introduced service based
revenue and costs evaluation analysis.
Considering the current trends appearing over the regulation of such services as: new
line installments and local calls the Company’s strategic tariff policy targets are as following:
Introduction of both subscription and per time charges payment to its household
clientele,
Introduction only 2 tariffs: one for its corporate users, another one for state-financed
institutions and households.
Introduction of economically justified cost based on service based revenue and costs
evaluation analysis aimed to evaluate sufficient operating income margin from every service
provided,
Settlement of the tariffs determined both with economically justified operating income
margins and with market conditions.
1.4. Social Benefits
PJSC MGTS provides social benefits to its household subscribers. Under the current
legislation Moscow Department of Social Protection of People compensates these benefits to
the Company both directly by the federal government as well as. The total amount of benefits
granted made up RUR'000 940,93. In 2003 The Company provided social benefits to
1,214 thousand of its subscribers.
15
100%
44,5% 43,9%
100%
35,6% 35,4%
0
500
1 000
1 500
2 000
2 500
3 000
3 500
коли
чество
або
нентов
, тыс.
чел
.
2002 2003
Information on the social benefits granted
Total number of household subscribersTotal number of citizens granteg with benefitsCitizens granted with benefits applied to subscription fee paymentsCitizens garnted with benefits applied to line installation
0,6% 0,2%
The Company's telephone branches provided social benefits in compliance to the
number of Federal Laws: “On veterans”, “On social protection of disabled in Russian
Federation”, “On Russian Federation Hero honor Statue”, “On rehabilitation of political
repressions’ victims” etc. In the reporting year 7 thousand lines were installed under social
benefits, 38.2 thousand customers were receiving benefits on the monthly bases. The amount of
revenue shortage due to the benefits granted amounted RUR'000 70,366.
In 2003 PJSC MGTS received RUR’000 10,701 from Moscow Department of Social
Protection of People as a compensation of benefits applied to line subscription fees and line
installment fees.
The average monthly number of citizens granted with social benefits under Federal Law
“On social protection of people suffered from radiation as a result of Chernobyl Nuclear Station
catastrophe” amounted 13.2 thousand people. The average monthly number of citizens granted
with social benefits under Federal Laws “On Soviet Union, Russian Federation and Glory
Honors» and “On provision of social guarantees to Socialist Labor Heroes”
amounted 1,4 thousand people.
In addition, in 2003 federal budget for the first time provided RUR’000 2,510 worth of
compensation for Moscow region pensioners.
16
Social benefits funding is provided by Moscow Department of Social Protection of
People in accordance to “On veterans”, “On social protection of disabled in Russian
Federation” and to Moscow Government Order N784 –PP dated September 24, 2002 “On
provision of benefits applied for telephone line payment to pensioners assigned to Moscow
social protection institutions”. The annual amount of benefits granted under Moscow social
protection institutions made up RUR'000 870,574 and covered 1,168 thousand of The
Company’s subscribers.
Information ob the amount of compensation received by the Company from Moscow
Department of Social Protection of People is given ate the table below.
Table1.4.1. Information ob the amount of compensation received by the Company from Moscow
Department of Social Protection of People in 2003
Average number of people Average number of people
Citizens’ category 2002 2003
Annual growth (+, -)
Growth rate, %
2002 2003 Annual growth (+, -)
Growth rate, %
1 2 3 4 5 6 7 8 9
Total 1 171 989 1 168 376 -3 613 99,7 614 625,7 870 573,9 255 948,2 141,6
Benefits were financed as following:
- PJSC MGRS own funds RUR'000 - 659 757;
- federal budget funds covered benefits granted in compliance to Federal Law “On
veterans” amounted RUR'000 157 458;
- City of Moscow funds covered benefits granted in compliance to Federal Law “On
social protection of disabled in Russian Federation» amounted RUR 53,359.
17
1.5. Technological policy and future development
In 2004 the major goals of the Company’s technological policy were to modernize its
equipment, introduce new machinery, improve service quality and present the range of new
telecommunication and information products. The Company forms its future development
plans taking into consideration existing market trends, potential developments in technology
and the results of equipment and software sample tests performed by PJSC MGTS Science
Centre.
Implementing its technological policy based on 2003 Board of Directors approved
business-plan The Company focused on the following areas:
♦ Construction of new telephone exchanges and expansion and reconstruction of the
existing ones, development of optic-fiber network and short number dialling
network;
♦ Modernisation of payphone network using new technology;
♦ Development of PDTN;
♦ Information and enquiry service development;
♦ Automation of business processes.
Construction of new telephone exchanges, expansion and reconstruction of
the existing ones
To increase its network capacity in the reporting year The Company put into
functioning new transport network switches, simultaneously upgrading existed telephone stations and
applying new distant operating concentrators. In 2004 feather network capacity expansion is going to
be implemented by construction of new transport network nodes. By the end of 2004 the number
of new transport network nodes will rise to 15 units.
Development of optic-fiber network
In the reporting year The Company modernised upgraded and reconfigured its fiber-
optic SDH transport network implementing XDM and DACX equipment produced by ECI and
Lucent.
18
The project is aimed to compose the interconnection links between transport network
nodes supporting two different Moscow telephone prefix codes 499 and 095. It’s planed that
customers with ABC-095 will keep their 7 digit numbers while ABC-499 will have 10 digit
dailing.
In 2003 The Company put a foundation into the feather development of its network
based on the introduction of commutation XDM equipment and a launch of new fiber-optic
SDH transport network switches aimed reconfiguration network traffic and allocate free additional
resources of the upper levels of the SDH network. Completion of the project planed by the end of
2004 will additionally mobilise 5,000 E1 streams.
Short number dialling network construction
In the reporting year, special electronic node USS-1 was mounted at automatic
telephone exchange # 916. It will substantially enhance the quality of special services 01, 02, 03,
04 and to establish a short number dialling network with other serial enquiry numbers (06, 07,
09).
In 2004 The Company plans complete USS-2 construction. This electronic node will
enable to interconnect new fiber-optic SDH transport network nodes and short number dialling
network.
PDTN development.
In the reporting year The Company continued to develop its PDTN. In 2003 the total
number of Internet access nodes reach 215 that enables The Company to supply PDTN services
all over the city.
The Company introduced IP-telephony services for its PDTN subscribers. In as well
tested PDTN capability to provide video-data transmission services. PDTN content providers
presented the number of additional services such as: distant education and medication, game
servers. Corporate networks have been created for the number of significant Moscow based
financial and commercial institution.
One of the main The Company’s targets for 2004 is to spread out its Internet access
PDTN technology over residents’ market. In order to accomplish the project The Company
expects to lower the costs of Internet access installations modernising and upgrading its PDTN
.
19
Current technological policy will expand PDTN capabilities, thus will enable The
Company to introduce innovative “last mile” technologies and present new services to the
clients.
Automation of business processes
The most important targets of The Company’s business process automation include:
- automation of accounting and economics tasks to interrelate financial and
operational business processes data and to introduce managerial accounting
techniques,
- creating the unified corporate managerial network,
- upholding of existing IT systems.
The Company tasks these targets in line with “PJSC MGTS IT development strategy”
adopted in 2003. The Company uses certified and licenced IT products to unify and make
compatible the software and equipment used in its automated business processing management
platforms.
The Company started installing new programme platform to its corporate data
transmission network.
To feather improve its automation The Company plans to development its PDTN to
install new IT equipment and software and to upgrade existing IT systems.
New services and technology research and testing projects.
In 2003 The Company carried out the number of new services and technology research
and testing projects in the following main areas:
1. Provision of interactive Web–interface services supported by Cisco-6400 that by now
has been already used in The Company’s PDTN.
2. Testing of such services as business class video conference, VoiP technology, video
monitoring, DVD quality TV and video on request provided within ADSL technology
using The Company’s PDTN.
PJSC MGTS plans to use exploit VoiP technology in the following areas:
- corporate purposes,
- Softswitch IP – telephony over ADSL,
- reconstruction and development of The Company’s public telephone network,
20
3. xDSL technology including SHDSL (Synchronised Hierarchy Digital Symmetric Line),
LRE (copper cable line Ethernet), reach DSL (advanced ADSL)
4. Development of DWM technology.
In 2004 The Company plans to carry on its DWTN technology testing to define its
feather practical implementation in its network.
1.6. Human Resources Policy
The human resources management is an important part of a The Company’s corporate
policy.
In 2003 the major objectives of PJSC MGTS HRM were as follows:
• to optimise The Company’s staff structure;
• To introduce efficient methods of staff motivation;
• To increase seniority reserve efficiency.
As on January 1, 2004 PJSC MGTS had 20,901 employees, or 123 employees less
than in 2002 - 21 024 employees. 57.3% The Company’s staff members have higher education
degree.
The total amount of staff expenses in 2003 raised comparing to the previous year by
35.2% and amounted RUR’000 2,558,703. In 2003 the average salary at MGTS was 10,364
roubles. PJSC MGTS staff members are being underpaid comparing to the average salary in
the large and medium-size Moscow based enterprises amounted RUR 11,824, while in 2003 the
average inflation weighted salary at MGTS amounted 9,171 roubles.
20,433
7,609
20,304
10,364
2002 2003
MGTS average salary and average number of staff.
Average number of staff Average salary (RUR)
21
To increase its employees and pensioners benefits The Company in line to its
Collective Staff Contract implements “Social and Economic employees and pensioners support
programme” . In 2003 in compliance to the programme The Company spent RUR’000 86,424
against RUR’000 30,015 spent in 2002. The main purposes of the expenditure were as
following:
- RUR’000 9,675 were paid as labour saving innovations bonuses,
- RUR’000 46,052 as paid vacancies,
- RUR’000 20,454 as social benefits.
In order to improve The Company’s staff social protection in December 2003 PJSC
MGTS Management Board approved “The programme of non-state pension for PJSC MGTS
employees” aimed to provide additional bonuses to The Company’s employees. In accordance
to the programme from July 1, 2004 The Company’s employees retired after 15 years of work
with PJSC MGTS entitled to additional pension paid from The Company’s account at Non-
State Pension Fund.
22
2003 PJSC MGTS Labour Cost structure
Salaries and wages allocated to operating costs
76.2%Medical Insurance
0.4%
Personal bonuses7.2%
Motivating bonuses4.5%
Cultural and sports corporate events
0,3%Staff training
1.8%
Social sphere (inc. investmets)
5,7%
Collective agreement expenses
3,1%
Non-State Pention Fund payments
0.8%
1.7. Environmental Policy
As in the previous years, in 2003 The Company conducted work to comply with
applicable environmental requirements. The Company took various steps to ensure
environment preservation and protection of life and health of its employees and Moscow
residents from adverse effects of business operations performed by MGTS.
In 2003 PJSC MGTS environmental policy had the following objectives:
- Air protection,
- Lakes and rivers preservation,
- Desinsection and deratisation of MGTS buildings and cable infrastructure,
- Utilisation of the expended production related materials,
23
- Implementation of energy and resources saving technologies,
- Land plots maintenance.
In 2003 AO MGTS spent for environmental policy about RUR’000 89,249 receiving
RUR’000 6,942 for utilization of the expended production related materials.
Environment Preservation Ddoctrine approved by Russian Federation Government
Order N 1225-r from August 31, 2002 outlines Russian State long term industrial ecological
Policy, its main targets and principles. Caring out its operations PJSC MGTS keeps in line to
the main standards of the Ddoctrine trying to preserve and restore ecology systems.
2. Financial Analysis of AO MGTS Operations for 2003 2.1. Revenues from and Sales of Telecommunications Services
Table 2.1.1.
Revenue structure
Description Measurement unit
2002 2003 Growth rate, %
1. Revenue from sales of goods, work, services
RUR’000 10 101 968 12 775 163 126,5
1.1. Revenues from public telecom services
RUR’000 9 212 680 11 752 195 127,6
Share in revenues % 91,2 92,0
Including
- Revenue from alternative operators RUR’000 2 644 565 3 049 926 115,3
Share in revenue % 26,2 23,9
2003 Environmental Policy Expenditure
Old stations recontraction
44.0%
Decinsaction and deratisation
21.3%
Utilisation and production related
waste6.5%
Energy and resource saving technologies
14,6%
Land plot maintainance6.7%
Air protection4,3%
Lakes and rivers protection
2.6%
24
1.2. Other revenues RUR’000 889 288 1 022 968 115,0 Share in revenues % 8,8 8,0 Including: - revenues from cable facilities rent RUR’000 465 570 582 359 125,1 - revenues from provision of telecom resources
RUR’000 200 016 204 862 102,4
In 2003 The Company’s Total Revenue rose by 26.5% comparing to 2002 and
amounted RUR’000 12,775,163. The major portion of the Company’s revenues (92.0%) was
generated by telecom services. Other revenues amounted RUR’000 1,022,968 including
RUR’000 582,359 received from cable facilities rental fees and RUR’000 204,662 earned from
provision of PJCS MGTS telecom resources and infrastructure to alternative operators.
Table 2.1.2. 2003 Operating Revenues*
RUR’000 2 0 0 3 #
Description
2002 1Q. IIQ. IIIQ. IVQ.
Growth
rate, %
1. Revenues from public telecom services, total, incl.: 9 212 680 2 595 486 5 417 100 8 576 984 11 752 195 127.6
I. From Public Broad-Band Data Transmission Network
201 677 93 120 205 483 322 983 454 831 225.5
- from data transmission 201 677 93 120 205 483 322 983 454 831 225.5
II. From local telephony 6 068 606 1 804 457 3 691 560 5 749 806 7 954 125 131.1
- installations 813 278 172 054 348 855 528 371 735 851 90.5
-subscription fees at subscription payment system
2 392 284 912 432 1 872 373 2 990 351 4 177 356 174.6
-revenue received from time billed subscribers
2 062 282 509 964 1 022 657 1 540 564 2 087 526 101.2
- line fee 1 253 304 331 571 664 141 1 004 442 1 350 367 107.7 -per time billing 808 978 178 393 358 516 536 122 737 159 91.1
-provision of additional technological equipment
460 621 129 486 278 642 430 344 584 076 126.8
- other services 340 141 80 521 169 033 260 176 369 316 108.6
Sales of telecom services to households, total, including:
2 934 769 1 029 440 2 095 242 3 340 203 4 676 119 159.3
- installations 476 492 98 875 186 483 294 792 406 291 85.3
-subscription fees at subscription payment system
2 315 772 896 901 1 840 912 2 942 355 4 112 581 177.6
-revenue received from time billed subscribers
17 953 5 335 10 873 16 720 23 174 129.1
- line fee 9 483 2 802 5 779 8 955 12 264 129.3
- per time billing 8 470 2 533 5 094 7 765 10 910 128.8
-provision of additional technological equipment
8 2 5 8 12 150.0
А)
- other services 124 544 28 327 56 969 86 328 134 061 107.6
Sales of telecom services to budget financed entities, total including:
817 848 184 509 390 353 606 798 847 110 103.6 b)
- installations 74 464 10 363 28 785 39 484 59 234 79.5
25
-subscription fees at subscription payment system
15 066 2 930 6 065 9 532 13 110 87.0
-revenue received from time billed subscribers
361 634 100 251 201 402 310 416 429 069 118.6
- line fee 288 355 86 028 172 641 266 725 365 064 126.6
- per time billing 73 279 14 223 28 761 43 691 64 005 87.3
-provision of additional technological equipment
249 887 65 725 144 459 232 428 322 976 129.2
- other services 116 797 5 240 9 642 14 938 22 721 19.5
Sales of telecom services to corporate subscribers , total, including:
2 315 989 590 508 1 205 965 1 802 805 2 430 897 105.0
- installations 262 322 62 816 133 587 194 095 270 326 103.1
-subscription fees at subscription payment system
61 446 12 601 25 396 38 464 51 665 84.1
-revenue received from time billed subscribers
1 682 695 404 378 810 382 1 213 428 1 635 283 97.2
- line fee 955 466 242 741 485 721 728 762 973 039 101.8
- per time billing 727 229 161 637 324 661 484 666 662 244 91.1
-provision of additional technological equipment
210 726 63 759 134 178 197 908 261 088 123.9
c)
- other services 98 800 46 954 102 422 158 910 212 535 215.1
III. Payphones 297 831 66 595 141 005 218 005 293 313 98.5
Households 249 569 54 309 112 985 167 932 221 498 88.8
Budget financed entities 9 099 3 147 7 270 13 280 19 332 212.5
Corporate clients 39 163 9 139 20 750 36 793 52 483 134.0
IV. Interconnection Traffic transmission 2 644 565 631 314 1 379 052 2 286 190 3 049 926 115.3
* In accordance to State statistics Comity “Revenue in telecom the Company” N5 Reporting Form approved by Comity’s Directive N 223 from January 24, 2002
26
As in the previous year, the major portion of the The Company’s local telephony
revenue (58.8%) was generated by services provided to households. Commercial
organisations contributed 30.6% share to local telephony revenue, budget financed entities are
responsible for 10.6% stake.
Local telephony Subscribers and Revenue Distribution in 2003.
Due to the number of factors in 2003 The Company’s Operating Revenue rose by
RUR’000 2,539,515 (27.6%) comparing to 2002.
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
RUR'000
Local telephony Interconnection andtraffic transmision
Data transmision Payphones Total operatingrevenues
Operating revenues
2002 2003
Revenue
Households58,8%
Budget finaced entties10,6%
Corporate subscribers
30,6%
Subscribers
Households82,6%
Budget financed entities5,7%
Corporate subscribers
11,7%
27
The increase in tariffs generated 58.8% (RUR’000 1,492,600) of additional revenue in
the reporting year. Network capacity expansion, introduction of new services and other factors
accounted for 41.2% (RUR’000 1,046,915) of the revenue growth.
If The Company kept its tariffs unchanged through the year its revenue growth rate
would have dropped from 127.6%. down to 111.4%
In 2003 The Company’s traffic totalled 34.1 billion minutes. In comparison to 2002
The Company’s traffic grew almost by 2 billion minutes (7.2%). Commercial and budget-
financed entity’s traffic slightly dropped.
2.2. Production and selling expenses
Production and selling expenses for 2003 amounted RUR’000 9,039,573. Expenses
growth rate of 120.6% comparing to the previous year was mainly caused by macroeconomic
reasons and investment and social expenditure undertaken by PJSC MGTS this year.
Company's traffic in 2002-2003.
3,274,118,5753,395,269,764
1,149,249,5751,181,756,392
27,638,140,775
29,631,110,014
2002 2003
min
Corporate subscribers Budget financed entities Households
28
The increase of The Company’s material costs was influenced by the rise of
energy prices by 6.7%, transport by 11%, inventories by 23.6% as well as by
implementation of new weight coefficients for construction prices.
An increase in tangible assets rose depreciation by 8.2% and additionally provided
RUR’000 163,961 of investment sources.
Other expenses rose by 16.1%.
Efficient use of The Company’s resources, long term partnership with suppliers and
service providers enabled to slow down the expenses growth rate. Costs growth rate
decreased by 2.6% comparing to that in 2002 (123.2%).
2 0 0 2 -2 0 0 3 P r o d u c tio n a n d S e ll in g e x p e n se s .
0
1 ,0 0 0 ,0 0 0
2 ,0 0 0 ,0 0 0
3 ,0 0 0 ,0 0 0
4 ,0 0 0 ,0 0 0
5 ,0 0 0 ,0 0 0
6 ,0 0 0 ,0 0 0
7 ,0 0 0 ,0 0 0
8 ,0 0 0 ,0 0 0
9 ,0 0 0 ,0 0 0
C ost os la bo u r S oc ia l T a x D ep r ec ia tio n M a te r ia l co s ts O th er ex p e n c es T o ta l C o s ts
R U R '0 0 0
2 0 0 2 2 0 0 3
2.3. Financial Performance
Table 2.3.1.
PJSC MGTS Major financial performance indicators for 2002-2003
# Indicator Description Units 2002 2003 Growth rate, %
1. Revenue from sales of goods and services (exclusive of VAT)
RUR’000 10 101 968 12 775 163 126.5
2. Cost of goods sold, work performed and services rendered
RUR’000 7 494 157 9 039 573 120.6
3. Income (loss) on sales RUR’000 2 607 811 3 735 590 143.2
4. Operating income/(loss), including:
RUR’000 1 335 632 1 114 977 83.5
Exchange rate differences RUR’000 -154 189 39 587 Х
5. Profit before tax RUR’000 1 272 179 2 620 613 206.0
6. Net profit RUR’000 1 126 418 1 936 894 172.0
7. Efficiency rations:* - Income on sales % 34.8 41.3 6.5 points - Net profit % 15.0 21.4 6.4 points
• - Profit/costs ratio
2003 Cost Strucrute
Other costs
24,7%
Labor costs
27,3%
Social tax
8,5%Depreciation
24,2%
Repair costs
6,5%
Stiuck and inventories
4,6%
Transport
0,6%Энергия3.6%
30
The Company’s revenues from sales of goods and services for 2003 rose by 26% while
its operating expenses totalled RUR’000 9,039,572 increasing by 20.6% in the reporting year.
Operating costs/revenue ratio rose by 6.5 points up to 43.2%, which was provided by higher
Revenue growth over Expenses.
Comparing to the previous year The Company’s Profit before tax in 2003 doubled and
reached RUR’000 2,620,613 million (exclusive of VAT), which represent a 30.6% increase as
compared to the year 2000 revenues. The given growth is caused by both increase in volume of
sales and decrease of non-operating expenses by RUR’000 220,655.
The rise of RUR Exchange rate to USD and simultaneous drop of exchange rate
differences accounted for RUR’193,776 decrease of non-operating expenses in 2003.
The Company’s 2003 Net profit amounted RUR’000 1,936,894. PJSC MGTS Net
profit efficiency ratio rose by 6.4 amounting 21.4%.
Table 2.3.2 The Company’s Comparative performance indicators
# Description Measurement
unit
2002
Actual
2003
Actual Description
1 Revenues per telephone line* RUR’000 2.27 2.85 125.5 2 Earnings** per telephone line RUR’000 0.35 0.63 178.0 3 Earnings** per employee RUR’000 69.81 127.12 182,1 4 Number of telephone lines* per
employee Units 198.5 203.1 102.3
5 Unit cost
RUR costs/
RUR revenue 0.74 0.71 95.4
6 Share of labour costs in revenue % 18.5 19.3 +0.8 points
*- Average number of main telephone sets and payphones for the period
** - Income before taxes adjusted for exchange rate difference
2.4. Primary Objectives of Financial Policy
As in the previous years the primary objectives of the Company’s financial policy in
2003 were as follows: to ensure funding of the Company’s day-to-day operations; to raise funds
for capital investments purposes; to accelerate financial resources turnover.
The Company’s 2003 financial performance was characterised by the following trends:
- The Company’s capital continued to grow, increasing its share in PJSC MGTS
balance from 71 to 78%,
- The Company lowered its operating costs to its operating revenue ratio by
2.2%, decreasing its non-operating expenses by 1% at the same time,
31
- Comparing to 2002 Company’s income tax share in its revenue rose from 1.4 %
up to 4%.
In the last five years The Company has paid significant attention to its debt management
as well as to the cost reduction. From 2000 The Company has been preparing and executing its
annual business plans in accordance to the corporate “Budgeting Regiment”. Cost reduction
programme resulted in the increase of The Company’s revenue prevailing the expenditure
growth rate.
Through the last years The Company has been continuously growing its Operating Net
Cash flow: in 2001 it amounted RUR 3.0 billion, in 2002 – RUR 4.3 billion, and in 2003 –
RUR 4.6 billion. Given growth allowed The Company to finance its investment projects in
amount of URU 3.5 simultaneously decreasing its leverage level with various debt instruments.
In 2003 The Company received RUR 19.7 billion against RUR 14.6 billion received in
2002. The growth rate amounted 119.2%.
Cash Inflows distribution
2002
2003
In 2003 The Company’s cash outflows amounted RUR 19.8 billion against RUR 14.2
billion received in 2002. The growth rate – 125.1%.
Cash Outflows distribution
2002
2003
87,4%
12,3%0,3%
Revieved from operting activity
Received from funancial activity
Received from investing activity
20.6%2.0%
77.4%
Revieves from operating activity
Received from financial activity
Recived from investing activity
21.6%
18.7%59.7%
Operating activity Cash Outflows
Financial activity Cash Outflows
Investing activity Cash Outflows
28,9%
17,6%
53,5%
Operating activity Cash Outflows
Financial activity Cash Outflows
Investing activity Cash Outflows
32
35,3%32,7%
64,7%67,3%
4 290 9984 615 558
2002 2003Net Operating cash flow to cover financing activities Net Operating cash flow to cover Investing activities
Net Operating cah flow
As in the previous years the primary objectives of the Company’s financial policy in 2003 were
to provide funding for The Company’s capital investments and to lower its leverage level. The
Company financed its projects from Net operating cash flow grown in 2003 by 107.6%
amounting RUR 4.6 billion. The diagram below represents Net operating cash flow distribution.
Net operating cash flow distribution (RUR’000)
The Company’s cash flows policy in 2003 was characterized by the following:
- Net Operating cash flow growth by 7.6%;
- Kept in time servicing of The Company’s debt;
- 30.6% growth of cash outflow to investing activities;
Maintaining its Net Operating cash flow positive dynamics The Company kept its liquidity at a
high level.
Table 2.4.1. Liquidity Indicators
# Indicator 01.01.2003 01.04.2003 01.07.2003 01.10.2003 01.01.2004
1. Net Current Assets.(RUR’000) -458 584 1 635 372 1 568 852 2 135 411 1 227 545
2. Current Liquidity Ratio 0,68 1,10 1,04 1,18 0,90 3. Average liquidity ratio 0,55 0,94 0,88 0,99 0,72 4. Absolute liquidity ratio 0,23 0,48 0,38 0,35 0,31
Using various debts instruments such as bank loans, trade finance and fixed income
bonds The Company refinanced and restructured its leverage to form positive difference
33
between its Current Assets and Current Liabilities and to increase its Current and Absolute
Liquidity Ratios.
Bank loans form a sufficient share of The Company’s Liabilities. Over the last years The
Company decreases the portion of its bank loans aimed to refinance its debt. At the beginning
of 2002 The Company had been using 87.4 % of the new bank loans to cover its maturing debt.
By the end of the year it used 85.4%. In 2003 The Company both lowered its debt level by
27.3% and decreased the portion of new bank loans refinancing the existing liabilities by 4.4.%
down to 81.0%. The Company’s leverage movements resulted from the change in MGTS
Liability Management strategy and growing share of investment orientated debt instruments
used in the reporting year.
RUR exchange rate rise and western banks more attractive interest rates encouraged The
Company to increase foreign currency denominated borrowings.
Table 2.4.2.
Bonds and Loans effective rates
Наименование показателя As on 01.01.2003 As on 01.01.2004
Foreign currency denominated debt effective interest rate
10,08% 9,68%
National currency denominated debt effective interest rate
19,56% 16,42%
The given analysis is evident to foreign currency denominated debt effective interest rate
decrease by 0.4% and national currency denominated debt effective interest rate decrease by
3.1%.
In 2003 The Company has been actively refinancing and paying off its short-term
liabilities. In the reporting period it decreased by 20% and amounted 32.2% of The Company’s
liabilities total.
The Company’s business efficiency rise is based on acceleration of current assets
turnover and improvements in The Company’s receivable and payables structure.
34
Table 2.4.3.
During the year there was a sharp rise in accounts receivable. By the end of the year
receivables acceded payables by RUR 637 million. Receivables structure was primarily
influenced by the increase in over due receivables that rose from RUR 77 million as on January
1, 2003 up to RUR 99 million as on January 1, 2004. By the end of the reporting year the total
amount of unpaid receivables amounted RUR 660 million. Mostly, it is a state debt to the
Company. Mentioned receivables were to compensate PJSC MGTS loss from the social benefits
provided by the Company to its subscribers under “On veterans” and “On social protection in
Russian federation» legislation.
The table below presents receivables and payables analysis including doubtful debt
provisions.
Table 2.4.4.
Receivables and Payables Analysis
Description As of
1.01.03 As of 1.04.03 As of 1.07.03 As of 1.10.03 As of 1.01.04
I. Receivables, RUR’000 -total 1 242 028 1 476 780 1 856 097 1 987 109 1 862 044 Trade receivables 774 623 747 950 894 454 967 276 1 236 306 Notes receivable 0 0 0 0 0 Receivables from affiliates 162 712 149 797 287 708 232 544 105 605 Advances paid 147 145 168 890 204 408 146 251 86 997 Other debtors 157 548 410 143 469 527 641 038 433 136 2. Payables, RUR’000
Turnover Indicators
# Description 01.01.2003 01.01.2004
1. Revenue from sales of goods and services (exclusive of VAT), RUR’000
10 101 968 12 775 163
2. Total assets quarterly average, RUR’000 22 825 618 24 593 725
3. Current assets quarterly average, RUR’000 2 892 454 4 100 480
4. Total assets turnover coefficient 0,44 0,52
5. Current assets turnover coefficient 3,49 3,12
6. Total assets turnover, in days 813 694
7. Current assets turnover, in days 112 116
8. Stock turnover, in days 32,45 31,42
9. Receivables turnover, in days 49 42
10. Payables turnover, in days 71 60
35
-total 1 261 592 1 484 038 1 733 962 1 559 298 1 225 041 Trade payables (60,76) 443 506 422 765 513 838 543 200 490 827 Notes payable (60) 0 0 0 0 0 Payables to affiliates and
subsidiaries 85 010 67 648 104 552 58 352 10 386
Accrued wages and salaries 78 042 120 344 111 181 114 896 122 421 Social insurance payable 44 957 61 873 64 164 21 685 24 295 Taxes payable 102 099 186 903 244 362 223 224 210 651 Advances received 468 538 588 361 632 917 564 455 348 129 Other creditors 39 440 36 143 62 948 33 485 18 333 3. Ratio of accounts receivable to accounts payable, RUR’000 а) excess of receivables over
payables 0 0 122 135 427 811 637 003
b) excess of payables over receivables 19 564 7 258 0 0 0
Provision for doubtful accounts, RUR’000 26 031 25 542 24 288 149 810 516 054
The Company concentrates its operations to form its main indicator – The Company’s Profit.
Table 2.4.5.
Retained profit breakdown Report for 2003
2003
N
Наименование показателя Measurement units
Approved by General
Shareholders Meeting
Report
1 2 3 4 5 1. Retained profit total RUR'000 1 126 418 1 126 418
Profit distribution: а) To cover previous year loss RUR'000 903 171 903 171
b) To cover reporting year loss RUR'000
c) To form reserves RUR'000 56 321 56 321 % of the net profit % 5,0 5,0 % of the retained profit % 5,0 5,0
d) To form The Company's employee privatisation fund RUR'000
% of the retained profit %
e) To pay dividends RUR'000 166 926 166 926 % of the net profit % 14,8 14,8
% of the retained profit % 14,8 14,8
f) To increase The Company’s capital RUR'000 0 0
% of the retained profit % 0,0 0,0
In 2004 The Company’s retained profit amounted RUR’000 1,936,894.
36
Net Profit growth formed an additional source worth RUR 1.6 billion to finance The
Company’s investing and financial activities and to repay its debts.
2003 financial results allowed The Company to form reserves amounted RUR’000
96,844.6 to pay RUR'000 193,689.7 worth of preferred shares dividends and RUR’000 96,848.8
for its common shares, cover previous years loss.
Table 2.4.6.
Net profit distribution 2004
N Indicators Measurement
units Planed 1 2 3 4 1. Reporting year retained profit RUR’000 1 936 894
Reporting year retained profit distribution: а) To cover previous year losses RUR’000
b) To form reserves RUR’000 96 845 % of the net profit % 5,0
c) To form privatization reserve RUR’000
% of the net profit %
d) To pay dividends RUR’000 290 539 % of the net profit % 15,0
e) To increase The Company’s capital RUR’000 1 549 510
% of the net profit % 80,0
The rest of the retained profit is kept to service The Company’s liabilities.
The main The Company’s financial policy results are as following:
• The Company’s net profit reached its maximum of RUR 1.94 billion,
• The Company decreased its debt servicing cash flows from RUR 4.92 billion down to
RUR 3.57 billion,
• The Company’s capex rose up to RUR 2.66 billion,
• The Company lowered its foreign currency denominated debt cost by 0.4% and its
national currency denominated debt cost by 3.1%,
• The Company continued to exploit a diverse range of financial instruments to fund its
business activity.
37
2.5.Capital Investments The main 2003 The Company’s capex indicators are given below:
Table 2.5.1.
Indicator 2002 2003 Growth rate, %
Total capital expenditure 2 391 935 2 621 039 109,6
Including expenditure for leasing 285 850 13 761
Volume of fixed assets put in operation 3 102 409 3 133 031 101,0
Including underground infrastructure received from the third parties
567 088 635 484
Investing cash flows 2 655 466 3 489 390 131,4
In the reporting year The Company’s capex rose by 109.6% amounting RUR’000
2,621,039 (RUR’000 2,391,935 in 2002). Volume of Fixed assets put in operation in 2003
amounted RUR’000 3,133,031 that are 101.1% of the comparable indicator for the previous year
(RUR’000 3,102,409).
The Company’s investing cash outflows in 2003 rose comparing to the previous year
volume of RUR’000 2,665,466 by 131.4% reaching RUR’000 3,489,390. The Company
disposed its investing outflows as following: RUR’00 288,718 to service foreign suppliers trade
finance, RUR’000 103,091 to purchase commercial notes, RUR’00 761,370 were lended to third
parties. Additionally, RUR’000 29,250 were spent to service bank investment loans interests,
RUR’000 182,373 to pay for equipment lease.
The Company covered 38.4% of its capex with RUR’000 1,006,808 of depreciation.
The remaining 61.6% were covered with debt finance amounted RUR’000 1,614,231. The
Company’s investment borrowings have been composed of RUR’000 264,878 of bank loans
including those obtained from foreign banks (RUR’000 186,430), trade finance amounted
RUR’000 335,592 and RUR 1 billion raised from bonds placement.
In 2003 The Company continued to exploit a diverse range of financial instruments to
fund its business activity including financial leasing that provided The Company with fixed
assets valued RUR’000 13,761.
38
Table 2.5.2.
Capex Sources (RUR’000)
2001
Share in
total
amount, %
2002
Share in
total
amount, %
2003
Share in
total
amount, %
1. Own funds, total including: 520 545 22,2 862 756 36,1 1 006 808 38,4
Depreciation charges 520 545 22,2 862 756 36,1 1 006 808 38,4
2. Borrowings, total including: 1 828 239 77,8 1 529 179 63,9 1 614 231 61,6
Bank loans 282 167 12,0 872 205 36,4 264 878 10,1
Borrowings 1 000 000 42,6 1 000 000 38,2
Other 546 072 23,2 656 974 27,5 349 353* 13,3
Total 2 348 784 100,0 2 391 935 100,0 2 621 039 100,0
-* pursuant to financial leasing.
The Company’s capex was distributed as following RUR’000 41.888 were spent on
socially valuable projects, RUR’000 764,610-covered The Company’s construction. The
Company purchased equipment and machinery worth RUR’000 1,781,799 and paid RUR’000
32,742 for new vehicles.
Table 2.5.3.
Capex structure (% of Capex Total)
2002 2003 % of change
New construction 19,9 25,7 5,8
Reconstruction 29,1 36,2 7,1
Expansion 22,0 15,2 -6,8
Modernization 29,0 22,9 -6,1
Noteworthy is the redistribution of capital investments resulting in a higher share of investments
in telephone exchange expansion and lower share investments in the new construction, which is
due to the need for increasing the numbering capacity in the built-up areas where point blocks
are now built.
39
In 2004 the Company’s investment policy was focused on equipment renewal and
modernisation, development of PDTN, automation of business processes, expansion of its
payphone network with introduction of new technologies, development of information and
enquiry services. Capital expenditure allocated in the reporting year for new technology
introduction amounted RUR’000 154,653.
Detailed The Company’s capex break down.
Table 2.5.4.
Capex main targets Amount, RUR’000
Share of the total volume,
%
Construction of new telephone exchanges and expansion and reconstruction of the existing ones
468 515* 17,9
Network reconstruction 810 563 30,9
Included Shepkin str. telephone switch repair works 244 788
PDTN construction and development 117 828 4,5
Cable infrastructure expansion 135 766 5,2
Payphone network modernization 47 239 1,8
Development of information and enquiry services 26 307 1,0
Modernization and renewal of communication constructions 218 988 8,4
Business process automation 262 415 10,0
Modernization and renewal of public constructions 202 519 7,7
Security systems introduction and development 26 930 1,0
Transport 32 474 1,2
Socially valuable projects 48 983 1,9
Other 222 513 8,5
Capex Total 2 621 039 100,0
In 2003 PJSC MGTS installed capacity reached 4,367,102 units, including 783,934 digital
numbers. Digitalisation of the Company’s network capacity is 18%.
The Company’s used capacity amounted 2,187,679 telephone numbers. Capacity
utilisation coefficient equals 95.89%.
The Company put into operation 71,370 lines and 14,200 commutation units. 35,600 lines and
8,200 commutation units were applied to digitalise existed capacity.
40
In 2004 The Company will aim its investment policy to continue network reconstruction
and development projects. It’s planned to install 200 thousand of new telephone numbers that
will bring network digitalisation ratio from 18 up to 21%.
Next year investment project are going to be financed both with The Company’s own
cash flows as well with borrowed funds including RUR 1.5 billion bond issue. The Company
additionally plans to lease commutating equipment to create new 99,300 units of installed
capacity.
It’s planned to mount new broad band access nodes.
The Company intends to continue expansion of its payphone network introducing new
services.
2004 Automation programme includes automation of management accounting and
customer services, development of customer support and equiry centres.
2004 investment programme will enable to satisfy demand for new installations, will
increase network digitalisation level improving quality of services provided to The Company’s
subscribers.
2004 Capex will exceed RUR 3.25 billion.
41
3. Management of the Company
4.1 . The structure of governing bodies of PJSC MGTS
In conformity with the Charter of the Company the governing structure of PJSC MGTS
is the following:
- the General Meeting of Shareholders - the supreme governing body of the
Company;
- the Board of Directors;
- the General Director –a sole executive body;
- the Management Council of the Company –a collective executive body;
- the Auditing Commission – a supervisory body.
The General Meeting of Shareholders
The supreme governing body of the Company is the General Meeting of Shareholders. It
is held annually not earlier than two months and not later than six months after the end of a
fiscal year. In accordance with Article 12 “The Meeting of Shareholders” of the Charter of the
Company (version 5) the following matters shall be within the competence of the General
Meeting of Shareholders:
1) introduction of amendments and additions to this Charter or the approval of the
Charter of the Company in a revised version;
2) reorganization of the Company;
3) liquidation of the Company, appointment of the liquidation commission and approval
of the interim and final liquidation balance sheets;
4) determination of the numerical composition of members of the Board of Directors,
election of the members of the Board of Directors and early termination of their powers;
5) determination of the number, nominal value, category (type) of authorized (declared)
shares;
6) increase of the Charter Capital by means of an increase of the nominal value of shares
or placement of additional shares. Increase of the Charter Capital by means of placement of
additional shares through a closed subscription or placement of common shares through an open
42
subscription, which make up over 25% of the previously placed common shares of the
Company;
7) reduction of the Company’s Charter Capital by means of a reduction of the nominal
value of placed shares, acquisition by the Company of a part of the placed shares in order to
reduce their total number, as well as by way of cancellation of the shares acquired or redeemed
by the Company;
8) Forming of a sole executive body – the General Director, and early termination of his
powers;
9) determination of the numerical composition of the Auditing Commission, election of
its members and early termination of its powers;
10) approval of the Auditor of the Company;
11) approval of the annual reports, accounting balance sheets, profit and loss accounts of
the Company, as well as distribution of its profits and losses, including payment (declaration) of
dividends, and the losses of the Company per the results of the fiscal year;
12) determination of the procedure for holding the General Meeting of Shareholders
(approval of the “Rules of Procedure of the General Meeting of Shareholders of MGTS”);
13) splitting or consolidation of shares;
14) taking decisions on the approval of transactions in the cases stipulated by Article 83
of the Federal Law “On Joint Stock Companies”;
15) taking decisions concerning the approval of major transactions in the cases provided
for by Article 79 of the Federal Law “On Joint Stock Companies;
16) acquisition by the Company of placed shares in the cases stipulated for by the
Federal Law “On Joint Stock Companies”;
17) taking a decision concerning the participation in holding companies, financial and
industrial groups, and other business associations;
18) approval of the by-laws regulating operation of the bodies of the Company:
a) Regulations on the Board of Directors;
b) Regulations on the Auditing Commission of the Company;
c) Regulations on the Management Council of the Company;
d) Regulations on the General Director;
19) approval of the amount, form and procedure for annual payment of dividends on all
the categories (types) of the shares;
20) taking a decision on reimbursement of the costs in the event of convocation of an
43
extraordinary meeting by the persons requested the holding thereof, at the expense of the
Company;
21) placement of the emissive securities of the Company by way of a closed subscription to
be converted into shares. Placement of the emissive securities of the Company by way of an open
subscription, to be converted into the common shares that make up over 25% of the shares placed
previously;
22) resolution of other issues provided for by the Federal Law “On Joint Stock
Companies” and the present Charter;
The Board of Directors
The Board of Directors shall execute the general management of the Company,
except for the resolution of the matters placed within the competence of the General Meeting of
Shareholders.
According to Article 13 “The Board of Directors” of the Charter of the Company
(version 5) the following matters shall be within the competence of the Board of Directors:
1) determination of the Company’s business priorities;
2) convening of the annual General Shareholders’ Meeting and any extraordinary
General Shareholders’ Meeting, except for the cases where no decision is taken by the
Board of Directors on convoking an extraordinary General Shareholders’ Meeting or a
decision is made to refuse to convene it;
3) approval of the agenda of the General Shareholders’ Meeting;
4) determination of the date of drawing up the list of shareholders entitled to participate
in the General Meeting of Shareholders, and other issues relating to the competence of the
Board of Directors according to the provisions of Article 12 of the Charter and pertaining to the
preparation and conduct of the General Shareholders’ Meeting;
5) increase of the Charter Capital of the Company at the expense of the Company’s effects
by way of placing by the Company of additional shares, to the extent of the amount and categories
(types) of the stated (declared) shares, only among the shareholders in proportion to the number of
the shares in their possession, as well as placing of common shares by an open subscription making
up 25% and less of the previously placed common shares of the Company.
44
6) placing by the Company through an open subscription of emissive securities
convertible into common shares constituting 25% and less of the previously placed common
shares of the Company.
7) placing by the Company of bonds and other emissive securities in the cases provided
for by the Federal Law “On Joint Stock Companies”
8) determination of the value (monetary valuation) of the Company’s effects, placement
and redemption value of emissive securities in the cases provided for by the Federal Law “On
the Joint Stock Companies”;
9) acquisition of the shares, bonds and other securities placed by the Company in the
cases provided for by the Federal Law “On Joint Stock Companies”;
10) forming of the Management Council and early termination of its powers;
11) recommendations as to the amount of remunerations and compensations payable to
the members of the Auditing Commission and determination of the fee payable for the
Company Auditor services;
12) recommendations as to the amount of the dividend on shares and its payment
procedure;
13) use of the Reserve Fund and other funds of the Company;
14) approval of internal documents of the Company, except for the internal documents
which adoption is placed by the Federal Law “On Joint Stock Companies” within the
competence of the General Meeting of Shareholders, as well as of other internal documents of
the Company which approval is placed by the Company’s Charter within the competence of the
executive bodies of the Company;
15) establishment of branch offices, individual units, as well as opening of representative
offices and their liquidation;
16) approval of major transactions in the cases stipulated for by Chapter X of the federal
Law “On Joint Stock Companies”;
17) approval of transactions stipulated for by Chapter XI of the Federal Law “On the
Joint
Stock Companies”
45
18) approval of the Registrar of the Company and terms and conditions of the contract
with him, as well as termination of such contract with him;
19) preliminary approval of annual reports, the annual book-keeping accounts, including
profit and loss statement (profit and loss accounts), as well as determination of profits and losses
of the Company per the results of fiscal year;
20) adoption of decision on participation (termination of participation, change of the
share
of participation) of the Company in other organizations, including participation by way of
purchasing, sale of shares, stocks of other organizations, excepting the cases provided for by
Sub item 17, Item 2 of Article 12 of the present Charter;
21) adoption of decisions on issuing securities, approval of issuing prospectuses, and of
securities issue results statements;
22) preliminary coordination of a transaction or several transactions interrelated with
regard to alienation or possibility of alienation by the Company, directly or indirectly, of
property which value makes up from 1,0% to 25% of the balance value of the Company’s assets
according to the book-keeping accounts of the Company on the last reporting date;
23) consideration of the Auditing Commission and Auditor reports;
24) determination of the content, volume of and procedure for protection of the
information constituting a state secret;
25) determination of the persons authorized to sign contracts of employment with the
General Director and members of the Management Council;
26) approval of terms and conditions of labor contracts concluded with the General
Director and members of the Management Council;
27) reassignment of the contract of employment with the General Director in the event of
early termination of his powers by the General Meeting of Shareholders;
28) approval of regulations on branches, representative offices and individual units of
the Company, introducing amendments and additions into their regulations;
29) other matters provided for by the Federal Law “On Joint Stock Companies”;
46
Members of the Board of Directors shall be elected by the General Meeting of
Shareholders according to the procedures provided for by the Federal Law “On Joint Stock
Companies” and the present Charter of the Company until the holding of the next General
Shareholders’ Meeting. The numerical composition of the Board of Directors shall be 12
persons.
By the decision of the General Meeting of Shareholders, the powers of the members of
the Board of Directors may be terminated earlier. The decision on such early powers termination
may only be taken in relation to all the members of the Board of Directors. Persons elected
members of the Board of Directors of the Company may be re-elected an unlimited number of
times. Only a physical person can be a member of the Board of Directors. A member of the
Board of Directors shall not necessarily be a shareholder of the Company. Election of the
members of the Board of Directors shall be conducted by cumulative voting. Candidates who
gained the biggest number of the votes are deemed elected to the Board of Directors. The
members of the Management Council of the Company can’t amount more than one forth of the
Board of Directors. The General Director of the Company may not be concurrently the
Chairman of the Board of Directors.
The Chairman of the Board of Directors shall be elected by and from amongst the
members of the Board of Directors by a majority of votes of the total number of the Board
of Directors members. The Board of Directors shall be entitled to elect one or a few Vice-
Chairmen of the Board of Directors.
The General Director and
The Management Council of the Company
The General Director and the Management Council shall carry out the management of
the Company’s day-to-day activities.
In compliance with Article 14 “The General Director. The Management Council of the
The Company” of the Charter of the Company (version 5) within the competence of the General
Director shall be the matters that are not placed by the present Charter within the competence of
the General Meeting of Shareholders, Board of Directors or Management Council, that is to:
1) act without a power of attorney on behalf of the Company, represent the Company’s
interests in all establishments and organizations, and in judicial agencies;
47
2) dispose of the Company’s property, except for the cases which are placed by the
Charter of the Company and The Company’s internal regulations within the competence of the
General Shareholders’ Meeting and Board of Directors;
3) use the funds and reserves created by the Company within the range of his
competence;
4) open with the banks settlement and other accounts in order to carry out all types of
settlements, credit and cash transactions;
5) conclude any civil transactions, agreements in the Russian Federation and abroad on
behalf of the Company in accordance with the procedure established by the current legislation of
the Russian Federation;
6) issue on behalf of the Company powers of attorney to close civil transactions and
effect
other legal acts within his competence;
7) approve the list of staff of the Company;
8) issue orders and give instructions binding upon all The Company’s employees;
9) conclude labor and civil contracts with physical persons, of work performance and
provision of services;
10) determine nomenclature of the officials directly reporting to the General Director of
the Company;
11) approve the organizational structure of the Company and its individual departments;
12) appoint managers of individual departments, including branch managers;
13) sign all documents on behalf of the executive bodies of the Company;
14) recruit, dismiss and transfer to other positions all the employees of the Company,
apply incentives and penalties to them;
15) determine the terms and conditions of work payment, identify and adopt the
principles
and procedures for work rating and reconsideration thereof, approve labor norms;
48
16) approve Standard Regulations on Constituent Departments of the Company, those of
the Company Management, Standard Job Responsibilities for its employees, those for
nomenclature officials, management personnel; determine and approve Internal Regulations on
the work routine, as well as Regulations and Instructions relative to the Company Activity
placed within the competence of the General Director;
17) organize and provide for book-keeping activity, securing accounts and statistical
records, and bear responsibility for their authenticity;
18) adopt decisions on: bringing various types of claims to court on behalf of the
The Company; satisfying a claim raised against the Company, renunciating a claim in part or in
total, acknowledging a claim; changing the subject or ground of a claim; concluding amicable
agreement; appealing of judicial acts; signing a protest lodging application; submitting a case to
court of corporate public or arbitration tribunal; lodging demands for compulsory execution of
judicial acts; receiving awarded property or cash means;
sign: complaints, claims, creditor requisitions, renunciations of a claim, replies to
statements of claim, petitions, renunciations of a claim in part or in total, amicable
agreements, judicial act complaints, protest lodging applications, claims for compulsory
execution of judicial acts;
19) supervise efficient and economical use of manpower, materials and financial
resources;
20) provide for establishing safe working conditions for employees of the Company,
observance of provisions of environment protection legislation;
21) secure fulfillment of commercial secret and other secrets protection requirements
established by the specific Laws;
22) carry out managerial activity aimed at elaborating the List of Information
constituting a commercial secret of the Company
23) conclude and secure implementation of the Collective Bargaining Agreement (if
such
agreement is rendered available in the Company);
24) within the framework of his competence, secure observance of legalism in the
49
The Company’s activity;
25) provide for implementation of decisions passed by the General Meeting of
Shareholders and the Board of Directors meeting, and for fulfilling the budget obligations and
economic contractual commitments;
26) direct elaboration and submission to the Board of Directors of annual reports, annual
Book-keeping accounts, including the Company’s profit and loss statements (profit and loss
accounts), as well as distribution of profits, payment (declaration) of dividends, and allocation
of losses of the Company per the results of a fiscal year;
27) determine and form numerical and personal composition of the Management
Council, submit it to the Board of Directors for approval, identify the scope of responsibilities of
each member of the Management Council, organize the Management Council work as a whole,
preside at the Management Council meetings, and provide for keeping their minutes.
The Management Council
The following matters shall be placed within the competence of the Management
Council:
1) working out of current and long-term activity plans, drawing up reports, proposals for
implementation of statutory tasks and objectives of the Company, securing execution of
decisions adopted by the General Shareholders’ Meeting and the Board of Directors;
2) preparation of materials and draft decisions on the matters to be considered by the
General Meeting of Shareholders and the Board of Directors meeting;
3) development of proposals respecting the tariff policies of the Company;
4) development of proposals respecting the investment policies, adoption of capital
investment plans;
5) approval of the internal documents regulating the matters within the competence of
the Management Council, except for the documents that shall be approved by the Board of
Directors and the General Meeting of Shareholders, and of the documents placed within the
competence of the General Director;
6) the Management Council shall have the right to take decisions on other matters
relating to the current activity of the Company on the instructions of the Board of Directors or at
the suggestion of the General Director of the Company.
50
The Auditing Commission
Supervision of the Company’s financial and economic activities is effected by the Auditing
Commission.
According to Article 16 “The Auditing Commission. The Auditor of the The Company”
of the Charter of the Company (version 5) the Auditing Commission is elected annually by the
General Meeting of Shareholders to supervise the Company’s financial and economic activities,
and shall consist of 5 members elected by a majority of votes of the shareholders – owners of
the voting shares of the Company taking part in the General Shareholders’ Meeting and entitled
to participate in voting on the issue.
In the event that the number of the candidates, who attained the majority of votes of the
shareholders – owners of the voting shares of the Company, exceeds the numerical composition
of the Auditing Commission specified in the present Charter, the candidates gained a higher
number of votes in relation to other candidates shall be deemed elected to the body.
The competence and the procedures for the Auditing Commission’s activities are
determined by the Charter of the Company and by the “Regulations on Auditing Committee of
the Company”.
The following matters shall be within the competence of the Auditing Commission:
- verification of authenticity of data contained in the reports and other financial
documents of the Company;
- identification of infringements of the procedure for keeping the financial accounts of
the The Company as provided for by the legal acts of the Russian Federation;
- identification of infringements of the legal acts of the Russian Federation based on
which the Company conducts its financial and economic activity;
- analysis of the financial and economic activity;
- evaluation of economic expediency of the Company’s financial and economic
operations;
51
The procedures for the Auditing Commission’s activities shall be determined by the
“Regulations on Auditing Committee of the The Company” approved by the General Meeting of
Shareholders of the Company.
A member of the Auditing Commission may not concurrently be a member of the Board
of Directors, the Management Council, or the General Director.
52
Brief description of Public Joint-Stock The Company MGTS officials – members of the Board of Directors, Management Council and Auditing
Commission.
Board of Directors
In 2003 the following persons were elected the members of the Board of Directors:
Chairman of the Board of Directors Nail I. Ismailov
Members of the Board of Directors Nominated by
1. Alexander P. Voronetz PJSC “AFK “Sistema”
2. Alexander Yu. Goncharuk PJSC “AFK “Sistema”
3. Dmitry L. Zubov PJSC “AFK “Sistema”
4. Vladimir S. Lagutin PJSC “AFK “Sistema”
5. Alexander L. Leiviman PJSC “AFK “Sistema”
6. Alexander V. Lopatin PJSC “Svyazinvest”
7. Semen V. Rabovsky PJSC “AFK “Sistema”
8. Irina M. Ragozina PJSC “Svyazinvest”
9. Viktor D. Savchenko PJSC “Svyazinvest”
10. Vasily V. Sidorov PJSC “AFK “Sistema”
11. Valery N. Yashin PJSC “Svyazinvest”
Alexander P. Voronetz, born in 1954, higher education. A member of PJSC MGTS Board of
Directors since 2002, First Deputy General Director of JSC Sistema Telecom.
Alexander Yu. Goncharuk, born in 1956, higher education. A member of PJSC MGTS Board of
Directors since 1998, Director General of PJSC Concern Nauchny Centr.
Dmitry L. Zubov, born in 1954, higher education. A member of PJSC MGTS Board of Directors
since 2003, Director General of PJSC I-B-N-Sistema.
Nail I. Ismailov, born in 1939, higher education. Chairman of PJSC MGTS Board of Directors
since 1999, President of Non-commercial organization Union of Communications Equipment
Producers and Consumers.
53
Vladimir S. Lagutin, born in 1947, higher education. A member of PJSC MGTS Board of
Directors since 1998, Director General of JSC Sistema Telecom. The share in the charter capital
of PJSC MGTS is 0,03617%. Owns 29 800 ordinary shares (% of the total number of ordinary
shares – 0,03733) and 4 850 preference shares.
Alexander L. Leiviman, born in 1949, higher education. A member of PJSC MGTS Board of
Directors since 2003, First Vice-President of JSC Sistema Telecom.
Alexander V. Lopatin, born in 1964, higher education. A member of PJSC MGTS Board of
Directors since 2000, Deputy General Director of PJSC Investment The Company of
Communications.
Semen V. Rabovsky, born in 1954, higher education. A member of PJSC MGTS Board of
Directors since 1998, Director General of JSC Comstar. The share in the charter capital of PJSC
MGTS is 0,01321%. Owns 9 900 ordinary shares (% of the total number of ordinary shares –
0,01240) and 2 750 preference shares.
Irina M. Ragozina, born in 1950, higher education. A member of PJSC MGTS Board of Directors
since 2000, Director of Corporate Management Department of PJSC Investment The Company of
Communications.
Viktor D. Savchenko, born in 1960, higher education. A member of PJSC MGTS Board of
Directors since 2002, Director of Law Department of PJSC Investment The Company of
Communications.
Vasily V. Sidorov, born in 1971, higher education. A member of PJSC MGTS Board of Directors
since 2003, President of PJSC Mobile TeleSystems.
Valery N. Yashin, born in1941, higher education. A member of PJSC MGTS Board of Directors
since 2002. Director General of PJSC Investment The Company of Communications.
54
No changes were made in the membership of PJSC MGTS Board of Directors in the
reporting period.
Director General
In August 2003 the Extraordinary General Shareholders’ Meeting elected M.A. Smirnov
Director General of PJSC MGTS for 5 years.
Mikhail A. Smirnov, born in 1950, higher education. Chairman of the Management
Council of PJSC MGTS since 2003.
Management Council of PJSC MGTS
Chairman of the Management Council
1. Mihail A. Smirnov Director General of PJSC MGTS
Members of the Management Council
2. Vladimir A. Afonin Head of HRM Department
3. Irina R. Borisenkova Chief Accountant
4. Aleksey V. Goltsov Deputy General Director
5. Aleksander K. Zhilin Deputy General Director - Chief of
the Security Service
6. Olga A. Zamaldinova Deputy General Director – Head of
IT Department
7. Valentina Ya. Irzhova Head of Law Department
8. Sergey N. Ksenofontov Head of Construction Department
9. Viktor S. Panov Deputy General Director – Head of
the Department of Technical
Operation of Telecommunications
10. Nikolay V. Savlukov Deputy General Director – Head of
Informational Resources and
Systems Department
11. Vladimir I. Sutyagin Deputy General Director – Head of
the Department of Engineering and
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Technical Provision “Service”
12. Viktor A. Chervony Deputy General Director – Head of
Economics and FinanceDepartment
Vladimir A. Afonin, born in 1939, higher education. A member of PJSC MGTS Management
Council since 1998. The share in the charter capital of PJSC MGTS is 0,00031%. Owns 200
ordinary shares (% of the total number of shares – 0,00025) and 100 preference shares.
Irina R. Borisenkova, born in 1963, higher education. A member of PJSC MGTS Management
Council since 2000.
Aleksey V. Goltsov, born in 1965, higher education. A member of PJSC MGTS Management
Council since 2003. The share in the charter capital of PJSC MGTS is 0,00094%. Owns 400
ordinary shares (% of the total number of shares – 0,00050) and 500 preference shares.
Aleksander K. Zhilin, born in 1946, higher education. A member of PJSC MGTS Management
Council since 2000.
Olga A. Zamaldinova, born in 1954, higher education. A member of PJSC MGTS Management
Council since 2003.
Valentina Ya. Irzhova, born in 1946, higher education. A member of PJSC MGTS Management
Council since 1998. The share in the charter capital of PJSC MGTS is 0,00115%. Owns 500
ordinary shares (% of the total number of shares – 0,00063) and 600 preference shares.
Sergey N. Ksenofontov, born in 1955, higher education. A member of PJSC MGTS
Management Council since 1999. The share in the charter capital of PJSC MGTS is 0,00003%.
Owns 30 ordinary shares (% of the total number of shares – 0,00004).
Viktor S. Panov, born in 1950, higher education. A member of PJSC MGTS Management
Council since 1998. The share in the charter capital of PJSC MGTS is 0,00767%. Owns 4 450
ordinary shares (% of the total number of shares – 0,00557) and 2 900 preference shares.
Nikolay V. Savlukov, born in 1958, higher education. A member of PJSC MGTS Management
Council since 1998. The share in the charter capital of PJSC MGTS is 0,00214%. Owns 200
ordinary shares (% of the total number of shares – 0,00025) and 1 850 preference shares.
Vladimir I. Sutyagin, born in 1945, higher education. A member of PJSC MGTS Management
Council since 1999. The share in the charter capital of PJSC MGTS is 0,00256%. Owns 1 200
ordinary shares (% of the total number of shares – 0,00150) and 1 250 preference shares.
56
Viktor A. Chervony, born in 1956, higher education. A member of PJSC MGTS Management
Council since 2000. The share in the charter capital of PJSC MGTS is 0,00053%. Owns 510
ordinary shares (% of the total number of shares – 0,00064).
The Audit Comity
In 2003 the following persons were elected to the Audit Comity:
Chairman of the Audit Comity Nominated by
Vasily V. Platoshin PJSC “AFK “Sistema”
The Audit Comity members Nominated by
Elena V. Bekian PJSC “AFK “Sistema” Konstantin V. Beliaev PJSC «Sviazinvest» Svetlana G. Krhechevskaia PJSC “AFK “Sistema” Irina V. Prokof’eva PJSC «Sviazinvest»
3.2. The Board of Directors activity.
In accordance to the current corporate legislation and Article 13 of PJSC MGTS Charter
The Company’s 2003 Board of Directors was composed of 12 members elected cumulatively.
On its meeting held on June 20, 2003 The Board of Directors elected N.I. Ismailov its
Chairman and V.A. Afonin its Secretary.
The Board of Directors work in 2003 was based on Article 13 Section 2 of The
Company’s Charter. The Board of Directors aimed to keep up to its semi-annual schederule and
concentrated on compliance to “July 7, 2003 General Shareholders Meeting Decisions
Implementation Plan” approved in August 2003.
On July 16, 2003 in accordance to Article 14 Section 4 the Board of Directors accepted the
General Director V.S. Lagutin resignation and decided to hold an additional Shareholders
Meeting to elect The Company’s new General Director.
The additional Shareholders Meeting held on August 15, 2003 elected M.A. Smirnov the
General Director for the term of 5 years.
In its work the Board of Directors paid close attention to in depth analysis of 2004-2008
The Company’s Development Plan and to the use of reserve funds. It also defined The
Company’s main business priorities, set targets for business efficiency and introduction of new
communication services based on modern technology and equipment.
On September 16, 2003 the Board of Directors formed PJSC MGTS Management
Council composed of 13 members.
57
The Board of Directors conducted 20 meetings, including 10 meetings held in a
combined form. It considered 101 issues, including:
- The Company’s 2004-2008 Development Plan;
- issuance of series 04 non-convertible non-documentary bonds kept under
mandatory centralised custody;
- The Company’s accounting Police compliance to both 2004 Russian and 2003
International accounting standards;
- Amendments to Budgeting process procedures;
- adoption of Auditors amendments to The Company’s 2003 financial reports;
- approval of 2004 Budge;
- appointment of the Board of Directors commission to prepare changes and
amendments to The Company’ Charter documents;
- PJSC MGTS management of its subsidiaries and dependent companies
The Board of Directors approved 29 deals of interest.
The Board of Directors conducted its work in line to its competence compiling to the
approved regulations and procedures.
3.3. The Board of Directors The Company’s business development report.
The Company’s 5 years Development Plan defines the following priorities:
- Development and renewal of traditional communication infrastructure, including
construction of new telephone exchanges and expansion and reconstruction of the existing ones;
- Introduction of new services including those provided with PDTN;
- Modernisation of payphone network using new technology;
- Automation of business processes;
- Perfection of Tariff Policy.
PJSC MGTS communication infrastructure developments were based on 2003 Annual
Business Plan and reflected city’s demand for new instalments. The Company put into operation
71,370 lines and 14,200 commutation units. 35,600 lines and 8,200 commutation units were
applied to digitalise existed capacity. In 2003 PJSC MGTS installed capacity amounted
4,367,102 units, including 783,934 digital ones. Digitalisation of the Company’s net capacity is
18%.
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In 2003 PJSC MGTS conducted significant volume of work to modernise
existing analogue exchange commutation nodes installing digital equipment. The
Company as well exopanded, modernised and reconfigurated its SDH fiber-optic
transport network and started it digitalise analogue telephone exchanges NN
222,229,292, 27X and 28X. The Company completed its preparations to open prefix codes
499 and 498.
Installed and used capacity increase, rise of tariffs, additional fund received from new
interconnection contracts enabled The Company to earn RUR’000 1,1725,195 that accounts for
127.6% of the previous year revenue.
Continuing development of traditional communication services The Company introduces
new products. It primarily aims to develop services that are not regulated by the state, for
instance, services provided by PDTN. In the reporting year The Company continued to develop
its PDTN. In 2003 the total number of Internet access nodes reach 215 that enables The
Company to supply PDTN services from all operating exchange.
The number of PDTN subscribers increased by 9,578 amounting 15,500 units most of
which are legal entities. Earnings from PDNT comparing from the previous year increased by
225.5%.
Market evaluation shows that feather development and expansion of PDTN capacity
mainly depends on The Company’s ability to spread out its Internet access PDTN services over
massive household Internet users’ sector.
The Board of Directors considered the issue measures to be taken by the Company to
speed up new technologies and services introduction, including ways to start provision of mass
scale Internet access services. Overtaking this project The Company plans to feather modernise
and upgrade its PDTN to lower the cost of Internet access installations and decrease per use
charges. PDTN services are provided in conjunction to JSC “MTU-Intel”. In the 3rd quarter of
2003 The Company introduced innovative marketing concept included new “STREEM” tariff
plans.
In 2004 it’s planned to keep high Internet access installation rates and to increase the
earnings from PDTN up to RUR 900 million.
The Board of Directors dedicated a special meeting to consider the issues of payphone
network development plan included network structure optimisation and simultaneous modernisation and
introduction of new and more efficient services. The main targets of The Company’s payphone
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network development plan are to organise alternative interconnection SETM equipment
supported system, to provide long distance and international IP-telephony and Internet access
services from The Company’s payphones, including GSM-payphones.
Comparing to 2002 reporting year revenue generated by this segment of The Company’s
business practically remained constant and amounted RUR’000 291,517.
“PJSC MGTS IT development strategy” adopted in 2003 defined the most important
targets of The Company’s business process automation including:
- automation of accounting and economics tasks to interrelate financial and
operational business processes data and to introduce managerial accounting techniques,
- creation of the sole managerial corporate net platform,
In 2003 The Company automated 4 of its telephone branches putting in operation
FORIS multifaceted automation system.
The Company started preparations to corporate information system (CIS) modernisation.
To expand its corporate data transmission network linking automation and information
systems The Company installed network equipment in 75 new locations and started working to
improve Network Management Centre security and performance.
PJSC MGTS is a commercial organisation incorporated as a joint stock the Company.
Therefore, evaluating its results it pays close to both its natural and financial indicators such as
total revenue, expenditure, profit (profitability), cost of capital, capitalisation, labour and
assets efficiency coefficients.
The following factors seriously constraint The Company’s ability to fulfil its
development strategy and to reach the set targets:
- Low share (below 20%) of modern equipment installed limits The Company’s capability
to provide up-to date services,
- PJSC MGTS runs a capital extensive business, hence, its revenue rise may only be
resulted from additional capex increase,
- High level of depreciation (The Company’s fixed assets are valued nearly 40% of its
historical price) demands intensive reconstruction,
- Current depreciation mostly received from depreciation of outdated under priced 50-70ss
equipment and analogue transport network can not be viewed as a sufficient source to finance
up-to-date technology introduction.
The Company’s production and technological basis’ current conditions as well as The
Company’s ability to overcome the lack of the own resources, to find ways to reproduce its
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working assets and to generate funds to finance its investment programmes are critical to its
feather development.
The table presented below demonstrates that in 2003 The Company, as in the previous
years, used debt finance to cover the lack of its own investment funds. At intensive borrowing
that for the last three years has financed more than 50 % of The Company’s capex
consequencelly makes The Company to allocate higher portion its resources to leverage
servicing.
Table 3.3.1. Capital Investment Sources (RUR’000)
2001 Share, % 2002 Share, % 2003 Share, %
The Company’s own resources (depreciating)
520 545 22,2 862 756 36,1 1 006 808 38,4
Borrowed funds (Loans, bonds, leasing)
1 828 239 77,8 1 529 179 63,9 1 614 231 61,6
Total 2 348 784 100,0 2 391 935 100,0 2 621 039 100,0
The Company’s capital investment sources structure will remain unchanged for the
near future.
In 2003 the Board of Directors considered the number of tariff policy aspects.
In 2003, as in the previous years, The Company continued its cross-finance practices
covering the losses generated from the provision of underpriced services to household
subscribers with revenues received from its corporate clientele as tariffs set for household
customers did not cover its costs.
Notably, there is positive movement in this issue. In 2002 revenue received from
households covered 60% of the cost of services provided while in 2003 this share rose up to
85%, mainly due to the increase in tariffs.
To provide economically justified tariffs and to comply to Russian Federation
Government legislation N173 from March 11, 2001 “On communication operators introduction
of service based cost and revenue evaluation practices” and to PJSC “Sviazinvest”
methodological recommendations The Company introduced service based cost and revenue
evaluation system.
Over all, The Company managed to increase its business effectiveness in 2003.
The Company’s 2003 total revenue rose comparing to 2002 by 26.5% and amounted
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RUR,000 12,775,163.
At the same time The Company’s 2003 total expenditure amounted RUR’000 9,039,573
98.2% of its business plan level (RUR’000 9,203,376). In comparecence to the previous year
the expenditure growth rate amounted 120.6%.
In accordance to 2003 business activity results the net profit amounted RUR’000
1,936,894 that is 110.8% of the business plan figure. Revenue growth rate (126.5%) prevailing
expenses growth rate(120.6%) enabled The Company to over take planned indicator.
Notably, accelerated revenue growth rate, decreased operating costs and increased sales
efficiency lead to the rise in The Company’s profit by 23.1% against 2003 business plan level.
RUR 100 of The Company’s revenue coasted RUR 70.76 which is 3.1% lower than that
was planned.
Comparing to 2003 business plan there was a rise in The Company’s labor and line
efficiency:
- revenue per line rose by 1.3%, profit per line by 20.6%;
- EBITDA per 1 employee amounted RUR’000 234.73 that is 9.4 % above
business plan figure.
The business efficiency indicators rise reflected successful dynamics of The Company’s
development, encouraged investors and led to the sufficient growth of The Company’s
capitalization from USD 551.6 million as on December 31,2002 up to USD 1 117.48 million as
on December 31, 2003.
Such factors as a strong foundation for future accelerated network reconstruction,
positive dynamics of economic effectiveness indicators and The Company’s ability to control its
business activity and accomplish its plans allow to make a proposition for The Company’s
feather successful development despite the constraints mentioned above.
3.4. The activity of PJSC MGTS Management Council.
The Board of Directors on September 29, 2003 set up the Management Council
consisting of 13 members for 2 years.
On December 23, 2003 the Board of Directors passed early termination of S.V.
Rabovsky’s, a member of the Management Council, power because of his work place change,
and introduced A.V. Goltsov, Deputy General Director of the Company, to the Management
Council.
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On January 27, 2004 the power of a Management Council member V.O. Kostrov were
early terminated due to his change of work place.
In its activity the collective executive body of the Company is guided by the legislation
concerning joint-stock companies, by the Charter and inner normative documents of PJSC
MGTS.
The Management Council paid the main attention to working out and putting into effect
the Program of PJSC MGTS development in 2004-2008, which was approved by the Board of
Directors. The Program is based on the plan of telephone network reconstruction, which
provides for termination of this task by 2012.
The Management Council on a regular basis take decisions on putting into practice the
Charter tasks and aims, control accomplishing of current and long-term plans in different
spheres of activities, listen to the reports of Heads of Departments and detached structures,
approve inner documents governing the aspects which are in the competence of the
Management Council, prepare materials for the Board of directors’ consideration.
The collective executive body attached great importance to the growth of network-installed
capacity, the dynamics of the tariffs for non-regulated communications services, reduction of
operation costs, increase of productivity and optimisation of the staff number, putting into
practice investment programs, complex automation of technological and managerial processes.
The Management Council conduct their meetings regularly observing all the established
norms and procedures. This year Management Council held 7 meetings where 31 issues were
considered. Every meeting the members listen to the report of the Management Council’s
Secretary on the implementation of the Board of Directors and the Management Council’s
decisions.
The Management Council took decisions on the following issues:
- draft business plan of the Company for 2004;
- use of telephone lines encoded ABC-095, 499, 495;
- implementation of Department of Informational Recourses and Technologies
development plan;
- Program of independent pensions for PJSC MGTS employees;
- funding of social structures;
- introduction of some changes and additions into the Regulations on criteria of
applicants to study at PJSC MGTS’ expense;
- automation of technological and managerial processes;
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- accomplishment of the decisions taken at the annual General Shareholders’ Meeting
held in 2003;
- preparation of the Company’s annual report for 2003;
- Regulations on setting up and control over PJSC MGTS budget (new version)
The Management Council always pays its attention to the network development and
reconstruction, to the state of affairs concerning indebtedness, contract work in the structural
departments and other problems.
Remuneration paid to the members of PJSC MGTS management bodies in 2003.
Payment of remuneration, benefits and/or compensations of expenses to the members of
the Company’s Board of Directors are regulated by Article 9 “Remuneration and compensations
of expenses to the members of the Company’s Board of Directors” of Regulations on the Board
of Directors of Public Joint-Stock The Company MGTS confirmed by PJSC MGTS General
Shareholders’ Meeting on June 15, 2002.
1. The Board of Directors members, while they are in power, are paid
remuneration at the end of every six months of work, as well as compensation
of current expenses pursuant to the activity of the Board of Directors
members.
2. The remuneration is paid to the members of the Board of Directors from a
special fund which is formed by contribution of 0,4% of the Company’s profit
after paying taxes and contribution to the reserve fund of the Company.
3. The decision on paying remuneration and compensation of current expenses
pursuant to the activity of the Board of Directors members is taken at the
meeting of the Board of Directors, by a simple majority following a proposal
of Chairman of the Board of Directors in accordance with the personal
contribution and the work made.
Remuneration is not paid to the member of the Board of Directors if he has taken part in
less than a half of the meetings of the Board of Directors.
The Board of Directors member, whose personal remuneration is on the election, doesn’t
vote.
The members of the Board of Directors are not enabled to receive any other
remuneration and compensations besides those provided for it these Regulations.
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The total amount of remuneration paid out in the reporting year to the members of the
Company’s Board of Directors in 2003:
Salary (RUR): 0
Bonuses (RUR): 4 012 866
Commissions (RUR): 0
Other payments (RUR): 0
Total (RUR): 4 012 866
Payment of remuneration, benefits and/or compensations of expenses to the members of
the Company’s collective executive body are regulated by Article 11 “Remuneration and
compensations of expenses to the members of the Company’s Management Council” of
Regulations on the Management Council of Public Joint-Stock The Company MGTS confirmed
by PJSC MGTS General Shareholders’ Meeting on June 15, 2002.
- The Management Council members, while they are in power, are paid remuneration
at the end of every six months of work, as well as compensation of current expenses
pursuant to the activity of the Management Council members.
- The decision on paying remuneration and compensation of current expenses pursuant
to the activity of the Management Council members is taken at the meeting of the
Management Council, by a simple majority following a proposal of the General
Director in accordance with the personal contribution and the work made.
- Remuneration is not paid to the member of the Management Council if he has taken
part in less than a half of the meetings of the Management Council.
- The Management Council member, whose personal remuneration is on the election,
doesn’t vote.
The total amount of remuneration paid out in the reporting year to the members of the
Company’s collective executive body in 2003:
Salary (RUR): 10 256 755,22
Bonuses (RUR): 1 195 524
Commissions (RUR): 0
Other payments (RUR): 0
Total (RUR): 11 452 279,22
Payment of remuneration, benefits and/or compensations of expenses to the members of
the Company’s Auditing Commission are regulated by items 3,4 Article 9 “Financial Provision
of the Auditing Commission. Remuneration and compensations to the members of the Auditing
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Commission” of Regulations on the Auditing Commission of Public Joint-Stock The Company
MGTS confirmed by PJSC MGTS General Shareholders’ Meeting on June 15, 2002.
- All authorized expenses pursuant to their current activity are compensated to the
Auditing Commission members.
- The remuneration is paid to the members of the Auditing Commission from a special
fund that is formed by contribution of 0,05% of the Company’s profit after paying
taxes and contribution to the reserve fund of the Company.
- The remuneration to the members of the Auditing Commission is paid in the terms
and in the way stipulated for the remuneration payment to the members of the Board
of Directors.
3.5. Information on the Company’s following to the Code of corporate
behaviour.
The system of corporate behaviour in PJSC MGTS is based on the principles of
corporate behaviour introduced by the Code of the same name by the Federal Securities
Commission of the Russian Federation. Some of the points of the Code can be found in the
Charter documents of the Company. The Company has worked out the Order of conducting the
General Shareholders’ Meeting, which mainly complies with the Code. The established way of
sizing and distribution of dividends is comprehensible for the shareholders and transparent. The
Company in proper time and in full size reveals information in mass media, on the corporate site
and in the information services of the trading systems (RTS, MICEX) on its financial and
economic activities by way of press-releases, considerable facts, Lists of affiliated persons and
quarterly published reports on emissive securities, conducts independent audit of financial
accounts. The Company’s management bodies work on a permanent basis, conducting their
meetings at least once a month (as a rule once in 3 weeks). The Company has established
mechanisms of settling corporate disputes: the proper recognition and legal authorizing of
interested deals, informing the shareholders and other interested persons of the deals with the
Company’s securities effected by the members of management bodies. The annual results and
the accounts of the Company are provided for the users in a comprehensible way with all the
comments necessary for decision-making.
The Company plans to go on working in the following directions:
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- to perfect the corporate behaviour of the Company, its officials and affiliated
persons;
- To maintain the high level of business culture in the relations between the
Company’s participants (shareholders, officials, employees, counter-agents, state
regulators)
- to introduce a high-performance method of protection of all the shareholders’
interests irrespectively of the shares number they own.
- to introduce standards of The Company’s business transparency and openness.
- to regulate the work order, subordination and accountability, spheres of responsibility
of the Company’s governing bodies members towards the proprietors of the
Company.
- to work out a mechanism of preventing and/or settling down business conflicts.
- to perfect the methods of inner and outer control over the Company’s governing
bodies effectiveness and/or compliance of their activity with the Company’s
shareholders interests.
3.6. The main risk factors of the Company’s activities.
Macroeconomic risks
The Company’s activities are subject to a variety of risks in macroeconomic, innovation,
operational, financial and legal fields.
From macroeconomic point of view substantial risks appear as a result of inflation,
monetary policy of the Central Bank.
Inflation leads to an increase in the expenses of the Company. As growth of regulated
services costs appear The Company applies to the regulating body (Ministry for Antimonopoly
Policy) for a tariffs increase. The regulating body accepts the necessity of the growth of tariffs
in accordance to the increase of the inflation rate in the country. The market determines the hike
of non-regulated tariffs; inflation usually leads to a change of such tariffs.
An alteration of dollar exchange rate influences the Company’s financial results but
doesn’t determine them, as the main tariffs are nominated in RUR. The growth of dollar
exchange rate on one hand leads to an increase in the costs of production as suppliers often
stipulate dollar as the currency of contracts, and on the other hand, it leads to an increase in
investment costs as suppliers nominate the price of equipment in dollars or in euro. RUR
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strengthening has the contrary effects. As a result of 2003 foreign currency exchange losses
amounted RUR 1.4 million or 0.02% of current expenses. In the reporting year the increase in
investment expenses because of the growth of dollar exchange rate is valued at RUR 96.0
million or 3.7% of capital spending. The Company puts a calculation of dollar exchange rate
into its business plans and budgets in accordance with the Government’s esteems, thus reducing
the risk of unpredicted financial losses.
Innovation risks
Innovation risks stand for the consequences of a rapid development of telecom
technologies. Appearance of new telecom services results in intensive capital investments in
new equipment with no guaranteed paybacks to and demand for such innovations. The
Company reduces such risks by introducing test sample areas and projects, which let without
any additional costs try new technologies and equipment, as well as check whether there is
demand for new services. In the reporting year the costs of this kind amounted RUR 154.6
million or 5.9% of capital spending. The project planned for 2004 will increase such costs to
RUR 400 billion.
Operational risks
Operational risks are the risks of the loss of control over the market, the risk of reduction
in revenue taking into account the legislation on benefits for communications services, the risks
of decrease in the quality of the services or suspension of services due to technical reasons.
In 2003 the Company’s market share according to the number of main telephone sets in
Moscow was 76%. As to the revenue share the Company got 55.8% of the revenue on the fixed
telephony market in Moscow. In 2004 this market is supposed to expand from RUR 20.2 to 23
billion. The number of The Company’s main telephone sets will grow by 50 718. Thus at the
present time the Company doesn’t suffer from the risk of traditional market share loss. Besides
this the control over the fixed telephony market allows to conduct an active marketing policy to
promote the new service of broadband data transmission network. At the end of the reporting
year 15 500 clients used this service, the forecast for 2004 – 41 000 users. The risk of market
loss in this case is considerably reduced by The Company’s advantages in the direct access to
potential clients, as well as by the dynamic marketing policy of the current years.
The causes of suspended access to the network are the risk of fire, damages of line and
cable constructions, of outer energy provision. In order to eliminate the possibility of fire caused
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by an outer tension on the line, new protecting fixtures are mounted. The Company insures its
property to get the insurance in the future. The total insurance costs amount to 1,9% of all
current expenses. The risk of line and cable constructions damages is reduced by completing a
number of tasks: control over constructing firms, legal measures to compensate the losses,
mounting of special locking fixtures on telephone shafts, cooperation with security service of
Moscow (concerning thefts of cables). Other technical risks (instability of out-of-date systems
operation, the consequences of breakdowns of transport system equipment) are eliminated by
modernization of the equipment, optimisation of the telephone network, applying new technical
inventions. In the reporting year the total capital spending on modernization of the network
reached RUR 884.7 million.
The Company conducts a current monitoring to estimate the level of revenue gatherings.
The share of outdated receivables in the last 5 years decreased from 3.2% to 0.8% of the
revenue. On the whole the risk of communications services income reduction is negligible due
to the opportunity to stop providing a service. Nowadays there is a risk of not receiving the
income from the beneficiary groups of people. According to the Federal laws veterans and
disabled people are granted with subscription fee discounts. The losses are specified in item 1.4.
In order to reduce the risk of not getting the revenue from the Federal budget and the budget of
Moscow The Company sets a reserve for the sum of three-month outdated debt, uses managerial
and legal measures to increase the share of compensates expenses. In 2002 the Company got
RUR 242.8 million compensation (39.5% of the respective expenses), in 2003 – RUR 210.8
million (24.2%).
Financial risks
The Company bears the risk of change of interest rate and foreign currency exchange.
At the end of 2003 the Company’s debt has the following structure:
Size of debt Currency of debt Effective interest rate
2 450 569 thousand RUR 16.42%
38 105 thousand USD 9.68%
A 1% increase in the RUR interest rate will lead to a RUR 35.3 million increase in the
debt service, if the foreign currency interest rate hikes by 1% - by USD 404 thousand. If the
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exchange rate of dollar rises by 1 RUR during the year, by the end of the year the volume of
debt will grow by RUR 38.4 million and the service payments – by RUR 2.6 million.
The Company imports substantial amounts of foreign equipment, paying for it in foreign
currency. A surge of the exchange rate makes the purchases more expensive, leads to additional
investment and other operational expenses. In order to minimize such risks The Company buys
such equipment as usual with term of payment by instalments. Thus immediately after a surge of
exchange rates the Company will pay only a part of the debt to the supplier. In the future the
Company will raise the tariffs to the level necessary to compensate the foreign exchange losses.
In 2004 to avoid currency and interest rates risks PJSC MGTS is going to reduce the
debt costs, increasing their terms. The Company’s net profit received in the reporting year will
let us reduce raising finance and in case of unstable credit market to pay off the most risky debts
earlier. Moreover, the size of payables amounts 18.2% of the whole year cash flow. The
Company with sales profitability reaching 40% is able to pay off all liabilities within 6 months.
Legal risks
The Company’s activity in accordance with the legislation should be licensed. The
Company has received the main licenses for communications services provision:
1. Provision of local telephony services (lic. №30000, valid till 11.12.2013).
2. Provision of data transmission services (lic. №29334, valid till 11.12.2008).
3. Provision of telematic services (lic.# 29335, valid till 11.12.2006).
4. Leasing of connection channels (lic. №29336, valid till 11.12.2013).
5. Provision of local, long distance and international communications services using the
network of payphones.
The Company complies with all the terms and conditions provided in the licenses, and
finds the risk of not extending the licenses negligible.
As to the foreign currency legislation the Company is not an exporter and has no
currency revenue. Changes in the foreign currency legislation may cause an increase in the
Company’s costs of raising finance in foreign currency, and, accordingly, a rise in investment
expenses in case of payment delay. A reduction of currency risks will be provided for by a rise
of the share of local suppliers’ equipment.
The Company is a legal entity and a tax agent and in compliance with the Tax Code it
pays and charges taxes in favour of state institutions.
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The 28,2% growth of tax burden in 2003 originates from the increase of the Company’s
net profit and from inflation. Despite the decrease of VAT rate from 20% to 18% on January 1,
2004, the Company plans a 3,1% growth of taxes from RUR 3 614 065 thousand in 2003 to
RUR 3 724 957 thousand in 2004. This is caused by a rise of the expenses on the property tax
which hiked from 2 to 2,5% and by a change of the tax base because of as well the cancellation
of benefits on line and cable constructions. No other tax risks are forecasted to come.
Buying a part of equipment in foreign states, the Company bears the risks of changes in
the customs legislation.
Introduction of licensing, certification and other allowance measures towards imported
telecom equipment may lead to an increase in the cost price. Introduction of a forbidding
measures or quotas on import of some goods may lead to a reduction of shipments volumes.
Nowadays no risk of introduction of some limiting measures on telecom equipment import can
be reasonably predicted. Mid-term risks of some forbidding measures are worthwhile to
consider negligible, as nowadays the largest suppliers of PJSC MGTS Storm Telecom and
Lucent Technologies have established their manufacturing lines in Russia. A real tax risk is
coming into effect of the new Tax Code from January 1, 2004. It adds claims towards provision
for customs payments, customs brokers, owners of stocks and customs bonds, carriers and this
may lead to a rise of expenses on customs legislation and consignment transportation. Despite
the risen transportation and storage costs, in 2004 the Company will reduce the customs
payments due to VAT decline from 20 to 18% and the respective decrease of the customs base.
3.7. Report of large and related party transactions
In 2003 the Company concluded 37 interested deals, total sum of which was RUR 1 492
601,8 thousand.
The Company didn’t conclude any large deals regulated by item 78 of the Federal law
“On Joint-Stock Companies” dated December 26, 1995.
Counter-agents in the interested deals made in 2003 were the following organizations:
Lease contracts:
1. Lease contract for immovable property in ownership of PJSC Rostelecom,
situated in Bryanskaya Street 3, Moscow between PJSC Rostelecom and PJSC
MGTS;
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2. Lease contract for immovable property in ownership of PJSC Rostelecom,
situated in Zubovskaya Square 3, building 1, Moscow between PJSC
Rostelecom and PJSC MGTS;
3. Lease contract for store buildings in ownership of PJSC MGTS situated in
Fabricius Street 56, building 2, Moscow at telephone exchange-949 of
Tushinsky Division of PJSC MGTS between PJSC MGTS and PJSC Central
Telecom The Company;
4. Additional agreement to Lease contract for store building between PJSC
Rostelecom and PJSC MGTS;
5. Lease contract for store buildings in ownership of PJSC MGTS situated in
Dekabristov Street 27, Moscow at telephone exchange-402 of Petrovsky
Division of PJSC MGTS between PJSC MGTS and PJSC Rostelecom;
6. Lease contract for place in the telephone canalisation for construction and
placing of a communications cable between PJSC MGTS and PJSC Central
Telegraph;
7. Additional agreement to Lease contract for place in the telephone canalisation
for construction and placing of a communications cable between PJSC MGTS
and PJSC Central Telegraph;
8. Lease contract for store buildings, total square – 977,8 sqr. m., situated in
Gorodeckaya Street 8-A, telephone exchange-701 of Lublinsky Division,
Moscow, between PJSC MGTS (Lesser) and PJSC MTS (Leaser);
9. Lease contract for store buildings, total square – 1001 sqr. m., situated in
Kuhmisterov Street 5, telephone exchange-353 of Lublinsky Division,
Moscow, between PJSC MGTS (Lessor) and PJSC MTS (Leaser);
The sum total of lease contracts amounts RUR 30 905,2 thousand.
Contracts for complex resources supplies:
10. Contract for complex resources supplies for technological equipment
operation at manufacturing sites of PJSC MGTS Divisions between PJSC
MGTS and PJSC Rostelecom;
11. Contract for attaching a fragment of PJSC Central Telegraph electric
communications network, based on indexes 542, 543, 544, 580, 585, 589
encoded ABC 095, to the public electric communications network by
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supplying access to PJSC MGTS’ communications constructions and technical
resources;
12. Contract for attaching a fragment of PJSC Central Telegraph electric
communications network, based on indexes 510, 514, 517, 518 encoded ABC
095, to the public electric communications network by supplying access to
PJSC MGTS’ communications constructions and technical resources;
13. Contract for attaching the data transmission network and telematic services of
the affiliated operator (JSC Telmos) to the network of public data transmission
of the affiliating operator (PJSC MGTS);
14. Contract for interaction between the data transmission network and telematic
services of JSC Telmos and the network of public data transmission of PJSC
MGTS;
15. Contract for attaching the IP data transmission network of PJSC MGTS (AS
25513) to the IP data transmission network of JSC MTU-Intel (AS 8359);
16. Contract for supplying by JSC MTU-Intel admission of the transit and local
traffic of PJSC MGTS IP data transmission network (AS 25513) to/from
global Internet through the IP data transmission network of JSC MTU-Intel
(AS 8359);
17. Additional agreement to the contract for attachment between PJSC MGTS and
JSC MTU-Intel about extension of the size and characteristics of the resource
of network coupling;
18. Contract for attaching the data transmission network and telematic services of
the affiliated operator JSC The Company MTU-Inform to the network of
public data transmission of the affiliating operator PJSC MGTS;
19. Contract for interaction between electric communications commutated
networks of PJSC MGTS and PJSC Central Telegraph;
20. Contract for attaching (index abx = 788 encoded ABC = 095) to the public
electric communications network between PJSC MGTS and JSC Telmos;
21. Additional agreement to Contract for complex resources supplies for
technological equipment operation at manufacturing sites of PJSC MGTS
Divisions between PJSC MGTS and PJSC Center Telecom;
The sum total of contracts for complex resources supplies amounts RUR 510 124,6
thousand.
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Contracts for equipment supplies:
22. Contract for supplies of an equipment set for arranging points of porting and
porting of connective lines to a fragment, the operator of which is PJSC
MGTS, designed for switching on PJSC Postelecom network, between PJSC
MGTS (Buyer) and PJSC Postelecom (Supplier);
23. Contract for supplies of equipment and materials between PJSC MGTS
(Buyer) and JSC Mediatel (Seller);
24. Contract for supplies of telecom equipment MEDIO CO and software between
JSC Mediatel (Supplier), JSC Invest-Svyaz-Holding (Lesser) and PJSC MGTS
(Leaser);
25. Lease contract between JSC Invest-Svyaz-Holding (Lesser) and PJSC MGTS
(Leaser);
26. Equipment purchase contract between PJSC MGTS and PJSC MTT.
The sum total of contracts for equipment supplies amounts RUR 505 860,5 thousand.
Financial contracts:
27. Agreement about termination of a part of mutual obligations between PJSC
MGTS and PJSC Central Telegraph;
28. Contract for settling legal relationship in order to deal with claims about the
services stated in the Contract, and also to prevent unapproved access of PJSC
MGTS subscribers to the network of PJSC Rostelecom, between PJSC MGTS
and PJSC Rostelecom;
29. Contract for accomplishing the functions of paying agent concerning PJSC
MGTS bonds of A3 issue (state registration number 4-03-00083-A of
December 10, 2002) between PJSC MGTS and PJSC MBRR;
30. Purchase contract for registered paperless shares of JSC City-Telecom
between PJSC MGTS (Buyer) and JSC City-Telecom (Seller):
31. Contract for rendering consulting services between JSC Mediatel and PJSC
MGTS.
The sum total of financial contracts amounts RUR 445 711,5 thousand.
74
4. Financial Overview for 5 years period
The Company’s balance sheet total increased by 1.7 times over the five years,
amounting to RUR 24,868 million as at the end of 2003.
Fixed assets and other non-current assets account for 86.2% of the Company’s assets,
which is inherent in the telecom industry.
Over the last 5 years The Company’s own funds share in balance sheet total rose by
20.1% and currently prevail in the Company’s capital structure, making up 71.3% as on January
1, 2004. Own funds account for the Company’s equity increased by RUR 10,267 million over
the last five years.
The given diagram presents The Company’s balance structure in 1999-2003.
I – Current assets
II – Non current assets
III – Equity
IV – Long term liability
V – Short term liability
Over the last 5 years The Company’s annual revenue rose by 2.9 times and amounted
RUR 12,775 million in 2003. The average annual growth rate made up 130.2%. The key
factors lead to revenue growth are rise of tariff and increased volume of the services provided.
The Company’s operating costs in the reporting period rose by 2.9 times and amounted
RUR 9,040 million. The average annual growth rate made up 131.3%.
Rapid growth of The Company’s operating costs was noticed in 1999 and in 2001. It
was resulted from both fixed assets revaluation conducted in these years and application of
V 18,7%
II13,8%
IV16,2%
III65,1%
I86,2%
Актив Пассив
75
accelerated depreciation at those times. In the rest of the years the Company’s revenue growth
rate was prevailing operating costs growth rate as a result of The Company’s effective work.
While the Company incurred a loss in 1999 resulted from the revaluation of its foreign
currency liabilities following the devaluation of the national currency it made steady profits
within 4 subsequent years. As a result its net profit growth rate amounted 248%.
In 1999-2003 the average cash inflows growth rate made up 122.4% while the average
cash outflows growth rate amounted 122.3%.
The share of expenses related to investing and financial activities in the cash used have
decreased to 46.5%. An increase in the share of current operating expenses was caused by
growing inflation and rising taxes.
The Company’s cash flows are well balanced, the net cash flow and cash flow balance
dynamics being indicative of The Company’s financial stability.
Table 4.1.
Balance Sheet of MGTS for the years 1999 through 2003 (in RUR’000)
ASSETS As at 31.12.99
As at 31.12.00
As at 31.12.01
As at 31.12.02
As at 31.12.03
1. Non-current assets Intangible assets 46 260 134 367 115 775 94 013 84 234 Fixed assets 8 187 602 12 482 276 16 698 015 17 687 061 18 512 764 Construction in progress 2 745 114 1 490 842 1 961 228 1 460 884 1 347 304 Long-term financial investments 125 822 948 258 936 038 913 103 1 005 746
Differed taxes 0 0 0 0 270 450
Other non-current assets 711 484 0 0 0 0 Total Section 1 11 816 282 15 055 743 19 711 056 20 155 061 21 220 498 2. Current assets Inventories 262 975 292 841 466 446 670 447 724 720 VAT reimbursable
294 095 35 760 231 495 374 595 353 565
Accounts receivable 927 797 972 553 1 178 431 1 210 997 1 345 992 Short-term financial investments 849 780 121 459 125 940 417 507 703 745 Cash 474 921 399 939 359 656 749 605 544 118 Other current assets 43 0 0 0 0 Total Section 2 2 809 611 1 822 552 2 361 968 3 423 151 3 672 140 Total assets 14 625 893 16 878 295 22 073 024 23 578 212 24 892 638
LIABILITIES AND EQUITY As at
31.12.99 As at
31.12.00 As at
31.12.01 As at
31.12.02 As at
31.12.03 3. Capital and reserves Share capital 1 915 901 1 915 901 1 915 901 3 831 802 3 831 802 Additional paid-in capital 6 742 884 9 736 875 13 851 921 11 935 938 11 935 934 Reserves and retained earnings -1 169 534 -1 142 147 -938 152 97 346 1 988 382 Total Section 3 7 489 251 10 510 629 14 829 670 15 865 086 17 756 118 4. Long-term liabilities
76
Borrowings 5 164 477 651 618 4 371 661 2 350 857 2 420 943
Differed taxes 0 0 0 0 329 272 Other long-term liabilities 0 301 857 309 147 341 552 297 862 Total Section 4 5 164 477 953 475 4 680 808 2 692 409 3 048 077 5. Short-term liabilities Borrowed funds 760 146 4 195 555 631 543 2 637 156 1 218 654 Accounts payable 1 211 106 998 343 1 352 445 1 261 592 1 225 042 Payable dividends 232 108 1 318 464 900 Deferred income 0 220 177 577 240 1 121 505 1 643 847 Other short-term liabilities 681 10 0 0 0 Total Section 5 1 972 165 5 414 193 2 562 546 5 020 717 4 088 443
Total equity and liabilities 14 625 893 16 878 295 22 073 024 23 578 212 24 892 638
Table 4.2.
Income Statement for the years 1999 through 2003 (in RUR’000)
Description 1999 2000 2001 2002 2003
Net revenues from sales of goods, work, services (less VAT, excise taxes and equivalent payments)
4 453 285 6 077 387 7 937 492 10 101 968 12 775 163
Cost of sales, general and administrative expenses 3 080 080 4 091 044 6 082 418 7 494 157 9 039 573
Income (loss) on sales 1 373 205 1 986 343 1 855 074 2 607 811 3 735 590
Interest income 65 301 30 492 12 691 28 253 62 513
Interest expense 432 432 629 418 784 640 830 674 499 428
Investment income 46 809 8 680 49 184 61 127 38 704
Other operating income 1 805 208 2 269 671 444 428 711 326 1 586 609
Other operating expenses 1 600 761 2 282 465 746 498 1 138 943 2 441 887
Operating income 1 257 330 1 383 303 830 239 1 438 900 2 482 101
Non-sale income 490 737 402 147 94 209 140 407 532 468
Non-sale expenses 1 723 525 797 369 417 271 307 128 393 956
Income (loss) before taxes 24 542 988 081 507 177 1 272 179 2 620 613
Differed tax assets 0 0 0 0 94 602
Differed tax liabilities 0 0 0 0 67 811
Income tax 120 628 207 063 140 744 145 761 521 306
Retained profit (loss) -96 086 781 018 366 433 1 126 418 1 936 894
Table 4.3.
77
Cash Flow Statement for the years 1999 through 2003
(in RUR’000)
Description 1999 2000 2001 2002 2003
Cash and its equivalents at the beginning of the period 565 917 483 622 406 296 359 571 707 380
Operating activity
Cash received 5 757 196 9 154 420 10 080 450 12 776 404 15 232 788
Cash used 3 784 794 6 440 376 7 039 792 8 485 406 10 617 230
Operating activity net cash flow 1 972 402 2 714 044 3 040 658 4 290 998 4 615 558
Investing activity
Cash received 1 361 924 733 562 170 877 40 624 398 140
Cash used 1 427 325 2 188 489 2 441 870 2 668 007 3 489 390
Investing activity net cash flow -65 401 -1 454 927 -2 270 993 -2 627 383 -3 091 250
Financing activity
Cash received 5 551 346 4 218 012 8 848 443 1 801 719 4 048 793
Cash used 7 553 734 5 563 926 9 665 937 3 077 320 5 736 363
Financing activity net cash flow -2 002 388 -1 345 914 -817 494 -1 275 601 -1 687 569
Net cash flow -95 387 -86 797 -47 829 388 014 -163 261
Cash and its equivalents at the end of the period 470 530 396 825 358 467 747 585 544 118
78
5. Financial statements of PJSC MGTS for the year 2003
prepared in accordance with Russian Accounting Standards
BALANCE SHEET as of December 31, 2003
CODES Form № 1 по ОКUD 0710001 Date (year, months, day) 2003/12/31 The Company Public Joint Stock The Company OKPO 04856548 "Moscow City Telephone Network" INN 7710016640 OKDP 64.20 Taxpayer's identification number 7710016640 OKOPF/Industry (type of activity) Communication services OKFS
47/16
OKEI 384 Legal status/form of ownership Open joint stock the Company Units of measurement thousands rubles Address 12 Petrovsky blvd., bld. 3, 101999 K-51, GSP-9, Moscow, 103804
ASSETS Line code Opening balance Closing balance
1 2 3 4
I. NON- CURRENT ASSETS
Intangible assets 110 94 013 84 234 Fixed assets 120 17 687 061 18 512 764 Construction in progress 130 1 460 884 1 347 304 Long term financial investments 140 913 103 1 005 746 Deferred tax assets 145 365 052 270 450
Total Section I 190 20 520 113 21 220 498
II. CURRENT ASSETS Inventories 210 670 447 724 720
including: raw materials and their equivalents 211 341 143 374 846 work in progress 213 6 924 11 565 finished goods and goods for re-sale 214 2 657 5 406 goods shipped 215 9 28 prepaid expenses 216 319 714 332 875
Value Added Tax reimbursable 220 374 595 353 565
Receivables maturing after 12 months
230 151 620 25 292 including:
other debtors 232 151 620 25 292
Receivables maturing within 12 months
240
1 059 377
1 320 700 including:
trade receivables 241 790 220 1 002 351 advances paid to suppliers 245 178 334 87 169 other debtors 246 90 823 231 180
Short-term investments 250 459 505 703 745 Cash and cash equivalents 260 707 607 544 118
79
Total Section II 290 3 423 151 3 672 140
TOTAL ASSETS (lines 190+290) 300 23 943 264 24 892 638
80
EQUITY AND LIABILITIES Line сode Opening balance Closing balance
1 2 3 4
III. EQUITY
Share capital 410 3 831 802 3 831 802
Additional paid in capital 420 11 935 938 11 935 934
Retained earnings 470 1 247 486 51 488
Accumulated deficit 471 (1 029 072) −
Income of current year 472 Х 1 936 894
Total Section III 490 15 986 154 17 756 118
IV. LONG TERM LIABILITIES Long-term loans 510 2 350 857 2 420 943
Deferred tax liabilities 515 261 461 329 272
Other long term liabilities 520 341 552 297 862
Total Section IV 590 2 953 870 3 048 077
V. CURRENT LIABILITIES Short-term loans 610 2 637 156 1 218 654
Current payables 620 1 244 115 1 225 042
including: trade payables 621 449 368 490 827
accrued wages and salaries 622 78 042 122 421
social insurance payable 623 44 957 24 295
taxes payable 624 84 624 210 651
advances received 625 547 166 348 129
other creditors 626 39 958 28 719
Dividends payable 630 464 900
Deferred revenues 640 1 121 505 1 643 847
Total Section V 690 5 003 240 4 088 443
TOTAL EQUITY AND LIABILITIES (lines 490+590+690) 700 23 943 264 24 892 638
OFF-BALANCE SHEET ACCOUNTS
Description Line сode Opening balance Closing balance
1 2 3 4
Assets leased, as lessee: 910 802 812 823 427 including capital lease agreements 911 514 839 556 482
Assets accepted for storage 920 159 195
Consignment goods received 930 − −
Bad debts written off 940
39 988
60 465
Collateral received 950 242 068 201 878 Collateral issued 960 502 784 257 080 Depreciation of dwelling premises 970 3 790 3 913 Depreciation of non-productive facilities 980 269 395
Intangible assets receivable 990 4 937 360 861
81
STATEMENT OF PROFIT AND LOSS for the year 2003
CODES Form № 2 по ОКUD 0710002 Date (year, months, day) 2003/12/31 The Company Public Joint Stock The Company OKPO 04856548 "Moscow City Telephone Network" INN 7710016640 OKDP 64.20 Taxpayer's identification number 7710016640 OKOPF/Industry (type of activity) Communication services OKFS
47/16
OKEI 384 Legal status/form of ownership Open joint stock the Company Units of measurement thousands rubles
Description Line code Current year Prior year
1 2 3 4
REVENUES AND OPERATING COSTS
Gross revenue from sales of goods and services
(less VAT, excises and equivalent payments) 010 12 775 163 10 101 968
Cost of sales 020 (7 565 557) (6 202 616)
Gross profit 029 5 209 606 3 899 352
Selling expenses 030 (35 343) (48 626)
General & administrative expenses 040 (1 438 673) (1 242 915)
Profit (loss) on sales 050 3 735 590 2 607 811
OTHER INCOME AND EXPENSES Interest income 060 62 513 28 253
Interest expenses 070 (499 428) (830 674)
Investment income 080 38 704 61 127
Other operating income 090 1 586 609 711 326
Other operating expenses 100 (2 441 887) (1 138 943)
Non-operating gains 120 532 468 140 407
Non-operating losses 130 (393 956) (307 128)
Income (loss) before tax 140 2 620 613 1 272 179
Deferred tax assets 141 (94 602) −
Deferred tax liabilities 142 (67 811) −
Income tax 150 (521 306) (145 761) NET INCOME 190 1 936 894 1 126 418
ADDITIONAL INFORMATION Fixed tax assets 200.1 46 256 −
Fixed tax liabilities 200.2 (92 697) −
Basic earnings per share 210 0,02184 0,01270
Diluted earnings per share 215 0,02184 0,01270
82
BREAKDOWN OF NON-OPERATING GAINS AND LOSSES
Current year Prior year Description Line code
gains losses gains losses
1 2 3 4 5 6
Fines and penalties recognized by court or debtor 810 1 417 (83) 1 638 (202) Prior years' adjustments 820 1 698 (4 516) 15 811 (19 868)
Reimbursement of losses caused by default on or by improper fulfillment of obligations 830
5 347
(55)
6 871 (26)
Foreign currency exchange gains and losses 840 182 899 (143 312) 29 232 (183 421) Provisions 850 Х (643 310) Х (45 174) Bad debts' write-off 860 176 877 (25 450) 1 393 (11 263)
83
STATEMENT OF CHANGES IN EQUITY for the year 2003
CODES Form № 3 по ОКUD 0710003 Date (year, months, day) 2003/12/31 The Company Public Joint Stock The Company OKPO 04856548 "Moscow City Telephone Network" INN 7710016640 OKDP 64.20 Taxpayer's identification number 7710016640 OKOPF/Industry (type of activity) Communication services OKFS
47/16
OKEI 384 Legal status/form of ownership Open joint stock the Company Units of measurement thousands rubles
Changes in Equity
Description Line code Share capital Additional paid
in capital Reserve capital Retained profit Total
1 2 3 4 5 6 7
Balances at December 31, 2001 010 1 915 901 13 851 921 − (938 153) 14 829 669 2002
Balances at January 1, 2002 030 1 915 901 13 851 921 − (938 153) 14 829 669 Net profit 042 Х Х Х 1 126 418 1 126 418 Dividends 043 Х Х Х (90 919) (90 919) Reserve capital 044 Х Х 18 322 (18 322) − Reserve capital increase/decrease
Increase of share value 046 1 915 901 (1 915 901) Х − − Fixed assets write down 047 − (82) Х − (82)
Previous year loss cover 048 − − (18 322) 18 322 − Balances at December 31, 2002 070 3 831 802 11 935 938 − 97 346 15 865 086
2003 Introduction of new accounting standards effect 082 − − − 121 068 121 068 Balances at January 1, 2003 100 3 831 802 11 935 938 − 218 414 15 986 154 Net profit 103 Х Х Х 1 936 894 1 936 894 Dividends 104 Х Х Х (166 926) (166 926) Reserve capital 110 Х Х 56 321 (56 321) − Reserve capital increase/decrease
Fixed assets write down 113 − (4) Х − (4) Previous year loss cover 114 − − (56 321) 56 321 −
Balances at December 31, 2003 140 3 831 802 11 935 934 − 1 988 382 17 756 118
84
Reserves
Description Line code
Opening balance Additions Disposals Closing balance
1 2 3 4 5 6
Reserves created in accordance to legislation Reserve capital Х Х Х Х
prior year 151 − 18 322 (18 322) − current year 152 − 56 321 (56 321) −
Expert evaluated reserves Provisions Bad debt provision Х Х Х Х
prior year 155 33 981 45 174 (53 124) 26 031 current year 156 26 031 643 310 (153 286) 516 055
SUPPLEMENTARY INFORMATION
Description Line code Opening balance Closing balance
1 2 3 4
1) Net assets 200 17 107 659 19 399 965
85
STATEMENT OF CASH FLOWS for the year 2003
CODES Form № 4 по ОКUD 0710004 Date (year, months, day) 2003/12/31 The Company Public Joint Stock The Company OKPO 04856548 "Moscow City Telephone Network" INN 7710016640 OKDP 64.20 Taxpayer's identification number 7710016640 OKOPF/Industry (type of activity) Communication services OKFS
47/16
OKEI 384 Legal status/form of ownership Open joint stock the Company Units of measurement thousands rubles
Description Line code
Current year Prior year
1 2 3 4
CASH AND EQUIVALENTS AT THE BEGINNING OF THE YEAR 100 707 380 360 760 OPERATING ACTIVITY CASH FLOW Cash received 110 15 034 787 12 220 747 Other receipts 120 173 557 330 475 Cash spend: 130 (11 136 662) (8 586 010)
Payment for inventories, goods, services and other current assets 150 (2 878 969) (2 481 109) payments to employees 160 (2 222 692) (1 696 097) interest payments 170 (519 432) (279 765) tax payments 180 (3 135 047) (2 506 528)
payroll taxes 181 (312 312) (293 221) advances paid 182 (657 158) (817 279) insurance payments 183 (205 208) (112 402) other payments 184 (1 205 844) (399 609)
Net cash from operating activities 190 4 071 682 3 965 212 INVESTING ACTIVITES CASH FLOW
Cash received from the non-current assets sold 210 102 473 5 696 Cash received from securities sold 220 209 125 409 716 Dividends received 230 38 704 91 144 Interest received 240 62 327 19 958 Cash received from the loans granted to other entities 250 36 915 − Deposits 260 1 787 881 121 555
Investments in fixed assets, intangible assets and other investments 290 (2 014 480) (2 309 071)
Financial investments 300 (103 091) (320 757) Loans given 310 (761 370) (302 948) Advances paid 320 (609 981) (332 357) Deposits 325 (2 428 085) (163 554) Other payments 330 − (14 039) Net investing cash flow 340 (3 679 582) (2 794 657) FINANCIAL ACTIVITIES CASH FLOWS
Cash received from the loans granted to other entities 352 2 233 484 1 471 114 Other receipts 354 − 72 006 Loan repaid 360 (2 458 325) (2 072 906) Financial rent payments 365 (182 373) (202 139) Payments of dividends 364 (148 148) (91 783) Net financial cash flow 370 (555 362) (823 708)
86
Cash and cash equivalents increase decrease 375 (163 262) 346 847 CASH AND EQUIVALENTS AT THE END OF THE YEAR 380 544 118 707 607 Interest exchange difference effect 390 (227) 1 104
87
APPENDIX TO THE BALANCE SHEET for the year 2003
CODES Form № 5 по ОКUD 0710005 Date (year, months, day) 2003/12/31 The Company Public Joint Stock The Company OKPO 04856548 "Moscow City Telephone Network" INN 7710016640 OKDP 64.20 Taxpayer's identification number 7710016640 OKOPF/Industry (type of activity) Communication services OKFS
47/16
OKEI 384 Legal status/form of ownership Open joint stock the Company Units of measurement thousands rubles
INTANGIBLE ASSETS
Description Line code
O
pening
balance
Received Redeemed Closing balance
1 2 3 4 5 6
Intangible assets 010 45 771 1 297 (11) 47 057
including:
Patents 011 93 1 297 − 1 390
Computer software 012 45 649 − − 45 649
Trade marks 014 29 − (11) 18
Other 040 114 550 10 333 (3 367) 121 516
Description Line code
O
pening
balance
Closing balance
1 2 3 4
Intangible assets depreciation 050 6 955 10 829 including:
Patents 051 6 97 Computer software 052 6 930 10 721
Trade marks 053 19 11
Other 060 59 353 73 510
88
FIXED ASSETS
Description Line code Opening balance Additions Disposals Closing balance
1 2 3 4 5 6
Buildings 100 4 217 973 215 905 (12 407) 4 421 471 constructions and transmission devices 101 20 905 804 784 068 (7 038) 21 682 834 Machinery and equipment 102 15 764 961 2 008 427 (263 778) 17 509 610 Vehicles 103 136 782 31 207 (9 393) 158 596 Office equipment 104 149 112 8 619 (29 034) 128 697 Perennial plantations 107 630 1 865 (181) 2 314 Other types of fixed assets 108 110 562 88 471 (41 847) 157 186 Total 120 41 285 824 3 138 562 (363 678) 44 060 708
Description Line code
Opening balance Closing balance
1 2 3 4
Depreciation of fixed assets 140 23 598 763 25 547 944 including:
buildings 140.1 1 030 625 1 073 059 constructions and transmission devices 140.2 13 323 981 14 154 615 machinery and equipment 140.3 9 015 339 10 074 455 vehicles 140.4 58 299 68 187 other 140.5 170 519 177 628
Leased assets 150 28 627 30 572 including:
buildings 150.1 1 034 1 408 machinery and equipment 150.3 25 612 26 851 vehicles 150.4 74 74 other 150.5 1 907 2 239
Rented assets 152 802 812 823 427 including:
buildings 152.1 284 578 254 305 machinery and equipment 152.3 515 751 569 055 Other 152.5 2 483 67
Constructions under state registration 160 44 538 56 234
ADDITIONAL INFORMATION
Changes in fixed assets value due to the renewal, reconstruction, liquidation works performed 180 659 960 1 852 199
89
SCIENTIFIC RESERCH AND DEVELOPMENT EXPENSES
Operations Line code Opening balance Received Written off Closing balance
1 2 3 4 5 6
Total 310 − 10 334 (2 471) 7 863 including:
used for production − 9 686 (2 249) 7 437 used for management − 648 (222) 426
ADDITIONAL INFORMATION Line code
Opening balance Received Written off Closing balance
1 2 3 4 5 6
Research in progress 320 − 66 319 (13 814) 52 505
ADDITIONAL INFORMATION Line code
Current year Prior year
Unsuccessful research expenses 325 3 480 −
FINANCIAL INVESTMENTS
Long-term investments Short-term investments
Description Line code opening balance closing balance opening balance closing balance
1 2 3 4 5 6
Investments in other companies share capital 510 868 449 866 467 − − including:
subsidiaries and affiliates 511 751 153 749 352 − − Other 512 117 296 117 115 − −
securities of other companies 520 − 111 944 112 692 6 216
including: Debt securities (bonds, promissory notes) 521 − 111 944 112 692 6 216
Loans granted 525 44 654 27 335 304 815 18 406 Deposits 530 − − 41 998 679 123 Total 540 913 103 1 005 746 459 505 703 745
90
RECEIVABLES AND PAYABLES
Description Line code
Opening balance Closing balance
1 2 3 4
Receivables:
Short-term receivables, 605 1 085 408 1 836 755 including:
trade receivables 606 816 251 1 518 406 advances paid to suppliers 607 178 334 87 169 other 608 90 823 231 180
Long-term receivables, 609 151 620 25 292 including:
other 613 151 620 25 292 Total 615 1 237 028 1 862 047 Payables: Short-term payables, 625 3 881 271 2 443 696
including: trade payables 626 449 368 490 827
advances received 627 547 166 348 129 taxes payables 628 129 581 234 946 bank loans 629 1 887 929 612 200 non-bank loans 630 749 227 606 454 other 631 118 000 151 140
Long-term payables, 635 2 692 409 2 718 805 including:
bank loans 636 1 350 857 1 420 943 non-bank loans 637 1 000 000 1 000 000 other 638 341 552 297 862
Total 640 6 573 680 5 162 501
Operating expenses
Description Line code
Current year Prior year
1 2 3 4
Costs of material resources 710 1 901 807 1 526 438 Payroll 720 2 502 712 1 898 621 Payroll taxes 730 786 247 635 903 Depreciation and amortization 740 2 192 804 2 012 391 Other expenses 750 1 676 573 1 602 178
Total operating expenses 760 9 060 143 7 675 531 (Increase [+], decrease [-]) :
work-in-progress and finished goods 765 7 409 (3 954)
prepaid expenses 766 13 161 185 328
91
Collateral
Description Line code Opening balance Closing balance
1 2 3 4
Received, total: 810 242 068 201 878 including:
Promissory notes 811 242 068 138 208 bank guarantees 812 − 63 670
Issued, total: 820 502 784 257 080 including:
guarantees granted to the 3rd parties 823 502 784 257 080 Pledged assets 824 3 635 638 3 835 775
including: Fixed assets 824.1 3 631 180 3 672 853
securities and other financial investments 824.2 4 458 162 922
92
5.2.1. Accounting policies 1) Basis of preparation The financial statements have been prepared by the Company on the basis of the effective
Russian accounting and reporting regulations, in particular, Federal Law No 129-FZ dated
November 21, 1996 “On Accounting” and the Regulation on Accounting and Reporting in
the Russian Federation as approved by Order of the Ministry of Finance of the Russian
Federation No 34n dated July 29, 1998.
Assets are recognized at the acquisition cost, unless otherwise provided by the current
Russian accounting regulations. Liabilities are recognized based on the expected costs of
their repayment.
2) Chart of accounts The Company has prepared its working chart of accounts based on the standard Chart of Accounts for Financial and Business Activities of Organizations approved by Order of the RF Ministry of Finance No. 94n dated October 31, 2000. Transition to the new chart of accounts was effected on January 1, 2002. 3) Stock count Stock counts are performed in accordance with the Methodological Guidelines for the Stock Count of Property and Financial Obligations approved by Order of the Russian Ministry of Finance No. 49 dated June 13, 1995. 4) Assets and liabilities denominated in foreign currency To account for transactions in foreign currency, the Company used the official exchange rate of ruble established by the Russian Central Bank as at the date of operation. Assets and liabilities denominated in foreign currencies are reported in rubles in amounts translated at the official rate of Russian ruble established by the Russian Central Bank as of December 31, 2003.
Currency Exchange rate at
31.12.2003
US Dollars 29.45 EUR 36.82
Exchange rate differences that arose during the reporting year on transactions with assets and liabilities and on their translation at the reporting date were recognized in the income statement.
93
5) Short-term and long-term assets and liabilities Assets (liabilities) are classified as short-term if they mature within 12 months of the reporting date. All the other assets (liabilities) are classified as long-term.
94
6) Intangible assets
Intangible assets include exclusive rights of the patent holder to inventions, industrial
samples, useful models, exclusive rights to computer programs, databases, and exclusive
rights of the trademark and service mark holders. Amortization of these intangible assets is
calculated using the straight-line method based on the useful lives prescribed by respective
documents. Where it was impossible to determine useful life the depreciation rate was
calculated presuming useful life of 20 years.
The intangible assets are recorded in the financial statements at initial cost less
accumulated amortization.
Non-exclusive rights to use intangible assets received by the Company are recorded off-
balance sheet. Periodic payments for the rights to use intellectual property are included in
the current period expenses, and fixed lump-sum payments are recognized as prepaid
expenses and subsequently charged to expenses during the period of the contract.
7) Scientific research projects development expenditure.
Scientific projects development expenditure is recognized in accordance to Accounting
Practices Rule 17/02 approved by Russian Federation Ministry of Finance Order No 115n
dated December 10, 2002. Expenses are recognized as they fulfill following conditions:
Expenses must be documentary proven,
there is a proper delivery and acceptance act,
research results were used in The Company’s activity and will lead to economic results in
future,
research results can be demonstrated .
Scientific projects development expenditure is represented as non-current investments
in Account 08-2000.
95
Unsuccessful Scientific projects are recognized as non-operating expenses and are
presented in Account 91 “Expenditure to unsuccessful scientific projects”.
Scientific projects development expenditure may be written off as operating expenditure
starting from the last date of the month next to the month when the project results were put
in use.
Scientific projects development expenditure writing off period is determined by the
Company’s specialists in accordance to the expert opinion of its use period.
8) Fixed assets
From January 1, 2002 the Company accounts for fixed assets in accordance with Order of
the Ministry of Finance of Russia No. 26n dated March 30, 2001 “Accounting for Fixed
Assets” PBU 6/01.
Fixed assets are carried at cost of their acquisition or manufacturing.
Fixed assets include assets with useful life over 1 year.
Fixed assets are recognized in the financial statements at initial (or revalued) cost less
accumulated depreciation.
Depreciation of fixed assets is calculated under the straight-line method. Useful life is
determined at the time of putting the asset in operation, according to the Unified Classifier
of the Fixed Assets Groups developed by MGTS.
Acquired fixed assets with the cost per unit not exceeding 10,000 rubles, as well as books,
publications and brochures are directly charged to current period expenses.
Revaluation of fixed assets may be performed once a year. Revaluation may be only
applied to the groups of comparable fixed assets with recalculation of its costs by an
96
independent expert at the existing market prices. After January 1, 2004 revaluation of fixed
assets is allowed be performed once in 2 years.
Gains and losses on disposal of fixed assets are recognized in the income statement as
operating gains (losses).
Interest on borrowings entered to finance acquisition (construction) of fixed assets is
capitalized for the period of construction (installation).
9) Inventories
From January 1, 2002 the Company accounts for inventories according to the Accounting
Standard “Accounting for Inventories” PBU 5/01 approved by Order of the Ministry of
Finance of Russia No. 44n dated July 9, 2001.
Inventories are recorded at acquisition cost.
Most divisions of the Company apply weighted-average cost formula.
Finished goods include completed products. Finished goods are recorded at actual
production cost.
Inventories are carried in the balance sheet at their net realizable value if lower than the
original cost of acquisition, with the difference recognized in the income statement.
10) Introduction of Unified Income Tax for “Dolphin” Holiday Hotel with Therapy.
Unified Income Tax is applied to certain entities in accordance to Russian Federation tax
legislation. PJSC MGTS separately accounts its property and liabilities taxed with Unified
Income Tax.
PJSC MGTS produces to tax authorities separate reporting (Form 2) representing accounts
its property and liabilities taxed with Unified Income Tax.
97
11) Prepaid expenses
The expenses incurred by the Company in the reporting year but related to next reporting
periods (insurance payments, lump-sum payments for the rights to intellectual property,
etc) are reported as prepaid expenses. Such costs are amortized to the income statement
evenly during the periods to which they relate.
12) Revenue recognition
Revenues from sale of goods and services are recognized as goods are shipped (or as
services are rendered) and upon issuance of invoices. Such revenues are recognized in the
financial statements net of VAT and sales tax.
In accordance to the Federal Law N 126-FZ dated March 7, 2003 “On communications”
certain groups of fixed telephony subscribers are entitled to benefits.
The list of benefits and the groups of customers entitled to such benefits is determined by
Russian Federation federal and municipal legislation.
In 2003 The Company changed its revenue recognition policy for revenue received from
customers entitled to the benefits. Starting from January 1, 2003, revenue received from
such subscribers is recognized at its actual value. As the result of accounting policy change
The Company’s receivables rose by RUR’000 659,757 and doubtful provision rose by
RUR’000 483,078
13) Trade receivables
Trade receivables are recognized at selling prices established by contracts between the
Company and its customers, and based on tariffs approved by state regulatory authorities
and executive bodies of the Company.
98
The Company provides for doubtful trade receivables. 100% provision is recorded for
receivables more than 6 months overdue and not secured by an adequate guarantee or
collateral. Provision is created individually for each doubtful debt.
Provision for doubtful debt is included in the operating expenses of the current period.
Uncollectable receivables are written off from the balance sheet either by management’s
decision or after the end of the limitation period and is subsequently recorded off-balance
sheet for 5 years.
14) Financial investments
Financial investments are recognized in accordance to Accounting Practices Rule 19/02
“Financial investments recognition” approved by Russian Federation ministry of Finance
Order N126n dated December 10, 2002.
Financial investments include investments in securities, loans provided to other entities,
bank deposits and factoring notes.
Investments in securities are recorded at its acquisition cost.
Gains and losses on disposal of securities are recognized in the income statement as
operating gains (losses). Interest income on loans granted is also recognized as operating
income.
There are no investments in securities quoted on stock markets.
Principal subsidiaries and affiliates are listed in Section III, p.4.
Financial investments are presented in Account 58 with sub-division according to the
nature of particular investment. Investments are classified as short-term if they mature
within 12 months of the reporting date. All the other assets investments are classified as
long-term. Investments having no market price are recognized at its acquisition cost.
99
15) Bank loans and Bonds
The body of the liability is recognized in accordance to borrowing agreement conditions
and in the amount of cash actually received. It’s represented in Account 66 “Short term
liabilities» and Account 67 “ Long term liabilities”. At the end of each month long term
liability appeared to mature within next 365 days is being transacted into short-term
liability.
Debt securities issued by the Company are initially reported in the amount of cash
received. The difference between this amount and the face value of debt securities is evenly
recognized in the income statement during their circulation period.
16) Equity
The sources of additional capital include amounts of fixed assets’ revaluation, value of
property received free of charge and under the investment program, share premium and
amount of financial resources restricted for capital expenditure.
The Company’s capital is composed from Share capital, additional capital, reserve funds
and retained profit. Reserve funds are formed from retained profit in accordance to The
Company’s Charter.
The Company as well forms doubtful debt provision and revaluation of investments in
securities provisions.
17) Profit tax
The Company’s accounting profit is different from its taxed profit in accordance to
Russian Federation Tax Code Chapter 25.
100
Difference between The Company’s accounting profit and its taxed profit arose from
implementation of various accounting revenue and expenditure recognition amendments
such set by Russian Federation Tax Code and additional tax legislation is recognized in
accordance to Accounting Practices Rule 18/02 “ Profit tax expenditure recognition”
approved by Russian Federation ministry of Finance Order N114n dated November 19,
2002.
18) Comparative information
In accordance with changes to the chart of accounts and introduction Accounting Practices
Rule 18/02 balance sheet value contains differed tax both in its assets and liabilities
sections. (See Sub Section 5.2.3. Article 1)
101
5.2.2. Important Indicators.
1) Chapter Capital. On December 31, 2003 the Company’s charter capital is fully paid and contains:
Indicator Number of shares Nominal value Number of shares possessed by the
Company Ordinary share 79 829 200 40 - Preferred share 15 965 850 40 - Total 95 795 050 40 -
2) Last year net profit distribution. In 2002 The Company’s net profit amounted RUR’000 1,126.418. The Company’s
annual shareholders meeting approved the following net profit distribution:
• RUR’000 54,284 to pay ordinary share dividends, • RUR’000 112,642 to pay preferred share dividends, • RUR’000 56,321 to allocate to the reserve fund, • RUR’ 000 903,171 to cover previous years loss.
In completion of the Board of Directors decision reserve funds were used to cover
previous years loss.
3) Net current assets. As on December 21, 2003 and December 31, 2002 The Company’s Current assets had
the following structure:
(in RUR’000)
Description 2003 2002 Current Assets 3 672 140 3 423 151 Short term liabilities (4 088 443) (5 003 240)
Deferred revenue 1 643 847 1 121 505 Total 1 227 544 (458 584)
In 2003 PJSC MGTS lowered its short term liabilities by repaying Sberbank loan in
February 2003 and short term loans provided by Donau Bank and JSC “ROSNO”.
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4) The Company’s main subsidiaries. Currently, MGTS has shareholdings in a number of companies with Russian and foreign
investments which provide telecommunications services based on new technologies.
The Company’s carrying value in its subsidiary and affiliates amounted RUR’000
866,467 as at 31 December 2003.
List of PJSC MGTS subsidiaries.
(in 000’RUR)
N The Company Class of shares Number of
shares
Book value (RUR)
Value as on 31.12.2003,
(RUR)
Ownership
interest, %
Subsidiaries (50 and above percent ownership)
1. JSC The Company MTU-inform Common, registered 510 10 18 51,0 2. JSC AMT Common, registered 10 2 050 8 729 100,0 3. JSC «Petrodvor» Common, registered 282 118 1 000 711 496 100,0 4. PJSC MS-Tel Common, registered 1 000 100 115 100,0 5. JSC Holiday Hotel “Priazov’e» Common, registered 2 734 1 62 67,0 6. JSC “Mediatel”
Common, registered 43 10 000 625 50,8
Subsidiaries Total - - 721 045 -
Subsidiaries (below 50 and above 20 percent ownership)
7. JSC «Comstar» Common, registered 500 23 020 11 511 50,0 8. JSC «Telmos» Common, registered 6 148 2 000 12 296 40,0 9. JSC «MTU-Intel» Common, registered 6 437 1 1 826 30,0
10. ЗАО «Moscow Cellular Communication» Common, registered
23 500 10 294 23,5 Proffered, registered. 5 875 10
11. PJSC JCB «LINK Bank» Common, registered 150 060 10 1 516 24,6 12. JSC «RadioPage» Common, registered 400 100 40 40,0 13. JSC «Center TS» Common, registered 380 10 4 50,0 14. JSC «Utro Tourist Hotel» Common, registered 821 110 10 821 34,8
Subsidiaries total - - 28 308 - Other
PJS «JCB MBRD» Common, registered 49 797 500 111 053 6,2 Other - - 6 061 -
Other Total - - 117 114 -
TOTAL - - 866 467 -
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In 2003 The Company sold its shares in JSC “Interregional Transit Telecom” and
JSC “Moscow Teleport”. Also, The Company purchased additional stake in JSC
“Mediatel” increasing its ownership share up to 50.83%.
5) Emergency expenditure and revenue. (RUR’000)
Наименование показателя 2003 2002 Total cost of damage (fire, traffic accidents etc.) (64 641) (10 335) Insurance cover, received by the Company 43 293 6 059 Total (21 348) (4 276)
These revenue and expenditure are shown in Form 2 “Profit and Loss accounts”, Lines
120 and 130 (also see Article 2. Paragraph 5.2.3.)
On February 14, 2003 there was a fire at the telephone switch building located at 51
Shepkin Street. As a result switches 281,284,288 and 971 were seriously damaged. The
damage property was insured by JSC “ROSNO” insurance the Company that partially covered
the cost of damage.
Another part of emergency payments arose at the special telephone branch and was caused cable
infrastructure repair works.
6) Earning per common share. Earning per common share shows the share of The Company’s profit allocated for
dividend payments to its common shareholders. In has been calculated using the two class
method on the basis of earnings and weighted average number of common shares outstanding.
Earnings used equal The Company’s retained profit excluding 10% allocated for preferred share
dividend payments.
Earnings per one common share in 2002 and 2003.
Indicator 2003 2002
Net profit, RUR’000 1 936 894 1 126 418 Number of RUR 40 preferred shares, units 15 965 850 15 965 850 Proffered shares dividends, RUR’000 193 689 112 642 Number of RUR 40 common shares, units 79 829 200 79 829 200 Basis of earnings, RUR’000 1 743 205 1 013 776 Earning per one common share, RUR 21,84 12,70
104
7) Bank Credits. Bank Loans as on December 31, 2002 and 2002 consisted of the following:
(RUR’000) Description 2003 2002
Sberbank 903 386 1 865 791 Vneshtorgbank 349 043 481 202 Raiffeisenbank 442 788 477 854 Citibank 254 359 241 646 Guta Bank 83 567 172 293 Total 2 033 143 3 238 786 Short term liability
612 200 1 887 929 Long term loans 1 420 943 1 350 857
As on January 1, 2003 MGTS debt to Sberbank on the loan agreement N425/3 dated
May 20, 2001 amounted RUR’000 1,454,079. In January and February 2003 The Company
repaid it mostly using funds obtained from its 3-rd bond issue placement. The loan pledged
equipment was used to collieries the newly entered Sberbenk credit line facility arranged under
agreement N2830 for the total amount of RUR’000 1,000,000.
The Company received a USD 7,065,515 loan from Citibank (Prague) for the purchase
of STROM Telecom equipment. The loan is collaterals by Czech Republic Export Guarantee
and Insurance Corporation. In 2003 The Company used USD 6,090,475 of the credit limit.
8) Loans (including bonds).
Loans’ liability, including interests as in December 31, 2002 and 2003 (RUR’000)
Indicator’s description 31.12.2003 31.12.2002
1st bond issue - 589 883 2nd bond issue 558 600 1 024 329 3rd bond issue 1 047 854 - The Company’s notes issued to Donau Bank - 128 981 Loan, received from JCS “ROSNO” - 6 034 TOTAL 1 606 454 1 749 227 Short term liability 606 454 749 227 Long term loans 1 000 000 1 000 000
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The Company in total placed 3 bond issues:
N Indicator Debt value, RUR mln.
Issue date Mature date
1. First bond issue. including, в том числе: 600 October, 2000
4th quarter, 2003
- Trench 1 360 October, 2000
- Trench 2 240 October, 2000
4th quarter, 2003
2. Second bond issue
1 000 November,
2001 4th quarter,
2004
3. Third bond issue
1 000 February, 2003 1st quarter,
2005
Bonds’ interests calculation and payment terms.
First RUR 600 mln. bond issue
The issue has a floating interest rate determined by weighted OFZ rate calculated 14 days prior to the next quarterly coupon starting date.
Second RUR 1,000 mln. bond issue
The issue has a floating interest rate determined by the Company itself no later than 6 days prior to the next semi annual coupon starting date.
Third RUR 1,000 mln. Bond issue
. Fists and second coupon interest rates amount 12.3%, third and forth are fixed with 17%.
In 2003 The Company repaid its 1st bond issue. It as well bought back
RUR’000 449,431 part of its 2-nd issue. On December 31, 2003 2-nd issue outstanding value
amounted RUR’000 558,600.
9) Related party transactions.
The Company presents its related party transactions in accordance to Accounting
Practices
Rule 11/2000 “Information on the related party transactions”.
As on December 31, 2003 the following entities own more than 20% of The Company’s
share capital:
PJSC “JFC “Sistema” – 55.62% of the common shares (46.35 of the share capital),
PJSC “Sviazinvest” - 28% of the common shares (23.33 of the share capital).
106
Goods and services sold to the related parties.
(RUR’000, excluding VAT)
The Company’s name Operating activity
Rent Property and fixed assets sold
Total
1. PJSC “Rostelecom” 757 928 - - 757 928 2. JSC «Comstar» 300 697 62 376 - 363 073 3. JSC «MTU-Inform The Company» 377 041 69 199 - 446 240 4. JSC «MTU-Intel» 397 192 4 767 - 401 959 5. JSC «Telmos» 169 818 57 613 - 227 431 6. PJSC «Central Telegraph» 250 267 - - 250 267 7. JSC «MTS» 127 342 19 428 51 543 198 313 8. JSC «МТТ» 31 752 20 - 31 772 9. JSC «АМТ» 40 495 3 896 - 44 391 10. JCS «Golden Line» 12 514 14 500 - 27 014 11.JSC «МСС» 1 149 1 422 - 2 571 12. JSC STC «Comset» - 1 622 - 1 622 Total 2 466 195 234 843 51 543 2 752 581
Goods and services purchased from the related parties.
(RUR’000, excluding VAT)
The Company’s name Operating activity
Rent Property and fixed assets sold
Total
1. JSC «Central telegraph» - - 113 876 113 876 2. JSC «Mediatel» 58 365 - 2 659 61 024 3. JSC «Petrodvor» 33 851 12 603 - 46 454 4. JSC «Telmos» 9 766 - 22 360 32 126 5. PJSC «MTS» 11 759 - 5 563 17 322 6. PJSC «MS-Tel» 15 154 - - 15 154 7. JSC «MTK-Trunk» 5 413 - - 5 413 8. JSC «MTU-Inform The Company» 7 879 - - 7 879 9. JSC «АМТ» 6 425 - 81 6 506 10. JSC «Comstar» 1 814 - - 1 814 11. JSC «Golden Line» 1 586 - - 1 586 12. JSC «Metro Telecom» 21 - 502 523 13. JSC «PTT-Teleport» 18 - - 18 Total 152 051 12 603 145 041 309 695
107
Related parties transactions
Related parties transactions receivables (RUR’000, excluding VAT)
The Company 31.12.2003 1. PJSC “Rostelecom” 91 822 3. JSC «MTU-Inform The Company» 44 092 3. JSC «Comstar» 30 288 4. JSC «Telmos» 20 542 5. PJSC «MTS» 18 157 6. JSC «MTU-Intel» 5 980 7. JSC «АМТ» 4 146 8. JSC «МТТ» 2 374 9. JSC Golden line 1 102 10. PJSC «Moscow Cellular Communications» 173 11. JSC «Mediatel» 173 12. Other 6 719 Total 225 568
Related parties transactions Payables (RUR’000, excluding VAT)
The Company 31.12.2003
1. JSC «Mediatel» 2 787 2. JSC «АМТ» 2 150 3. JSC«Petrodvor» 2 002 4. JSC «MTU-Inform» 1 226 5. PJSC «MTS» 838 6. JSC «Comstar» 553 7. JSC «Golden Line» 544 8. Other 4 281 Total 14 381
10) Remuneration paid to the members of PJSC MGTS management bodies.
The total amount of remuneration paid out in the reporting year to the members of the
Company’s management bodies (the Board of Directors and the Management Council)
108
amounted RUR’000 17,317, including RUR’000 11,346 of salary and RUR’000 5,971 of
commissions.
11) Segments information.
In accordance to Accounting Practices Rule 12/2000 The Company must provide its
operating segments information. The given data will allow The Company’s stakeholders to
better evaluate The Company’s performance and to overlook its future development perspective.
The Company conducts its operations on Moscow. Its operational revenue received
from provision of telecom services account for about 85% of its gross earnings. Other activities
conducted by the Company are insignificant to its performance.
12) Subsequent events.
Dividends.
The size of The Company’s annual dividends is going to be approved by Shareholders
Meeting that will be holding June 2004. Approved dividends are doing to be represented in The
Company’s 2004 financial reporting.
Credits and Loans.
On February 12, 2004 the Board of Directors decided to issue 04 series 5 years RUR
denominated bonds in the amount 1.5 billion. The issue received Federal Committee on Stock
Market registration on March 23, 2004.
On April 28, 2004 bonds have been placed on Moscow Interbank Stock Exchange at its
Nominal value. Coupon interest rate amounted 10%.
In accordance to The Company’s decision bond holders are allowed to sell back to PJSC
MGTS these bonds at its nominal value in 2 years time – on the 4th coupon payment date, April
26, 2006.
13) Commitments and contingencies.
Legal proceedings
109
At the time of the report preparation The Company was not involved in litigation and
other claims that are in the ordinary course of its business activities.
Guarantees issued as on December 31, 2003
(RUR’000)
Creditor Debtor Value Vneshtorgbank JSC «RTK-Leasing» 45 839 Vnesheconombank JSC «Comstar» 209 689 Other 1 552 Total 257 080
Management believes that these guarantees will not have a material impact on the size of
The Company’s liabilities in future.
Pledges
The pledge agreements active as on December 31, 2003 are presented below:
(RUR’000) Beneficiary Value
Sberbank PJSC MGTS 2 730 458 Raiffaisenbank PJSC MGTS 662 727 Vneshtorgbank PJSC MGTS 224 507 JCB MBRD PJSC MGTS 3 159 Citibank, (Prague) PJSC MGTS 214 924 Total 3 835 775
110
14) Loans provided and notes purchased.
(RUR’000)
15) Income tax
2003 Income tax formed in accordance to Accounting Practices Rule 18/02 is presented below: (RUR’000)
Indicator’s description 31.12.2003
Income tax expense 628 947
Permanent tax liabilities:
Effect on rate different from standard 36 197 Non taxable items 305 Other 56 195
Total 92 697
Permanent tax assets:
Non taxable items (9 289)
Indicator’s description 31.12.2003 31.12.2002
Long term investments JSC «Investment pension the Company» 25 200 25 200 Note center «Energogas» - 10 000 JSC «MBRD» 1 944 3 146 JSC «Intersot ТМ» 2 135 2 135 «Business Audit» LLC - 4 173 PJSC «Personal Telecommunications» 110 000 - Total 139 279 44 654
Short term investments
JSC «MBRD» 1 216 112 556 JSC «Petrodvor» 3 794 294 768 PJSC «Alpha Bank» 5 000 - Link Bank 8 000 8 000 JSC «Priasovie Hotel» 6 612 - JSC «Petrovskoe podvorie» - 2 047 Note center «Energogas» - 136
Deposits
JSC «MBRD» 641 382 - JSC CB «Citibank» 37 741 41 998
Total 703 745 459 505
111
Other (36 967) Total (46 256)
Differed tax increase/decrease:
On the previous tax period loss (219 846) On current period revenue 125 233 Other 11
Total (94 602)
Differed tax liabilities increase/decrease
On fixed assets:
Differences in taxation and accounting fixed assets depreciation methods (21 313)
Other (273) On intangible:
Differences in taxation and accounting fixed assets depreciation methods (482)
On inventories: Differences in taxation and accounting fixed assets cost recognition (2 556)
Other (43 187) Total (67 811)
Total Current Income Tax 512 975
Tax authorities sanctions 8 315
Unified Income Tax 16
Total Income Tax 521 306
16) Business material facts.
On December 16, 2003 Moscow Government with its Statutory № 1053-PP “On
additional
measures to be taken for Moscow city telephone network reconstruction” approved The
Company’s 2004-2012 modernization plan. The plan forecasts the use of The Company’s own
and borrowed funds for feather modernization and reconstruction of The Company’s telephone
switches and construction of new up-to date technology telephone stations. It is planned spend
USD 1.6 billion to renew 350 telephone switches and to install 4,249 thousands telephone
numbers.
The Statutory as well approves PJSC MJTS to provide benefits to Moscow city socially
Unprotected citizens.
112
5.2.3. Additional notes to financial reporting.
1. Balance sheet (Form N1)
In 2003, in compliance to new Accounting Practices Rule 18/02 The Company presented
its
Differed taxes arose from its previous years operations in its balance sheet. Introduction of
Accounting Practices Rule 18/02 new Income tax calculation procedure lead to The Company’s
retained profit rise by RUR’000 121,068 comparing to 2002.
Complying with the newly introduced Accounting Practices Rule 19/02 The Company
removed
its deposits from Line 260 to Line 250.
Unified Social tax presented in Chart 69, is transferred from Line 625 to Line 626.
Difference in line 241(RUR 139,107) as on December 31, 2002 and as on January1, 2003 was
resulted from reclassification of accounts receivable from subsidiaries.
(RUR’000)
Values as on N Indicator Line code
01.01.2003 31.12.2002 1. Differed assets 145 365 052 - 2. Trade receivables 241 790 220 651 113 3. Shirt term investments 250 459 505 417 507 4. Cash and cash equivalents 260 707 607 749 605 5. Differed taxes 520 261 461 -
6. Social insurance payable 623 19 211 44 957
7. Taxes payable 624 110 371 102 099 8. Previous years retained losses 471 (1 029 072) (1 029 072) 9. Previous years retained income 470 1 247 486 -
10. Current year retained income 472 - 1 126 418
Receivables (Line. 240 Form N 1)
(RUR’000)
Value as on № Indicator 31.12.2003 31.12.2002
1. trade receivables (line.241), including: 1 002 351 790 220 other debtors 176 679 -
113
2. Taxes receivable 40 505 25 595 3. Social insurance receivable 18 165 7 619 4. Employees receivable 2 823 3 184 5. Advances paid 87 169 178 333 6. State property rent receivable 16 451 - 7. Customs revivals 3 004 - 8. Other 150 233 54 426 Total 1 320 700 1 059 377
Additional Capital (Line. 420 Form N 1)
(RUR’000) Value as on № Description
31.12.2003 31.12.2002 1. Revaluation 9 978 462 9 978 466 2. Capex source 802 592 802 592 3. Assets acquired for free 434 979 434 979 4. Share issuance income 31 31 5. Investment program completion 719 870 719 870 Total 11 935 934 11 935 938
Other Long-term liabilities (Line. 520 Form N 1)
(RUR’000) Value as on The Company
31.12.2003 31.12.2002 Siemens 297 862 341 552 Total 297 862 341 552
2. Profit and loss accounts (Form N 2)
Interest expenses (Line. 070 Form N 2)
(RUR’000)
Indicator 2003 2002 Loans interest to pay (290 511) (290 122) Including bonds interests (278 636) (280 766) Bank loans interests to pay (208 917) (540 552)
Total (499 428) (830 674)
Other operating income (line. 090 Form N2)
(RUR’000.)
Indicator 2003 2002 Income from securities sold 1 357 351 572 696
114
Income from fixed assets and inventories sold 67 970 82 045 Doubtful debt reserve restoration 149 278 41 974 Income from cession agreements 4 14 343 Returned inventories 11 765 - Other 241 268 Total 1 586 609 711 326
Other operating expenses (line. 100 Form N2)
(RUR’000.)
Indicator 2003 2002 Expenses from securities sold (1 260 974) (552 253) Taxes (220 446) (205 531) Payments for services provided by credit organizations
(200 071) (149 473)
Expenses from fixed assets and inventories sold (95 842) (157 421)
Doubtful debt expenses (643 310) (39 599) Expenses from cession agreements (9) (26 047) Foreign currency exchange losses (3 333) (6 765) Securities issuance additional expenditure
(16 174) -
Other (1 728) (1 854)
Total (2 441 887) (1 138 943)
115
Other Non-operating gains (Line. 120 Form N2)
(RUR’000)
Indicator 2003 2002 Gains from assets acquired for free 113 361 67 616 Payments to recover losses bank faults losses 5 347 6 748
Outdated liabilities 176 877 1 379
Exchange rate differences 182 899 29 232
Exchange rate difference arose from assets purchased 7 367 62
Last year profits recognized this year 1 698 15 811 Emergency gains 43 293 6 058 Fines 1 417 1 638 Other 209 11 863 Total 532 468 140 407
Outdated liabilities amounted RUR’000 172 607 present the advances received from
unused payphone cards prepaid in the previous years and expired in 2000-2003. Due to the
absence of information of the amount of unused payphone cards The Company could not in
2000-2002 recognize its gains. In 2003 automation of its payphone network allowed The
Company to determine the number of payphone cards expired and write it off as a non-operating
gain.
Other Non-operating losses (Line. 130 Form N2)
Indicator 2003 2002
Outdated receivables (25 450) (11 263)
Exchange rate differences (143 312) (183 421)
Charity and cultural expenses (13 604) (13 445)
Financial aid provided to employees (85 039) (26 910)
The Board of Directors and shareholders meeting expenses (5 563) (5 321)
Securities servicing charges (6 581) (163)
Theft (499) (2 623)
Unsuccessful Scientific research projects (3 480) -
Emergency losses (64 641) (10 335) Other (45 787) (53 647) Total (393 956) (307 128)
116
6. Independent auditor’s opinion
To the shareholders of PJSC “Moscow City Telephone Network”
We have audited the accompanying financial statements of PJSC “Moscow City
Telephone Network” (the «The Company») for the year ended December 31, 2003. The
Company’s financial statements comprise:
Balance Sheet – Form No. 1 as of December 31, 2003; Income Statement – Form No. 2 for 2003; Statement of Changes in Equity – Form No. 3 for 2003; Statement of Cash Flows – Form No. 4 for 2003; Appendix to Balance Sheet – Form No. 5 for 2003; Notes to Financial Statements for 2003.
These financial statements are the responsibility of the Company’s Board. Our
responsibility is to express our opinion, based on the results of our audit, on whether these
statements are reliable in all material respects and whether the accounting procedures are in
compliance with legislation of the Russian Federation.
We conducted our audit in accordance with the Federal Law of the Russian Federation
No. 119-FZ dated August 7, 2001 “On auditing activities”; federal rules (standards) of auditing
approved by Resolution of the Russian Government No. 696 dated September 23, 2002,
effective rules (standards) of auditing approved by the Commission on Auditing Activity under
the Russian President and our internal standards.
The audit was planned and performed to obtain reasonable assurance that the financial
statements are free of material misstatements. The audit included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. The audit also
included assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion regarding the
reliability in all material respects of the accompanying financial statements and compliance of
the accounting procedures with the legislation of the Russian Federation.
117
In our opinion, the financial statements of PJSC “Moscow City Telephone Network”
present fairly, in all material respects, its financial position as of December 31, 2003, and the
results of its operations for the year ended December 31, 2003, in accordance with the Federal
Law of the Russian Federation No. 129-FZ dated November 21, 1996 “On Accounting”.
General Director Dan Collinson Koch Date 30 April 2003
Auditor Mikhail V. Raikhman
Certificate to perform general audit No. 002598 issued on January 31, 2003 for an unlimited period
ZAO “Deloitte & Touche CIS”
118
7. Opinion of the audit committee
On the results of financial and operating activities of PJSC Moscow City Telephone Network
for 2003.
“26” April 2004 Moscow In accordance to the Company’s Charter, to PJSC MGTS Audit Committee regulation and to
PJSC MGTS Audit Committee comprised of:
Platoshin V.V.
Beliaev K.V.
Krhzechevskaya S.G.
Prokof’eva I.V.
Conducted 2003 Financial Reporting Audit.
Audit conducted from 19th to 30th of April 2004 in the following fields:
- Annual accounting reporting data reliability
- Proper application of accounting reporting practises in 2003
The Audit Committee of PJSC Moscow City Telephone Network (PJSC MGTS) performed an
audit in order to confirm financial statements of PJSC MGTS for 2003.
The audit was performed on a sampling basis.
The Audit Committee has not detected any facts that would allow to conclude that the financial
statements of the Company are not fair.
In the opinion of the Audit Committee, the financial statements of PJSC MGTS present fairly
the financial position of PJSC MGTS as at 1 January 2004, the results of operations, changes in
capital and cash flows for the year 2003.
Chairman of the audit committee Platoshin V.V. ______________
Members of the audit committee Beliaev K.V. ______________
Krhzechevskaya S.G. ______________
Prokof’eva I.V. ______________
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8. Consolidated financial statements. Years Ended December 31, 2003, 2002
and 2001.
INDEPENDENT AUDITORS’ REPORT
To the shareholders of PJSC Moscow City Telephone Network:
We have audited the accompanying consolidated balance sheets of PJSC Moscow City
Telephone Network (“MGTS”) and its subsidiaries (collectively the “Group”) as of December
31, 2003 and 2002, and the related consolidated statements of operations, changes in
shareholders’ equity and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Group’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, such consolidated financial statements present fairly, in all material respects, the
financial position of the Group as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 4, in December 2003 the Group made a decision to dispose one of the Group’s subsidiaries. As a result, the subsidiary’s assets and liabilities and results of its operations are presented as discontinued operations in the accompanying financial statements.
May 21, 2004
PJSC MOSCOW CITY TELEPHONE NETWORK AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (in U.S. dollars and in thousands)
2003 2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 6) $ 42,382 $ 39,777 Short-term investments (Note 7) 66,150 5,424 Accounts receivable, advances and taxes receivable, net (Note 8) 72,470 72,703 Inventories 13,839 11,306 Deferred income taxes, net (Note 15) 9,423 3,424
Assets of discontinued operations (Note 4) 58,999 76,031 Total current assets 263,263 208,665
NON-CURRENT ASSETS:
Property, plant and equipment, net (Note 9) 931,639 833,328 Advance payments for property, plant and equipment 3,861 2,258 Long-term investments (Note 10) 78,422 76,516 Deferred income taxes, net (Note 15) 44,854 34,211
Total non-current assets 1,058,776 946,313
TOTAL ASSETS $ 1,322,039 $ 1,154,978 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES:
Debt maturing within one year (Note 11) $ 51,700 $ 66,037 Accounts payable,taxes payable and other accrued liabilities (Note 12) 44,131 35,362 Deferred revenue, current portion (Note 13) 37,412 35,649 Liabilities of discontinued operations (Note 4) 42,498 45,491
Total current liabilities 175,741 182,539 NON-CURRENT LIABILITIES:
Long-term debt (Note 11) 101,828 105,551 Deferred revenue (Note 13) 79,425 63,812 Retirement and post-retirement benefits (Note 14) 4,897 4,235 Property, plant and equipment contributions 88,388 64,493 Deferred income taxes (Note 15) 67,688 13,214
Total non-current liabilities 342,226 251,305
TOTAL LIABILITIES 517,967
433,844 MINORITY INTERESTS IN EQUITY OF SUBSIDIARIES 80,360 69,083 SHAREHOLDERS’ EQUITY:
Preferred stock, 15,965,850 shares authorized, issued and outstanding (Note 16) 22,538
22,538
Common stock, 79,829,200 shares authorized, issued and outstanding (Note 16) 112,462
112,462
Additional paid-in capital 61,806 61,806 Retained earnings 515,193 455,245 Other comprehensive income (Note 3) 11,713 -
Total shareholders’ equity 723,712 652,051
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,322,039 $ 1,154,978 See notes to consolidated financial statements.
PJSC MOSCOW CITY TELEPHONE NETWORK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (in U.S. dollars and in thousands except for earnings per share)
2003 2002 2001
Operating revenues (Note 17) $ 472,512 $ 380,899 $ 356,231 Operating expenses (Note 18) (335,210) (267,589) (236,823) OPERATING INCOME 137,302 113,310 119,408 Income from affiliates 894 3,025 2,287 Gain on disposal of long-term investments (Note 10) 3,560 - 1,195 Interest income 4,656 1,921 933 Interest expense (17,200) (30,135) (29,267) Currency translation gain 3,058 658 1,920 INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAX EXPENSE AND MINORITY INTERESTS 132,270 88,779 96,476
Income tax expense (Note 15) (33,773) (20,313) (29,223) Minority interests (20,060) (14,572) (13,036) INCOME FROM CONTINUING OPERATIONS 78,437 53,894 54,217 (Loss)/income from discontinued operations (net of
income tax effect of $1,589; $850 and $268) (8,626) 3,562 849 Gain on disposal of discontinued operations (net of
income tax effect of $476) - 769 -
NET INCOME $ 69,811 $ 58,225 $ 55,066 Earnings per common share before (loss)/income from
discontinued operations, diluted and basic $ 0.90 $ 0.63 $ 0.66 (Loss)/income from discontinued operations (0.11) 0.05 0.01 Earnings per common share, diluted and basic
(Note 20) $ 0.79 $ 0.68 $ 0.67 Weighted average number of common shares outstanding 79,829,200 79,829,200 79,829,200
See notes to consolidated financial statements.
PJSC MOSCOW CITY TELEPHONE NETWORK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (in U.S. dollars and in thousands)
2003 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 69,811 $ 58,225 $ 55,066 Adjustments to reconcile net income to cash provided by operating activities:
Loss/(income) from discontinued operations 8,626 (4,331) (849)
Allowance for doubtful accounts 348 1,270 1,141 Depreciation charge 69,298 61,423 60,193 Currency translation gain (3,058) (658) (1,920) Income from affiliates (894) (3,025) (2,287) Deferred gain amortization (735) (735) (735) Deferred taxes 2,274 4,756 4,154 Post-retirement benefits 327 (2,575) 3,046 Loss on disposal of property, plant and equipment 3,459 526 49 Gain on disposal of long-term investments (3,560) - (1,195) Minority interest 20,060 14,572 13,036
Changes in certain assets and liabilities
Accounts receivable, advances and taxes receivable 3,554 (1,202) (17,916) Inventories (1,538) 644 2,462 Accounts payable, taxes payable and other
accrued liabilities
1,368
(23,360)
798 Deferred revenue 10,243 18,313 (7,490)
Net cash provided by operating activities 179,583 123,843 107,553 CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends received from investees 830 1,643 1,721 Acquisition of subsidiary, net of cash received - (50) 352 Purchases of property, plant and equipment (75,905) (67,286) (82,087) Proceeds from sale of property, plant and equipment 2,219 2,467 1,979 Proceeds from sale of long-term investments 4,103 - 1,196 (Purchases)/proceeds from sale of short-term investments, net
(55,279)
3,088
4,468
Net cash used in investing activities (124,032) (60,138) (72,371)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 79,714 44,196 158,544 Repayments of borrowings (114,041) (69,038) (150,896) Repayments of vendor financing (8,926) (13,488) (8,885) Payments on capital leases (4,041) (5,201) (5,243) Dividends paid (5,754) (3,019) (4,996)
Net cash used in financing activities (53,048) (46,550) (11,476) NET CASH USED IN DISCONTINUED OPERATIONS - (6,517) (11,915) EFFECTS OF CURRENCY TRANSLATION ON CASH AND
CASH EQUIVALENTS
102
(665)
(2,564) INCREASE IN CASH AND CASH EQUIVALENTS 2,605 9,973 9,227 CASH AND CASH EQUIVALENTS, beginning of year 39,777 29,804 20,577 CASH AND CASH EQUIVALENTS, end of year $ 42,382 $ 39,777 $ 29,804
PJSC MOSCOW CITY TELEPHONE NETWORK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (continued) (in U.S. dollars and in thousands)
2003 2002 2001 SUPPLEMENTAL INFORMATION:
Cash paid for interest, net of amounts capitalized $ 17,197 $ 29,832 $ 30,783 Income taxes paid 30,398 19,373 21,181
NON CASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment received free of charge $ 18,793 $ 18,050 $ 12,736 Equipment acquired through vendor financing (Note 11) 17,093 8,522 3,234 Equipment acquired under capital leases (Note 11) 1,571 4,770 13,217
In addition, non-cash investing activities during the year ended December 31, 2003 included disposals of shares of subsidiaries and affiliates, as described in Notes 5 and 10. See notes to consolidated financial statements.
PJSC MOSCOW CITY TELEPHONE NETWORK AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 (in U.S. dollars and in thousands)
Preferred stock Common stock
Retained
earnings Total
Shares Amount
Shares Amount
Additional paid-in capital
Other compre- hensive income
Balances at January 1, 2001 15,965,850 $ 12,346 79,829,200 $ 61,502 $ 64,255 $ 411,384 $ - $ 549,487
Net income - - - - - 55,066 - 55,066Dividends declared on preferred shares - - - - - (1,218) - (1,218)Dividends declared on common shares - - - - - (1,801) - (1,801)Balances at December 31, 2001 15,965,850 $ 12,346 79,829,200 $ 61,502 $ 64,255 $ 463,431 $ - $ 601,534
Increase of par value of shares - 10,192 - 50,960 - (61,152) - - Net income - - - - - 58,225 - 58,225Effect of acquisition from a related party - - - - (2,449) - - (2,449)Dividends declared on preferred shares - - - - - (3,549) - (3,549)Dividends declared on common shares - - - - - (1,710) - (1,710)Balances at December 31, 2002 15,965,850 $ 22,538 79,829,200 $ 112,462 $ 61,806 $ 455,245 $ - $ 652,051
Net income - - - - - 69,811 - 69,811Dividends declared on preferred shares - - - - - (6,576) - (6,576)Dividends declared on common shares - - - - - (3,287) - (3,287)Translation adjustment (Note 3) - - - - - - 47,052 47,052Income tax effect of changes in the
functional currency (Note 3) - - - - -
- (35,339) (35,339)Balances at December 31, 2003 15,965,850 $ 22,538 79,829,200 $ 112,462 $ 61,806 $ 515,193 $ 11,713 $ 723,712
The Board of Directors recommended to the shareholders to declare 2003 dividends of $0.04 on the common shares and $0.41 on the preferred shares.
Dividends paid per share in 2002 were $0.02 (2001: $0.02) on the common shares and $0.23 (2001: $0.07) on the preferred shares.See notes to consolidated financial
statements.
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PJSC MOSCOW CITY TELEPHONE NETWORK AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (in U.S. dollars and in thousands) 1. THE GROUP
Description of Business – PJSC Moscow City Telephone Network (“MGTS”) operates
one of the largest metropolitan communication networks in the world. Founded in 1882
and nationalized in 1917, MGTS was privatized and became an open joint stock the
Company in 1994. MGTS provides telecommunication services to residential subscribers,
state-financed institutions and businesses within the city of Moscow.
The Group has two reportable segments, (1) MGTS and (2) MTU-Inform and other
subsidiaries
(see Note 19 for additional information on segments). The Group’s controlling
shareholder is AFK Sistema.
The principal activities of the Group’s subsidiaries of are as follows:
Operating Entities Short Name Principal activity ZAO “The Company MTU-Inform” MTU-Inform Providing direct lines, digital channels
and blocks of phone numbers to other telecom operators; providing data transmission services.
PJSC “Personal Communications”
PeCom Telecommunication services to residential subscribers and businesses of Moscow metropolitan area in CDMA standard (see Note 4).
ZAO “AMT” AMT Radiotelephony services and repair of telecommunication equipment.
ZAO “Mediatel” Mediatel Resale and maintenance of telecommunication equipment and software.
ZAO “Petrodvor”
Petrodvor Providing services to the entities of the Group.
Affiliates of MGTS provide fixed-line and wireless telecommunication, data transmission,
internet, electronic and voice mail, and teleconferencing services throughout the Moscow
metropolitan area.
Local telephone services are regulated tariff services and changes in rate structure are
subject to Ministry of Antimonopoly Policy (“MAP”) approval. In 2003 and 2002,
approximately 68% and 64%, respectively, of MGTS segment revenues were generated
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from regulated tariff services. Fixed monthly fees approved by MAP during 2003 are
presented in the table below:
In Rubles:
January 1 – May 31, 2003
June 1 - July 31, 2003
August 1 - December 31, 2003
Residential customers (net of sales tax of 5%) 110 126 140 State financed institutions 125 126 140 Corporate entities 165 165 165
Residential customers are charged a fixed monthly fee while corporate entities and state-
financed institutions are charged for local traffic in addition to a fixed monthly fee.
2. STRATEGIC ACTIONS
In December 2003, the Group announced its long-term investment program for the period from 2004 till 2012 providing for extensive capital expenditures including expansion and full digitalization of the Moscow telephone network. The program was approved by the resolution of Moscow City Government of December 16, 2003. Capital expenditures under the investment program are currently estimated to be approximately $1,600 mln. during the years 2004-2012 and include reconstruction of 350 local telephone stations and installation of 4.3 mln. of new phone numbers.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT
ACCOUNTING PRONOUNCEMENTS
Basis of Presentation – The acthe Companying financial statements have been prepared
in conformity with the accounting principles generally accepted in the United States of
America (“U.S. GAAP”). The Group’s entities maintain accounting records in Russian
Rubles (“RUR”) in accordance with the requirements of Russian accounting legislation.
The acthe Companying financial statements differ from the financial statements prepared
for statutory purposes in the Russian Federation (the “RF”) in that they reflect certain
adjustments, appropriate to present the financial position, results of operations and cash
flows in accordance with U.S. GAAP, which are not recorded in the accounting books of
the Group’s entities.
Principles of Consolidation – The consolidated financial statements include the accounts of MGTS and its subsidiaries after the elimination of significant interthe Company transactions and balances. The ownership interest of MGTS and proportion of voting power of the Group in the significant subsidiaries as of December 31, 2003 and 2002 are as follows: Operating entities Ownership interest Proportion of voting power
2003 2002 2003 2002
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MTU-Inform 51% 51% 51% 51% PeCom (Note 4) 42% 42% 83% 83% AMT 100% 100% 100% 100% Mediatel 51% Affiliate 51% Affiliate Petrodvor 100% 100% 100% 100%
The Group’s ownership structure includes interests in subsidiaries owned by entities, related by means of common control. Net assets and operating results of the subsidiaries related to such holdings are accounted for as minority interests.
Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses of the reporting period. Actual results could differ from these estimates. Examples of significant estimates include the allowance for doubtful accounts, the recoverability of long-lived assets and valuation allowances on deferred taxes. Concentration of Business Risk – The Group’s principal business activities are within the RF. Laws and regulations affecting businesses operating in the RF are subject to rapid changes, which could impact the Group’s assets and operations. Foreign Currency Translation – The Group follows a translation policy in accordance with SFAS No. 52, “Foreign Currency Translation”. Due to a highly inflationary economy in the Russian Federation in 2002 and 2001, the U.S. Dollar (the Group’s reporting currency) has been designated as the Group’s functional currency. Starting from January 1, 2003, the Russian economy ceased to be considered highly inflationary for accounting purposes. Management has determined that for the fiscal year beginning January 1, 2003, the functional currency of MGTS, AMT and Petrodvor is the Ruble. Accordingly, the reporting currency amounts were translated into Rubles at the exchange rate current at January 1, 2003. These amounts became the new accounting basis for non-monetary assets and liabilities. Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 92-8, “Accounting for the Income Tax Effects under FASB Statement No. 109 of a Change in Functional Currency When an Economy Ceases to Be Considered Highly Inflationary”, the differences between the new functional currency bases of non-monetary assets and liabilities and their tax bases represent temporary differences, for which deferred taxes must be recognized. Income tax effect of changes in the functional currency amounting to $35.3 mln. was reported within other comprehensive income for the year ended December 31, 2003. The Group determined U.S. Dollar (“USD”) as its reporting currency and translated functional currency financial statements into USD. Assets and liabilities were translated at year-end exchange rates, while income and expense items are translated at the average rate for the quarter in which such transactions occurred. The resulting translation adjustment was recorded as a separate component of other comprehensive income. Management believes that the USD remains the functional currency of MTU-Inform and Mediatel, as the majority of its revenue, costs, property and equipment purchased,
128
debt and trade liabilities are either priced, incurred, payable or otherwise measured in USD. Accordingly, MTU-Inform and Mediatel continued to remeasure its books of record into USD. Under this method, monetary assets and liabilities are translated into USD at the rate in effect as of the balance sheet date. Non-monetary balance sheet amounts, revenues and expenses are translated at the rate prevailing on the dates of transactions. Exchange gains and losses arising from the remeasurement of monetary assets and liabilities not denominated in USD are included in currency translation gains in the statements of operations. The official rate of exchange, as determined by the Central Bank of the RF, between the Ruble and the U.S. Dollar at December 31, 2003 was 29.45 (2002: 31.78; 2001: 30.14). The Ruble is not a fully convertible currency outside of the territory of the RF. The translation of RUR-denominated assets and liabilities into USD for the purpose of these financial statements does not indicate that the Group could or will in the future convert the reported values of the assets and liabilities in USD. Revenue Recognition – The Group’s revenues are principally derived from the provision
of local telephone and data transmission services which consist of (i) usage charges, (ii) a
monthly telephone service fee, (iii) service activation and installation fees, (iv) sale of
prepaid calling cards and
(v) charges for value-added telecommunication services. The Group records revenues over
the periods they are earned as follows:
(i) Revenues derived from local telephone usage and data transmission are
recognized as the services are provided.
(ii) Monthly telephone service fees are recognized in the month during which the
telephone services are provided to customers.
(iii) Upfront fees received for activation and installation of wireline and data
transmission services are deferred and recognized over the expected customer
relationship period. According to management estimates, the customer
relationship period for wireline voice phone subscribers is 15 years for
residential customers and 5 years for all other categories of subscribers. The
customer relationship period for subscribers of MTU-Inform is estimated at
three years.
(iv) Revenues from sale of prepaid calling cards are recognized as the cards are used
by the customers or the prepaid cards expire.
(v) Revenues derived from value-added telecommunication services are recognized
when the services are provided to customers.
Other related telecommunications service revenues are recognized as follows:
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(i) Revenues from the provision of internet services are recognized when the
services are provided to customers.
(ii) Interconnection fees from other telecommunications operators are recognized
when the services are provided to the operators.
(iii) Lease income from operating leases is recognized over the term of the lease.
MGTS is required to grant discounts ranging from 20% to 100% on installation and
monthly fees to certain categories of residential subscribers, such as pensioners, military veterans and disabled individuals, and is entitled to reimbursement from the federal budget for these discounts. Due to the lack of certainty of reimbursement, MGTS accounts for such revenues upon collection.
Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, amounts on deposit in banks and cash invested temporarily in various instruments with maturities of three months or less at time of purchase.
Financial Instruments and Fair Value – Financial instruments carried on the balance sheets include cash and bank balances, receivables, investments, accounts payable and long-term debt. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item.
Current financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and bank balances, receivables, short-term investments and accounts payable.
Long-term financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of long-term investments and long-term debt. It is not practicable to estimate the fair value of most of these financial instruments. This is due to quoted market prices not being readily available and valuations not being completed or obtained due to the excessive costs involved. Fair values of corporate bonds issued by MGTS are disclosed in Note 11. As of January 1, 2001, the Group adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. This statement requires that all derivatives, including some embedded derivatives, be measured at fair value and recognized as either assets or liabilities. Changes are recorded in comprehensive income, depending on the designated use and effectiveness of the instruments. The effects of adoption were not material to the Group’s financial position or results of operations. Accounts Receivable – Accounts receivable are stated at their net realizable value after deducting an allowance for doubtful accounts. Such provisions reflect either specific cases of delinquency or defaults or estimates based on evidence of collectibility. Concentrations of credit risk with respect to trade receivables are limited due to a highly diversified customer base, which includes a large number of individuals, private businesses and state-financed institutions.
Inventories – Inventories comprise cables, spare parts, telephones and accessories and are
stated at the lower of cost or market. Cost is computed on an average cost basis.
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Property, Plant and Equipment – Property, plant and equipment is stated at cost less
accumulated depreciation, except for assets contributed by the majority shareholder under the
investment program and assets received free of charge from third parties. These assets have
been included at fair values based on the estimated market values at the time of the transfer.
Significant renovations are capitalized if they extend the life of the asset or significantly
increase its revenue generating capacity. Repairs and maintenance are charged to the statement
of operations as incurred.
Capital leases are recorded at the fair market value of the asset or the present value of future
minimum lease payments, whichever is lower.
Items of property, plant and equipment that are retired or otherwise disposed of are eliminated
from the balance sheet along with the corresponding accumulated depreciation. Any gain or
loss resulting from such retirement or disposal is included in the determination of net income.
Property, plant and equipment is depreciated on a straight-line basis over the following
estimated useful lives:
Years
Buildings 47 Analogue telecommunication equipment 17 Digital telecommunication equipment 10 Transfer devices 31 Site improvements 44 Other equipment 3 – 25
Property, plant and equipment held and used by the Group are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of assets may
have been impaired. Management believes that no impairment has occurred relating to the
Group’s investments in property, plant and equipment as of December 31, 2003.
The Group incurs costs associated with operating and other equipment which require
installation and related works to enable assets to commence revenue generating activities. All
costs necessarily incurred which are directly attributable to the construction, preparation and
installation of an item to commence revenue-generating activities are capitalized.
Property, plant and equipment which was transferred to the Group free of charge is capitalized
at its market value at the date of transfer and deferred revenue is recorded and amortized to the
consolidated statement of operations over the contributed assets’ life.
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Goodwill – As of January 1, 2002, the Group adopted SFAS No. 142, “Goodwill and Other Intangible Assets”. This Standard eliminates goodwill amortization from the statement of operations and requires an evaluation of goodwill for impairment (at the reporting unit level) upon adoption of this Standard, as well as subsequent evaluations on an annual basis, and more frequently if circumstances indicate a possible impairment. This impairment test is comprised of two steps. The initial step is designed to identify potential goodwill impairment by comparing an estimate of the fair value of the applicable reporting unit to its carrying value, including goodwill. If the carrying value exceeds fair value, a second step is performed, which compares the implied fair value of the applicable reporting unit's goodwill with the carrying amount of that goodwill, to measure the amount of goodwill impairment, if any. If SFAS No. 142 had been applied retroactively to January 1, 2001, the net income for the year ended December 31, 2001 would have increased by $0.9 mln.
Investments – Investments in businesses in which the Group does not have control, but
exercises significant influence over operating and financial policies (“affiliates”), are accounted
for using the equity method. The Group’s share of net income of affiliates is included in the
statement of operations, and the Group’s share of the net assets of affiliates is included in the
balance sheet.
Investments in corporate shares where the Group owns more than 20% of share capital, but
does not have the ability or intent to control or exercise significant influence over operating and
financial policies, as well as investments in corporate shares where the Group owns less than
20% of share capital, are accounted for at cost of acquisition. Management periodically
assesses realizability of the carrying values of such investments and provides valuation
reserves, if required.
The promissory notes purchased by the Group are carried at cost and a discount against the
nominal value is accrued over the period to maturity, if it exceeds one year. A provision is
made, based on management assessment, for notes that are considered uncollectible.
Retirement and Post-Retirement Benefits – Contributions are made to the Government’s
social and medical insurance and retirement benefit schemes at the statutory rates in force
during the year.
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 2% of the annual gross remuneration of each employee. UST is
allocated to three social funds, including the pension fund, where the rate of contributions to
the pension fund vary from 28% to 2%, respectively, depending on the annual gross salary of
each employee. The contributions are expensed as incurred.
During the year ended December 31, 2002, MGTS established a defined contribution plan to
provide eligible employees with additional income upon retirement. MGTS’s contributions to
the plan, totaling $0.9 mln. and $0.6 mln. in 2003 and 2002, respectively, (RUR 2,000 a year
132
per eligible employee) are managed by the pension fund “Sistema”, a party related by means of
common control.
In addition, MGTS has historically offered its employees certain benefits upon and after
retirement. The cost of such benefits is recognized during an employee’s years of active service
(Note 14).
Income Taxes – Income taxes have been computed in accordance with RF laws. From January 1, 2001, the RF enacted an income tax rate of 35%. Effective January 1, 2002, this rate was decreased to 24%. Also, income tax on dividends paid within Russia was decreased to 6% (from 15% in 2001), investment allowances were abandoned and carryforward period for unused taxable losses was increased to 10 years. Deferred income taxes are accounted for under the liability method and reflect the tax effect of all significant temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group will be able to realize the benefit, or the future deductibility is uncertain.
Borrowing Costs – The Group capitalizes interest on borrowings during the active construction
period of major capital projects. Capitalized interest is added to the cost of the underlying
assets and is amortized over the useful lives of the assets. For the years ended December 31,
2003, 2002 and 2001 capitalized borrowing costs amounted to $1.2 mln., $0.6 mln. and $1.2
mln., respectively. Other borrowing costs were recognized as an expense in the period in which
they were incurred. Debt issue costs are amortized to expense over the term to maturity.
MGTS historically issued offers to repurchase its outstanding bonds at a certain date. The offer price for the first issue of the bonds was stated above par value. This premium was amortized into interest expense over the bonds’ term.
Earnings Per Share – Earnings per share is computed using the two-class method. Net income
available to common shareholders is divided by the weighted average number of common
shares outstanding in the year. Net income available to common shareholders is determined by
reducing net income by the greater of dividends declared in the accounting period on preferred
shares or of dividends on preferred shares guaranteed under MGTS’ Charter.
Comprehensive Income – Comprehensive income is defined as net income plus all other
changes in net assets from non-owner sources. The following is a reconciliation of
comprehensive income, net of income tax effect:
2003 2002 2001 Net income 69,811 58,225 55,066 Translation adjustment 47,052 - - Income tax effect of change in the functional
currency
(35,339) - -
Total comprehensive income 81,524 58,225 55,066
133
Dividends – Annual dividends are recommended by the Board of Directors for approval of
the shareholders in a general meeting. This occurs subsequent to year end and dividends
are recognized in the year to which they relate.
Reclassifications – Certain reclassifications of prior years’ amounts have been made to conform to the presentation adopted for 2003. Recent Accounting Pronouncements – In June 2001, Financial Accounting Standard Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the asset’s useful life. An entity shall measure changes in the liability for an asset retirement obligation due to passage of time by applying an interest method of allocation to the amount of the liability at the beginning of the period. The interest rate used to measure that change shall be the credit-adjusted risk-free rate that existed when the liability was initially measured. That amount shall be recognized as an increase in the carrying amount of the liability and as an expense classified as an operating item in the statement of operations. The Group adopted SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 did not have a material impact on the Group’s financial position or results of operations. As of January 1, 2002, the Group adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale consistent with the fundamental provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”. While it supersedes APB 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”, it retains the presentation of discontinued operations but broadens that presentation to include a component of an entity (rather than a segment of a business). However, discontinued operations are no longer recorded at net realizable value and future operating losses are no longer recognized before they occur. Under SFAS No. 144, there is no longer a requirement to allocate goodwill to long-lived assets to be tested for impairment. It also establishes a probability weighted cash flow estimation approach to deal with situations in which there is a range of cash flows that may be generated by the asset being tested for impairment. SFAS No. 144 also establishes criteria for determining when an asset should be treated as held for sale. Following the adoption of SFAS No. 144, the Group reflected PeCom business as discontinued operations for all periods presented (see Note 4). In April 2002, FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. This Standard rescinds FAS No. 4, “Reporting Gains and Losses from Extinguishments of Debt”, and an amendment of that Standard, Standard No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. This Standard also rescinds Standard No. 44, “Accounting for Intangible Assets of Motor Carriers” and amends Standard No. 13, “Accounting for Leases”, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications
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that have economic effects that are similar to sale-leaseback transactions. This Standard also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Group adopted the requirements of SFAS No. 145 effective January 1, 2003. The adoption of SFAS No. 145 did not have a material impact on the Group’s financial position or results of operations. In June 2002, FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF No. 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Group adopted the provisions of SFAS No. 146 effective January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on the Group’s financial position or results of operations. In November 2002, FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. FIN No. 45 also requires additional disclosure requirements about the guarantor’s obligations under certain guarantees that it has issued. The Group adopted the initial recognition and measurement provisions of this interpretation on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 did not have a material impact on the Group’s financial position or results of operations. In November 2002, the Emerging Issues Task Force (“EITF”) issued a final consensus on EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on when and how an arrangement involving multiple deliverables should be divided in separate units of accounting. The Group adopted the requirements of EITF Issue No. 00-21 prospectively for arrangements entered into after June 15, 2003. The adoption of EITF Issue No. 00-21 did not have a material impact on the Group’s financial position or results of operations. In December 2002, FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition SFAS No. 148 amends the disclosure requirements of SFAS No 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Group adopted the provisions of SFAS No. 148 effective January 1, 2003. The adoption of SFAS No. 148 did not have a material impact on the Group’s financial position or results of operations.
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In April 2003, FASB issued SFAS No. 149, “Amendments of FASB Statements No. 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 clarifies under what circumstances a contract with an initial investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying and certain other existing pronouncements. The Group adopted the requirements of SFAS No. 149 for contracts entered into or modified and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on the Group’s financial position or results of operations. In May 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) certain classes of freestanding financial instruments that embody obligations for the issuer, including mandatory redeemable financial instruments, obligations to repurchase the issuer’s equity shares by transferring assets and certain obligations to issue a variable number of shares. The Group adopted the requirements of SFAS No. 150 effective July 1, 2003. The adoption of SFAS No. 150 did not have a material impact on the Group’s financial position or results of operations. In December 2003, FASB issued a revision to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits, an amendment of FASB Statements No. 87, 88, and 106” (“SFAS No. 132R”). SFAS No. 132R revised employers’ disclosure about pension plans and other postretirement benefit plans. It requires additional disclosures about the plan assets, benefit obligations, cash flows and net periodic benefit cost of defined benefit plans and other defined postretirement plans. It does not change the measurement or recognition of those plans required by previous Financial Accounting Board Standards. This statement is generally effective for financial statements with fiscal years ending after December 15, 2003. Following the adoption of SFAS No. 132R, the Group included the required annual disclosures in its consolidated financial statements as of and for the year ended December 31, 2003 (Note 14). In December 2003, FASB issued a revision to Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46R” or the “Interpretation”). FIN 46R clarifies the application of ARB No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R requires the consolidation of these entities, known as variable interest entities (“VIEs”), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. Among other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies, to the end of the first reporting period ending after March 15, 2004, except that all public companies must at minimum apply the provisions of the Interpretation to entities that were previously considered “special-purpose entities” under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003. The Group does not anticipate that the adoption of FIN 46 will have a material impact on its financial position, cash flows and results of operations.
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In December 2003, the Securities Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition.” SAB 104 updates portions of the interpretive guidance included in Topic 13 of the codification of Staff Accounting Bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The Group believes it is following the guidance of SAB 104.
4. DISCONTINUED OPERATIONS
During 2003, the management of AFK Sistema, the parent the Company of the Group, made a decision to dispose of PeCom operations. In accordance with SFAS No. 144 the consolidated financial statements of the Group reflect PeCom business as discontinued operations for all periods presented. Accordingly, revenues, costs and expenses, assets, liabilities and cash flows of PeCom have been excluded from the respective captions in the statements of operations, balance sheets, and statements of cash flows and have been reported as income or loss from discontinued operations, net of applicable taxes; as assets and liabilities of discontinued operations; and as net cash used in discontinued operations for all periods presented. Revenues from discontinued operations and income (loss) from discontinued operations before income taxes and minority interest for the years ended December 31, 2003, 2002 and 2001 are presented in the table below: 2003 2002 2001 Revenues from discontinued operations 51,305 44,544 31,405 (Loss)/income from discontinued operations
before income taxes and minority interest (13,328)
10,759
5,533 Assets and liabilities of discontinued operations as of December 31, 2003 and 2002 consisted of the following: 2003 2002 Current assets 9,688 9,521 Non-current assets 49,311 66,510 Total assets of discontinued operations 58,999 76,031 Current liabilities 27,639 40,089 Non-current liabilities 11,994 3,007 Minority interest 2,865 2,395 Total liabilities of discontinued operations 42,498 45,491 Assets of discontinued operations as of December 31, 2002 included goodwill in amount of $19.3 mln. assigned to PeCom. In May 2003, the management of AFK Sistema announced its intention to curtail further investments in PeCom. Concurrently, the Group performed an impairment test of goodwill assigned to PeCom and recorded an impairment charge of $19.3 mln., which was included in net loss from discontinued operations.
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5. ACQUISITIONS AND DISPOSALS
In July 2002 MTU-Inform disposed of its holding in MTU-Intel, then a subsidiary of
MTU-Inform, to the Group’s controlling shareholder for cash consideration of $0.1 mln. As a result, the Group’s voting power in MTU-Intel decreased from 38.0% to 25.5%.
Concurrently, control over operating and financial policies of MTU-Intel was
transferred from MTU-Inform to the controlling shareholder. The Group changed its method of accounting for investment in MTU-Intel shares from consolidation in 2001 to equity method in 2002.
If the Group’s investment in MTU-Intel would be accounted for under equity method for all periods presented, consolidated assets as of December 31, 2001 would decrease by $10.1 mln. and consolidated revenues for the year then ended would decrease by $9.0 mln.
Subsequently, the Group’s interest in MTU-Intel was increased from 25.5% to 30.0%, while control over MTU-Intel operations remained with the controlling shareholder.
In April 2003, the Group increased its ownership interest and voting power in Mediatel from 35.8% to 50.8% by purchasing shares from a related party for cash consideration of less than $0.1 mln. The Group changed its method of accounting for its investment in Mediatel shares from equity method in 2001 and 2002 to the consolidation method in 2003.
6. CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of December 31, 2003 and 2002 consisted of the following: 2003 2002
Rubles 20,982 22,916 U.S. Dollars 207 3,195 Restricted cash – U.S. Dollars 1,281 1,321 Other currencies 15 13 Cash equivalents 19,897 12,332 Total 42,382 39,777 Cash equivalents as of December 31, 2003 include USD and RUR denominated deposits with Moscow Bank for Reconstruction and Development (“MBRD”), a the Company related by means of common control. Cash equivalents as of December 31, 2002 include USD denominated promissory notes from MBRD. Such deposits and promissory notes have original maturities of three months or less.
Cash and cash equivalents held by the Group in MBRD as of December 31, 2003 and 2002 amounted to $29.4 mln. and $18.6 mln., respectively.
Restricted cash balances maintained under the terms of a letter of credit opened in Citibank for the redemption of Citibank loan amounted to $1.3 mln. as at December 31,
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2003 and 2002.
7. SHORT-TERM INVESTMENTS
Short-term investments as of December 31, 2003 and 2002 consisted of the following: 2003 2002
RUR-denominated promissory notes from related parties 28,289
-
USD-denominated promissory notes from related parties 12,000 - RUR-denominated bank promissory notes 7,128 - USD-denominated bank promissory notes 2,000 - EUR-denominated bank promissory notes 1,250 - RUR-denominated time deposit in MBRD 8,488 - USD-denominated time deposit in MBRD 1,300 - PeCom RUR-denominated promissory note 5,070 5,070 Other non-interest bearing loans to related parties 625 354 Total 66,150 5,424
RUR-denominated promissory notes from related parties are issued by MBRD and
Sistema Telecom, an entity related by means of common control. Promissory notes of
MBRD in the amount equivalent to $24.6 mln. bear interest of 11-13% per annum and
mature in 2004. Promissory note of Sistema Telecom in the amount equivalent to $3.7
mln. bears interest of 6% per annum and matures in December 2004.
USD-denominated promissory notes of MBRD bear interest of 7-8% per annum and
mature in 2004. Interest income received from related parties is disclosed in Note 22.
Bank promissory notes are receivable in 2004 and bear interest of 11-13%, 5% and 5% per
annum for promissory notes denominated in RUR, USD and EUR, respectively.
Time deposits in MBRD have the original term of 6 months and bear interest of 12% and
7% for RUR-denominated and USD-denominated deposits, respectively.
PeCom RUR-denominated promissory note is interest-free and the principal amount is
receivable on demand.
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8. ACCOUNTS RECEIVABLE, ADVANCES AND TAXES RECEIVABLE, NET
Accounts receivable, advances and taxes receivable as of December 31, 2003 and 2002 consisted of the following:
2003 2002
Customers 23,655 32,118 Related parties, including affiliates, Rostelecom and state-financed
institutions 21,032
16,514 Other receivables and advances 15,554 4,851 VAT recoverable 12,636 20,056 Other taxes receivable 2,042 1,874 Allowance for doubtful accounts (2,449) (2,710) Total 72,470 72,703 Rostelecom, provider of national long distance and international telecommunications services, is a subsidiary of Svyazinvest, which owns 28% of MGTS voting shares. Svyazinvest is controlled by the Government of the RF. Rostelecom pays a fee to MGTS for the transit of domestic long distance and international calls originated by MGTS subscribers. Respective revenue amounts are disclosed in Note 17.
9. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment as of December 31, 2003 and 2002 consisted of the following: 2003 2002
Buildings and site improvements 193,929 168,108 Switches and transmission devices 870,217 782,113 Other fixed assets 167,594 90,532 Construction in progress 70,485 66,740 Total cost 1,302,225 1,107,493 Accumulated depreciation (370,586) (274,165) Total 931,639 833,328
Construction-in-progress and equipment for installation are not depreciated until an asset
is placed into service.
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10. LONG-TERM INVESTMENTS
Long-term investments as of December 31, 2003 and 2002 consisted of the following: 2003 2002
Ownership, %
Investment Ownership, %
Investment
Investments in affiliates:
ZAO Comstar 50 36,520 50 32,906 ZAO Telmos 40 17,009 40 17,190 PJSC MCC 24 7,262 24 6,730 ZAO MTU-Intel 30 5,695 30 5,349 Total investments in affiliates 66,486 62,175 Other investees, at cost Various 6,771 Various 10,217 Interest free loans to investees 1,011 1,090 PeCom RUR-denominated
promissory notes
3,735
- Comincom RUR-denominated
promissory note
-
2,705 MTU-Intel RUR-denominated
promissory note
419
329 Total 78,422 76,516
In December 2003, the Group sold 14.55% of “Mezhregionalniy Transit Telecom” shares
to AFK Sistema in exchange for PeCom promissory notes with total face value of $3.7
mln. and maturity not earlier than December 2006. The promissory notes are RUR-
denominated and carry interest rate of 16% per annum. The gain realized on this
transaction amounted to $3.6 mln.
During 1999, the Group disposed of its 10% holding in ZAO Combellga, a Moscow
telecommunications operator. In April 2002, the Group agreed to defer repayment of $3.1
mln. outstanding on the respective note receivable to April 2005. In December 2003, the
note receivable was settled for the amount of $3.9 mln., which included principal amount
and interest accrued.
In October 2002, the Group sold its 50% share in ZAO Golden Line to MTU-Intel in
exchange for 4.5% of MTU-Intel’s common shares, an interest-free promissory note with
a face value of RUR 23.2 mln. ($0.8 mln.) and $0.1 mln. in cash. The promissory note
maturing in 2007 is included in long-term investments at a discounted value of $0.4 mln.
Discounted value has been determined using the current interest rates at which similar
loans would have been offered to the Group by non-related borrowers.
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Distributable retained earnings of the Group’s investees are based on amounts extracted
from their statutory financial statements and may significantly differ from the amounts
calculated on the basis of U.S. GAAP.
11. DEBT OBLIGATIONS
Debt obligations as of December 31, 2003 and 2002 consisted of the following: Currency 2003 2002
Bonds 1st issue, 1st tranche due 2003 RUR - 9,540 Bonds 2nd issue RUR 18,692 31,462 Bonds 3rd issue RUR 33,951 -
Total corporate bonds 52,643 41,002
Sberbank RUR 30,556 58,333 Vneshtorgbank USD 11,652 12,565 Vneshtorgbank RUR - 2,359 Raiffeisenbank USD 15,000 15,000 Citibank USD 8,616 7,577 Gutabank USD 2,837 5,421 Alfabank USD - 1,000
USD-denominated promissory notes USD - 3,831
RUR-denominated promissory notes RUR - 189
Long-term portion of vendor financing Various 17,500 8,904
Short-term portion of vendor financing Various 9,135 7,330
Long-term portion of finance leases Various 2,135 3,967 Short-term portion of finance leases Various 3,454 4,110
Total debt 153,528 171,588
Less amounts maturing within one year (51,700) (66,037)
Total long-term debt 101,828 105,551
Corporate bonds – In the fourth quarter of 2000, MGTS issued two tranches of RUR-
denominated bonds (first issue) with aggregate face value of 600 mln. RUR (equivalent of
$20.3 mln. as of December 31, 2003) due in 2003. The Group has fully repaid both
tranches of the first issue of the bonds as of December 31, 2003.
In the fourth quarter of 2001, MGTS issued RUR-denominated bonds (second issue) with
face value of 1,000 mln. RUR (equivalent of $33.4 mln. as of December 31, 2003) due in
2004. Interest is payable semi-annually. The issue has a floating interest rate, which is set
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for each coupon payment not later than 6 days before the date of the prior coupon
payment. Interest (11.3% as at
December 31, 2003) should not be less than the weighted average interest rate of OFZ
(Russian Government Federal Bonds) as at the date the interest rate is fixed.
In February 2003, MGTS issued RUR-denominated bonds (third issue) with the face value
of
1,000 mln. RUR (equivalent of $33.4 mln. as of December 31, 2003) due in 2005. The
bonds carry
a coupon of 12.3% during the first year of trading and of 17.0% during the second year.
Market value of the bonds approximates their carrying value as of December 31, 2003 and
2002.
Sberbank credit facility – In December 2000, MGTS signed a credit facility with
Sberbank for a total amount equivalent to $90.0 mln. to refinance its obligations under
Eurobond borrowings. The loan was received in three tranches during the first quarter of
2001. In September 2002, MGTS prolonged repayment of the outstanding balance ($30.6
mln. as of December 31, 2003) to the first quarter of 2005. The remaining balance was
repaid in 2003. The interest rate on the prolonged loan was 18% during the first six
months and 12% during the second six months of the year. Equipment valued by
independent appraiser at $87.3 mln. is pledged to collateralize the outstanding balance as
of December 31, 2003.
Vneshtorgbank – During the year ended December 31, 2002, the Group received a
number of loans from Vneshtorgbank maturing in 2003-2007 to finance working capital.
The loans are collateralized by pledge of equipment valued by the parties at $7.6 mln. The
weighted average interest rate on the Vneshtorgbank loans outstanding as of December 31,
2003 is 8.3% per annum.
Raiffeisenbank – In September 2002, MGTS entered a credit line with Raiffeisenbank
limited to
$15.0 mln. The equipment pledged under the credit line as at December 31, 2003 is valued
at
$22.5 mln. In addition, MGTS is required to maintain monthly gross cash flows with the
bank of not less than $1.5 mln. The loan bears interest of LIBOR+5% and matures in
2007. As of December 31, 2003, the LIBOR rate specified in the agreement equaled 1.4%.
Citibank – In September 2003, MGTS received a loan from Citibank for the purchase of
equipment in the amount of $6.1 mln. The loan bears interest of LIBOR+5%, and is
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repayable in 8 semi-annual installments. The loan is collateralized by pledge of equipment
in the amount of $5.4 mln. and by deposit in Citibank (Note 6) and guaranteed by Export
Guarantee and Insurance Corporation, Czech Republic.
In July 2001, an uncollateralized bank loan was provided to MGTS by Citibank at
LIBOR+1.6% for the purchase of equipment. The loan is guaranteed by Export Guarantee
and Insurance Corporation, Czech Republic and AFK Sistema.
Based on restrictive covenants of the Citibank loan agreements, the Debt to Equity ratio
and Debt Service to Earnings Before Interest and Taxes (“EBIT”) ratio of MGTS should
not exceed 1:1. MGTS is not allowed to obtain borrowings individually exceeding $30.0
mln. (apart from the Sberbank loan, Raiffeisenbank loan and the third issue of MGTS
bonds) or alienate more than 10% of its assets without the written approval of the Bank
and its aggregate debt may not exceed
$250.0 mln.
Gutabank – In 1999 and 2000, loans were provided to MGTS by Gutabank for the
purchase of equipment from a foreign vendor. Under the terms of the agreements, MGTS
is required to maintain monthly gross cash flows on the specified bank accounts in the
amount of $14.0 mln. The loans are repayable in equal semiannual installments to be
settled in 2005. The weighted average interest rate on the Gutabank loans is 13.0%.
Alfabank – In December 2002, MTU-Inform received a loan from Alfabank for $1.0 mln.,
bearing interest at 6.5% per annum, which was repaid in January 2003.
Promissory notes – In 2002, MGTS issued discounted notes to Donau-Bank. The notes
had value of $5.3 mln. at maturity in December 2003 and a yield of 12%. The notes were
settled in December 2003.
Vendor financing – Foreign suppliers of telecommunications equipment provide
uncollateralized commercial credit to the Group denominated in various currencies on
short-term and long-term bases, mostly interest free.
Finance leases – During 2001-2003, MGTS entered several lease agreements for
telecommunications equipment. The agreements expire in 2004 -2007 and assume transfer
of ownership for equipment to MGTS after the last lease payment is effected. The net
book value of leased assets comprised $14.7 mln. and $14.1 mln. as of December 31, 2003
and 2002, respectively, while rent expense for the years 2003, 2002 and 2001 amounted to
$0.8 mln., $1.3 mln. and $0.5 mln., respectively.
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In 2003, the Group entered into a lease agreement with Invest-Svyaz-Holding, an entity
related by means of common control. The net book value of assets leased under the
agreement and the present value of the future net minimum lease payments is $1.7 mln.
The weighted average interest rate of all borrowings denominated in hard currency at
December 31, 2003 and 2002 was 5.63% and 7.96%, respectively, while it was 11.97%
and 20.13%, respectively, for borrowings denominated in RUR. These figures are
calculated without taking into account borrowings from related parties, vendor financing
arrangements and capital lease agreements.
The debt obligations as of December 31, 2003 have the following maturities:
2004 51,700 2005 88,304 2006 5,040 2007 6,576 2008 1,908 Total 153,528
12. ACCOUNTS PAYABLE, TAXES PAYABLE AND OTHER ACCRUED
LIABILITIES Accounts payable, taxes payable and other accrued liabilities as of December 31, 2003 and 2002 consisted of the following: 2003 2002
Trade accounts payable 9,837 12,125 Accounts payable to related parties 2,678 2,732 Taxes payable 13,040 9,187 Accrued payroll 5,391 2,563 Accrued interest 2,263 3,161 Other liabilities 10,922 5,594 Total 44,131 35,362
The Group purchases equipment from Strom Telecom, Czech Republic, an entity related
by means of common control. Accounts payable to Strom Telecom as of December 31,
2003 and 2002 amounted to $2.4 mln. and $1.2 mln., respectively.
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13. DEFERRED REVENUE
Deferred revenue as of December 31, 2003 and 2002 consisted of the following: 2003 2002
Short-term portion Deferred revenue from connection fees 24,489 20,327 Advances from customers 12,112 14,587 Deferred gain on disposal of an investment 811 735 Total 37,412 35,649 Long-term portion Deferred revenue from connection fees 79,425 63,060 Deferred gain on disposal of an investment - 752 Total 79,425 63,812
The gain on sale of an investment to a related party has been deferred to future accounting
periods and is recognized as the Group fulfills its obligations under the transaction.
14. RETIREMENT AND POST-RETIREMENT BENEFITS
MGTS has historically provided certain benefits to employees upon their retirement and
afterwards. Currently such benefits include bonus payments of a fixed amount to retiring
employees with at least five years of service (RUR 5,700 (USD 195 at the exchange rate
current as of December 31, 2003) or RUR 11,400 (USD 390), depending on actual years
of service); lifetime payments of a fixed amount to employees retiring with at least fifteen
years of service (RUR 1,200 (USD 41) per employee, for the year ended December 31,
2003); and discounted telephone service to employees retiring with at least thirty years of
service. An employee is withdrawn from the benefit scheme if their employment with
MGTS is discontinued prior to retirement.
The assumed discount rate used in determining net periodic cost is 8% per annum. The
future benefit payments to retirees are expected to be paid as follows:
2004 1,469 2005 423 2006 397 2007 373 2008 352 2009-2013 1,291 Thereafter 592 Total 4,897
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15. INCOME TAX EXPENSE
The Group’s provision for income tax for the years ended December 31, 2003, 2002 and 2001 is as follows: 2003 2002 2001 Current taxes 31,499 15,557 25,069 Deferred taxes 2,274 4,756 4,154
Total income tax expense 33,773 20,313 29,223
The provision for income taxes is different from that which would be obtained by
applying the statutory income tax rate to net income before income tax and minority
interests. The items causing this difference are as follows:
2003 2002 2001
Income tax charge computed on income before
taxes at standard tax rate applicable to the Group of 24% (35% in 2001) 31,745
21,307
33,767 Currency exchange and translation differences (968) (1,115) 1,111 Effect of rates different from standard (161) (545) (457) Non-deductible items 3,157 666 12,523 Effect of changes in income tax rate - - 10,918 Tax credits - - (10,374) Change in valuation allowance - - (18,265) Income tax expense 33,773 20,313 29,223
Temporary differences between the tax and accounting bases of assets and liabilities
give rise to the following deferred tax assets and liabilities at December 31, 2003 and
2002: 2003 2002
Deferred tax assets
Accrued operating expenses 2,548 2,598 Post-retirement benefits 1,175 1,062 Property, plant and equipment contributions 21,213 10,999 Deferred revenues 25,135 14,633 Tax losses carry forward 1,539 8,343 Allowance for doubtful accounts 2,667 - Total 54,277 37,635 Deferred tax liabilities Undistributed earnings of affiliates (4,338) (4,076) Depreciation of property, plant and equipment (63,187) (8,536) Other (163) (602) Total (67,688) (13,214)
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The Group does not record a deferred tax liability related to undistributed earnings of
MTU-Inform, as it intends to permanently reinvest these earnings.
16. SHAREHOLDERS’ EQUITY
Common shares carry voting rights with no guarantee of dividends.
Preferred shares carry guaranteed dividend rights amounting to the higher of (a) 10% of
the income of MGTS as disclosed in the Russian statutory accounting reports prepared
under Russian accounting regulations and (b) the dividends paid on common shares. No
dividends may be declared on common shares before dividends on preferred shares are
declared. Where the preferred dividend payable according to the Charter is not paid in any
year the preferred shares also carry voting rights. At the annual shareholders meetings in
June 2003 and 2002 the payment of a dividend to preferred shareholders was approved.
Preferred shares carry no voting rights except on resolutions regarding liquidation or
reorganization of MGTS, changes to dividend levels of preferred shares, or the issuance of
additional preferred stock. Such resolutions require two-thirds approval of preferred
shareholders. The preferred shares have no rights of redemption.
In the event of liquidation, preferred shares have priority over common shares. In this
circumstance, holders of preferred shares receive the par value of their shares, or the
amounts payable to common shareholders, if higher.
In accordance with the Сharter, MGTS is permitted to repurchase, on the open market, up
to 10% of its common and preferred shares each year. Repurchased shares must either be
sold or cancelled within one year of being purchased. MGTS has no treasury shares as at
December 31, 2003.
In June 2002 MGTS increased the par value of each share of its common and preferred
stock from 20 RUR to 40 RUR. Consequently, the aggregate par value of the issued stock
was increased by reclassifying the respective amount from the Group’s retained earnings
as of the date of approval of this transaction by shareholders.
148
17. OPERATING REVENUES Operating revenues for the years ended December 31, 2003, 2002 and 2001 consisted of the following:
2003 2002 2001 MGTS - Fixed monthly charges Companies 61,607 58,225 56,406 State financed institutions 24,006 17,648 14,569 Residential customers 113,176 74,096 57,036
MGTS - Local traffic fees Companies 26,483 23,022 25,140 State financed institutions 2,430 2,337 2,567
MGTS - Service activation fees Companies 15,077 13,286 14,062 State financed institutions 1,411 1,220 1,376 Residential customers 5,094 4,056 3,053
MGTS - Data transmission 14,847 6,421 - MGTS - PJSC Rostelecom interconnect 24,742 21,244 32,459
MGTS - Rental of lines 37,177 27,241 17,720 MGTS - Other 38,221 39,651 39,389 MTU-Inform and other subsidiaries 108,241 92,452 92,454
Total 472,512 380,899 356,231
MGTS is not licensed to provide domestic long-distance and international long-distance, or DLD/ILD, telecommunications services directly to its subscribers, but must route such traffic through a DLD/ILD licensed operator. As a result, DLD/ILD traffic originated by MGTS subscribers is carried by Rostelecom, which bills MGTS subscribers directly. In 2003 MGTS had an agreement with Rostelecom pursuant to which Rostelecom paid MGTS approximately $2.0 mln. per month of its DLD/ILD revenues generated by MGTS subscribers.
18. OPERATING EXPENSES Operating expenses for the years ended December 31, 2003, 2002 and 2001 consisted of the following:
2003 2002 2001
Employee costs 126,066 86,435 76,491 Depreciation charge 69,298 61,423 60,193 Repairs and maintenance 52,353 41,882 37,415 Taxes other than income taxes 12,991 14,622 13,326 Network traffic 4,036 5,301 6,306 Utilities and energy 13,013 10,257 8,849 Rent 9,484 8,249 3,733 Bank charges 6,531 4,761 3,843 Advertising 5,810 2,834 2,935 Insurance 6,052 4,022 3,675
149
Transportation 2,389 1,902 1,872 Provision for bad debts 348 1,270 1,141 Sundry expenses 26,839 24,631 17,044 Total 335,210 267,589 236,823
19. SEGMENT INFORMATION
An analysis of the Group’s business segment information for the years ended December 31, 2003, 2002 and 2001 is as follows: Year ended December 31, 2003 MGTS MTU-Inform
and other subsidiaries
Total
Net sales to external customers 364,271 108,241 472,512 Intersegment sales 16,118 - 16,118 Income from affiliates 894 - 894 Interest income 2,207 2,449 4,656 Interest expense (17,057) (143) (17,200) Depreciation charge (59,514) (9,784) (69,298) Operating income 82,504 54,798 137,302 Income tax expense (18,147) (15,626) (33,773) Investments in affiliated companies 73,257 - 73,257 Segment assets 1,104,584 178,856 1,283,440 Capital expenditures 99,106 14,256 113,362 Year ended December 31, 2002 MGTS MTU-Inform
and other subsidiaries
Total
Net sales to external customers 288,447 92,452 380,899 Intersegment sales 14,574 - 14,574 Income from affiliates 3,025 - 3,025 Interest income 950 971 1,921 Interest expense (29,990) (145) (30,135) Depreciation charge (52,367) (9,056) (61,423) Operating income 70,282 43,028 113,310 Income tax expense (10,342) (9,971) (20,313) Investments in affiliated companies 72,392 - 72,392 Segment assets 966,952 130,205 1,097,157 Capital expenditures 82,504 15,470 97,974 Year ended December 31, 2001 MGTS MTU-Inform
and other subsidiaries
Total
Net sales to external customers 263,777 92,454 356,231 Intersegment sales 10,594 - 10,594 Income from affiliates 2,287 - 2,287 Interest income 792 141 933 Interest expense (28,465) (802) (29,267)
150
Depreciation charge (51,377) (8,816) (60,193) Operating income 66,217 53,191 119,408 Income tax expense (7,702) (21,521) (29,223) Investments in affiliated companies 73,257 - 73,257 Segment assets 920,931 136,028 1,056,959 Capital expenditures 100,103 11,171 111,274
THE RECONCILIATION OF SEGMENT ASSETS TO THE RESPECTIVE INFORMATION IN THE
CONSOLIDATED FINANCIAL STATEMENTS IS AS FOLLOWS: 2003 2002 2001 Total segment assets 1,283,440 1,097,157 1,056,959 Assets of discontinued operations 58,999 76,031 75,783 Intersegment assets (20,400) (18,210) (25,507) Consolidated assets 1,322,039 1,154,978 1,107,235
20. EARNINGS PER SHARE
Earnings per common share have been calculated using the two-class method on the basis
of earnings and weighted average number of common shares outstanding calculated as
follows:
2003 2002 2001
Net income from continuing operations 78,437 53,894 54,217 (Loss) income from discontinued operations (8,626) 4,331 849 Less: dividends declared on preferred shares (6,576) (3,549) (1,218)
Net income available to common shareholders 63,235 54,676 53,848
Weighted average number of common shares outstanding was 79,829,200 for each of
three years in the period ended December 31, 2003.
21. OPERATING LEASES
(a) As lessor – The Group leases excess office space through operating leases, the
majority of which are cancelable. Assets under operating leases are included in property,
plant and equipment. The amount of rent income under these agreements is not significant
to the Group’s results.
(b) As lessee – The Group leases buildings and office space mainly from Moscow
Government through contracts, which expire in various years through 2008. Rental
expenses under operating leases are included in the statement of operations (Note 18).
151
Future minimum lease payments due under non-cancelable leases at December 31, 2003
are: 2004 6,636 2005 2,810 2006 2,593 2007 2,447 2008 2,390 Thereafter 27,786
Total 44,662
The land on which the Group’s buildings and other facilities are located is owned by the City
of Moscow. The Group pays the city rent for the land based on the total area and location of
land occupied. Land rental expense was approximately $2.8 mln. for the year ended December
31, 2003 and $0.9 mln. for each of the years ended as of December 31, 2002 and 2001.
22. RELATED PARTY TRANSACTIONS
The Group provides services to affiliates and companies related by means of common
control. The revenues generated from these companies in 2003, 2002 and 2001 were
approximately $64.0 mln., $53.0 mln. and $51.0 mln., respectively.
The Group purchases insurance services from Rosno, a the Company related by means of
common control. The respective insurance expense in 2003, 2002 and 2001 amounted to
$4.8 mln., $4.7 mln. and $3.3 mln., respectively.
The Group purchases telecommunication equipment from Strom Telecom s.r.o, a the
Company related by means of common control. The cost of equipment purchased from
Strom Telecom in 2003, 2002 and 2001 was $9.7 mln., $8.1 mln. and $17.1 mln.,
respectively.
Interest income received from MBRD on bank and deposit accounts in 2003, 2002 and
2001 amounted to $1.2 mln, $0.4 mln. and $0.2 mln., respectively. Interest income
received on MBRD promissory notes in 2003, 2002 and 2001 amounted to $1.7 mln., $0.3
mln. and $0.2, respectively.
23. COMMITMENTS AND CONTINGENCIES Issued guarantees – MGTS is a guarantor under the credit facility with a limit of $65.0
mln. provided to Comstar by Vnesheconombank. The facility is effective till January
2005. The guarantee amounted to $7.1 mln. and $12.3 mln. as of December 31, 2003 and
2002, respectively.
152
MGTS is a guarantor under the credit facility with a limit of $4.2 mln. provided to RTK-
Leasing, a related party, by Vneshtorgbank. The facility is to be settled prior to July 2004.
The guarantee amounted to $1.5 mln. and $3.1 mln. as of December 31, 2003 and 2002,
respectively.
In December 2002 MTU-Inform and Alfabank signed a Guarantee agreement. According
to the agreement MTU-Inform guaranteed a loan of $4.0 mln. provided to Golden Line by
Alfabank. The loan matures in November, 2005. In addition, MTU-Inform pledged
equipment with a fair value of $4.7 mln.
In December 2003 MTU-Inform pledged telecommunication equipment in the amount of
$17.4 mln. to guarantee a loan provided by MBRD to Skylink, a related party. The amount
of the loan as of December 31, 2003 is $15.7 mln. and is to be settled in December 2004.
Under these guarantees the Group could be potentially liable for a maximum amount of
$29 mln. in case of the borrower’s default under the obligations. As of December 31,
2003, no event of default has occurred under any of the guarantees issued by the Group.
Contingencies – The Russian economy, while deemed to be of market status beginning in
2002, continues to display certain traits consistent with that of an emerging market. These
characteristics have in the past included higher than normal inflation, insufficient liquidity
of 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 subject to the government’s continued actions with regard to
legal, and economic reforms.
On January 1, 2004, a new Law on telecommunications came into effect in Russia. The
law sets the legal basis for the telecommunications business in Russia and defines the
status that state bodies have in the telecommunications sector. The Group cannot predict
with any certainty how the new law will affect it. The new law creates a new interconnect
pricing regime in 2004 that should be more transparent and unified and it creates a
universal service charge calculated as a percentage of revenue which will be introduced
from 2005. The new law may increase the regulation of the Group’s operations and until
the time when appropriate regulations consistent with the new law are promulgated, there
will be a period of confusion and ambiguity as regulators interpret the legislation.
In recent years, the Russian government has initiated revisions of the Russian tax system.
Effective January 1, 1999, the first part of the Tax Code was enacted. Effective January 1,
2001, the second part of the Tax Code was enacted and effective January 1, 2002 new
regulations, relating to federal income tax were enacted. The new tax system is generally
153
intended to reduce the number of taxes, the overall tax burden on businesses, and to
simplify the tax laws.
Russia currently has a number of laws related to various taxes imposed by both federal
and regional governmental authorities. Applicable taxes include value added tax
(‘‘VAT’’), corporate income tax (profits tax), a number of turnover-based taxes, and
payroll (social) taxes, together with others. The government’s policy on implementation of
these regulations is often inconsistent or nonexistent. These facts create tax risks in Russia
that is more significant than typically found in countries with more developed tax systems.
The tax inspection is currently challenging the application by MGTS of certain provision
of the tax legislation, including application of the investment allowance for income tax
purposes in 2001. The tax inspection assessment amounted to the equivalent of $5.1 mln.
at the rate current at balance sheet date. The Group will contest the assessment on the
grounds that application of the investment allowance was in compliance with tax laws in
effect at the time. No accrual has been made in the acthe Companying financial statements
with respect of this claim.
Management believes that it has adequately provided for tax liabilities in the acthe
Companying consolidated financial statements; however, the risk remains that relevant
authorities could take differing positions with regard to interpretive issues.
In the ordinary course of business, the Group may be party to various legal and tax
proceedings, and subject to claims. In the opinion of management, the Group’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 Group.
Licenses – Substantially all the Group’s revenues are derived from operations conducted pursuant to licenses to operate in Moscow and the Moscow region granted by the Russian Government. The Voice Phone Communication license expires in July 2008. Suspension or termination of the Group’s main license or any failure to renew it could have a material adverse effect on the financial position and operations of the Group. However, the Group has no reason to believe that the license will not be renewed or suspended or terminated, and the management estimates the possibility of such events as very low. Commitments – In December 2003 MGTS signed an agreement to acquire telecommunications equipment and related services from ECI Telecom. The vendor financing amounting to $4.6 mln. will bear interest of LIBOR + 3% and be repayable in 7 equal quarterly installments starting February 2004.
Interest of the Moscow City Government in the telecommunications sector in the
Moscow metropolitan area – The operations of the telecommunications network in
Moscow are of considerable interest to the City Government. The City Government has
154
exercised and may be expected to continue to exercise influence over the Group’s
operations. In particular, the City Government may influence setting of tariffs charged to
customers to protect low income groups, such as pensioners.
25. SUBSEQUENT EVENTS
In January 2004 the Group entered an agreement with Ericsson Nikola Tesla D. D.,
Croatia for purchase of telecommunication equipment for the total amount of $2.6 mln.
payable in 2004-2005.
In March 2004 the Group entered a lease agreement with Invest-Svyaz-Holding for
purchase of telecommunication equipment from Strom Telecom. The total amount of
future minimal lease payments under the agreement is $12.5 mln. payable in 2004-2007.
Net book value of leased equipment is approximately $10.7 mln.
In the first quarter of 2004 the Group entered several agreements for purchase of
telecommunication equipment from Siemens AG, Germany for the total amount of $14.4
mln. with payments due in 2004 and 2005.
In April 2004, MGTS issued 5-year RUR-denominated bonds in the amount of 1,500 mln.
RUR (approximately $50.9 mln.). The bonds carry a coupon of 10% per annum. The
Group made an unconditional offer to repurchase the bonds at par value in April 2006.
In May 2004, AFK Sistema announced completion of the operational merger of its three digital operators, including MTU-Inform, Comstar and Telmos. The completion of the legal merger is expected in 2005. The merged the Company will operate under the name of “Comstar United Telesystems”. Until completion of the legal merger of the three companies the management functions will be carried out by Comstar. Management of the Group can not estimate the potential effect of the merger on the financial position and results of operations of the Group.
155
9. Subsidiaries and affiliates
Currently, MGTS has shareholdings in 22 companies with Russian and foreign
investments, 9 of which provide telecommunications services based on new technologies in
Moscow and regional telecom markets. The rest specialise in construction, information
technologies, banking and securities registration.
The par value of its shares in subsidiary and affiliates totalled RUR’000 354,424.2 as
at 1 January 2004, their carrying value amounting to RUR’000 860,096.5 as at 1 January 2004.
In 2003 there were the following changes in MGTS investment to its subsidiaries
structure:
- The Company purchasing from FGUP “LIONIIS” 15% of JSC “Mediatel” share capital
represented by 18 ordinary shares with the nominal value of RUR 10,000 each. MGTS
increased its ownership stake in JSC “Mediatel” from 35.83% to 50.83%.
- The Company sold to “Plenksys Gesselshaft fur Sattillecommunications MbX” its 10%
stake of ordinary shares to ZAO “The Company MTU-Intel”. Number of shares sold – 40.
Nominal value RUR 5 for each share.
- The Company sold to PJSC “JFC “Sistema” 150,000 common shares (15% stake of
ordinary shares and 12.75% of share capital) and 10,592 preferred shares (6% stake of
prefer shares outstanding and 0.9% of share capital) of PJSC “Interregional Transit
Telecom”
- The Company took part in an additional issuance placement of JSC “City Telecom” shares
purchasing 18,053 of RUR 10 nominal value ordinary shares. MGTS stake in the
mentioned The Company remained 5%.
- The Company didn’t take part in an additional issuance placement of PJSC “Reestr” shares
and lowered its ownership share from 11.8% down to 3.64%.
- The Company quit its ownership in “Mediacom-33” in 1sr quarter 2001. This investment
has been written off the balance sheet in 2003.
PJSC MGTS main long term investment target is to raise its subsidiaries value. The
Company therefore tries to increase its ownership share in its subsidiaries.
PJSC MGTS is mostly interested in obtaining control over the subsidiaries providing
telecom services.
The Company cooperates with its subsidiaries trying to reach the following objectives:
1. To increase its investing income (dividends received from the subsidiaries),
2. To develop the number of new telecom services for the subsidiaries to penetrate
new markets and attract new clientele under PJSC MGTS branding.
Undoubtedly, capital consolidation is a current way for telecom companies to
156
develop. MGTS presently merges its main telecom subsidiaries: JSC “Comstar”, JSC
“Telmos” and JSC “MTU Inform” to create the united digital operator. In line to the incoming
merger the subsidiaries conduct joined marketing and investment policy in order to decrease
transactional costs and eliminate internal competition between each other.
Table 9.1. presents the main services provided by JSC MGTS telecom subsidiaries on Moscow
and Russian markets.
Telecom services provided to Muscovites and regional customers by The Company’s
subsidiaries
Table 9.1.
1. Local, long distance and international telephony JSC “Comstar”, JSC “Telmos”, JSC “MTU Inform The Company”, JSC “City Telecom”, PJSC MTT, JSC “AMT”
2. Data transmission JSC “Comstar”, JSC “Telmos”, JS “MTU Inform The Company”, JSC “City Telecom”, JCS “MTU-Intel”
3. Internet
JCS “MTU-Intel”, JSC “Comstar”, JSC “Telmos”, JSC “MTU Inform The Company”, JSC “City Telecom”,
4. IP – telephony JSC “MTU-Intel”, JSC “Comstar”, JSC “Telmos”, JSC “MTU Inform The Company”
5. Radio Paging JSC “Radio Page” 6. Trunking JSC “AMT”, JSC ”MTK Trunk” 7. Cellular telephony PJSC “MCC” 8. Distant radio search JSC “AMT” 9. Telematic services JCS “MTU-Intel”, JSC “Comstar”, JSC
“Telmos”, JSC “MTU Inform The Company”
10. High speed lines JCS “MTU-Intel”, JSC “Comstar”, JSC “Telmos”, JSC “MTU Inform The Company”
12. Repair of telecom equipment JCS “АМТ"
In 2003 telecom companies including PJSC MGS subsidiaries were concentrating on
receiving revenues from such high value added and well demanded services as: data
transmission, Internet access etc. The main market growth’s appeared in the corporate clientele
sector.
Fixed communications companies' sales profitability rose in 2003 comparing to 2002
due to both growth in volume of sales and increase in sales of high value added services.
In order to increase its income form its subsidiaries PJSC closely monitors their financial
performance paying particular attention to the growth of revenue generating working assets.
Subsidiaries’ net assets growth amounted 17% in 2003 (27% in 2002).
157
Number of MGTS subsidiaries sufficiently enlarged its net assets increasing its
profitability and providing well-balanced leverage policy.
In 1995-2003 the dividends received by PJSC MGTS from its subsidiaries and
dependent companies amounted RUR’000 293,566.
158
10. Financial statistics
N Indicator Balance sheet lines
01.01.00
01.01.01
01.01.02
01.01.03
01.01.04
1) Liquidity and solvency analysis 1 Current liquidity ratio 290 / 690 1,45 0,34 0,92 0,68 0,90
Current assets / current liabilities 2 Absolute liquidity ratio * 260 / 690 0,67 0,10 0,19 0,23 0,31
Cash in hand / current liabilities 2) Profitability analysis
3 Return on sales 140 / 010
loss incurred 0,13 0,05 0,11 0,15
Net income / revenues 4 Return on assets
140 / 399 loss
incurred 0,04 0,02 0,05 0,08
Net income / assets 5 Earnings per one preferred share 190 / # of
shares loss
incurred 0,049 0,023 0,071 0,121
Net income / number of preferred shares 6 Earnings per one common share 190 / # of
shares loss
incurred 0,010 0,005 0,014 0,024
Net income / number of common shares 3) Assets performance analysis
7 Asset turnover 010 /399 0,26 0,29 0,36 0,43 0,52
Revenues / assets 8 Current asset turnover 010 / 190 1,56 3,33 3,48 2,95 3,12
Revenues / current assets 9 Receivables turnover
010 / 240 4,59 6,14 7,25 8,75 7,43
Revenues / receivables 10 Receivables turnover, net 010 / 240 78,47 58,61 50,32 41,12 48,46
(Receivables / revenues) * 360 11 Debt turnover 020+030+040 /
620 2,54 4,10 4,50 5,94 7,32
Operating expenses / payables 12 Debt turnover, days 020+030+040 /
620 141,55 87,85 80,05 60,60 49,17
(Payables / operating expenses) * 360 4) Capital structure analysis
13 Leverage (debt load) ratio 590/ 590+490
0,35 0,06 0,24 0,15 0,15
Long-term debt / (long-term debt + share capital) 14 Interest coverage ratio ** 140 / 070 0,85 2,37 2,00 3,62 8,64
(Net income + interest + depreciation) / interest 15 Cost of capital 140 + 070 /490 0,04 0,03 0,04 0,05 n.a.
'dividends + interest payable on long-term debt) / total assets
159
5) Market value analysis
16 Current yield on shares 0,014 0,619 0,834 0,963 0,862
Dividends / capital market value 17 Current yield on one common share - - 0,37 0,35 0,36
Earnings per 1 common share / price of 1 common share 18 Current yield on 1 preferred share / price of 1 preferred share 0,29 14,47 7,02 6,48 3,97
Earnings per 1 preferred share / price of 1 preferred share 19 Price to earnings ratio (common share) - - 271,70 287,46 279,83
P/E = market price / earnings per share 19 Price to earnings ratio (preferred share) 347,14 6,91 14,24 15,43 25,17
P/E = market price / earnings per share
* - cash in hand includes short-term financial investments;
** - Less capitalised interest.
160
11. MGTS dividend policy
In the absence of Net Profit in 1999 MGTS did not pay dividends at its ordinary
shares.
1999 preferred shares dividends were paid from a special reserve find and amounted
RUR’000 680. Thus in 1999 The Company allocated 4.2 kopeks for each of its preferred
shares.
Improved financial results in 2000-2002 allowed MGTS to sufficiently increase
dividend payments. Dividends paid in the mentioned years at each preferred share amounted in
2000 –RUR 4.89, RUR 2.29511 in 2001 and RUR 7,055171 in 2002. Ordinary share dividends
in 2000-2002 remained at a level of RUR’ 0.68.
1998-2002 MGTS Dividends Indicator 1999 2000 2001 2002 2003*
Ordinary share dividends (RUR’000) 54 284 54 284 54 284 96 849
Preferred shares dividends (RIR'000) 671 78 073 36 643 112 642 193 690
Dividends for one ordinary share (RUR) 0.68 0.68 0.68 1.2132
Dividends for one preferred share (RUR) 0.042 4.89 2.29511 7.055171 12.1315 *Recommended by The Company’s Board of Directors
PJSC MGTS Dividends in 1999-2003
0
2
4
6
8
10
12
14
1999 2000 2001 2002 2003
Div
iden
ds p
er o
ne s
hare
, R
UR
0
25,000
50,000
75,000
100,000
125,000
150,000
175,000
200,000
Am
ount
of
ivie
nds
paid
for
eah
c sh
are
type
, RU
R'0
00О
.
Amount of dividends paid on common shares Amount of dividends paid on preferred shares
Dividends per one common shares Dividends per one preferred shares
161
The Company’s Shareholders Meeting established the following dividend per
each type of shares for 2003 and the following form and time of dividend payment:
Annual dividend per one common share at RUR 1.2132. Payments shall be
made in cash within the period from 15 July 2004 through 31 December 2004.
Annual dividend per one preferred share at RUR 12.1315. Payments shall be
made in cash within the period from 15 July 2004 through 31 December 2004.
162
12. PJSC MGTS Securities
Stocks market
Moscow City Telephone Network is one of the largest national securities issuers. The
Company’s shares are traded both in Russian on Moscow Interbank Currency Exchange
(MICEX) and Russian Trading System (RTS) and abroad in ADR form.
In the reporting year PJSC MGTS strengthen its stock market positions. Variety of
factors such as: national economy growth, The Company’s recent financial successes and
changes in its top-management brought investors’ attention to PJSC MGTS and doubled its
capitalisation from USD 551,619,805 as on December 31, 2002 up to USD 1,117,480,793
as on December 31, 2003.
Table 12.1.
Average weighted PJSC MGTS stock prices in 2002-2003
2
4
6
8
10
12
14
3.1
25.1
15.2
12.3 2.4
23.4
20.5
10.6 2.7
23.7
13.8 3.9
24.9
15.1
0
5.11
26.1
1
17.1
2
10.1
31.1
21.2
17.3 7.4
28.4
22.5
16.6 7.7
28.7
18.8 8.9
29.9
20.1
0
11.1
1
2.12
24.1
2
Date
Shar
e va
lue,
USD
200
250
300
350
400
450
500
550
600
650
700
RT
SI
MGTS MGTSP RTSI
163
PJSC MGTS stock market prices in 2002-2003 (in USD)
Having 4,127,791 of main telephone numbers in 2003 PJSC MGTS has the highest
among national operators capitalization over number on the main telephone units ratio
amounted USD 285,25 one set installed.1
1 The list of national telecom operators being compared to PJSC MGTS excludes PJSC “Uralsviazinform” as the named the Company provides both fixed and wireless telephony services.
Акции обыкновенные Акции привилегированные Показатели
2003 год 2002 год 2003 год 2002 год
Bid, min 5,00 5,9 2,55 2,21
Bid, max 12,85 7,26 9,25 3,7
Ask, min 6,20 5,95 3,50 2,27
Ask, max 15,00 7,45 10,00 3,99
Max price 6,40 5,95 3,50 2,4
Min price 12,90 7,45 7,00 3,75
164
Despite the low free float as the most of The Company’s shares are concentrated in its 2
main shareholders’ hands PJSC MGTS remained on the top on national exchanges listings:
MICEX assigned The Company’s shares to 1-st level “A” list, RTS to 2-nd level “A” list.
Total The Company’s common stock trade volume in 2003 amounted USD 2,327,299
comparing to USD 2,312,633 in 2002. Number of deal done with The Company’s common
shares grew by 6.8 times and amounted 501.
Total The Company’s preferred stock trade volume in 2003 amounted USD 1,680,017
comparing to USD 1,425,425 in 2002. Number of deal done with The Company’s preferred
shares grew by 10 times and amounted 1,203.
In 2003 The Company has been working to feather ADR program ran in conjunction to
The Bank of New York. In the reporting year number of ADR floated in exchange to The
Company’s shares rose from 930 thousand up to 2.2. million pieces.
Debt market
In 2003 The Company has been working to develop its bond program. In February 2003
The Company placed its 3-rd RUR 1 billion bond issue. The structure of the new bond was
different from the previous The Company’s bond issues. This bond became the first RUR
Far East Communication
Company
North-West Telecom
Center Telecom
PJCS MGTS
Volgatelecom
Southern Telecommutication
Company
Siberiatelecom
0
50
100
150
200
250
300
Сapitalization over number on the main telephone units ratio.
165
denominated corporate fixed income note issued for as long as 2 years. The issue was placed
in an auction conducted on February 11, 2003 at MICEX. High demand allowed The
Company to set a notably low interest rate for this borrowing -12.3% for the fist 2 semi annual
coupons. The Company’s bonds remain one of the most popular fixed income instruments on
the national market.
In 2003 4thst quarter The Company paid off its first RUR 600 million bond.
The main aims of MGTS bond program is to actively manage The Company’s debt
optimizing its leverage - constantly refinancing short or expensive liabilities with long term and
cheaper ones.
In 2003 The Company was accomplishing this target as following:
The Company was attempting to increase its bonds liquidity. In 2003 The Company’s
bonds were one of the most liquid corporate fixed income issues. The Company’s bonds were
traded at Moscow Interbank Currency Exchange. The Company kept its bonds trade volume
high and stable: 2nd bond issue annual trade volume amounted RUR 2,925,227,216, 3rd bond
issue annual trade volume amounted RUR 2,205,538,622. The bond was given a 1st level “A”
listing.
Main characteristics of MGTS bond issues traded in 2003:
1 issue 1tranch with its nominal value of RUR 360 million: interest rate - 7.4%,
1 issue 2tranch with its nominal value of RUR 240 million: interest rate - 6.77%,
2 issue with its nominal value of RUR 1 billion: interest rate – 14.04%,
3 issue with its nominal value of RUR 1 billion: interest rate – 12.3%,
The average cost of bond servicing decreased in 2003 by 0.53% from 12.29% to
11.75% that lead to the expenditure economy amounted RUR 13.78 million.
In 2003 PJSC MGTS bond issues continued to attract close attention of both Russian
and international rating agencies.
On February 4, 2003 “Standard & Poors” rated The Company’s 2 and 3 ruble
denominated bonds at a level “ruBBB+” .
National rating agency “Expert RA” on February 26, 2003 assessed The Company’s 1,2
and 3 ruble denominated bonds at an “A” risk level.
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13. Information for Shareholders
Share Capital
As at the register closing date:
Share capital: 3,831,802,000 roubles;
Number of issued shares: 95,795,050 shares, including:
registered common shares: 79,829,200 shares,
registered preferred shares: 15,965,850 shares,
Par value of one share: 40 roubles.
The Company Shareholders
The total number of shareholders entitled to participate in annual shareholders’ meetings –
1,562.
The Company shareholders that hold at least 5% of voting shares:
1. Public Joint Stock Company “Investment Communications The Company” (PJSC
“Svyazinvest”) – 28% of votes.
Shareholding in MGTS – 23.33 %.
List of PJSC “Svyazinvest” shareholders with at least 20 % ownership interest in
PJSC Svyazinvest:
Full name of shareholder Location Shareholding in PJSC Svyazinvest
The Ministry of State Property of the Russian Federation
Russia, Moscow 50 % + 1 share
MUSTCOM LIMITED Nicosia, Cyprus 25 % + 1 share The Russian Federal Property Fund Russia, Moscow 25 % - 2 shares
2. Public Joint Stock Company “AFC “Sistema” (PJSC “AFC “Sistema”)– 55.62% of
votes.
Shareholding in the issuer – 46.35%.
List of the shareholders of PJSC “AFC “Sistema” with at least 20% ownership interest in
PJSC “AFC “Sistema”
Full name of shareholder Location Shareholding in PJSC “AFC “Sistema”
Vladimir P. Yevtushenkov Russia, Moscow 75.6%
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Information about Annual Shareholders’ Meeting
The meeting was held on 19 June 2004. It was attended by 267 shareholders or their proxies
with 73,028,454 votes, which accounts for 91.48% of the total number of votes represented by
the The Company’s voting shares that were counted when establishing the presence of a
quorum.
Agenda of the Meeting:
1. Approval of the annual report and the annual financial statements including the Company’s income statement, distribution of income for 2003;
2. Distribution of The Company’s annual 2003 profit, 3. Determining the amount of annual dividends per each class of shares and form and time
of dividend payment; 4. Election of the Board of Directors members; 5. Election of the Audit Committee members; 6. Approval of the auditor of MGTS for 2004; 7. Approval of the new edition of The Company’s Charter; 8. Approval of the new edition of Shareholders’ Meeting Regiment; 9. Approval of the new edition of The Company’ Board of Directors Regulation; 10. Approval of the new edition of The Company’ Audit Comity Regulation 11. Approval of the new edition of The Company’ Management Council Regulation; 12. Approval of the new edition of The Company’s General Director Regulation.
The meeting approved The Company’s annual report and the annual financial statements including the Company’s income statement, distribution of income for 2003
The Meeting elected the Board of Directors comprised of 12 persons:
Members of the Board of Directors
Nominated by
1 Vladimir Akulich A. PJSC “Sviazinvest”
2 Levan Vasdze Sh. PJSC “JSC “Sistema”
3 Alexander Vronets P PJSC “JSC “Sistema”
4 Alexander Goncharuk Y PJSC “JSC “Sistema”
5 Sergey Drozdov A. PJSC “JSC “Sistema”
6 Elena Zabuzova V. PJSC “Sviazinvest”
7 Nail Ismailov I PJSC “JSC “Sistema”
8 Vladimir Lagutin S. PJSC “JSC “Sistema”
9 Irina Ragozina M. PJSC “Sviazinvest”
10 Viktor Savchenko D. PJSC “Sviazinvest”
11 Mikhail Smirnov. A. PJSC “JSC “Sistema”
12 Valery N. Yashin PJSC “Sviazinvest”
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The Meeting elected the Board of Directors comprised of 5persons:
Members of the Audit Comity
Nominated by
1. Vladimir Beliaev K. PJSC “Sviazinvest” 2. Svetlana Krhzechevskaya G. PJSC “JSC “Sistema” 3. Vasily Platoshin V. PJSC “JSC “Sistema” 4. Irina Prokof’eva V. PJSC “Sviazinvest” 5. Natalia Tomilina G. PJSC “JSC “Sistema”
The Meeting appointed Closed Joint-Stock The Company “Deloitte and Touche CIS” as
auditor to MGTS in 2004.
The Meeting established the following dividend per each type of shares for 2003 and
the following form and time of dividend payment:
Annual dividend per one common share at RUR 1.2132. Payments shall be made in
cash within the period from 15 July 2004 through 31 December 2004.
Annual dividend per one preferred share at RUR 12.1315. Payments shall be made in
cash within the period from 15 July 2004 through 31 December 2004.
The shareholders’ meeting resolved the remaining items of the meeting’s agenda as
following:
To approve the new edition of The Company’s Charter; To approve the new edition of Shareholders’ Meeting Regiment; To approve the new edition of The Company’ Board of Directors Regulation; To approve the new edition of The Company’ Audit Comity Regulation To approve the new edition of The Company’ Management Council Regulation;
To approve the new edition of The Company’s General Director Regulation.
The Board of Directors meeting held on June 25, 2003 elected V.S. Lagutin its Chairman.