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2002] ANNUAL REPORT SVYAZINVEST CONTENTS]
CHAPTER PAGE No
1.] Message from the Chairman 4 2.] Director General's Address 5 3.] The Company Profile 6 4.] Major Results and Developments 7 5.] Managerial Bodies 8
5.A.] Board of Directors 8
5.B.] Management Board 8
5.C.] The Group's Consolidation Procedures 10 6.] The Group's Management Activities 12
6.A.] Reorganisation of Regional Telecommunication Operators 13
6.B.] Corporate Governance 14 6.c.] Financing and Operating Activities 15
6.D.] Technical Policy 17
6.E.] Marketing Strategy Development 18
6.F.] Social Policy 19 Svyazinvest Annual report 2002 Annual
CHAPTER PAGE No
7.] The Group's Financing and Operating Activities 20
7.A.] Telecommunication Network Development 21
7.B.] Cellular Mobile Communications 23
7.C.] Financial Results 25
7.D.] Investing Activity 26
7.E.] Liabilities 28
7.F.] Receivables 28
7.G.] Human Resources 29
7.H.] Efficiency Indicators 30 8.] Secondary Market Development 31 9.] Participation in Research and Telecommunication 33 Sector Development Programmes 10.] Basic Trends of the Group's Evolution in 2003 34 11.] Unaudited Consolidated Financial Statements, Prepared in Accordance 35 with IFRS as at December 31, 2002 12.] Notes to Unaudited Consolidated Financial Statements, Prepared in Accordance 39 with IFRS as at December 31, 2002 13.] Information to Shareholders 80
page No 3 1.] MESSAGE from the Chairman
Dear Colleagues,
I would like to present the results achieved by the largest national telecom holding company in 2002. The previous year for the Russian telecom sector was a successful one. Svyazinvest companies, whose achievements are a pledge of robust and dynamic development of the telecom infrastructure nationwide, have greatly contributed to the success. The year 2002 was marked not only by the improvement in the company's performance. Thanks to a skillful revamp of the holding company's organisational and managerial structures, Svyazinvest operators have become more powerful, progress oriented and capable of meeting current economic challenges. This fact is impressively proved by significant growth of regional telecom companies' market capitalisation and a boost in volumes of their securities trading. The coming year should herald integration of telecom operators' business, development of a common basis for marketing, technical and human resources policies. The objective of the reform is to lay solid foundations for companies' credibility and investor attractiveness, as well as to gain new opportunities for network reconstruction and development. I wish everybody employed with the holding company every success in addressing these challenges and hope you will prepare the ground for more efficient operation of the telecom sector and its potential growth, as well as create equal opportunities for inhabitants of both major cities and remote villages to enjoy modern information services in the near future.
Minister for Communications and Informatisation of the Russian Federation Leonid D. Reiman
page No 4 Svyazinvest
2.] report 2002 Annual DIRECTOR General's Address
Dear Ladies and Gentlemen,
It gives me great pleasure to present the 2002 Annual Report of Joint Stock Company Svyazinvest. The report year is undoubtedly a unique period in Svyazinvest development. It is the year of completing the formal integration of more than seventy regional telecom operators into seven mega regional companies. It is the year of the proactive corporate reform aimed to create managerial systems capable of bolstering effective operation and dynamic development of the newly formed mega regional companies. And finally, it is the year of sustainable growth of all Svyazinvest entities, construction of up to date telecom networks, vigorous roll out of new services, cellular business development, revision of marketing approaches, etc. The boost in overall operating and financial figures of companies is a natural consequence of these processes. I would like to take the opportunity to thank our fellow shareholders, staff and partners of the largest Russian telecom group for support, understanding and cooperation. I am sure that in the current year the Group will improve its results: Svyazinvest operators will become not only more viable in terms of economic development and positioning in the Russian telecom market, but also more flexible, dynamic and customer oriented companies. The Group's operators undoubtedly have all necessary prerequisites to meet these targets.
Valery N. Yashin
page No 5 3.] THE COMPANY PROFILE
Telecommunication Investment Joint Stock Company (Svyazinvest) was founded in 1995 by consolidating its controlling stakes in regional telecom operators of the Russian Federation. Svyazinvest equity capital stands at 19.5 billion Roubles* and its shareholders include the Ministry of Property Relations of the Russian Federation (50% + 1 share), Russian Federal Property Fund (25% – 2 shares) and the Cyprus based consortium Mustcom Ltd. (25% + 1 share).
Svyazinvest includes: 1) OAO Rostelecom; 2) seven mega regional companies: OAO Central Telecommunications Company (OAO CentreTelecom); OAO North West Telecom (OAO NWT); OAO Uralsvyazinform; OAO Sibirtelecom; OAO VolgaTelecom; OAO Southern Telecommunications Company (OAO STC); OAO Far East Telecommunications Company (OAO Dalsvyaz); 3) telecom operators: OAO Central Telegraph; OAO Lensvyaz; OAO Dagsvyazinform; 4) telecom research institute OAO Giprosvyaz; 5) affiliates: OAO Svyaz Komi Republic; OAO Moscow City Telephone Network (OAO MGTS); OAO Kostroma GTS. OAO Rostelecom is the national long distance and international incumbent. The company works with 400 international operators and telecom administrations, participates in 30 international cable networks, and has direct connections with 88 operators in 72 countries.
Svyazinvest operators hold licenses and provide local, domestic long distance and international telecom services, data transmission, access to the Internet, ISDN, WLL, as well as GSM, NMT 450, AMPS and DAMPS mobile services.
page No 6 * Figures on pages 6 30 are presented in accordance with Russian Accounting Standards. Svyazinvest
4.] report 2002 Annual MAJOR RESULTS and Developments
Under the direction of a highly skilled management team, it took only one and a half year to pull off an unprecedented reform of the Russian fixed line telephony. By the end of 2002, 72 regional operators were merged into seven large and economically viable mega regional companies, each of them in terms of business operation was comparable to the leading Euro pean peers. Tariffs for local calls for residential customers and organisations on average increased over 1.4 and 1.1 times, respectively. The Group's revenue soared by 29.6% and totaled 99.8 bn Roubles compared to 2001. Income generated from telecom services grew by 25.3% and stood at 88.1 bn Roubles. Sales profit amounted to 28.2 bn Roubles representing a 48.4% rise against 2001. Profit margin reached about 40%. As a result of the holding company's investing activity the volume of capital expenditures hiked by 60% from the previous year and totaled 25.1 bn Roubles, including 8.0 bn Roubles – the volume of construction and installation work performed. Digitalisation rate of backbone networks of Svyazinvest telecom operators and OAO Rostelecom reached 81% and 74.8%, respectively. The Group put into operation 7,704.4 km of fiber optic transmission lines and 813.7 km of digital radio relay links. Total installed capacity of local networks was 26.54 m lines compared to 25.03 m lines at the beginning of the reporting period. Digitalisation rate of installed local telephone lines was 40.73% against 34.86% in 2001. For the first time on the basis of uniform methodological principles in line with international accounting standards (IAS), detailed annual budgets were developed and adopted by Svyazinvest companies. The Group's total workforce was 368,117 employees.
page No 7 5.] MANAGERIAL BODIES
Leonid D. Reiman Minister for Communications 5.A. and Informatisation of the Russian Federation, ] Chairman of the Board of Directors Board of Directors Alexander V. Anoshkin Assistant to the Head of the President's Administration (since June 27, 2002) of the Russian Federation David Geovanis Representative of Mustcom Ltd. Consortium Alexander V. Borodin Adviser to the Minister for Property Relations of the Russian Federation Anatoly N. Golomolzin Deputy Minister for Anti Monopoly Policy and Entrepreneur Support of the Russian Federation Gherman O. Gref Minister for Economic Development and Trade of the Russian Federation Stuart J. Paperin Executive Vice President of the Soros Fund Sergei V. Mitrofanov Deputy Director General of the Federal Agency of Government Communications and Information (FAPSI) Valery P. Fatikov Deputy Chairman of the Russian Federal Property Fund
B Valery N. Yashin Director General 5. .] Vadim E. Belov Deputy Director General Management Alexander V. Lopatin Deputy Director General Board Stanislav N. Panchenko Deputy Director General Georgy A. Romsky Deputy Director General Yevgeny V. Yurchenko Deputy Director General (member of the Management Board since February 2003) Sergei I. Kuznetsov Director General of OAO Rostelecom Anton I. Osipchuk till December 16, 2002 Vladislav S. Vasin till August 12, 2002
page No 8 Svyazinvest Annual report 2002 Annual
Vadim E. Belov Valery N. Yashin
Alexander V. Lopatin
Stanislav N. Panchenko Georgy A. Romsky
Sergei I. Kuznetsov Anton I. Osipchuk
page No 9 Yevgeny V. Yurchenko Vladislav S. Vasin In this annual report the analysis of financial indicators of Svyazinvest subsidiary and affiliate 5.—.] companies (collectively, "The Group") was made based on consolidated financial statements. The Group's The Group's consolidated financial statements were prepared on the basis of aggregate Consolidation financial statements of entities incorporated in Svyazinvest and adjusted according to Procedures Methodical Recommendations on Preparation and Presentation of Consolidated Financial Statements adopted by the Ministry of Finance of the Russian Federation (Order No 112 dated December 30, 1996). Significant intra Group transactions were eliminated from consolidated financial statements so as to present the Group's business as a single entity. Consolidated financial statements included assets, liabilities, as well as revenues and expenses of Svyazinvest and its subsidiaries totaled on a line by line basis. A list of subsidiary companies is shown below:
table 5.С.1 COMPANY NAME CORE BUSINESS VOTING EQUITY INTEREST, % INTEREST, % Subsidiary companies
1 OAO CentreTelecom communication services 50.69 38.02 2 OAO North West Telecom communication services 50.84 39.89 3 OAO VolgaTelecom communication services 50.67 38.00 4 OAO STC communication services 50.69 38.16 5 OAO Uralsvyazinform communication services 51.42 41.38 6 OAO Sibirtelecom communication services 50.67 38.23 7 OAO Dalsvyaz communication services 50.57 38.13 8 OAO Rostelecom communication services 50.66 38.01 9 OAO Giprosvyaz design, construction and operation of tele 50.66 38.00 com digital facilities
10 OAO Central Telegraph communication services 51.00 38.25 11 OAO Lensvyaz communication services 50.66 38.00 12 OAO Dagsvyazinform communication services 50.66 38.00 13 ZAO Mobitel communication services 100.00 100.00
Inclusion of affiliates' data in the consolidated financial statements was made by using an index that showed the valuation of Svyazinvest equity interest in an affiliate company for the period of investments, and an index that showed the Svyazinvest share in the profit and loss of an affiliate for the reporting period, and was recorded in the Profit and Loss Account under "Capitalized Income (Loss)". Investments in other affiliates were shown in the consolidated financial statements at the historical cost. Such an approach did not exercise a significant influence on the formation of notions of the Group's financial standing and its financial results.
Affiliate companies are listed below:
page No 10 Svyazinvest No COMPANY NAME CORE BUSINESS EQUITY INTEREST, %
JSC SVYAZINVEST AFFILIATES 1 OAO MGTS communication services 23
2 OAO Svyaz Komi Republic communication services 19 report 2002 Annual 3 OAO Kostroma GTS communication services 28 OAO ROSTELECOM AFFILIATES 4 ZAO Westelcom international telecom services 100 5 OAO RTK Leasing real and personal property leasing, investing activity, real 27 estate transactions table 5.с.2 6 JSC Globalstar – Space local, domestic long distance and international telecom 51 Telecommunications (JSC GlobalTel) services (voice communication, facsimile, paging by means Affiliate of wireless and telecom facilities, including PSTN, mobile companies and satellite facilities, etc.) 7 JSC Telmos building and operation of telecom networks in Moscow 20 and other regions 8 JSC RTKomm.Ru IT development; design, production and dissemination of 31.5 software and hardware for local, corporate and global area networks; access to the Internet
OAO NORTH WEST TELECOM AFFILIATE 9 JSC WestBaltTelecom digitalisation of secondary networks in the Kaliningrad 28 region. Local, domestic long distance and international telecom services and data transmission OAO VOLGATELECOM AFFILIATES 10 JSC Saratov Mobile DAMPS cellular services 50 11 ZAO Nizhny Novgorod Cellular Communications GSM 900 cellular services 50 OAO STC AFFILIATES 12 JSC Stavtelecom local, domestic long distance telecom services and data 51 transmission 13 JSC Astrakhan Mobile AMPS 800 cellular services 50 14 JSC Stavropol Cellular Communications AMPS 800 cellular services 50 OAO URALSVYAZINFORM AFFILIATE 15 JSC South Urals Cellular Telephone GSM 900,GSM 1800 cellular cervices 45 OAO SIBIRTELECOM AFFILIATES 16 ZAO Yeniseitelecom NMT 450, GSM 900 cellular services 51 17 JSC Baikalwestcom NMT 450, GSM 900 cellular services 51 18 JSC Siberian Cellular Systems – 900 GSM 900 cellular services 30 OAO DALSVYAZ AFFILIATE 19 JSC Primtelephone local, domestic long distance and international telecom 50 services
OTHER COMPANIES 20 ZAO Startkom development and implementation of IT and computer 51.3 aided systems of business processes 21 ZAO RusLeasingSvyaz financial leasing 64.1 22 ZAO Registrator Svyaz keeping a register of registered securities' holders 20.7 23 OAO Rostelecom Bezopasnost security services 95
The above mentioned joint stock companies were registered in the Russian Federation. The consolidated financial statements were intended for informing Svyazinvest shareholders not only about the Group's financial standing, but also about their equity interest and share in the Group's net profit.
page No 11 6.] The Group's MANAGEMENT ACTIVITIES
6.A.] Reorganisation of Regional Telecommunication Operators 6.B.] Corporate Governance 6.C.] Financing and Operating Activities 6.D.] Technical Policy 6.E.] Marketing Strategy Development 6.F.] Social Policy
page No 12 The integration oftheSvyazinvestThe integration subsidiaries muchaheadofschedule. wascompleted authorized therestructuringofeachsevenMRCs. of Anti Monopoly Policy andEntrepreneur SupportoftheRussian Federation (MAP) operatorsfrom themerger andbasecompanies.TheMinistry of72regionaltelecom Seven large companies(MRCs) mega regional formed –oneperfederal district–were consolidation launchedattheendofpreviousyear. The year2002wasmarkedbythecompletionofSvyazinvest subsidiaries' Far East REGION NorthWest South Central Volga Urals Siberia SRTO OAO North West nications Co. (OAO STC) OAO SouthernTelecommu Telecom) Co.nications (OAOCentre OAO Central OAO VolgaTelecom OAO Uralsvyazinform OAO Sibirtelecom (OAO Dalsvyaz) communications Co. OAOTele FarEast Telecommu Telecom JSC Cherepovetselektrosvyaz JSC Elektrosvyaz Pskov region JSC Novgorodtelecom JSC Murmanelektrosvyaz JSC Elektrosvyaz Karelia Republic JSC Elektrosvyaz Kaliningrad region JSC Elektrosvyaz Vologda region JSC Artelecom JSC Elektrosvyaz Kalmykia Republic JSC Volgogradelektrosvyaz region Astrakhan JSC Svyazinform JSC Sevosetinelektrosvyaz JSC KabBalktelecom JSC Elektrosvyaz Rostov region JSC Karacha JSC Elektrosvyaz krai Stavropol JSC Elektrosvyaz Adygea Republic JSC Tambov Elektrosvyaz JSC Lipetskelektrosvyaz Kurskregion JSC Elektrosvyaz JSC Voronezhsvyazinform JSC Belsvyaz JSC Yartelecom JSC Tulatelecom JSC Smolensksvyazinform JSC Elektrosvyaz Ryazan region JSC Elektrosvyazregion Orel JSC Elektrosvyaz Kostroma region JSC Elektrosvyaz Kaluga region JSC Elektrosvyaz Tver region JSC Ivtelecom JSC Elektrosvyaz Vladimirregion JSC Briansksvyazinform ChuvashiaJSC Svyazinform region JSC Saratovelektrosvyaz regionJSC Svyazinform Samara JSC Elektrosvyaz Orenburgregion JSC Elektrosvyaz Ulyanovskregion JSC UdmurtTelecom Republic Mari El JSC Martelcom Mor JSC Svyazinform JSC Kirovelektrosvyaz JSC Svyazinform JSC Khantymansiiskokrtelecom JSC Svyazinform JSC Yamalelektrosvyaz JSC Tyumentelecom JSC Elektrosvyaz Kurgan region SverdlovskJSC Uraltelecom region JSC Elektrosvyaz Buryatia Republic JSC Elektrosvyaz Chita region JSC Elektrosvyaz Irkutskregion JSC Elektrosvyaz Khakassia Republic JSC Elektrosvyaz Kr JSC Tomsktelecom JSC Elektrosvyaz Omskregion KemerovoJSC Elektrosvyaz region JSC Elektrosvyaz AltaiRepublic JSC Altaitelecom JewishAutonomousJSC TTC Region JSC Kamchatsvyazinform JSC krai Elektrosvyaz Khabarovsk JSC Magadansvyazinform JSC Sakhalinsvyaz JSC Amursvyaz MERGING RTOS evo Cherkesskelektrosvyaz Penza region Chelyabinsk region asnoyarsk krai dovia Republic COMPLETION DATE OFMERGER 30.11.2002 01.10.2002 31.10.2002 31.10.2002 30.11.2002 30.11.2002 30.09.2002 Operators ("SRTOs") Telecommunications Super Regional 6. table Operators Telecommunication of Regional Reorganisation 6. A А . .1 ] page No page No
13 Annual report 2002 Svyazinvest At the final stage of the Svyazinvest revamp a number of organisational and managerial tasks were successfully accomplished, namely: 1) regional branches of base companies were set up and registered; 2) organisational structures of general directorates and regional branches were developed; 3) required amendments to charters of joint stock companies were made. In addition, merged companies obtained/extended licenses and frequency allocations. Alongside the formal reform, Svyazinvest pushed ahead with a number of corporate restructuring projects (introduction of uniform accounting policies and a separate cost accounting methodology, as well as budgeting and international accounting standards, development of a marketing strategy for MRCs, transition to centralized equipment purchases, working out a Unified General Plan of MRCs and Rostelecom Telecom Networks Development for the Period Ending 2007). In conjunction with Accenture research on business developments at two pilot mega regional companies (OAO VolgaTelecom and OAO Uralsvyazinform) was completed, in the course of which weak and strong points of business at each of the regional companies were analyzed, as well as required information for further stages of the corporate restructuring project was gathered.
In 2002 at the final stage of the formal (legal) reorganisation of the joint stock companies 6.B.] included in the Group, the creation of a corporate governance system of future interregional companies got underway. Corporate Governance In the first half of 2002 branches located not far from each other or performing similar tasks were amalgamated forming the basis for enlarged units and making it possible not only to enhance management, cut down operating costs (basically, due to reduction in personnel costs), streamline collection and spending of funds, but also to boost solvency of branches and the Group, separate a technological function from customer servicing one due to cost minimisation and cash flow consolidation. In the second half of 2002 purposeful efforts were made to eliminate all branches of merging companies, allowing them to minimize risks when the latter were withdrawn from the unified state register of legal entities. It was decided that branches located in areas serviced by base companies should be eliminated and by replaced structural units of a regional branch at the base company's location. To create prerequisites for MRC operation as a single entity, on the basis of all entities involved in the reorganisation within a federal district, branches were set up in every base company and registered, as well as their executives and chief accountants were appointed. The organisational structure of an MRC general directorate was developed and approved by the base companies' boards. Such tasks as strategic management of the company, its business development, preparing and making managerial decisions and their supervision were assigned to the general directorate. According to the targets set, the general directorate's organisational structure was tasked with strategic planning and business development, sales management (separating out a VIP sector), IT, telecom development and operation, financial and business issues, corporate governance and assets, accounting, legal support, human resources management, internal auditing and others. In order to create efficient vertical management, a regional branch's organisational structure that virtually resembled that of the MRC general directorate was developed.
page No 14 In thereportingyearGroup'stariffsforlocalcallsonaverage increased: accounting data. aresetbasedon costandincome separate services Since January1,2002tariffsfortelecom Tariff Policy adopted. andin housedocumentswere editions ofMRCcharters andnew appointed generaldirectorswere elected, were to theboards andauditcommittees of2003tolegallysupportthecompletion of therestructuringquarter process. Newmembers heldinDecember2002– first shareholder meetingsofallmega regional companieswere jointgeneralgeneral meetingsofjointstockcompaniesinvolvedinthereorganisation, In compliance legislation atshareholder withthecurrent andmerger agreementsadopted astheMRC general directoronof Svyazinvest theMRC departments,aswell boards. companies, andparticipationof2or3membersthemanagementboard, representatives of therepresentation principle equaltoSvyazinvestthe unconditional maintenance stakesin laws.Suchanapproach federalandcorporate providedfor controlling stakes,andobserve was madeupinordertoexerteffectivecontrolon ofMRC thepartofSvyazinvest, owner toMRCA list boards – ofSvyazinvestrepresentatives–candidates andauditcommittees prepared.board executivebody)were –acollective activity ofmanagerial bodies(shareholderandboard's astheMRC general meetings,aswell andin housedocuments neweditions thatregulated oftheMRC charter reorganisation, ascompletionoftheformal operators, aswell Governance, practicalexperienceoftelecom legislation, recommendations oftheCodeCorporate Given amendmentstothecurrent operation andanagreementwiththeheadofbranch. MRC setforthinneweditions ofadraft charter,activity were clauses governingbranch preparingGuidelines branch andmakingmanagerial asregards decisions thatregulated and structural also unitswere takenintoaccount. distribution ofresponsibilitiesof creating andprovisioningservices, andauthority tostaff andmakingmanagerialpreparing customerrelationship decisions, management,processes forcustomerprofileprocedure structure. andcustomerpreference Inaddition, catering The regionalbranch'smanagerial structurewasdesignedso astotakecare ofeverybusiness a) telegrams grewbyanaveragetelegrams of Tariffs fordomesticlong distance indexed.InDecember rates were services fortelegraph over 2002 2001 2000 YEAR 1.4 times for the household sector; timesforthehouseholdsector; 18% RWHRT*INFLATIONINDEX* GROWTH RATE* . b) over 142.5 127.0 131.8 1.1 timesfororganisations. 115.1 118.6 120.2 * %change,y o y Household Sector for Local Callsforthe Growth Rate ofTariffs 6. table Activities and Operating Financing 6. C .1 C . ] page No page No
15 Annual report 2002 Svyazinvest Liability Management Debt servicing and optimisation of the Group's investment programmes involved: 1) trimming costs and extending the maturity period of borrowings by increasing the amount of bonds in the overall volume of borrowed funds; 2) currency risk reduction by boosting the amount of rouble borrowings in the overall volume of borrowed funds; 3) bringing down the cost of purchased equipment through the centralisation of procurements; 4) attraction of leasing companies (OAO RTK Leasing, ZAO RusLeasingSvyaz, JSC Promsvyazleasing) to optimize equipment purchases; 5) cutting borrowing costs by revising the policy of fund raising, as well as handpicking by the Group the largest Russian banks authorized to work with its companies and capable of granting cheap long term loans to finance their investing activity. Introduction of Budgeting In the year 2002 for the first time on the basis of uniform methodological principles brought in line with IAS rules, detailed annual budgets of subsidiaries were developed and adopted. Every company's budget corresponded to macro indices that determined its financing and economic policy and represented key development trends of the Group as a whole. Quarterly assessment and supervision of budgets implementation made it possible to analyze budget variance and, if necessary, to adjust them for subsequent quarters. The budgeting ideology greatly contributed to meeting rigorous targets, enhancing the level of discipline and responsibility of employees as regards budget planning and implementing adopted budgets. In 2002 a new Comshare electronic budgeting system equipped with a unified data base was put into service. It supported real time centralized handling of target data and enabled companies to efficiently prepare consolidated budgets of various levels. The new budgeting system coupled with the actual data collecting system facilitated to a great extent comparison of target and actual data, enhanced control efficiency. The new system was applied to project MRC budgets for 2003. Cost Optimisation In 2002 Svyazinvest proceeded with its cost optimisation programme that involved: 1) implementing the separate cost accounting procedure starting from the January 1, 2002; 2) spending control; 3) cost standards development; 4) cost planning in line with developed standards. Based on the results of the pilot project on the Group's companies comparative performance analysis carried out by McKinsey, economically feasible costs were calculated to be further used for planning annual budgets. Centralisation of MRC Financial Functions In 2002 Svyazinvest embarked on centralizing the following financial functions performed by megaregional companies: a) investment management: investments in stocks and other securities, long term loans; b) loan and credit raising; c) loan and credit payments; d) lease payments (leasing contract management); e) settlements with OAO Rostelecom; f) settlements with VIP clients; g) insurance; h) settlements with non government pension funds.
page No 16 Svyazinvest
Risk Management in the Course of Telecom Operators' Reorganisation In 2002 Svyazinvest prepared a uniform accounting methodology of the restructuring process report 2002 Annual and special reporting forms that ensured comparability of presented indicators. A detailed programme to manage and analyze accounting, tax and legal risks arising from the corporate reorganisation, as well as measures to minimize their effects were developed. The efficiency of this accounting and reporting methodology of the reorganisation effects was proved by positive auditors' evaluation of 2002 financial statements of all mega regional companies. Uniform Accounting Policies In 2002 telecom operators changed over to uniform accounting policies and a uniform chart of accounts according to both Russian accounting standards and IAS rules and managed to reduce risks stemming from the corporate reform and enhance credibility of financial statements of the Group's companies and the entire Group. Development and implementation of the current cost and income separate accounting procedure made it possible to calculate the cost of separate telecom services and identify sources of cost optimisation and income increase at telecom operators. With support from Svyazinvest all mega regional companies compiled their 2002 financial statements under IAS rules, and for the first time these statements were audited. In 2002 all companies of the Group began implementing the information collection and consolidation system that allowed them to gather information containing different degree of detailing, as well as facilitated compiling financial statements. In 2003 the system is expected to be further improved and developed.
Over the next few years as far as the Group's technical policy is concerned, regulatory documents D developed by telecom research institutes would form the basis for its development. 6. .] Under the Svyazinvest direction, within the scope of a research project entitled "System and Network Technical Policy Solutions for Development of MRCs and OAO Rostelecom Infocommunication Networks as Integral Parts of Russia's Interconsistent Telecom Networks for the Period Ending 2007", strategic development of all types of telecom networks was dealt with by the Leningrad Research and Development Communication Institute (LONIIS) in conjunction with other research institutes. In parallel to the above mentioned research project, General Plans of MRCs and OAO Rostelecom Telecom Networks Development were prepared by OAO Giprosvyaz (Moscow) and consisted of nine volumes, namely: a unified general plan to develop all MRCs and OAO Rostelecom telecom networks (one volume), documents dealing with network development of each mega regional company (seven volumes) and OAO Rostelecom, the national long distance and international telecom operator (one volume). Creation of large mega regional operators required development of unified approaches and corporate standards of customer servicing. To meet the target Svyazinvest worked out a concept to build a MRC account management system to be implemented in all mega regional companies. To enhance the quality of communication and expand the range of value added services, telecom operators paid much attention to developing intra regional and local telecom networks, phasing out analogue equipment and air lines, as well as to building multiservice, intellectual and broadband access networks. Optic fiber cable networks, hybrid cable and coaxial networks with passive coaxial distribution, as well as integrated multiservice networks based on cutting edge data transmission technologies and principles were projected and built. The telecom sector development made new demands on systems supporting payment for telecom services. And issues like interconnection fees, one stop payment for all types of services, as well as customer oriented technological processes were pushed to the foreground.
page No 17 Under the prevailing circumstances Svyazinvest faced up to the following issues: 1) building a centralized settlement system between operators based on a computerized accounting system; 2) building a modern computer based network infrastructure and training highly skilled IT specialists; 3) developing corporate standards of service provision and payment for telecom services; 4) separating out customer servicing to focus telecom operators' efforts on applying market sales tools. Creation of call/customer contact centres – an efficient customer relationship mechanism – was one of the ways of enhancing the quality of customer servicing and expanding the range of services offered. Since December 2001 when the Ministry of Communications and Informatisation of the Russian Federation adopted the concept of a single payphone card in Russia, Svyazinvest has been taking steps to boost the payphone business competitiveness by introducing a single payphone card into regional operators' networks. In the light of consolidation of Svyazinvest entities into mega regional companies, the alignment of every MRC infocommunication environment became a task of top priority.
In 2002 Svyazinvest in conjunction with The Boston Consulting Group and JSC Cominfo 6.E.] Consulting implemented the first two stages of the MRCs Marketing Strategies Development Project. Marketing Strategy As a result of implementing the first stage of the project, telecom market research methods Development (Volga region was selected as a pilot one) were defined and the analysis of global and Russian telecom markets was made. During the second stage of the project research on regional markets was done by marketing services of telecom operators. In parallel to this research, methods to form a marketing strategy concept, as well as programmes to promote MRC services in the regional telecom market and other documents were developed by consulting firms based on the results of the pilot project implemented at OAO VolgaTelecom. On completion of the second stage, a comprehensive picture of the consumer market of all pilot regions was revealed, as well as a general forecast of the Russian telecom market development up to 2006 was prepared. At the end of the reporting period Svyazinvest and MRC marketing services (task groups supported by The Boston Consulting Group) embarked on the third and final stage of developing marketing strategies for six mega regional companies (excluding the pilot OAO VolgaTelecom). The marketing strategy concept encompassed: a) current and long term analysis of regional telecom markets; b) current and long term positioning of mega regional companies; c) future MRC income structure based on types of services offered; d) MRC priorities with regard to various customer segments; e) MRC development organisational priorities; f) principles of MRC service promotion. The key task assigned to the Group's companies was to retain and strengthen their positions in regional telecom markets, as well as to break a negative tendency towards losing the most lucrative market segments. And the crucial target of the marketing strategy was to transform traditional operators into customer oriented companies. Customer care priorities of all megaregional companies included as follows: 1) improving business customer servicing and relationship in order to break a growing tendency for corporate customers to churn, and to increase the market share within the business segment; 2) a flexible tariff policy, encouraging demand for long distance services, proactive promotion of services that provide dial up access to the Internet in order to retain a large share of the household segment and boost an average income per line; 3) a vigorous sales policy to offer packages of services, first of all to corporate customers and high end subscribers.
page No 18 personnel wasselected. managementsystem developed; and incentivesforkeyMRC staffwere prepared accordingtopr At thestageofdrawing upaCollective Agreement anoptimalsocial packagewas partnership development. ofsocialan opendiscussion andinprogress, –current associal projects –aswell its availablefunds; the targets developmentbasedon setbythecompanyforaparticularperiod ofits and fundsbalancing providing comprehensive social ofthecompany'semployees; protection production tasksandmeetingthetargets setbythecompany; Focusing onemployees thebasisofSvyazinvestsocialThe followingkeyprinciplesformed policy: 2) 1) 4) 3) accounts and financial services were assessed; assessed; were accounts andfinancial services Projects implementedbySvyazinvestin2002: and management. waspaidtoimproving professionalskillsofseniormanagersineconomics Much attention the wishesofcompanies. madeupincompliance MRCtrained accordingtocurricula with staffwere trainingcentres colleges.At trained atspecialized andtechnical staffthatwere skills oftelecom institutes engagedinimprovingprofessional were During thereporting periodhumanresources services Under non governmentpensionschemeco largest pension fundinRussia). non government will bethefifth Rostelecom Garantia –shouldbemerged (inter sector.funds inthetelecom pension leading funds –Telecom Soyuz Itwasdecidedthattwo and government pension scheme.As atDecember31, 2002there were To ensure social since1996 protection, andcultural centres.gartens The Group maintainedandsponsored holiday centres, holidaycamps, sanatoria, kinder package includedasfollows: by thecompany'smanagement. A socialpackage of thecompany, socio psychological asaccounting forits aswell climate. a monthly retirementpensionpaidbythecompany.a monthly aid,summertimeholidays,andhealthresorts. material catering, AgreementUnder theCollective large scale social including implemented programmes were housing conditions; means; means;
Personnel evaluation andtraining Non government pension scheme Social assets Social supportofemployeesandtheirfamilies f ) cultural activities; culturalactivities; wasthepractical fulfillmentofkeysocial policy tasksundertaken Democratic decision-making d –providingsocial thatencouraged stafftoachieve guarantees ) non government pension scheme; evailing operatingtargets and who greatly contributed to efficient performing of toefficientperforming whogreatlycontributed
a g ) ) medical insurance; medicalinsurance; recreational andsportingactivities. Under anewCollectiveAgreementthesocial telecom operators haveembarkedondevelopinganon telecom ntracts, uponretirementemplo b )
–undertheCollectiveAgreement, a methodicalrecommendationson compensation ms ofassetsanewconsolidated pensionfund ) atotalof b c ) ) a platform tosupportacomputer aided aplatform fringe benefits; benefits; fringe actual financialresources e ) service transportation service 1,045 Responsibility 11 employees fromeconomic, c non government pension ) improved Targets yees were entitledto yees were – Social Policy encompassed: social policy Svyazinvest 6. F . ] page No page No
19 Annual report 2002 Svyazinvest 7.] THE GROUP'S FINANCING and Operating Activities
7.A.] Telecommunication Network Development 7.B.] Cellular Mobile Communications 7.C.] Financial Results 7.D.] Investing Activity 7.E.] Liabilities 7.F.] Receivables 7.G.] Human Resources 7.H.] Efficiency Indicators
page No 20 Svyazinvest
In 2002 the Group put into operation 7,704.4 fiber optic lines and 813.7 digital radio relay lines. 7.A. Digitalisation rate of MRC interregional backbone networks was as follows: ] report 2002 Annual OAO Uralsvyazinform – 93%; OAO CentreTelecom – 85.7%; OAO VolgaTelecom – 78.3%; Telecommuni OAO STC – 74.2%; OAO North West Telecom – 66.2%; OAO Sibirtelecom – 65.3%; cation Network OAO Dalsvyaz – 64.9%. Development In 2002 nearly 5 thousand analog transmission lines and over 7 thousand air lines were phased out. The Group's local telephone network development on the basis of modern digital exchanges enabled regional operators to improve the quality of services offered and extend their range (ISDN, access to telematics services, the Internet and intellectual networks). In 2002 the level of capacity of electronic exchanges to the total installed capacity of local telephone networks stood at 40.73% against 34.86% in 2001. As at the end of 2002, the installed capacity of the Group's local telephone network was 26.54 m lines against 25.03 m lines at year end 2001 including crossbar exchangers – 12.1 m lines (45.6% of the total installed capacity); quasi electronic exchanges – 1.46 m lines (5.49%); electronic exchanges – 10.81 m lines (40.73%); step by step exchanges – 2.16 m lines (40.73%). In addition, the installed capacity of local telephone network of Svyazinvest largest affiliates at year end was as follows: OAO MGTS – 4.33 m lines; OAO Svyaz Komi Republic – 0.29 m lines; OAO Kostroma GTS – 0.092 m lines. In 2002 an increase in main telephone lines amounted to 1.23 m lines. The number of main telephone lines rolled out by Svyazinvest affiliates was as follows: OAO MGTS – 0.088 m lines, OAO Svyaz Komi Republic – 0.011 m lines and OAO Kostroma GTS – 0.005 m lines.
COMPANY NAME INSTALLED CAPACITY, TOTAL, DIGITALISATION RATE, (%) table 7.А.1 (in thousands of lines) The Group's Local Network 2001 2002 2001 2002 Development MRCs, total 24,387.7 25,800.1 35.0 40.81 OAO CentreTelecom 5,806.8 6,108.5 30.2 35.78 OAO North West Telecom 3,460.1 3,612.3 33.9 36.91 OAO VolgaTelecom 3,998.5 4,237.9 33.8 40.75 OAO STC 3,310.1 3,545.0 31.5 38.66 OAO Uralsvyazinform 3,112.4 3,323.9 48.5 54.76 OAO Sibirtelecom 3,577.7 3,781.3 37.3 43.15 OAO Dalsvyaz 1,122.0 1,191.2 32.7 38.73 OAO Lensvyaz 415.2 427.9 21.5 25.81 OAO Central Telegraph 63.5 116.1 100.0 100.0 OAO Dagsvyazinform 166.7 169.8 21.7 22.58
page No 21 table 7.А.2 COMPANY NAME INSTALLED CAPACITY, TOTAL, DIGITALISATION RATE, (%) (in thousands of lines) Local Network Development of Svyazinvest 2001 2002 2001 2002 Largest Affiliates OAO MGTS 4,252.96 4,334.86 14.88 16.52 OAO Svyaz Komi Republic 280.87 292.36 44.51 49.12 OAO Kostroma GTS 86.59 92.21 38.12 42.02
In the report year 618.3 thousand lines of analog exchanges were phased out, including 400.6 thousand lines of step by step exchanges (12.83% of their total capacity); 217.7 thousand lines of crossbar exchanges (1.46% of their total capacity). As at year end 2002 the Group operated 122 domestic long distance exchanges (101 digital and 21 analogue ones inclusive), including regional transit nodes. The total capacity of domestic long distance exchanges amounted to 473,000 regional channels and lines. And the capacity of all digital domestic long distance exchanges reached 89% of the total capacity. Phasing out analogue domestic long distance exchanges was constrained by a large number of analogue exchanges installed on local telephone networks. As at the end of the reporting period Rostelecom operated eight automatic switching nodes with a total capacity of 107,000 channels. Analogue equipment capacity was 22% of the overall capacity of automatic switching nodes. As at year end the Group operated 172.6 thousand payphones, including 107.8 card phones. With regard to broadband access network development, cable TV networks were widely built. By the end of 2002 more than 14 regional branches provided cable TV services. OAO STC, OAO VolgaTelecom and OAO Uralsvyazinform demonstrated the most rapid growth of cable TV network construction. In 2002 to address issues regarding development and launching of new telecom services by the Group's companies, a number of projects to build multiservice networks were carried out. In order to meet a continually growing demand for Internet services and handle the increasing traffic volume, capacity of the existing access nodes was enlarged and new access nodes were built.
page No 22 1) OAO CentreTelecom multiservice network in the Moscow region. The main target was to Svyazinvest create a universal transport medium to transmit digital flows carrying any multimedia Major Projects information, and use special transport protocols to secure a required level of quality of the Completed by the transmission. Group in 2002 2) The first phase of JSC Rostovelektrosvyaz (a branch of OAO STC) multiservice network. The objective was to create a transport network in the city of Rostov on Don and in the Rostov region. report 2002 Annual 3) The first phase of JSC Elektrosvyaz Stavropol krai (a branch of OAO STC) data transmission network. The implementation of the first phase of the project enabled operators to integrate practically all towns of Stavropol krai into a regional transport network that could provide dial up and broadband access to the Internet, VPN services for budget funded organisations and corporate customers, dial up access to VPN networks, voice communication services based on VoIP technology, as well as to create a medium for additional services (videoconferencing, broadcasting, video on demand, video information transport). 4) Multiservice network of OAO Sibirtelecom's Novosibirsk based branch. 5) Corporate network for the Tax Ministry of the Russian Federation mutually built by JSC RTKomm.RU and Svyazinvest regional companies.
Cellular services were provided by the Group, as well as by its subsidiary (affiliate) companies. Out of seven mega regional companies, six companies rendered cellular services 7.B.] and three companies out of these six ones provided cellular services in several frequency Cellular Mobile bands. By the end of the year 15 branches of mega regional companies held licenses granted Communications by the Ministry of Communications and Informatisation of the Russian Federation to provide GSM900, GSM900/1800, NMT450 and AMPS/DAMPS mobile services. By year end 2002 the Group's companies counted 290,000 cellphone users, including a) 250,000 GSM users; b) 39,000 NMT users; c) 1,000 AMPS users. OAO Uralsvyazinform had the largest subscriber base – 150,000 users.
COMPANY NAME STANDARD COVERAGE AREA table 7.B.1 MRC Cellular Business
OAO CentreTelecom NMT450 Arkhangelsk region OAO North West Telecom NMT450 Yaroslavl region, Ivanovo region, Kostroma region AMPS/DAMPS the city of Tula GSM900/1800 Tambov region OAO VolgaTelecom NMT450 Samara region GSM900 Mari El Republic OAO Uralsvyazinfrom NMT450 Perm region GSM900 DAMPS800 the city of Perm OAO Sibirtelecom NMT450 Tomsk region, Khakassia Republic, GSM900 Buriatia Republic OAO Dalsvyaz GSM900 Magadan region, Kamchatka region
page No 23 At the end of the reporting period the Group participated in 61 cellular companies, including 27 companies wherein it held controlling stakes and 23 companies wherein its minority interest ranged between 20% and 50%. Svyazinvest and its subsidiary (affiliate) companies provided cellular services in 66 constituents of the Russian Federation. The Group accounted for the largest market share in Urals region (50%), followed by Far East region (28%), Siberia region (17%) and Volga region (15%). Over the reporting period the overall subscriber base serviced by the Group's cellular operators almost quadrupled and counted 2,150 thousand users by year end.
graph. 7.B.1 600 The Group's Cellular Subscriber Base (in thousands) 500
2001 400 2002 300
200
100
0 Volga Urals Siberia Far East
ZAO Nizhny Novgorod Cellular Communications and JSC Southern Urals Cellular Telephone demonstrated the highest growth of their subscriber bases, and a considerable increase in subscriber numbers was witnessed at JSC Ermak RMS and JSC Volgograd GMS. MRCs subsidiary (affiliate) companies counted 1,860 thousand mobile users, including 1,200 thousand GSM users, 530 thousand NMT users, 130 thousand AMPS users.
table 7.B.2 COMPANY NAME SHAREHOLDER EQUITY SUBSCRIBER BASE, by year end 2002, (in thousands) The Group's INTEREST, (%) Largest Cellular Assets ZAO Yeniseitelecom* OAO Sibirtelecom 100 75 *transactions to increase JSC Baikalwestcom* OAO Sibirtelecom 100 68 MRC ownership in cellular companies' assets up to ZAO Uralwestcom OAO Uralsvyazinform 51 20 100% were completed JSC Southern Urals in February 2003 OAO Uralsvyazinform Cellular Telephone 100 156 JSC Ermak RMS OAO Uralsvyazinform 90 83 ZAO Nizhny Novgord OAO VolgaTelecom Cellular Communications* 100 172 JSC Ulyanovsk GSM OAO VolgaTelecom 51 48 ZAO Delta Telecom OAO North-West Telecom 43 95 JSC Primtelephone OAO Dalsvyaz 50 55 JSC MCC OAO Rostelecom 23.5 85 JSC Volgograd GSM OAO STC 50 132
page No 24 The Group posted a 99.8 bn Roubles revenue for 2002 representing a 29.6% gain against 2001. 7.C.] Svyazinvest Financial bn, Roubles bn, USD Results
120 3.2 3.5 Annual report 2002 Annual 100 2.5 3 80 2.2 2.5 2 60 123.2% 129.6% 1.5 40 1 graph. 7.C.1 20 62.5 77.0 99.8 0.5 Revenue Dynamics 0 0 2000 2001 2002
Income generated from telecom services increased by 25.3% and totaled 88.1 bn Roubles. The structure and dynamics of the Group's operating income for the period of 2000–2002 are shown below:
bn, Roubles 127.4% 125.3% 55.2 70.3 88.1 graph. 7.C.2 90 Operating 8.8 Income Dynamics 80 3.6 70 6.8 142.2% other 2.6 60 29.3 rural telephone service 133.8% 50 5.0 20,6 2.0 urban telephone service 40 15.4 115.4% 122.2% local telephone service 30 20 40.2 46.4 39.2 10 0 2000 2001 2002
In 2002 expenses stood at 71.6 bn Roubles, upward 23.2% from the previous year. The Group's purposeful efforts to curb growth of spending secured outpacing revenue growth over expense growth resulting in a noticeable increase in profit and margin profit.
bn, Roubles graph. 7.C.3 90 Operating Expenses Dynamics 80 123.2% 70 122.6% 60 50 40 30 20 47.4 58.1 71.6 10 0 2000 2001 2002
page No 25 The Group's sales profit totaled 28.2 bn Roubles showing a 48.4% hike compared to 2001. Margin profit reached almost 40%.
bn, Roubles bn, USD graph. 7.C.4 Sales Profit Dynamics 30 1 0.9 25 0.8 0.9 0.7 20 0.6 0.6 0.5 15 0.5 0.4 10 125.8% 148.4% 0.3 5 0.2 15.1 19.0 28.2 0.1 0 0 2000 2001 2002
As a result of the Group's (excluding OAO Kostroma GTS, OAO Svyaz Komi Republic and 7.D.] OAO MGTS) investing activities the volume of capital expenditures soared by 60% against 2001, and totaled 25.1 bn Roubles including the amount of construction and installation work Investing Activity performed that reached 8.0 bn Roubles.
bn, Roubles 30
25.1 25 graph. 7.D.1 Investment Dynamics 20 10.9 15.7 14.7 own resources 15 12.0 borrowings 10.2 10 8.8 12.0 total 8.6 14.2 5 6.5 5.5 3.4 2.7 0 2.3 1998 1999 2000 2001 2002
Out of the total volume of capital expenditures, regional operators' resources stood at 10.9 bn Roubles and borrowings – 14.2 bn Roubles. In 2002 Svyazinvest signed a financial leasing agreement with JSC RTK Leasing to purchase 1.2 m ports for switching equipment. 0.84 m ports were delivered and deployed. Purchases of equipment on the financial leasing basis in the amount of 4.4 bn Roubles – a fourfold increase against 2001 – were made to construct local and long distance facilities, backbone networks and launch new types of telecom services. Fixed assets in the sum of 22.1 bn Roubles representing a 151.4% hike from 2001 were put into operation.
page No 26 Basic Production Capacities Launched by the Group in 2002, namely: Svyazinvest A total of 2,496 596 lines of automatic exchanges, including 202,476 lines of rural telephony; 64,200 channels of domestic long distance exchanges; 9,284.8 km of intra regional transmission lines, including 8,332.4 km of cable lines, 952.4 km of radio relay links and 456.0 km of backbone cables. Annual report 2002 Annual
thousand, km graph. 7.D.2 14 Intra Regional Lines and Backbone 12 Cables Deployed 10 transmission lines 8 6 4 2 7.4 12.8 5.9 7.0 9.7 0 1998 1999 2000 2001 2002
m, lines graph. 7.D.3 2.5 Roll Out of Automatic Exchanges 2
1.5
1
0.5 1.6 1.11.2 1.8 2.5
0 1998 1999 2000 2001 2002
During the report year the following major fiber optic backbones and intra regional digital transmission lines were put into service: 1) The OAO Rostelecom 455.97 km fiber optic backbone Russia–Kazakhstan.
2) COMPANY NAME INTRA REGIONAL AUTOMATIC LINES, km EXCHANGES, (in thousands of lines)
OAO North West Telecom - 145.6 OAO CentreTelecom 2,674.4 502 OAO VolgaTelecom 1,292.8 411 OAO STC 440.9 379.3 OAO Uralsvyazinform 1,490 478.6 OAO Sibirtelecom 1,268 376.9 OAO Dalsvyaz 154 106.6
page No 27 Amounts of external borrowings and other liabilities due from the Group stood as follows: 7.E.] Bank loans: Liabilities as at December 31, 2001 – USD 249,832.8 thousand; as at December 31, 2002 – USD 348,664.6 thousand. Bonds: as at December 31, 2001 – USD 2,958.5 thousand; as at December 31, 2002 – USD 26,184.4 thousand. Debts owed to vendors: as at December 31, 2001 – USD 355,322.8 thousand; as at December 31, 2002 – USD 279,750.3 thousand. Liabilities under leasing agreements: as at December 31, 2001 – USD 403,568.5 thousand; as at December 31, 2002 – USD 397,458.1 thousand.
Accounting for established bad debt provisions in the sum of 5.1 bn Roubles, the Group's total 7.F.] amount of accounts receivable stood at 26.5 bn Roubles. This figure represented a 41.7% increase from 2001, including accounts receivable for telecom services that grew by 39.5% Receivables against a backdrop of a 31.9% rise in gross income. Growth in the total sum of receivables and receivables for telecom services that outstripped gross income growth was basically accounted for by amendments made to Rostelecom accounting policies in regard of payment for rendering and selling services to foreign telecom administrations. The amendments were effected based on a new accounting procedure for such transactions being developed at Rostelecom. Growth in receivables and receivables for telecom services amounted to 18.8% and 14.4%, respectively, excluding Rostelecom increased receivables. Structure analysis of the receivables provided grounds for claiming that in 2002 a 1.6 fold hike in receivables recorded under "Advances Paid" was caused by a marked rise in advance payments transferred by regional operators to vendors of telecom equipment. Debts due from budget funded organisations for provided telecom services dropped by 27.2% and stood at 1.6 bn Roubles. The total sum of 2.5 bn Roubles was refunded from the budgets of all levels for services rendered to people and organisations eligible for benefits, constituting 56.0% of the overall amount subject to refund.
bn, Roubles % graph. 7.F.1 Receivables Dynamics 30 30.3% 35 25 25.8% 30 the Group's receivables, total 22.6% 24.3% 20 25 the Group's receivables 20 for telecom services 15 26.5 15 the Group's receivables due from 10 17.1 18.7 budget funded organisations for 15.9 18.8 10 telecom services 10.5 12.2 13.5 5 2.8 2.6 2.2 1.6 5 relative weight of total receivables in sales revenue (%) 0 0 1999 2000 2001 2002 including bad including bad debt provisions debt provisions
page No 28 As at year end 2002 the Group's workforce was 368,117 employees – a 100.5% rise from Svyazinvest year end 2001. The increase in staff numbers was attributable to setting up seven MRC general 7.G.] directorates. Human In 2002 remunerations were paid and social privileges were provided to staff of MRC bran ches under pay regulations developed at branches on the basis of the pay scale adopted at the Resources telecom sector. Annual report 2002 Annual thousand, Roubles %
10 150 graph. 7.G.1 145 Average Salary 8 140% Dynamics at MRCs 136% 136% 136% 140 and OAO Rostelecom 6 131% 132% 135 130% 2001 4 129% 130 8.0 6.3 6.9 2002 2 6.0 5.1 6.0 5.4 125 4.6 3.84.9 4.6 3.24.3 3.6 4.0 5.3 0 120 % change against 2001 STC Telecom Dalsvyaz Rostelecom North-West Sibirtelecom VolgaTelecom CentreTelecom Uralsvyazinform
In the report year companies chiefly applied a time based and bonus pay system. The salary's fixed amount was calculated based on a minimum pay rate adopted at branches including statutory premium payments and bonuses.
table 7.G.1 COMPANY NAME TOTAL INCLUDING The Group's Staff by Education and Age EDUCATION AGE
Specialized Higher vocational Under 40 50 Retiring age education training and older ¿51 23 4 6
Headcount 368,117 76,163 110,009 154,155 83,765 20,989 (as at Dec. 31, 2002) Employed on a competitive basis 2,501 1,578 666 1,720 158 10 Assessed employees 6,734 2,729 3,080 3,039 1,556 157 Employees who improved their professional skills and undertook 99,902 30,122 30,973 42,959 14,714 1,874 advanced training, including executives 12,440 9,102 2,581 3,843 3,095 418 specialists 39,472 18,919 16,553 18,677 5,714 738 Employees trained abroad, 539 491 43 195 187 24 including executives 373 353 13 93 153 20 specialists 165 138 27 95 28 4 Managers (branches inclusive) 22,882 14,943 6,199 5,540 8,112 1,769
page No 29 .
The Group's efficiency indicators and their growth rates in 2002 compared to the 7.H.] previous year were as follows: Efficiency Indicators a) revenue per line – 4.2 thousand Roubles (up 23.5%); b) revenue per employee – 294 thousand Roubles (up 36.7%); c) profit per line – 1.2 thousand Roubles (up 50.0%); d) number of lines per employee – 70 (up 11.1 %).
graph. 7.H.1 thousand, Roubles thousand, Roubles Dynamics of Revenue 4.5 1.6 and Profit per Line 1.5 4 1.4 1.3 revenue per line 1.2 3.5 1.2 profit per line 1.1 3 1.0 0.9 0.8 2.5 2.9 0.8 0.7 3.4 4.2 0.7 2 0.6 2000 2001 2002
number thousand, Roubles of lines graph. 7.H.2 Dynamics of Revenue 300 75 and Number of Lines per Employee 250 70 70
200 revenue per employee 65 63 number of lines per employee 150 60 100 59 171 215 294 50 55 2000 2001 2002
page No 30 Svyazinvest Annual report 2002 Annual 8.] SECONDARY MARKET Development
Svyazinvest restructuring was one of the key factors that boosted secondary market development of mega regional companies in 2002. A marked rise in MRC share prices was obvious especially when compared with companies not involved in the reorganisation (OAO MGTS, OAO Central Telegraph, OAO Lensvyaz, OAO Svyaz Komi Republic). The latter share prices remained practically the same.
COMPANY CAPITALISATION CAPITALISATION INCREMENT (%) table 8.1 as at Jan. 3, 2001, as at Dec. 31, 2002, ($,m) ($,m) Change in Capitalisation* of MRCs and Companies Not Involved in the OAO CentreTelecom 169.52 374.72 121.1 Reorganisation OAO North West Telecom 169.09 245.06 44.9 *estimated based on the OAO VolgaTelecom 152.88 286.31 87.3 price of ordinary shares OAO STC 141.37 210.49 48.9 OAO Uralsvyazinform 194.90 416.65 113.8 OAO Sibirtelecom 107.91 286.30 165.3 OAO Dalsvyaz 7.68 63.90 732.4 OAO Central Telegraph 11.63 13.29 14.3 OAO Svyaz Komi Republic 8.99 8.51 -5.4 OAO MGTS 399.15 498.93 25.0
page No 31 graph. 8.1 Volumes of Trading OAO CentreTelecom in Stocks of MRCs and Companies OAO North West Not Involved in the Telecom Reorganisation (in thousands of USD) OAO STC OAO VolgaTelecom
OAO Uralsvyazinform January 2001 OAO Sibirtelecom December 2002 OAO Dalsvyaz
OAO Central Telegraph
OAO Lensvyaz
OAO Komisvyaz
OAO MGTS thousand, $ 0 150 300 450 600 750 900
1) S&P's corporate governance ratings were awarded to the Group's companies.
table 8.2 COMPANY NAME DATE OF AWARDING RATING S&P's Corporate (LATEST REVIEW) Governance Ratings as at Year End 2002 OAO Norh West Telecom 20.11.2002 5.6 OAO Uralsvyazinform 20.09.2002 6.0 For reference: JSC Aeroflot - 5.2 JSC MTS - 7.4
2) ADR programs of mega regional companies were developed. In the course of the Group's reorganisation, ADRs of merging entities were converted into ADRs of base companies. JP Morgan Chase Bank was handpicked and appointed as single depository bank for servicing ADR programmes. 3) Well established international credit rating agencies reviewed/awarded credit ratings to Svyazinvest companies.
table 8.3 COMPANY NAME CREDIT RATING/FORECAST Credit Ratings as at December 31, 2002 S&P Fitch OAO CentreTelecom ——— / Stable - OAO North West Telecom ——— / Stable - OAO VolgaTelecom ¬- / Stable - OAO STC ———+ / Stable - OAO Uralsvyazinform ¬- / Stable ¬ / Stable OAO Sibirtelecom - ¬ / Stable OAO Dalsvyaz - ¬- / Stable OAO Rostelecom ¬- / Stable - OAO MGTS ¬- / Stable -
page No 32 Svyazinvest
9.] report 2002 Annual PARTICIPATION IN RESEARCH AND TELECOMMUNICATION Sector Development Programmes
In order to enhance the efficiency of all restructuring processes, the Group continued to cooperate with the non profit partnership Centre for Research on Tele communication Development Problems ("the Partnership"). The Partnership founded by seven mega regional companies and OAO Rostelecom focused on studying telecom services market development problems and promoting a further boost in telecom companies' competitiveness. In 2002 the following Partnership's programs were given top priority: 1) Telecom Sector Restructuring: Challenges and Outlook. It encompassed a) legal support to telecom companies; b) developing a corporate restructuring model; c) risk analysis in the course of corporate restructuring; d) consulting; e) technological auditing of accounting and payment operations. 2) Financial and Economic Analysis and Growth Outlook for Telecom Sector's Enterprises. It involved a) collection, processing and consolidation of financial and economic data; b) tariff regulation. 3) The State and Telecom Sector. It included a) mechanisms for supervising the telecom sector; b) support of telecom legal initiatives; 4) Analysis and Prospects for Telecom Services Market. It involved a) marke ting strategies development; b) investigations carried out by telecom core organisations; c) analysis and long range forecast for the telecom sector. 5) Human Resources Management. It encompassed a) human resources ma nagement; b) seminars on the Partnership's activities; d) pension reform.
On the whole, in 2002 the Partnership implemented over 20 projects wherein task groups, as well as experts from research institutes, consulting firms and the Group's companies participated.
page No 33 10.] BASIC TRENDS of the Group's Evolution in 2003
A corporate restructuring programme (Svyazinvest master plan) developed by the holding company's specialists for the coming year involved a package of measures to address the following seven challenges:
1) Corporate issues, namely: a) defining and implementing a corporate governance model; b) developing and implementing strategic planning procedures; c) developing and implementing a subsidiary business management system; d) preparing and implementing outside and in house communication programmes; e) optimizing the usage of social assets. 2) Business Potential Development: a) developing and adopting a marketing strategy; b) designing and implementing marketing processes; c) re engineering of service sales and customer servicing business processes; d) centralizing MRC billing systems. 3) Network Management: a) preparing system and network solutions for the development of MRCs and OAO Rostelecom infocommunication networks as integral parts of Russia's interconsistent telecom networks up to 2007; b) preparing a unified general plan to develop MRCs and OAO Rostelecom telecom networks up to 2007; c) current and long term planning of facilities construction and defining MRC network growth indices. 4) Introduction of the Organisational Structure; Human Resources Management: a) defining document formats related to the human resources management strategy; b) developing a mid term organisational structure; c) preparing a mid term plan to create an in house training and corporate development system. 5) Enhancement of IT Infrastructure: a) preparing an IT strategy scenario; b) developing IT project managerial methods; c) working out a plan to deploy data processing centres. 6) Boosting Efficiency of Financial and Economic Services: a) implementing budgeting at mega regional companies; b) centralizing treasuries; c) introducing an accounting information system; d) managing non current assets. 7) Procurement Restructuring Programme: a) optimizing purchases of equipment and materials; b) inventory.
Implementation of these projects will create favourable conditions for an actual merger of consolidated operators' businesses enabling mega regional companies to gain full fledged benefits of the reorganisation and efficiently operate in the ever growing competitive and gradual market liberalisation environment.
page No 34 Svyazinvest Annual Report 2002 Report Annual 11.] UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, PREPARED IN ACCORDANCE WITH IFRS as at December 31, 2002
page No 35 Unaudited NOTE Consolidated Balance Sheet ASSETS As at December 31, 2002 Non current assets Property, plant and equipment 5 182,978 Intangible assets 6 805 ASSETS Goodwill 8 243 (In millions of Russian Roubles in terms Negative goodwill 8 (721) of purchasing power of the Rouble Investments in associates 9 8,920 at December 31, 2002) Other long term investments 7 1,345 Advances to suppliers of equipment 1,411 Lease receivables 10 2,033 Long term accounts receivable 435 Total non current assets 197,449 Current assets Inventories 11 4,242 Trade accounts receivable 12 10,051 Other current assets 13 10,146 Short term investments 14 2,983 Cash and cash equivalents 15 6,375 Total current assets 33,797 Total assets 231,246 SHAREHOLDERS' EQUITY, MINORITY INTEREST AND LIABILITIES Shareholders' equity 16 Share capital 98,302
Accumulated losses and reserves (40,531) Total shareholders' equity 57,771 Minority interest 90,595 Non current liabilities Long term borrowings 17 11,818 Finance lease obligations 18 1,120 Equipment contributions 1,727 Deferred tax liability 26 20,087 Other non current liabilities 930 Total non current liabilities 35,682 Current liabilities Accounts payable and accrued expenses 19 18,780 Taxes and social security payable 20 6,373 Dividends payable 545 Short term borrowings 17 8,880 Short term portion of long term borrowings 17 11,704 Short term portion of finance lease obligations 18 916 Total current liabilities 47,198 Total shareholders' equity, 231,246 minority interest and liabilities
page No 36 NOTE Svyazinvest
REVENUES 22 113,021 Operating expenses Wages, salaries, benefits and payroll taxes (35,454)
Depreciation and amortisation (23,790) 2002 Report Annual Materials, repairs, maintenance and utilities (10,146) Taxes other than on income (3,796) Interconnection charges – international (5,826) Interconnection charges – national (3,416) Interconnection charges – associates (1,469) Bad debt expense (1,759) Loss on disposal of property, (1,255) plant and equipment Other operating expenses 23 (13,374) Unaudited Consolidated Total operating expenses (100,285) Statement of Operations Income from operations 12,736 For the year ended Income from associates 701 December 31, 2002 Interest expense (3,834) Interest income 609 Income from financial investments, net 24 2,771 REVENUES Other income (expenses), net 25 473 (In millions of Russian Roubles in terms Foreign exchange loss (2,947) of purchasing power of the Rouble Net monetary gain 2,058 at December 31, 2002, except for Income before taxation and minority interest 12,567 Earnings per share) Income tax expense Current income tax charge (6,716) Deferred income tax benefit 124 Total income tax expense 26 (6,592) Income after taxation 5,975 and before minority interest Minority interest (4,427) Net income 1,548 Basic and diluted 27 0.08 earnings per share, Roubles Yashin V.N. Belyaev K.V. General Director Chief Accountant
SHARE ACCUMULATED LOSSES TOTAL EQUITY Unaudited Consolidated CAPITAL AND RESERVES Statement of Changes in Shareholders' Equity As at January 1, 2002 98,302 (41,824) ñ 56,478 For the year ended Net income for the year ñ 1,548 ñ 1,548 December 31, 2002 Dividends (see Note 16) ñ (35) ñ (35) Cumulative translation loss ñ (220) (220) As at December 31, 2002 98,302 (40,531) 57,771 (In millions of Russian Roubles in terms of purchasing power of the Rouble Yashin V.N. Belyaev K.V. at December 31, 2002) General Director Chief Accountant
August 31, 2003
page No 37 Unaudited Consolidated TOTAL EQUITY Statement of Cash Flows For the year ended December 31, 2002 Cash flows from operating activities: Income before taxation and minority interest 12,567 Adjustments to reconcile income (loss) to cash generated from operations (In millions of Russian Roubles in terms Depreciation and amortisation 23,790 of purchasing power of the Rouble Bad debt expense 1,764 at December 31, 2002) Loss on disposal of property, plant, equipment and other assets 1,471 Income from associates (694) Income form financial investments (2,771) Interest expense 3,831 Interest income (601) Foreign exchange loss 2,947 Other gains (38) Net monetary gain (2,058) Operating income before working capital changes 40,208 Increase in trade accounts receivable (2,505) Increase in other current assets (3,737) Increase in inventories (1,030) Increase in payables and accruals, excluding interest and tax payables 5,189 Net cash generated from operating activities 38,125 Interest paid (3,482) Income tax paid (6,920) Net cash from operating activities 27,723 Cash flows from investing activities: Capital expenditures (25,841) Purchase of investments, notes receivable and other securities, net (1,303) Proceeds from sale of property, plant and equipment 400 Interest received 593 Dividends received 115 Net cash used in investing activities (26,036) Cash flows from financing activities: Proceeds from loans and borrowings 11,131 Repayments of loans and borrowings (13,787) Proceeds from bonds 3,989 Repayment of bonds (1,021) Payment under lease agreement (286) Dividends paid (35) Dividends paid to minority shareholders (530) Net cash used by financing activities (539) Monetary effects on cash and cash equivalents 83 Effects of exchange rate changes on cash and cash equivalents 33 Net increase in cash and cash equivalents 1,264 Cash and cash equivalents at the beginning of the year 5,111 Cash and cash equivalents at the end of the year 6,375 Non monetary transactions: Non cash additions to property, plant and equipment 5,437
Yashin V.N. Belyaev K.V. General Director Chief Accountant
August 31, 2003
page No 38 as atDecember31,2002 IN ACCORDANCE WITHIFRS STATEMENTS, PREPARED CONSOLIDATED FINANCIAL NOTES TOUNAUDITED 12. Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 6 8 7 14 11 9 5 4 3 2 1 15 13 12 10 ...... ] ] ] ] ] ] ] ] ] ...... ] ] ] ] ] ] ] Cash andcashequivalents Short term investments Other currentassets Trade accountsreceivable Inventories Lease receivables Investments inassociates Goodwill andnegativegoodwill Other long term financial investments Intangible assets Property, plantandequipment Subsidiaries of Summary and financialresources Market position, liquidity Description ofbusiness significant accountingpolicies Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note Note
12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 12. 31 21 19 18 17 16 33 32 30 29 28 27 26 25 24 23 22 20 ...... ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] ] Events afterthebalancesheetdate Segment reporting Related partiesdisclosures Contingencies Commitments and riskmanagement Fair valueoffinancialinstruments Earnings pershare Income taxes Other non operating incomeandexpenses Income fromfinancialinvestments Other operatingexpenses Revenues Pension plansandemployee benefits Taxes andsocial securitypayable Accounts payableandaccruedexpenses Finance leasepayables Borrowings Shareholders' equity page No page
39 Annual Report 2002 Svyazinvest Amounts presented in millions of Russian Roubles in terms of purchasing power of the Ruble as at December 31, 2002.
The Company Note 12.1.] Open Joint Stock Telecommunication Investment Company OAO Svyazinvest ("Svyazinvest", Description "the Group" or "the Company") is the State controlled holding company for the telecommuni of business cations sector. The registered office of the Company is Pluschikha St. 55, bldg. 2, 119121 Moscow, the Russian Federation. Through its dependent companies, the Group provides services in substantially all telecommunications markets throughout the Russian Federation ("Russia"). The Group's fixed line telecommunications network extends across virtually the whole territory of Russia. The Group is the principal telecommunications carrier in Russia. Through its subsidiary and associated undertakings, the Group holds licenses to provide fixed line local, long distance and international telecommunications services (including data transmission, leased lines and broadband services) throughout Russia. The Group also provides mobile services in various cellular standards and radio paging services in selected regions. The Group controls approx imately 26.5 million of installed lines and serves 2.2 million mobile subscribers. The Russian Federation, through the Russian Fund of Federal Property and the Ministry of State Property, is the main shareholder of the Group. Svyazinvest was wholly owned by the Russian Government until July 1997 when the Government sold 25% plus one share of the share capital of the Company to a consortium of private companies, Mustcom Limited. The Government has and may be expected to continue to exercise significant influence over the operations of the Group. The Government's influence is not confined to its shareholding in Svyazinvest. It has general authority to regulate domestic long distance and local tariffs. In addition, the Ministry of the Russian Federation for Communications and Informatisation ("MinCom") has control over the licensing of providers of telecommunications services in accordance with Federal Law No 15-FZ dated February 16, 1995. The Board of Directors of the Company includes representatives of federal bodies, giving the Government a substantial degree of influence over the policies and operations of the Group.
page No 40 Decree On December22,1992,theGovernmentofRussia issued Formation ofSvyazinvest accordance withGovernmentDecree asatAugust ofpurchasing power 1997)asadditionalbles in interms capitalcontributed the GovernmentofRussianF tion suant totheDecree ofthePresident oftheRussian Federa portant addition totheinitial share wasmadepur capital quent increases totheinitial share Themostim capital. Further toSvyazinvest transferred insubse assetswere associates totheCompany. Operators ("RTOs"), three regional operators telegraph andfour uting its in78Regional equityinterests Telecommunications The Governmentinitially capitalisedtheCompanybycontrib ed, noneoftheCompany'sequity ordebtsecurities are publicly traded. While certain ofthesecurities oftheGroup'ssubsidiaries andinvestmentsarepubliclytrad of additional assetsfortheCompany. bytheRTOsbe usedforthedevelopmentofrural communicationsnetworks andthepurchase tions oftheGovernmentRussian Federation instruction tee Property Commit State 18,1995inaccordancewith tember Svyazinvest intheRussian wasregistered Federation on Sep industry.the telecommunications of whichlaunchedtheprivatisation cations Enterprises", Following theauction, theCompanyinAugust 1997received oftheshares. apublicauction following share capital ofSvyazinvesttoMustcomLimited November 25,1994and dated tion oftheRussian Government Propertysian sold, Federation Committee") inaccordance "State withtheResolu (formerly In Julyl997,theRussian Federal Property Fund Property and theState MinistryoftheRus Privatisation ofSvyazinvest toSvyazinvest. transferred vyaz") were graph"), OAO GTSandOAO Ekaterinburg Giprosvyaz("Gipros com ("Rostelecom"), OAO Central Telegraph("Central Tele oftheRussiantee Federation's equity stakesinOAO Rostele Property ManagementCommit 23, 1997,wherebytheState tial Decree Svyazinvest wasprivatisedinaccordancewiththePresiden sets oftheGroup 1,1995. asatApril plan andthevaluationofas approved theprivatisation No
No 427
No 1003 , dated April 28,1997,andtheResolution, dated of
1989 No entitled "On ofCommuni Privatisation
1225-r dated October dated 10,1994andtheResolu dated September 1,1995,which September dated No ederation No
742
No 618 dated July24, 1995. dated
1205-r dated May23,1997, dated No
618 dated August to dated 25,1997.Thesefundswere , dated May , dated No
1297 2,334 25% ( 543 plusoneshareofthe inmillions ofRou page No No page
41 Annual Report 2002 Svyazinvest Group Companies Reorganisation In 2002 the Group completed the reorganisation of the RTOs started in 2000. 72 RTOs were merged into seven Super Regional Telecommunications Operators ("SRTOs") based on the regional principle as follows:
table 12.1.1 REGION SRTO MERGING RTOS DATE OF MERGER COMPLETION Super Regional Telecommunications Operators ("SRTOs") Far East OAO Dalsvyaz ОАО Amursvyaz – ОАО Sakhalinsvyaz – September 30, 2002 ("Dalsvyaz") ОАО Magadansvyazinform – ОАО Electro svyaz of Khabarovsk region – ОАО Kamchat svyazinform – АО TTC of Evreiskaya AO Siberia ОАО Sibirtelecom ОАО Altaitelecom – ОАО Electrosvyaz of Altai Re November 30, 2002 ("Sibirtelecom") public – ОАО Electrosvyaz of Kemerovo region – ОАО Electricheskaya svyaz of Omsk region – ОАО Tomsktelecom – ОАО Electrosvyaz of Krasnoyarsk region – ОАО Electrosvyaz of Khakasia Republic – ОАО Electrosvyaz of Irkutsk region – ОАО Electrosvyaz of Chita region – ОАО Electrosvyaz of Buryatia Republic Urals OAO Uralsvyazinform ОАО Uraltelecom of Sverdlovsk region – October 1, 2002 ("Uralsvyazinform") ОАО Electrosvyaz of Kurgan region – ОАО Tyumentelecom – ОАО Yamalelectro svyaz – ОАО Svyazinform of Chelyabinsk region – ОАО Khantymansiyskokrtelecom Volga ОАО VolgaTelecom ОАО Svyazinform of Penza region – November 30, 2002 ("VolgaTelecom") ОАО Kirovelectrosvyaz – ОАО Svyazinform of Mordovia Republic – ОАО Martelecom of Marii El Republic – ОАО Udmurttelecom – ОАО Electrosvyaz of Ulyanovsk region – ОАО Electrosvyaz of Orenburg region – ОАО Svyazinform of Samara region – ОАО Saratovelectrosvyaz – ОАО Svyazinform of Chuvashia Republic Centre ОАО Central ОАО Bryansksvyazinform – ОАО Electrosvyaz November 30, 2002 Telecommunications of Vladimir region – ОАО Ivtelecom – Company ОАО Electrosvyaz of Tver region – ОАО Electro ("CentreTelecom") svyaz of Kaluga region – ОАО Electrosvyaz of Kostroma region – ОАО Electrosvyaz of Orel region – ОАО Electrosvyaz of Ryazan region – ОАО Smolensksvyazinform – ОАО Tulatele com – ОАО Yartelecom – ОАО Belsvyaz – ОАО Voronezhsvyazinform – ОАО Electro svyaz of Kursk region – ОАО Lipetsk elektrosvyaz – ОАО Tambovelectrosvyaz South ОАО Southern ОАО Electrosvyaz of Adygeya Republic – November 1, 2002 Telecommunications ОАО Electrosvyaz of Stavropol region – Company ("STC") ОАО Karachaevo Cherkesskelectrosvyaz – ОАО Electrosvyaz of Rostov region – ОАО Kab Balktelecom – ОАО Sevosetin electrosvyaz – ОАО Svyazinform of Astrakhan region – ОАО Volgogradelectrosvyaz – ОАО Electrosvyaz of Kalmykiya Republic North West ОАО North West ОАО Artelecom – ОАО Electrosvyaz of Volog October 31, 2002 Telecom ("NWT") da region – ОАО Electrosvyaz of Kaliningrad region – ОАО Electrosvyaz of Karelia Repub lic – ОАО Murmanelectrosvyaz – ОАО Nov gorodtelecom – ОАО Electrosvyaz of Pskov region – ОАО Cherepovetselectrosvyaz
page No 42 The average number ofemployees duringtheyearwas368thousand. Employment ings areprovided in withinRussia. services which provide telecommunications Details oftheprincipalundertak Associated undertakings. aresetoutin statements, Details ofsubsidiary intheseconsolidated undertakings,whichhavebeen included financial svyaz), among certainotherservices. ZAO RusLeasingSvyaz andZAO Russian Industrial Bank),andscientific research (Gipro (Central Telegraph), (OAO leasing andfinancialRTC Leasing services ("RTC Leasing"), undertakings. Other subsidiary areas. service respective callsintheir and revenue fordomesticlong collection distance andinternational with Rostelecom's andalso network domesticlong providebilling distanceandinternational of Russia. TheSRTOs andRTOs, undercontractwith Rostelecom, subscribers interconnect to organisations financed by the State, residentsandbusinessesin to organisations financedbytheState, (including mobileservices) and,incertainregions, otherservices and transmission services) ofsubscriberaccesslines,localswitching (includingtelephony installationandmaintenance Lensvyaz fixedline andOAO providetraditionallocalandinter regional Dagsvyazinform) Regional Telecommunications Operators. ofIndependentStates. munications operatorsinothercountriesoftheCommonwealth Rostelecom also operators leases andtocertaintelecom channelstodigitaloverlaynetwork operators. operators andregionaltelecommunications withinternational and interconnects phony, acrossRussia conferencingservices datatransmissionandvideo telegraph andtelex, andDomesticLongInternational Distance. principalbusinesses: The Groupcomprises thefollowing Operations oftheGroup pact on theGroup'sconsolidated financial statements. didnothaveasignificantim Asaresult,thereorganisation the earliestperiodpresented. amountsasiftheentitieshadbeencombinedonJanuary1,2002, historical carrying their assetsandliabilitiesCombinations. Inapplyingthismethod,theSRTOs havereflected at for themergers method asprescribedbyIAS usingthepooling ofinterests 22–Business amongentitiesbe applied undercommoncontrol,eachSRTO totransactions hasaccounted Financial ReportingWhile accountingprinciplesto International Standardsdonotspecify consolidated ofoperations fortheyearendedDecember31,2002. statement Transaction expensedintheaccompanying 694andwere tothemergers were costsrelated Securities Commission("FSC")andshareholders' meetingsofthemerging RTOs. The mergers approvedbytheMinistryofAnti Monopoly Policy were ("MAP"),theFederal Note 9 Note 4 The Groupalso inanumberofotherentities hasequityinterests . . These companiesprovide andCLECservices telegraph ThesevenSRTOs remainingRTOs andtwo (OAO Rostelecom's network provides Rostelecom's basicvoicetele network 75 administrative regions page No page No
43 Annual Report 2002 Svyazinvest Tariff setting procedures Note 12.2.] Under Russian anti monopoly regulations, operating units of Svyazinvest, as monopoly carri ers, are subject to government tariff regulations restricting the tariffs for their services. The Market position, tariffs set by the federal authorities do not generally cover the costs of providing telecommuni liquidity and financial cation services and required capital expenditures for network development. While in 2002 the resources Group produced an operating profit of 12,736 and generated operating cash flows of 27,723, the existing tariffs' formation is one of the major factors resulting in excess of current liabilities over current assets amounting to 13,401 as at December 31, 2002. As a short term measure management has obtained tariff increases in 2002 and will continue to seek further tariff in creases. Starting from January 1, 2002, the Group introduced a cost accounting system that served as a basis for tariff setting. During 2002 average tariffs set by MAP for the RTOs in creased as follows:
table 12.2.1 CUSTOMER GROUPS URBAN AREAS, % RURAL AREAS, % 2002 average tariffs increase set by MAP for the RTOs Residential 42 47 Corporate 8.7 9.7 Government 18 21
Liquidity and financial resources As at December 31, 2002 the Group's current liabilities exceeded its current assets by 13,401. As a result, significant uncertainties exist as to the Group's liquidity and future capital resources. Primarily due to ongoing investments in maintenance and construction programmes, the Group requires cash flows from operations, debt and other long term financing resources, including hard currency borrowings for which no commercially viable hedging instruments are available. To date, the Group has significantly relied upon short term and long term financing to fund the improvement of its telecommunication network. This financing has historically been provided through bank loans and vendor financing. Management believes that, if needed, certain projects may be deferred or curtailed in order to fund the Group's current operating needs. Through 2003, the Group anticipates funding from a) existing cash reserves, b) cash generat ed from operations, c) placement of Rouble bonds in the Russian market by SRTOs, and d) other financing from domestic lending institutions. Management also expects to continue to be able to delay payment for certain operating costs to manage its working capital requirements if necessary. The accompanying consolidated financial statements have been presented on a going concern basis, which contemplates the realisation of assets and the satisfaction of liabilities in the nor mal course of business. Accordingly, the financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or any other adjust ments that might result should the Company either be unable to continue as a going concern or if the Company was to dispose of assets outside the normal course of its operating plan.
page No 44 has applied the uniting of interests methodinaccordancehas applied with the uniting ofinterests IAS 22– those entities,forthatpartoftheyearduringwhich arenotcontroll Where entities tifiable non monetary asincomeintheperiod assetsacquired ofacquisition. isrecognised useofdepreciableon theexpected assets.Theexcessofnegativegoodwill overfairvalueofiden life ofidentifiable depreciable assets acquired, unless anothermethodismore appropriate based asnegativegoodwillandisdepreciat is reflected useful life. Theexcessofthefairvalueacquired identifiable netassetsover purchase price paid assets andliabilities during its asgoodwill acquired expected andisdepreciated isrecognised inthefairvalueofidentifiable price paidovertheacquirer'sThe excessofpurchase interest inthenear future. subsequentdisposal acquired andheldexclusively aviewtotheir with the unrealisedprofits withintheGroup.TheGr asare theCompanyandamongsubsidiary undertakings areeliminated, between transactions penses oftheCompanyandsubsidiaryundertakings,on aline by line basis.Balancesand consolidated includetheassetsandliabilities financial statements andrevenues, costsandex into SRTOs in asdescribed ofRTOsny oftheGovernment'sshares in Rostelecom andotherentities. Thereorganisation 1.Thismethodhasalso beenappliedinaccountingforthe1997transferin Note totheCompa oftheGovernment'ssharesinRTOsCompany's ownership andothercompaniesasdescribed The "uniting methodofaccountinghasbeenapplied ofinterests" tothetransferin1995into or indirectly, ofmorethan A subsidiaryisanentitythatcontrolled bytheCompany, directly through ownership, either bytheGroup. adopted Note 9 The Group comprises theparentCompany, its subsidiaries (see Principles ofconsolidation taxation. Actual results coulddifferfromtheseestimates. lives ofproperty, plantandequipment,provisionfordoubtfulaccountsdeferred totherecoverability relate anddepreciable period. Themostsignificantestimates amountsofrevenuesandoperating costsduringthereporting ments andthereported and disclosure ofcontingent assetsandliabilities ofthefinancialstate atthedate amountsofassetsandliabilities andassumptionsthataffectthereported estimates managementtomake requires The preparationofconsolidated financial statements Accounting asrequired byInternational nancial statements, Standard ("IAS") 1– disclosures forsuchcomparative note fi ended December31,2001,andtherelated ofoperatio statements solidated comparative with balancesheetasatDecember31,2001,along separate es inshareholders' equity fortheyearendedDecember31,2002.Acomparative con andchang ofoperations, cashflows statements at December31,2002andtherelated isl presentation herein Financial statement istheRussian financialstatements Ruble.dated fortheaccompanyingconsoli oftheGroup andthereportingtional currency currency as furtherdisclosed in"Property, Thefunc plantandequipment"section ofthisNote. erty, plantandequipmentinsome oftheGroup's subsidiaries andassociate undertaking andmodifiedbytheinitial fortheeffectsofinflation valuation ofprop vention restated costcon The consolidated usingthehistorical havebeenprepared financial statements by theIASB. for fairpresentationinaccordancewith prescribed thestandards andinterpretations andreclassified are basedontheunderlyingaccountingrecords,adjusted statements Federation. Exceptasdescribedelsewhere theaccompanyingconsolidated financial and inaccordancewith theRegulations onAccounting andReporting intheRussian accounting records andpreparesits statutoryaccountingreportsinRussian Roubles Accountingthe International StandardsBoard ("IASB"). TheGroupmaintainsits FinancialR dance withInternational havebeenpreparedinaccor The accompanyingconsolidated financial statements Basis ofpresentation sentation of Financial Statements Financial of sentation ). Accounting tothoseIFRSprinciples policies ofsubsidiaries toconform are adjusted ns, cash flows and changes in shareholders' equityfortheyear andchangesinshareholders' ns, cashflows 50% Note 1 ed throughouttheyear, consolidat ofthevotingsharecapitalentity, orothermeans.These , havenotbeenpresented. was also accounted forunderthismethod.Undertheuniting wasalso accounted eporting Standards("IFRS"),aspublishedby imited totheconsolidated balancesheetas imited ed over the remaining weighted averageuseful ed overtheremainingweighted oup excluded from consolidationoup excludedfrom subsidiaries control existed, exceptwheretheCompany control existed, ed results includethe results of ed results Note 4 Business Combinations Business ) andassociates (see Pre . accounting policies of significant Summary Note Note 12. 3 . page No page No ]
45 Annual Report 2002 Svyazinvest of interests method the financial statement items of the combining enti ties for the period in which the combination occurs are included in the consolidated financial statements as if they had been combined from the beginning of the first period presented. Associates in which the Group has significant influence but not a control ling interest are accounted for using the equity method of accounting. Significant influence is usually demonstrated by the Group owning, di rectly or indirectly, between 20% and 50% of the voting share capital or by exerting significant influence through other means. The Group's share of the net income or losses of associates is included in the consolidated statement of operations, and the Group's share of the net assets of associ ates is included in the consolidated balance sheet. An assessment of in vestments in associates is performed when there is an indication that the asset has been impaired or the impairment losses recognised in prior years no longer exist. When the Group's share of losses exceeds the carrying amount of the investment, the investment is reported at nil value and rec ognition of losses is discontinued except to the extent of the Group's com mitment. Unrealised profits that arose from transactions between the Group and its associates were eliminated in proportion to the Group's share in such associates, and unrealised losses were excluded in the proportion to the Group's share in such associates, if there is no evidence of indicators of impairment of an asset transferred. In case the share in an entity from 20% to 50% is acquired with inten tion to sell it in a foreseeable future, such investment is accounted for as investment available for sale.
Accounting for the effects of inflation IAS 29 – Financial Reporting in Hyperinflationary Economies ("IAS 29"), requires that finan cial statements prepared on a historic cost basis be adjusted to take into account the effects of inflation for entities reporting in the currency of hyperinflationary economies. The accompany ing consolidated financial statements have been restated in terms of the measuring unit current at the latest presented balance sheet date and the net gains or losses arising on the net mone tary position of assets and liabilities during the period presented have been included in the statement of operations and disclosed separately. The Group has utilised the consumer price index reported by the State Committee on Statistics of the Russian Federation ("Goskomstat") in the application of IAS 29. The application of IAS 29 to specific categories of transactions and balances within the consolidated financial statements is set out as follows: a) All amounts are stated in terms of the measuring unit current at December 31, 2002; b) Cash and cash equivalents, available for sale investments, receivables, payables, interest bearing loans, current taxes and dividends payable have not been restated as they are monetary assets and liabilities and are stated in Roubles current at December 31, 2002; c) Gains or losses on the net monetary position of assets and liabilities which arise as a result of inflation, are computed by applying the change in the consumer price index to the monetary assets and liabilities during the period; d) Non monetary assets and liabilities and shareholders' equity are restated from their historic cost or valuation by applying the change in the consumer price index from the date of recogni tion to the balance sheet date; e) Items in the consolidated statements of income and of cash flows are restated by applying the change in the consumer price index from the dates when the items where initially recorded to the balance sheet date. As the characteristics of the economic environment of the Russian Federation indicate that hyperinflation has ceased, effective from January 1, 2003 the Group no longer applies the provisions of IAS 29.
page No 46 charged directlyagainstincome. ontheremaining balanceoftheliability. ofinterest achieve aconstantrate Financecharges are thefinancechargesandreduction oftheleaseliabilityments areapportionedbetween so asto leased propertyor, iflower, payments.Lease atthepresentvalue oftheminimumlease pay capitalised are attheinceptionofleasefairvalue oftheleaseditem, ownership Finance leases, whichtransfertotheGroupsubstantially allthe risks and benefitsincidentalto Leases –Groupaslessee thecostof itsproperty pany torealise theCom allow withoutthat theoperating significantcost, whichwould licenses willberenewed lives usedfordepreciation of thecost The period ofvalidity thantheuseful oftheCompany'soperating licences issignificantlyshorter lossesare recognised intheincome statement. the assetbelongs.Impairment forthecash generating therecoverable unit towhich amountisdetermined dent cashinflows, money andtherisksspecifictoasset.For largelyindepen anassetthatdoesnot generate marketassessmentsof thetimevalueof current discountrate thatreflects using apre tax value present totheir arediscounted futurecashflows assessing valueinuse,theestimated amount ofproperty, ofnetsellingprice andvalueinuse.In plantandequipmentisthegreater recoverableassets orcash generating totheir unitsare down written amount.Therecoverable recoverable values exceedtheestimated amount,the indication existsandwherethecarrying valuemaynotberecoverable. thecarrying Ifanysuch or changesincircumstancesindicate valuesofproperty, whenevents The carrying forimpairment plantandequipmentarereviewed ofproperty,from items plantandequipment. ofeconomic benefits pattern withtheexpected and theperiodsofdepreciation areconsistent The usefullivesanddepreciation periodically toensurethatthemethods methodsare reviewed economic usefullives ofeachclassassetasfollows: Property, plantandequipmentare onthestraight line depreciated basisovertheestimated which eachGroupundertakingoperates. astheenvironment in intoaccountthesecircumstances, managementtook aswell statements, useful livesofproperty, plantandequipmentforthepurposesoftheseconsolidated financial costs.Inestimationofthe capacityatsubstantially lower orsuperiorservice vides thesame bytheequipmentthatpro Group. Thesechangeswilllead tothereplacementofmajoritems haveanincreasing theactivitiesof impacton technology Changes intelecommunications ofincome asincurred. charged totheconsolidated statement asset orsignificantlyincreaseitsrevenuegenerating capacity. Repairs are andmaintenance thelife ofthe extend Significant renovations andimprovementsarecapitalisediftheseitems purchase price. use.Trade attheconstruction costor inarriving intended are deducted discountsandrebates conditionable taxes,andanydirectlyattributablecostsofbringing theassettoworking forits Cost comprisesconstruction costorpurchaseprice,includingimportdutiesandnon refund mating historicalcost. Property, historical plantandequipmentarerecorded atrestated costorvaluationapproxi Property, plantandequipment Computers, officeandotherequipment Computers, Motor vehicles equipment Other telecommunication Digital switches Analogue switches services Buildings, constructions andsite , plant and equipment through normal operations. , plantandequipmentthroughnormal of property, plantandequipment.Management believes 3-5 years 5 years 10-20 years 10-15 years 10-20 years 20-50 years and therelatedusefullives and equipmentclasses Property, plant 12. table 3 .1 page No page No
47 Annual Report 2002 Svyazinvest Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term.
Leases – Group as lessor Upon inception to a finance lease the Group records the net investment in leases, which consists of the sum of the minimum lease payments and unguaranteed residual value (gross investment in lease) less the unearned finance lease income. The difference between the gross investment and its present value is recorded as unearned finance lease income. The unearned finance lease income is amortised over the life of the lease using the constant interest rate method. With the exception noted below, the date of inception of the lease is considered to be the date of the lease agreement or commitment, if earlier. For purposes of this definition, a commitment shall be in writing, signed by the parties to the transaction, and shall specifically set forth the principal terms of the transaction. However, if the property covered by the lease has yet to be constructed or has not been acquired by the Group at the date of the lease agreement or com mitment, the inception of the lease shall be the date when construction of the property is com pleted or the property is acquired by the Group. Any advance payments made by the lessee prior to commencement of the lease reduce the net investment in lease. The Group records capital expenditures related to acquisition of equipment subject to leasing as equipment purchased for leasing purposes. These expenditures are being accumulated until the equipment is ready for use and being transferred to the lessee.
Equipment contributions Telecommunication equipment that has been transferred to the Group free of charge by custom ers and other entities outside the privatisation process is capitalised at its market value at the date of transfer and a corresponding liability is established, which is credited to the consolidat ed statement of income on the same basis as the equipment is depreciated. Contributions from Municipal Authorities to the acquisition cost of property, plant and equip ment are recognised as income over the life of the associated asset in accordance with IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance.
Intangible assets Intangible assets acquired separately from a business are capitalised at cost. Intangible assets acquired as part of an acquisition of a business are capitalised separately from goodwill if the fair value can be measured reliably on initial recognition, subject to the constraint that, unless the asset has a readily ascertainable market value, the fair value is limited to an amount that does not create or increase any negative goodwill arising on the acquisition. Intangible assets, excluding development costs, created within the business are not capitalised and expenditure is charged against profits in the year in which it is incurred. Licences and software costs are being amortised evenly over their useful economic lives de termined based on terms of the licence or the licence agreement for software. Amortisation is computed using the straight line method over their remaining estimated useful life, typically 5 10 years. The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.
Goodwill and negative goodwill The Group follows the requirements of IAS 22 – Business Combinations – for the accounting of goodwill (negative goodwill) resulting from the business combinations accounted for under the purchase method. Any excess of the cost of the acquisition over the Group's interest in the fair value of the identi fiable assets and liabilities acquired as at the date of the exchange transaction should be de scribed as goodwill and recognised as an asset. Goodwill is carried at cost less any accumulated amortisation and any accumulated impairment losses. Goodwill is amortized using the straight line method over the period that reflects the best estimate of the period during which future economic benefits are expected to flow to the enterprise, typically 5 years.
page No 48 come frominvestmentsisaccrued intheperiod itisearned. "Income fromfinancial ofoperations. in Interest investments"intheconsolidated statement investmentsisincludedin ofnet income.Incomefromavailable for sale in thedetermination onanindividualinvestmentbasis. Unrealised gainsandlossesare included value determined on individualbasis.Available for sale atfair investmentsare stated tised costdetermined atamor arestated Loans bytheGroup,includinglease receivables originated andreceivables The Grouphadnosecurities classifiedasheld to maturity ortradingatDecember 31, 2002. as trading. Allotherinvestmentsare classified asavailable for sale. inpriceareclassified fluctuations pally forthepurposeofgeneratingaprofit fromshort term to holdmaturity areclassifiedasheld to maturity investments.Investmentsacquiredprinci andability paymentsandfixedmaturity thattheGrouphaspositiveintent or determinable debtor, tobesold withtheintent immediately. unless theyareoriginated Investmentswithfixed by theGrouparefinancial by providingmoney, assetscreated directlytoa goodsorservices the Group,held to maturity, Loans tradingandavailable for sale. originated andreceivables by loans originated categories: andreceivables Investments are classified intothefollowing Investments andspecificanalysis ofsignificantaccounts. counts receivable Provision ofcollectionsac basedon thehistorical pattern fordoubtfulaccountsiscreated period inwhichtheyareidentified. provision fordoubtfulaccounts.Baddebtsare offinthe written atamortisedcost,after carried inthebalance sheetatthefairvalueofconsiderationReceivables arestated givenandare Accounts receivable movingorobsolete items. forslow netofreserves Inventories arereported averagemethodofinventoryvaluation. ment shouldRostelecom usetheweighted it therefore adjustmenttothefinancial mayresultinmaterial state by differentcostformulas, naturethatare measured astotheir withsimilarcharacteristics There canbeinventoryitems Inventories heldasatDecember31,2002by: of theGroup,exceptRostelecom whichusesFIFOmethod: average methodforallcompanies primarilybytheweighted valueasdetermined net realisable ofcostor Inventories include spare partsandancillaryequipmentarevaluedatthelower Inventories monetary assetsisrecognisedasincomeimmediately. b) average usefullifeoftheidentifiable acquireddepreciable/amortisable assets; basisovertheremainingweighted monetary assetsisrecognisedasincomeon asystematic a) asfollows: ised asincomeinthestatement expenses thatcanbemeasured ofacquisition,negativegoodwillisrecogn reliably atthedate To futurelossesand toidentifiable thatnegativegoodwilldoes notrelate expected theextent are recognised. whenthefuturelossesandexpenses should berecognisedasincomeinthestatement not represent identifiable liabilities ofacquisition, thatportion ofnegativegoodwill atthedate are identifiedintheGroup's planfortheacquisitionandcanbemeasuredreliably, butwhichdo To toexpectationsoffuturelossesandexpensesthat relates thatnegativegoodwill theextent recognised asnegativegoodwill. of theidentifiable assetsandliabilities shouldbe acquired overthecostofacquisition, inthefairvalues oftheGroup's oftheexchangetransaction, Any interest excess,asatthedate Total All othergroup companies Rostelecom the amount of negative goodwill notexceeding thefairvaluesofacquiredthe amountofnegativegoodwill identifiable non the amountofnegativegoodwillinexcessfairvaluesacquiredidentifiable non 4,242 3,740 502 December 31,2002 Inventories heldasat 12. table 3 .2 page No page No
49 Annual Report 2002 Svyazinvest Cash and cash equivalents Cash and cash equivalents consist of cash on hand and in bank, and highly liquid investments with original maturities of three months or less, with insignificant risks of diminution in value.
Deferred income taxes Deferred tax assets and liabilities are calculated in respect of temporary differences in accor dance with IAS 12 – Income Taxes, ("IAS 12"). IAS 12 requires the use of a balance sheet liability method for financial reporting and account ing for deferred income taxes. Deferred income taxes are provided for all temporary differenc es arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. The principal temporary differences arise in respect of property, plant and equipment. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on tax rates that have been enact ed or substantively enacted at the balance sheet date. Valuation allowance is created for de ferred tax assets that are not expected to be realised. Deferred tax liabilities relating to undistributed earnings of subsidiaries and associates are accrued when it is probable that such earnings will be remitted to the Company in the foresee able future.
Loans and borrowings All loans and borrowings are initially recognised at cost. After initial recognition, interest bearing loans and borrowings, are subsequently measured at amortised cost using the effective interest rate method.
Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects a provision to be reimbursed, the reimbursement is rec ognised as a separate asset but only when the reimbursement is virtually certain. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. In subsequent periods the in crease in discounted provisions is recognised as an interest expense.
Pensions and other post employment benefits Social contributions (including contributions to the state pension fund) are made through a uni fied social tax ("UST") calculated by the companies of the Group by the application of a regres sive rate from 35.6% to approximately 18% to the annual gross remuneration of each employ ee. The Group allocates the UST to three social funds (state pension fund, social and medical insurance funds), where the rate of contributions to the pension fund vary from 28% to 14% depending on the annual gross salary of each employee. The Group's contributions relating to the UST are expensed in the year to which they relate. Under collective bargaining agreements, the Group also provides post employment retirement benefits. The majority of the Group's employees are eligible to participate in defined benefit plans based upon a number of factors, including years of service, age and compensation. The Group has not complied with IAS 19 – Employee Benefits. Specifically, the Group has not made an actuarial determination of the present value of its benefit obligation under these ar rangements to allow it to record its obligation and make the required disclosures under IAS 19 as at December 31, 2002. In order to fund a portion of the Group's obligation, the Group has committed to contribute agreed amounts (negotiated annually) to certain non government pension plans. Contributions made by the Group to these plans are charged to expense when incurred.
Revenues Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.
page No 50 when the services were rendered. were when theservices intheperiod services tomobiletelecommunications The Grouprecognisestherevenues related Mobile telecommunicationsservices are rendered. period when theservices inthe services totelegraph recognises TheGroup revenuesrelated data transmission services. comprisefees Revenues services fromtelegraph Telegraph services revenues are rental recognisedovertheleaserelated term. forasoperatingleasesavailable and on themajority ofleases.Thesecontractsareaccounted The Groupleasesitspremisestootherbusinessesunderannual contracts.Renewal optionsare Rent ofassets rendered. toradio were revenues broadcasting related intheperiodwhenservices fees fromsubscribersandtheinstallation feesforwireline radio sets.TheGrouprecognisesthe maintains thewirelineThe Group radiobroadcasting Therevenues comprise themonthly network. Radio andTVbroadcasting are rendered. intheperiodwhenservices services totheInternet The Grouprecognisesrevenuesrelated services Internet when theinstallationiscomplete. co The Grouprecognisesinstallation feesforindefinite Installation fees rendered. were inthe period whentheservices services recognises tonetwork revenues related TheGroup operatorswithThe Groupprovides accesstoitsnetwork. othertelecommunication Network services rendered. are intheperiodservices to thelongdistanceservices Group recognises revenuesrelated utilised.TheGroup charges basis.The long distancefeeson aper minute call andtheservices Revenues basedon are timeusedbythecaller, from longdistanceservices thedestinationof Long distanceservices isprovided tothesubscriber.month theservice inthe feesforlocal services tothemonthlynetwork The Grouprecognisesrevenuesrelated Monthly subscriptionfeesforlocalservices 11) 10) 9) 8) 7) 6) 5) 4) 3) 2) 1) therevenue sourcesThe Groupcategorises ineleven majorcategories: Rent ofassets; Radio andTVbroadcasting; services; Internet Installation fees; services; Network Monthly subscription feesforlocalservices; Telegraph services; (domesticandinternational); Long distanceservices Mobile telecommunications services; telecommunications Mobile Other services. Other telecommunications services; Other telecommunications for cabletransmissionsandotherwire line ntracts withitssubscribersasrevenues page No page No
51 Annual Report 2002 Svyazinvest Other telecommunications services Other telecommunications services mainly include revenues from payphones network, rent of channels, and sales of handsets and accessories.
Other services Revenues other than telecommunications revenues primarily consist of revenue from produc tion of telecommunications equipment and its technical support, transportation services, main tenance of recreational facilities and other social infrastructure and sale of goods and services provided by non core units.
Mutual offset and barter A portion of sales is settled through mutual offset and barter arrangements. These transactions are generally either in the form of direct settlement by goods or services (barter) or through a chain of non cash transactions involving a number of enterprises. These operations are ac counted for at fair value as agreed between the parties. Value added taxes Value added taxes related to sales are payable to the tax authorities. The Group's subsidiaries use both methods of VAT accounting – an accrual basis based upon invoices issued to the sub scriber and a cash basis based upon cash funds received from subscribers. VAT incurred for purchases and paid to suppliers may be reclaimed, subject to certain restrictions, against VAT related to sales. VAT related to purchase transactions that are reclaimable after the balance sheet date are recognised in the balance sheet on a gross basis. Foreign currency transactions Transactions denominated in foreign currencies are translated into Roubles at the exchange rate as at the transaction date. Foreign currency monetary assets and liabilities are translated into Roubles at the exchange rate as at the balance sheet date. Exchange differences arising on the settlement of monetary items, or on reporting the Group's monetary items at rates different from those at which they were initially recorded in the period, or reported in previous financial statements, are recorded as foreign currency translation gains or losses in the period in which they arise. As at December 31, 2002 the rates of exchange used for translating foreign currency balances were (in Russian Roubles for one unit of foreign currency):
table 12.3.3 The rates of exchange used for translating foreign currency ba US Dollars 31.78 lances as at December 31, 2002 Japanese Yens 0.27 * Special Drawing Rights are special cur rency units, issued by International Mone Special Drawing Rights (SDR)* 42.95 tary Fund and being used for interstate settlements. SDRs are quoted daily. Euros 33.11
The main part of the Euro indebtedness was denominated in Eurozone currencies before Janu ary 1, 2002 and has been translated into Euro using the fixed official exchange rates.
Borrowing costs Borrowing costs that are directly attributable to the acquisition or construction of an asset are capitalised as part of the cost of the asset when it is probable that they will result in future economic benefits to the enterprise and the costs can be measured reliably. To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation is determined by applying a capitalisation rate, calculated based on the borrowing costs for the period, other than those applicable to borrowings made specifically for the purpose of obtaining a qualifying asset. Other borrowing costs are recognised as an expense in the period in which they are incurred. Capitalisation of borrowing costs commences when the activities to prepare the asset are in progress and bor rowing costs and expenditures for the asset are being incurred. Borrowing costs are capitalised until the assets are ready for their intended use.
page No 52 ing theimpact,ifany, thepronouncement willhave on future consolidated statements. financial evaluat toIFRSin2005.TheCompanyiscurrently financial statements their panies willconvert In June2003theIASB Financial issuedInternational Reporting Standard 1("IFRS 1")– New accountingpronouncements are theprimarysegmentsofGroup. segment.Businesssegments inonegeographical Management considersthattheGroupoperates b) a) the companiesofGroupanditssubsidiaries areengagedin: structureoftheGrouping businesssegmentsbasedon andtypesofactivities theorganisational In accordancewithIAS 14(revised1997)– Segment information average numberofordinarysharesoutstandingduring theperiod. shareholders bytheweighted bydividingthenetincome/(loss)forperiodattributableto pershare arecalculated Earnings Earnings pershare been declared. ing forthesubsidiary's ortheassociate's dividends,whetherornotthedividendshave preferred adjust share ofprofit orlossesafter its which areheldoutsidetheGroup,Companycomputes has beenrecovered.Ifasubsidiary oranassociate shares hasoutstandingcumulativepreferred allsuchprofitsuntiltheminority'sallocated shareoflossespreviouslyabsorbed bythemajority to, makegoodthelosses.Ifsubsidiarysubsequentlyreportsprofits,majority is interest thattheminority hasabindingobligationto, excepttotheextent the majority interest andisable the subsidiary. Theexcess,andanyfurtherlossesapplicabletotheminority, arecharged against inaconsolidatedthe minority interest subsidiary intheequityof mayexceedtheminority interest amounts ofthenetidentifiable assetsandliabilities ofthesubsidiaries. to Thelossesapplicable Company. attheminority's iscarried proportionofthepre acquisition carrying Minority interest directly orindirectly whicharenotowned, throughsubsidiaries,attributable tointerests bythe includes thatpartofthenetresultsMinority ofoperations andofnetassetssubsidiaries interest Minority interest Adoption of International Financial Reporting Standards Reporting Financial International of Adoption ance sheet date inaccordance withIASance sheetdate 10– arenotrecognisedasaliabilityfinancial statements atthebal butbeforeapprovalofthe thebalancesheetdate or declared after period covered andthatareproposed bythefinancial statements tobeinrespectofthe a paymentisestablished. Dividendsstated Dividends are recognised whentheshareholder's righttoreceive Dividends Financial Instruments: Recognition and Measurement and Recognition Instruments: Financial into The Grouphasnotentered Hedging instruments were authorizedforissueisdisclosedwere in butbeforethefinancial statements thebalancesheetdate after hedging instrumentsunderprovisions ofIAS 39(Revised 2000)– Balance Sheet Date Sheet Balance mobile telecommunications services. mobile telecommunications fixed line telecommunications services; fixed linetelecommunications . Theamountofdividendsproposedordeclared contracts that would qualify as qualify contracts thatwould Note 16 Segment Reporting Segment Events After the After Events . . . IFRS 1 provides the basis on whichcom . IFRS1provides thebasison theGroupidentifiesfollow First time page No page
53 Annual Report 2002 Svyazinvest The accompanying consolidated financial statements include the assets, liabilities and results Note 12.4.] of operations of Svyazinvest and the following principal subsidiaries:
Subsidiaries SUBSIDIARY PRINCIPAL ACTIVITY OWNERSHIP VOTING
OAO Rostelecom Intercity and international 38.00 50.67 telecommunications services OAO CentreTelecom Super Regional Telecommunications 38.02 50.69 table 12.4.1 Operator ("SRTO"), a provider of telecommu nication services (including local, national Principal subsidiaries and international voice telephone services) of the Group OAO Dalsvyaz SRTO, a provider of fixed line local and long 38.13 50.56 distance telecommunication services, telegraph and data transfer services, including Internet OAO NWT SRTO, a provider of fixed line local and long 39.89 50.84 distance telecommunication services OAO Sibirtelecom SRTO, a provider of fixed line local and long 38.23 50.67 distance telecommunication services, telegraph and data transfer services, including Internet OAO STC SRTO, a provider of fixed line local and long 38.16 50.69 distance telecommunication services, tele graph and data transmission services OAO Uralsvyazinform SRTO, a provider of fixed line local and long 41.38 51.42 distance telecommunication services, as well as cellular and paging services OAO VolgaTelecom SRTO, a provider of fixed line local and long 38.17 50.67 distance telecommunication services OAO Dagsvyazinform RTO, a provider of fixed line local and long 38.00 50.67 distance telecommunication services OAO Lensvyaz RTO, a provider of fixed line local and long 38.00 50.67 distance telecommunication services OAO Central Telegraph Telegraph and CLEC services provider 38.25 50.67 Non commercial Non for profit organisation 38.63 100.00 partnership "Research Centre on Telecommu nications Development Problems" (RCTDP)1 OAO Giprosvyaz2 Research and development 46.52 60.00 OOO Dagestanskaya Mobile services provider 19.38 51.00 Sotovaya Svyaz3 OOO ChOP Rostelecom Security services 83.74 98.00 Bezopasnost4 ZAO RusLeasingSvyaz5 Leasing services 48.43 64.20 ZAO Registrator Svyaz6 Registrar services 23.12 40.70 ZAO Delta Telecom7 Mobile services provider 28.87 85.62 ZAO RTK Invest8 Financial services 38.75 100.00 ZAO Startcom9 Telecommunications consulting services 35.17 51.20 OAO RTC Leasing Leasing services 13.60 29.90 RTDC Holding, Inc., USA Telecommunication holding company 12.30 100.00 ZAO Mobitel Telecommunications services 100.00 100.00
1 Indirect shareholding via Rostelecom, CentreTelecom, Dalsvyaz, NWT, Sibirtelecom, STC, Uralsvyazinform and VolgaTelecom. 2 Joint shareholding via Svyazinvest (38%) and RCTDP (22%). 3 Indirect shareholding via Dagsvyazinform (51%). 4 Joint shareholding via Svyazinvest (75%) and Rostelecom (23%). 5 Joint shareholding via Svyazinvest (38.2%), VolgaTelecom (7.7%), Sibirtelecom (7.3%), Uralsvyazinform (7.3%) and NWT (3.7%). 6 Joint shareholding via RCTDP (20%), Svyazinvest (12.1%) and Rostelecom (8.6%). 7 Joint shareholding via Rostelecom (42.5%) and NWT (43.12%). 8 Indirect shareholding via RCTDP (100%). page No 54 9 Joint shareholding via Svyazinvest (25.1%), STC (11%), VolgaTelecom (7.7%), CentreTelecom (3.7%) and Uralsvyazinform (3.7%). operations andfinancialpositionofRTC Leasing. board ofdirectorsRTC Leasing. toconsolidate ThereforetheGroupcontinues theresultsof significantamountsof debtofRTC Leasingtees toappointthemajorityof andhasaright themajorpartofoverall revenuesofRTC Leasing. bytheGroupforms ated guaran TheGroup ment, policiesandday to dayoperations ofRTC Leasing. Financeincomefrom leases gener The managementoftheGroup toexercise believesthatitcontinues control overthemanage companying consolidated balancesheetasatDecember31, 2002. 74 forusingthepurchase method.Negative goodwillof chase ofminority wasaccounted interest Accordingly, theeffectiveshareofRostelecom inRTC Leasing increasedto detailsofRIBacquisition). shares astreasury (seebelow byRIBaretreated Shares owned 31, 2002thepartiessignedanadditionalagreement (see andinvestingattractivenessincrease ofRTC Leasing. capitalisation SubsequenttoDecember to certainactionsintended performs thelatter Leasing passtotheConsortium would after tium"), fromthethird side.UndertheAgreement with theConsortium, thecontrol overRTC one side,RTC Leasing from theotherside,andaconsortium oftheshareholders ("Consor Rostelecom fundRostelecom Garantiya pension andnon state ("Initial shareholders"), from ("Agreement") agreement The additionalissuewasmadeinaccordancewithtrilateral between part ofissuedshares andpurchasedadditional est invotingstock ofRTC Leasing of 3,964,714 In February 2002RTC Leasing, asubsidiary ofRostelecom, issuedandsold anadditional and financial position ofZAO Registrator Svyaz. vest andits subsidiaries, therefore theGroupcontinuestoconsolidate theresultsofoperations istrator Svyaz asthemajority oftheBoard ofDirectorsmembersare representatives ofSvyazin The Groupexercisescontrolovermanagement,policies andday to dayoperationsofZAO Reg the Group. accountingprinciples from used by andmaydiffermaterially theaccountingpolicies accepted ofZAOThe financial "DeltaTelecom" statements inaccordancewith areprepared USgenerally the Russian as theCompany. Federation year enddate andhavethesame areincorporated in All oftheabovesubsidiaries exceptforthosespeciallymentionedotherwise RTC Leasing: ofordinary shares of owners companieswere theissuancefollowing Immediately after Total shares ordinary ZAO Russian Industrial Bank("RIB"),asubsidiary ofRostelecom ZAO KFP Finance ZAO Gamma Invest Treasury sharesonthebalancesheetofRTC Leasing RCTDP, asubsidiary ofSvyazinvest CB Severo ZapadniyTelecombank pensionfundRostelecom GarantiyaNon state Rostelecom was recognized in relation to this transaction andincludedinnegativegoodwill intheac wasrecognizedinrelation tothistransaction ordinary sharesatparvalueof10Roubles pershare. TheGroupretained inter its 27.1% heldvia Rostelecom bypurchasingtherespective 2.8% via RCTDP. Note 33 ). % OFORDINARY SHARE 32.27% 100 15.93 15.77 15.93 0.48 2.82 18.91 3.03 27.13 . Thepur the issuance immediately after shares ofRTC Leasing owners ofordinary Companies being 12. table 4 4 .2 page No page
55 Annual Report 2002 Svyazinvest Acquisition of RTDC Holdings, Inc. In April 2002 RosTelecomLeasing S.A. ("RTCL S.A."), a subsidiary of Rostelecom registered in Switzerland, acquired from AT&T for a cash payment of 33 million US Dollars (1,117 at the exchange rate at date of transaction) 94.9% of ordinary shares in telecommunications holding company RTDC Holdings, Inc. ("RTDC"), registered in the USA, and all rights under the loan receivable from RTDC of 48 million US Dollars (1,615 at the exchange rate at date of transac tion). RTDC has significant investments in a number of Russian cellular telecommunications companies. The acquisition was accounted for under the purchase method. In October 2002 RTCL S.A. purchased the remaining 5.1% shares of RTDC for a cash payment of 1.3 million US Dollars (43 at the exchange rate at date of transaction) from International Finance Corporation. After this purchase the Group owned 100% of the voting shares of RTDC. RTDC owned investments in a number of telecommunications companies in which the Group also had ownership. Following the acquisition, the Group's direct and indirect interests in the principal investments changed as follows:
INTEREST ENTITY INTEREST CONTROLLING table 12.4.3 HELD BEFORE ACQUIRED INTEREST POST Change of the Group's ACQUISITION WITH RTDC ACQUISITION direct and indirect interests in the principal ZAO AKOS 0% N/A 92% 92% investments ZAO Westelcom 50 Rostelecom 50 100 ZAO Nizhegorodskaya Sotovaya Svyaz ("NCC") 50 Volga Telecom 50 100 ZAO Yeniseytelecom 51 Sibirtelecom 49 100 ZAO Baikaltelecom 51 Sibirtelecom 49 100 ZAO Uralwestcom 51 Uralsvyazinform 49 100 The Group began to consolidate AKOS, Westelcom, and NCC subsequent to acquisition.
Acquisition of RIB In March 2002 RTC Leasing acquired 80% of ordinary shares of RIB for a cash payment of 93. The Group accounted for this acquisition under the purchase method. Accordingly, the results of operations and financial position of RIB were consolidated by the Group beginning from March 2002. In July 2002 RTC Leasing acquired the remaining 20% for 11. This transaction was accounted for as purchase of minority interest using the purchase method.
Other acquisitions During 2002, the Group also completed less significant acquisitions summarized as follows:
ENTITY ACTIVITY PERCENTAGE ACQUISITION table 12.4.4 ACQUIRED COST Other acquisitions of the Group RTDC Holdings, Inc. Cellular telecommunication operations 100% 1 160 ZAO Radiotelephone G Mobile service 100% 442 ZAO Mobile Service Mobile service 100%
After the acquisition of ZAO Radiotelephone G and ZAO Mobile Service, the Group had 83% ownership of OOO Yuzhno Uralskiy Sotoviy Telephone ("YUST"), a provider of mobile servic es in Chelyabinsk region. Before December 31, 2002 the Group acquired the remaining 17% of shares for 49,649.
page No 56 using discount rates of using discountrates may be granted. As aconsequence, theseassetsare notrecognisedmay begranted. intheconsolidated bal ofproperty,to theseitems plantandequipmentthere isnoexpectationthatsuchrights transmission devicesandother assetsfreeofcharge. TheRTOs rights donothave ownership local MunicipalAdministrations, bytheir granted, therights tousecertainbuildings, switches, documents andprocesses, privatisation someIn accordancewith oftheRTOs their havebeen amounts. minated assets" current return ofprepayments asatDecember31,2002was prepaid rent amountof recognised intheaccompanyingconsolidated Thecarrying financial statements. channels. Additional depreciationmaining period ofusethesatellite expenseof starting from February ofthere 2003.TheCompanyhasaccordingly revised itsestimate channels During aplantodiscontinueusingthesesatellite 2002theCompanyformalised channels. depreciation methodtoamortisetheprepaidsatellite value ofcableandtransmissiondevicesasatJanuary1,2002. TheCompanyusescomposite Payments channelsintheamountof forrentof satellite Property, plantandequipmentof The total interest costs capitalized during 2002 amounted to costscapitalizedduring2002amounted The totalinterest 1,615 valueofplantandequipmentheldunderfinanceleasesat December31,2002is The carrying loss. 1998 theCompanyrecognisedanimpairment setinRoubles notincreasedinlinewiththeRoublewere andwere devaluation.As aresult,in tariffs whilerevenuesremainedgenerally currencies atapre crisisforeign levelastheservice in denominated ofborrowings totherepayment in thesignificantincreaseofpayablesrelated 1998 economic inRussia. crisis Inparticular, asignificantdevaluationoftheRouble resulted theAugust bythemanagementafter noted assetswere ofthelong term of possibleimpairment Indicators itslong livedAs assetsforimpairment. atDecember31,1998theGroupreviewed fittings. equipmentandofficefurniture, fixturesand Other assetsincludemotorvehicles, computer Net book valueatDecember31,2002 At December31,2002 Disposals Share ofsubsidiaries Charge for theyear 1,2002 At January Accumulated Depreciation At December31,2002 Recovery loss ofimpairment lossfortheyear Impairment 1,2002 At January Accumulated impairmentloss At December31,2002 Disposals Transfers Acquisition ofsubsidiaries Additions 1,2002 At January Cost orvaluation . Leased assetsare financeleaseliabilities. pledgedassecurity fortherelated (189) (see 18% 545 Note 13 forRouble amountsand denominated are included in "Long term accounts receivable" areincluded accountsreceivable" in"Long term ). Non current portion of amounts receivable wasdiscounted portionofamountsreceivable ). Non current 21,131 CONSTRUCTIONS BUILDINGS AND (114,015) (111,414) 185,191 181,701 (9,495) were pledgedassecurity againstborrowings. were (9,633) (2,598) (4,437) 61,681 210 1,837 6,072 138 (1) 16 . Amounts receivable from thelessor. Amountsreceivable forpartial - - DEVICES TRANSMISSION SWITCHES AND (195,487) (186,026) (13,469) 293,736 283,367 (8,636) (6,175) (8,703) 89,613 15,265 4,319 1,270 (311) 1,757 67 9 - 544 were includedinthecarrying were (43,432) AND OTHER MACHINES (39,394) (2,117) (5,456) 63,014 18,874 . 58,121 (708) 6,661 1,534 (116) (717) 218 131 3% 9 - forUSDollardeno FOR INSTALLATION AND EQUIPMENT CONSTRUCTION ASSETS UNDER (27,998) (356) 12,810 13,729 12,111 30,423 (919) (912) (875) (49) 105 and"Other 5 - - - - - 897 (352,934) (336,834) (19,758) was (19,928) (11,802) (23,362) 182,978 555,670 535,300 TOTAL 30,563 1,609 7,690 (428) (49) 219 - and equipment Property, plant 12. table and equipment Property, plant Note Note 5 .1 12. 5 page No page . ]
57 Annual Report 2002 Svyazinvest ance sheet. The Management does not believe that annual rental costs, should they become payable in the future, would have a material effect on the results of operation or the financial position of the Group. Except for Rostelecom, the Group's accounting records relating to fixed assets are not designed to support their presentation in accordance with IAS 16 – Property, Plant and Equipment, IAS 29 – Financial Reporting in Hyperinflationary Economies and IAS 36 – Impairment of Assets. There fore, certain estimates were made by management to present fixed assets in the accompanying consolidated financial statements. As a result of the matters described in the preceding paragraph, any adjustments to the PP&E balance, if any, could materially affect the deferred income tax liability and the related disclo sure (see Note 26). In the future, the Group expects to hire an independent appraiser to assist in reconstruction of the historical cost of the Property, Plant and Equipment, to make necessary adjustments, if any, to the Group's books and records, in order to comply with IFRS.
Note 6 LICENCES SOFTWARE NUMBERING TOTAL 12. .] AND OTHER CAPACITY Intangible assets
Cost At January 1, 2002 116 1,182 159 1,457 Additions 4 252 116 372 Disposals (76) (144) - (220) At December 31, 2002 44 1,290 275 1,609 table 12.6.1 Accumulated Amortisation Intangible assets At January 1, 2002 (70) (592) (71) (733) Charge for the year (8) (138) (28) (174) Disposals 58 45 - 103 At December 31, 2002 (20) (685) (99) (804) Net book value at December 31, 2002 24 605 176 805
In 2002 Central Telegraph entered into several contracts with MGTS for connection to its net work and for the use of MGTS technical resources for the total amount of 6.4 million US Dol lars. Settlements under these contracts included both mutual offsets and cash payments. Some of the intangible assets (numbering capacity) received per offset agreements were valued in accordance with IAS 38 – Intangible Assets in the amounts equal to the cost of equipment and other costs incurred by Central Telegraph in preparing the equipment for offset. The Group uses a useful life of ten years to amortize such assets.
Note 12.7.] Other long term investments as at December 31, 2002 are comprised of the following: Other long term financial investments Bank loans 177 Long term notes receivable 187 OAO Telecominvest 615 table 12.7.1 Other investments 1,081 Other long term Less: provision for impairment of long term investments (715) investments as at December 31, 2002 Total other long term financial investments 1,345
The Group indirectly owns a 15% stake in OAO Telecominvest ("Telecominvest") via NWT.
page No 58 from from Goodwill andnegativegoodwillareamortizedusingstraight line methodover periodsranging identifiable assetsacquiredoverthepurchaseconsideration paid. inRTC Leasinginterest (see from inRTDC acquisitionNegative goodwillresulted oftheinterest andchangesinownership paid overthefairvalueofidentifiable netassetsacquired. line ofoperations. oftheconsolidated statements ofgoodwill andnegativegoodwillisincludedin"DepreciationAmortisation andamortisation" ( Westelcom Goodwill wasrecognizedinconnection with theacquisition ofYUST( 3 2 1 Indirectshareholding viaRostelecom (20%) Indirectshareholding viaSTC(50%) Indirectshareholding viaRostelecom(15%) ZAO GlobalTel ОАО Kostromskaya GTS ZAO Primtelephone nications OAO Cellular Commu Moscow ZAO Telmos ZAO Volgograd GSM – 900("SCS 900") ZAO Siberian CellularSystems ZAO Stavtelesot ОАО Svyaz Komi Republic Golden Telecom, Inc.,USA OAO MGTS Total investmentsinassociates Other Net book valueat December31,2002 At December31,2002 Disposals Charge fortheyear 1,2002 At January Accumulated Amortisation At December31,2002 Disposals Additions 1,2002 At January Cost 3 to 10 4 years. 17 3 ) andRIB( 6 5 2 22 Note 4 ) (see 1 Note 4 ) andrepresents theexcessoffairvaluenet Various vices provider Telecommunication ser tion Operator Regional Telecommunica provider Mobile services provider Mobile services provider CLEC services provider Mobile services provider Mobile services provider Mobile services cation Operator Regional Telecommuni provider CLEC services cation Operator Regional Telecommuni ) andrepresents theexcessofpurchaseprice 6 5 4 Indirectshareholding viaRostelecom (51%) Indirectshareholding viaDalsvyaz(50%) Indirectshareholding viaRTDC(22%) ODILNEGA GOODWILL 243 (29) - (25) (4) 272 - 246 26 VOTING, % CARRYING AMOUNT CARRYING VOTING, % 51.00 37.29 50.00 45.50 20.00 50.00 30.00 41.00 25.34 15.00 28.00 162 ), Moteco ( ), Moteco TIVE GOODWILL (721) 85 - 85 - (806) - (806) - OF INVESTMENTS 8,920 533 - 59 90 145 226 245 249 324 338 1,874 4,837 29 ), negative goodwil Goodwill and in associates Investments goodwill Goodwill andnegative 12. table December 31,2002 of theGroupasat Investments inassociates 12. table Note Note Note Note 8 9 .1 .1 12. 12. 9 8 page No page . . ] ]
59 Annual Report 2002 Svyazinvest All associates except for those specially mentioned otherwise are incorporated in Russia and have a balance sheet date of December 31, 2002. Investments in associates are re flected under the equity method. In April 2002 the Group obtained control over Westelcom, Delta Telecom and YUST (see Note 4), therefore the Group ceased to account for Westelcom, Delta Telecom and YUST using the equity method. The Group owns 45.5% of shares of OAO Moscow Cellular Communications ("MCC"), mobile services provider in Moscow city and Moscow region of Russia, of which Rostele com and RTDC own 23.5% and 22%, respectively. Subsequent to December 31, 2002 Rostelecom sold its interest in MCC to Sky Link (see Note 33). As at December 31, 2002 the Group determined that recoverable amount of investment in MCC increased due to beginning of CDMA network development and reversed impairment loss of 55 recog nised in prior periods and included this amount in "Income from associates". As at December 31, 2002 the Group owns 30% of SCS 900 (indirectly via Sibirtele com), a mobile services provider in Novosibirsk region of Russia. Subsequent to Decem ber 31, 2002 the Group approved the sale of its share in SCS 900 (See Note 33). As at December 31, 2002 the Group owns 51% of Stavtelesot, a mobile services provider in Stavropol region of Russia, of which 10% are owned by STC and 41% by OAO Stavtele com ("Stavtelecom"), a 51% subsidiary of STC. Subsequent to December 31, 2002 the Group sold its 41% and 10% interests in Stavtelesot. The Group accounted for the 41% share in Stavtelesot using equity method. Management estimated the fair value of its 10% interest in Stavtelesot based on the sale proceeds subsequent to December 31, 2002 (see Note 33). The Group owns 51% of the ordinary shares of ZAO GlobalTel ("GlobalTel"). GlobalTel was created in 1996 to provide access to a US based global mobile satellite telephone network. Since the time of its launch, the global satellite network has experienced tech nical problems and low subscriber interest, as the result of which GlobalTel has only recently developed its operations beyond the development stage. The US owner of the satellite network also owns the remaining 49% of GlobalTel. The charter of GlobalTel, its by laws and the way GlobalTel historically conducted its operations provide for sub stantive participation of both shareholders in the economic activities of GlobalTel. The minority shareholder has effective veto rights that would prevent the Group from causing GlobalTel to take an action that is significant in the ordinary course of its business. Be cause effective control of GlobalTel does not rest with the Group, management accounts for the investment in GlobalTel under the equity method. The Group did not recognize its share in losses of GlobalTel in 2002 as the accumulated share in losses of GlobalTel ex ceeded the investment of the Group in GlobalTel valued at zero as at December 31, 2002. Loans and other accounts receivable from GlobalTel are also written off. Any receipts from GlobalTel are recognized as income in the period they are received. The carrying amount of investments in associates in the accompanying consolidated fi nancial statements is equal to the Group's share of underlying equity in the net assets of investee companies, except for investments in Golden Telecom, Inc. ("Golden Telecom"). The initial investment in Golden Telecom was valued at its market value (see Note 24). Management believes that the Group has the ability to exercise significant influence on the financial and operating activities of Golden Telecom, through representation on its Board of Directors. Therefore, investments into Golden Telecom are accounted for using the equity method. Accounting policies of associates may not comply with accounting policies used by the Group in preparation of the accompanying consolidated financial statements. In the opin ion of management, with the exception of MGTS, differences in accounting policies of associates do not materially affect the identification of the Group's share in income of associates. The financial statements of MGTS are prepared in accordance with US gen erally accepted accounting principles and may differ materially from the accounting pol icies used by the Group.
As discussed in Note 1, the principal activity of RTC Leasing and RusLeasingSvyaz is the leas Note 12.10.] ing of equipment to telecommunication companies. In prior years, the Group was a principal Lease lessee of such equipment. During 2002 RTC Leasing concluded significant number of new agree ments with companies, other than companies of the Group, including MGTS and OAO Megafon receivables ("Megafon"), an associate of Telecominvest.
page No 60 balance sheet(see isincludedinAccounts portion receivables oflease Current intheaccompanying receivable At are comprised December31,2002lease ofthefollowing: receivables Trade atDecember 31,2002arecomprisedofthefollowing: accountsreceivable Inventories atDecember31,2002are comprisedofthefollowing: cember 31,2002: thematurity provides profile ofthefutureminimumleasepaymentsasatDe The tablebelow The Group identified trade receivables by the following majorcustomergroups: bythefollowing The Groupidentifiedtradereceivables Total tradeaccountsreceivable,net Less provisionfordoubtfulaccounts portion ofobligationsleaseCurrent receivable Trade accountsreceivable Total inventories,net Less: andobsolete items provision for unusable Goods heldforresale Spare parts,cablesandmaterials Gross investmentinleases portionofleasereceivables Current Non current portionofleasereceivables Including: Total leasereceivables Equipment purchasedforleasingpurposes Net investmentinleases Less: unearnedfinanceleaseincome Gross investmentinleases Total tradeaccountsreceivable,net Less: provision fordoubtfulaccounts customers Other corporate Foreign operators Russian operators Residential customers financedbyState Organisations Note 12 ). LESS 1YEAR THAN 751 1 5 YEARS 810 TOTAL 375 2,033 2,408 1,303 1,105 (456) 1,561 10,051 (5,327) 375 15,003 4,242 (138) 505 3,875 10,051 (5,327) 3,720 1,027 3,911 4,856 1,864 1,561 receivable Trade accounts Inventories as atDecember31,2002 by themajorcustomergroups Group’s tradereceivables 12. table as atDecember31,2002 Trade accountsreceivable 12. table as atDecember31,2002 lease payments of thefutureminimum The maturityprofile 12. table as atDecember31,2002 Lease receivables 12. table as atDecember31,2002 Inventories 12. table Note Note Note 12 12 10 10 11 .2 .1 .2 .1 .1 12. 12. 12 11 page No page No . . ] ]
61 Annual Report 2002 Svyazinvest Trade accounts receivable, net of provision for doubtful accounts, include the amount of 1,027 due from foreign telecommunication operators. The receivables are denominated in foreign currencies and are principally represented by SDRs and US Dollars. At December 31, 2002 the carrying value of trade accounts receivable was equal to their fair value. The Group issue invoices to the governmental and corporate customers on a monthly basis. For residential customers the companies of the Group send monthly payment requests and substan tially rely upon the customers' ability to remit payments in accordance with the received pay ment requests. All charges to customers are based on tariffs, denominated in Roubles, effective in the period calls were made. In limited circumstances, the Group charged and collected pen alties for the delays in payments and has been able to obtain certain payments through the Arbitrage Court. In order to further reduce a portion of the risk associated with the customers non payments, in certain cases the Group has negotiated the reimbursements made by goods and services that are utilised in carrying out its non core business.
Other current assets at December 31, 2002 are comprised of the following: Note 12.13.] Other current assets Prepayments and advances 1,539 VAT recoverable 3,536 Settlements with other debtors 499 Other taxes prepaid 2,402 Notes receivable 618 table 12.13.1 Income taxes prepayments 438 Other current assets Receivables from employees as at December 31, 2002 289 Other 1,273 Less: provision for other current assets (448) Total other current assets, net 10,146
Notes receivable represent interest and non interest bearing promissory notes received from subscribers in settlement for telephony services. At December 31, 2002 the carrying value of other receivables and notes receivable was equal to their fair value.
Note 12.14.] Short term investments are comprised of the following as at December 31, 2002: Short term investments VEB bonds (USD denominated) 197 table 12.14.1 Eurobonds (USD denominated) 127 Short term investments Liquid bills of exchange as at December 31, 2002 2,085 Other 574 Total short term investments 2,983
Fair value of investments traded on active markets is based on the market quotes for such investments. Fair value of investments that are not traded on active markets is based on esti mated discounted future cash flows. The discount rate is identified individually for each com pany and is based on the weighted average cost of capital. Transactions with financial instruments are recognized using the settlement date accounting. Assets are recognized on the day they are transferred to the Group and derecognised on the day that they are transferred from the Group. Vnesheconombank (VEB) bonds are bearer securities guaranteed by the Ministry of Finance of the Russian Federation ("MinFin") and are commonly referred to as "MinFin Bonds". The bonds carry an annual coupon interest rate of 3%. Vnesheconombank bonds are stated at market value based on quotations obtained from the over the counter market.
page No 62 the accompanyingfinancial statements. in todisclose anamountforthedistributablereserves notbeappropriate ment believes itwould lations thereforemanage dealingwiththedistribution rightsareopentolegal interpretation, was statutory reportingforms net profit. For inthe annual 2002,the statutory netincomeoftheGroupcompaniesasreported other appropriations. Russian legislation year identifiesthebasisofdistribution asthecurrent The statutoryaccountingreportsoftheGroupcompaniesare basisofprofitdistribution and Distributions year endingDecember31,2003. forthe infinancialstatements andwillbereflected thebalancesheetdate after declared were asatDecember31,2002sincethey notaccruedforinthe financial statements dends were dividends of At theAnnual General MeetingofshareholdersheldinJune2003,theapproved fortheyearendedDecember31,2002. financial statements idated Dividends fortheyearendedDecember31,2001amountingto Dividends 3.1 million include currencies deposits depositsinUSDollarsof inforeign Short term behalf ofproviders ofloans totheGroup. equivalent of includesamountsheldinUSDollarsof currencies inforeign Cash inbankdenominated as afinancial income. financial instrumentprimarily forthepurposeofreceiving 17.5% Group planstosellduring oneyear. intherange Thebillsofexchangebearinterest from panies maturing within availablefundsintobillsofexchangeissuedbyvariousThe Group Russian investstemporarily com as follows: each withanominalhistoricvalueofoneRussian Rouble pershare. Detailsofshare capitalare The totalhistoric sharecapital valuesubscribed,issuedandfullypaidconsists ofordinary shares, Share capital assetsatDecember31,2002arecomprisedOther current ofthefollowing: Total outstandingsharecapital Ordinary shares Total cashandequivalents ofcreditandothercashequivalents Letters Time depositwith theCentralBankofRussia with theCentralBankofRussiaObligatory reserves accountwiththeCentralCurrent BankofRussia currencies deposits–inforeign Short term deposits–Roubles Short term currencies Cash inbank–foreign Cash inbank–Roubles hand Cash on and are denominated inRoubles andare TheGroupusesbillsofexchange denominated currencies. andinforeign US Dollars. 0.002562 Roubles 18.7 million 12 months after the balance sheet date orwith nofixedmaturity, thebalancesheetdate months after whichthe USDollarsandcontainsamountsof 303 perordinary shareasatJune2002totalling . However, thislegislation andotherstatutorylawregu AUTHORISED ISSUED AND NUMBER OFSHARES 19,518,337,220 19,518,337,220 120 35 were accruedintheconsol were CURRENT ATCURRENT DEC NOMINAL VALUE (INROUBLES held in escrow accountson heldinescrow 98,302 98,302 99 50 6,375 533 355 171 433 134 1,793 596 2,289 71 , equivalentof EMBER 31,2002) . Thesedivi 5.5% 593 to , equivalents Cash andcash Shareholders' equity as atDecember31,2002 Cash andcashequivalents 12. table Share capital 12. table Note Note Note Note 15 16 .1 .1 12. 12. 16 15 page No page . . ] ]
63 Annual Report 2002 Svyazinvest Note 12.17.] Short term borrowings at December 31, 2002 are comprised of the following: SHORT TERM BORROWINGS CURRENCY EFFECTIVE INTEREST AMOUNT Borrowings RATE, % Bills of exchange and promissory notes - 250 Bonds 17-22 2,027 Bank loans Sberbank RUR 12-25 2,170 UralSib RUR 19.5-21.5 300 table 12.17.1 Promstroybank RUR 16-23 287 Alfa Bank RUR, EUR Short term borrowings 12.5-22 278 as at December 31, 2002 Vneshtorgbank RUR 21 181 Bank of Moscow RUR 18 170 Other Various 2,756 Total bank loans 6,142 Vendor financing Alcatel EUR 4.5-12 156 Ericsson Nicola Tesla USD 8 101 Other Various 201 Total vendor financing 458 Loans from regional authorities 3 Total short term borrowings 8,880 Long term borrowings at December 31, 2002 are comprised of the following:
table 12.17.2 LONG TERM BORROWINGS CURRENCY EFFECTIVE INTEREST AMOUNT RATE, % Long term borrowings as at December 31, 2002 Bills of exchange and promissory notes - 185 Bonds 17.5-18 1,934 Bank loans Vnesheconombank EUR Plafond-C+2% 2,814 Vnesheconombank JPY 3 3,089 Sberbank RUR, EUR 18-20 5,187 Vneshtorgbank USD 9 804 Alfa Bank USD 7-8 767 ING Bank Eurasia USD Libor+6% 264 National Reserve Bank EUR 10 237 National Reserve Bank USD 12.5-27 569 Incombank EUR Fibor+6.25% 221 GUTA Bank RUR 19-25 197 London Forfeiting Company PLC EUR 4.5-6.5 183 KBC Bank EUR 5.94 142 Dresdner Bank EUR 4.5-6.5 135 Other Various 530 Total bank loans 15,139 Vendor financing Sumitomo USD Libor+3.2% 1,110 Siemens EUR 6 642 Alcatel EUR 6.6-12 415 Iskratel USD, EUR 6-10 315 Ericsson Nicola Tesla USD 8 149 Centre for economic development USD 7 125 Ericsson USD 8 113 Other Various 3,056 Total vendor financing 5,925 Restructured obligations to the subscribers 205 on commercial instalment of telephones Loans from regional authorities 134 Less: short term portion of long term (11,704) borrowings Total long term borrowings 11,818 page No 64 Borrowings are asfollows: summarisedbycurrency Borrowings also certainoftheseobligations. guarantees c) b) In August issued 2002,Uralsvyazinform Long term bonds accompanying consolidated balancesheetasatDecember31,2002. annually. Thebondsprincipalamountof onbondsis interest inNovember2003asapproved bytheBoardexercisable ofDirectorsRTC Leasing. Annual each andsold thematpar. Thebondsmature inNovember2004withearlyredemptionoption 21 22% bytheCentreTelecom isdetermined rate Coupon board interest to ofdirectors,andamounted the value of In October 2001CentreTelecom issued Short term bonds below: are agreements presented Thedetailsofthemajorborrowing maturity profile havethefollowing asatDecember31,2002: borrowings Long term a) Details ofsignificantsecured loan balancesaresummarisedbelow: sued byUralsvyazinform intheamountof bondsis asatDecember31, 2002.As atDecember31,2002Svyazinvest owned short term no control overtheprocess ofbonds presentationfor repayment,theliabilities are classified as totheUralsvyazinform forsettlementbyAugustpresented has 11,2003.AsUralsvyazinform placed anirrevocable offertoretire the bondson August 18,2003intheeventbonds were maturityon AugustThe bondshaveastated 6,2005.On August 19,2002,Uralsvyazinform each. Bondshave In November2002RTC Leasing issued duringtheconsolidation. eliminated were bondsissuedbyCentreTelecomber 31,2002Svyazinvest owned intheamountof Total 2007 andthereafter 2006 2005 2004 2003 Overdue Total borrowings Other Japanese Yens Euros Dollars States United Russian Roubles Long term suppliercredits amountingto Long term Bankloans amountingto Billsofexchangeandpromissory amountingto notes 95 th day from the date of issue; interest perothercouponsarepayable ofissue;interest every th dayfromthedate during2002.ThebondsmatureonNovember18,2003,i.e.in 1,000 Roubles 12 18% coupons paideach coupons each.Bondshave and 8,734 16% THAN VENDOR FINANCING BORROWINGS OTHER are securedbyequipment. forthefirstandsecondyears,respectively, payable semi 6,365 515 77 731 2,032 2,383 627 600,000 1,000,000 90 1,500,000 5 MILLION ROUBLES 11 1,485 coupons.Payments against1stcouponaremade on days having an annualised interest rate at dayshavinganannualisedinterest 875 , which were eliminated duringtheconsolidation. eliminated , whichwere 32,402 12 3,082 6,007 4,721 18,580 interest bearing bonds, interest bearing are securedbyequipment.TheGovernment is included in short term borrowings inthe borrowings isincludedinshort term coupon bonds with coupon parvalue bondswithparvalueof VENDOR FINANCING 65 are securedbyequipment. 17,157 1,073 635 1,944 4,811 7,669 1,025 CURRENCY, MILLION AMOUNT INSPECIFIED 732 01 days.AsatDecem series, withapar series, - 11,573 181 149 18,580 1,000 Roubles 1,000 Roubles TOTAL 182 23,522 1,588 712 2,675 6,843 10,052 1,652 73 17.5% , which nd day. . table 12. table as atDecember31,2002 by currency Borrowings summarised 12. table as atDecember31,2002 of long term borrowings Maturity profile 17 17 .4 .3 page No page
65 Annual Report 2002 Svyazinvest In June 2002 CentreTelecom issued 600,000 interest bearing bonds, 02 series, with a par value of 1,000 Roubles each. Bonds have 6 coupons. Payments against 1st coupon are made on the 95th day from the date of issue; interest per other coupons are payable every 182nd day. Coupons bear interest: 20% (1st and 2nd coupons); 18% (3rd and 4th coupons); 16% (5th and 6th coupons). The bonds mature on April 21, 2005, i.e. in 1031 days. In March 2002 NWT issued 300,000 non convertible bonds with a par value of 1,000 Roubles each. The bonds were placed at a discount of 3.5%. The maturity date is April 10, 2004. Interest is payable in July 2002 at 20% p.a., in October 2002 at 19% p.a., in April 2003 at 18% p.a., in October 2003 and April 2004 at 16% p.a. As at December 31, 2002 Svyazinvest owned bonds issued by NWT in the amount of 5, which were eliminated during the consolidation.
Vnesheconombank During 1994 1997 the MinFin granted the companies of the Group long term financing for pur chases of telecommunications equipment from various foreign vendors. Vnesheconombank has been acting as an agent of the MinFin on collection of the payments from the Group. The liabilities were initially denominated in Deutsche Marks and later converted into Euros after the introduc tion of the Euro. Interest is accrued at a floating rate Plafond C (which in 2002 was approxi mately 6.5%) plus 2%. Following the 1998 crisis and significant appreciation of the Deutsche Mark against the Rouble, payments under some of these contracts were suspended, and approxi mately 640 of the total liability to Vnesheconombank included in the current portion of long term loans in the accompanying consolidated balance sheet as at December 31, 2002, became over due. Subsequent to December 31, 2002 the Group restructured this liability (see Note 33). As at December 31, 2002 amount payable to Vnesheconombank included 11,601 million Japa nese Yen (3,089), related to a credit agreement between Rostelecom and Vnesheconombank com menced in 1994. It was repayable in equal annual instalments of 2,105 million Japanese Yen, with a final payment due not later than October 2001. The Government decree provides for the possibility of restructuring of Government's debts administered by Vnesheconombank over a 10 year period at an interest rate of 3% per annum. In accordance with the provisions of the decree, in 2001 the Group entered into negotiations with respect to restructuring this credit agreement on conventional terms. As at December 31, 2002 the Group was in technical default on payments of principal and interest. In 2002 the Group repaid several other loans totalling 1,909 which contained cross default provisions and therefore were also technically defaulted. Subsequent to the balance sheet date the Group restructured this credit agreement (see Note 33). The entire amount of the loan was classified as current obligation. As at December 31, 2002 the Group does not have loans, which contain cross default provisions.
Incombank On February 25, 1998 STC entered into a loan agreement with Incombank for the amount of 12 million DEM repayable by February 25, 2003. On August 21, 1998 the maturity was extended until July 20, 2004. Equipment for the amount of approximately 400, investments in 10% of shares in Stavtelesot and in 51% of shares in Stavtelecom were pledged as collateral for this loan. In accordance with the initial terms of the agreement, interest was accrued at six months DEM FIBOR plus 6.25%. Following the economic crisis of 1998 and the substantial increase of exchange rate of DEM to Ruble, in 1999 the Group requested cancellation of the loan agreement and changing the terms of agreement so that the payments should be executed in Roubles translated at exchange rate as at the date of receipt of loan. As at December 31, 2002 the amount to be repaid and terms of the repayment were still in dispute. The loan is classified in the accompanying consolidated balance sheet in accordance with its initial repayment schedule. Subsequent to December 31, 2002 the Group entered into agreement with debt holder to repay the loan partially in cash and in Stavtelesot shares. Management believes that carrying amount of liability in the accompanying consolidated balance sheet approximates the amount that will be repaid upon final resolution of the dispute (see Note 33).
Early debt extinguishments During 2002 the Group early extinguished loans payable to Telecom Italia (337) and Merrill Lynch (612), both agreements contained cross default provisions. There were no gains or losses recognized on these extinguishments.
page No 66 following: Trade accountspayable comprisedofthe andaccruedexpensesasatDecember31,2002are lease paymentsare asfollows: lease paymentsunderfinancelease contracts togetherwith thepresent valueofthenetminimum The grouphasfinanceleases contractsofplantandmachinery. forvarious items Future minimum ofoperations. statement ting income,net"intheconsolidated 31.6 million During October November 2002theGroupearlyextinguishedloan payabletoSiemensof Taxes andsocial securitypayableasatDecember 31,2002are comprised ofthefollowing: bySDRandUSDollars. represented principally currencies, Trade accountspayable inforeign includeamountstotalling to1,832,whichare denominated Present valueofminimumleasepayments Less amountsrepresenting financecharges Total minimumlease payments oneyearbutnotmore thanfiveyears After Within oneyear Total taxes andsocial securitypayable Provision for taxcontingencies Other Property tax Social security andpayroll taxes Sales tax Road users'tax Income tax VAT payable Total accountspayableandaccruedexpenses Other payables Amounts payable tocustomers Research and developmentfundlevy payabletoGovernment Wages andotheramountspayabletoemployees Settlements withsuppliers andcontractors Accrued expenses Advances fromsubscribers received Trade accountspayable EUR ( EUR 986 ). Gain from the transaction of ). Gainfromthetransaction MINIMUM PAYMENTS 230 2,036 (302) 2,338 826 1,512 isincluded into"Othernon opera OF PAYMENTS PRESENT VALUE 6,373 40 522 348 248 249 609 694 3,663 18,780 1,663 341 127 1,641 4,732 2,145 2,454 5,677 2,036 1,120 916 payables Finance lease payable Taxes andsocial security and accruedexpenses Accounts payable as atDecember31,2002 under financeleasecontracts Future minimumleasepayments 12. table as atDecember31,2002 security payable Taxes andsocial 12. table as atDecember31,2002 and accruedexpenses Trade accountspayable 12. table Note Note Note Note Note 18 20 19 .1 .1 .1 12. 12. 12. 20 19 18 page No page . . . ] ] ]
67 Annual Report 2002 Svyazinvest In 2002 the Group made various payments to employees in addition to salary. These payments Note 12.21.] generally represent financial aid to the Group's disabled employees and bonuses to employees, which had made no breaches of internal policies during the last fiscal year. Such benefits were Pension plans and included in salary, benefits, salary taxes and other social expenditures in the accompanying employee benefits consolidated statement of operations for the year ended December 31, 2002. In addition to statutory pension benefits, the Group also contributes to defined benefit plans, which cover most of its employees. The plans provide for payments of retirement benefits start ing from statutory retirement age which is currently 55 for women and 60 for men. The benefits are based on a formula recognising minimal statutory pension level, length of service, both in the Group and in the telecommunications industry as well as final average earnings and posi tion in the Group. The benefits are not vested and are subject to the employee retiring from the Company on or after the above mentioned respective ages. The Group makes contributions to the pension funds in the amounts representing fixed percentage of participating employees' salaries or in amounts fixed in the agreements with pension funds, depending on the nature of each particular agreement. As described in Note 3, the Group has not made an actuarial determination of the present value of its benefit obligation under these arrangements to allow it to record its obligation and plan asset and make the required disclosures under IAS 19 – Employee Benefits, as at December 31, 2002.
Note 12.22.] Revenues for the year ended December 31, 2002 are comprised of the following: Revenues Revenues from Subscribers Domestic long distance calls 35,935 Monthly subscription fees for local services 21,383 International calls 11,913 Installation charges 7,096 Radio and television broadcasting 2,032 table 12.22.1 Telegraph services 1,497 Revenues Mobile telecommunications services 7,957 for the year ended December 31, 2002 Private circuits and leased lines 2,568 Data communications 1,088 Timed charges for local calls 3,467 Total revenues from Subscribers 94,936 Revenues from Operators Revenues from Foreign Operators 5,100 Revenues from National Telecommunications Operators 4,397 Total revenues from Operators 9,497 Other revenues 8,588 Total revenues 113,021 For the year ended December 31, 2002 the Group identified revenues by the following major customer groups:
table 12.22.2 Group’s revenues by the major customer Residential 52,763 groups for the year ended December 31, 2002 Corporate 48,408 Organisations financed by the State 11,850 Total by customer group 113,021
Corporate customers include enterprises controlled by the State.
page No 68 an entity owned byRTDC, party.an entityowned to tounrelated amounted Incomefrom thetransaction 2002theGroup soldIn September for full amountinDecember2002and ( US Dollarspromissory note completed inMarchcompleted 2002for oftheGroup'sment forthesale On December28,2001STC andOAO Mobile TeleSystems intopreliminary agree ("MTS")entered amountoftheinvestmentinGoldenTelecomcarrying asatDecember31,2002. income tax)"intheyearendedDecember31,2002.Theremaining partof of able netassetsacquiredinamountof The excessofpurchase pricepaidforsharesofGoldenTelecom overthefairvalueofidentifi Therefore, investmentsintoGoldenTelecom forusingtheequity method. are accounted cial andoperating ofGoldenTelecom, activities through Management believes on thefinan thattheGroup hastheability toexercise significantinfluence totheBoardtatives oftheGroup havebeenelected ofDirectorsGoldenTelecom. theGrouprecognizedagainof nection withthissale 5,2002.Transaction to tobeSeptember costsamounted which wasdetermined ued attheaverage themeasurementdate, ofNASDAQ daysbefore two andafter closingquotes Ordinary sharesofGoldenTelecom date). average marketquotes atthetransaction val were lars ( com. Purchase consideration paidbyGoldenTelecom comprised ofcash In September 2002 the Group completed a sale ofits asale 2002 theGroupcompleted In September Other operating ofthefollowing: expensesfortheyearendedDecember31,2002are comprised 8 Loss ofinvestments fromimpairment Unrealised gainon investments,net available for sale Loss ofotherinvestments from disposal ofinvestmentinDontelecom Income fromdisposal ofinvestmentinKubanIncome fromdisposal GSM ofinvestmentinSovintel Income fromdisposal Total otheroperatingexpenses Other Repair ofadministrative premises Expenses withrespect toGroupmerger Fireguards andsecurity Audit andconsultancy fees Mailing Transportation Payments toGossvyaznadzor Education Representative andbusinesstrips expenses Advertising Rent (excludingchannelrent) Cost ofgoodssold Income fromfinancialinvestments,net years. Amortisation charge years.Amortisation of 335 at the exchange rate as at the date of transaction), non interest bearing non interest oftransaction), asatthedate attheexchangerate 1,527 33.6 million 24% attheex 32 4,024,067 stakeinZAO Kuban GSM("Kuban was GSM").Thesale 762 isincludedin"Incomefromassociates (excludingrelated 246 wasidentifiedandshallbeamortizedovertheperiod US Dollars (approximately USDollars(approximately its change rate as at the date of transaction) settledin oftransaction) asatthedate change rate 33.3% ordinarysharesofGoldenTelecom ( interest inordinary ofDontelecom, shares interest 1,733 50% representation on i on representation interest in Sovintel toGoldenTele inSovintel interest . In November 2002 two represen . InNovember2002two 1,043 millionRoubles ts Board of Directors. 10 million 730 13,374 5,830 61 694 923 818 155 348 625 135 351 506 1,589 1,339 2,771 (370) 360 (93) 116 1,025 1,733 isincludedin 172 46 million 1,786 . Incon USDol 116 . at ). expenses Other operating investments Income fromfinancial December 31,2002 for theyearended Other operatingexpenses 12. table ended December31,2002 investments fortheyear Income fromfinancial 12. table Note Note Note Note 23 24 .1 .1 12. 12. 24 23 page No page . . ] ]
69 Annual Report 2002 Svyazinvest Note 12.25.] Other non operating Other income 1,010 income and expenses Charitable contributions (23) Other assets disposal gain 174 Fair value of contributions received 103 Gain on early extinguishments of loans payable 230 table 12.25.1 Fines and penalties paid (104) Other non operating Fines and penalties received income and expenses 5 for the year ended Other expenses (922) December 31, 2002 Other non operating income (net) 473 In October 2002 the Group received telecommunication equipment from the company, which is not a related party, free of charge. Fair value of the equipment was estimated as equal to 103. The Group recognized fair value of the contribution received in other non operating income, since the contribution was unconditional and the equipment could be utilized to gen erate future revenue.
Note 12.26.] The income tax charge for the year ended December 31, 2002 is comprised of the following: Income taxes Current income tax charge (6,716) table 12.26.1 Deferred tax benefit The income tax charge 124 for the year ended Income tax charge for the year (6,592) December 31, 2002 The reconciliation of the theoretical amount that would arise using the Russian statutory rate (24% for 2002) to the total actual income tax were as follows for the year ended December 31, 2002:
table 12.26.2 Theoretical tax charge at statutory rate of 24% (3,094) Tax rate reconciliation Non deductible expenses (1,046) for the year ended December 31, 2002 Non taxable income 47 Non temporary elements of monetary loss (3,478) Other non temporary effects (765) Inflation effect on deferred tax balance at the beginning of the year 1,744 Total tax charge for the year (6,592)
Deferred income taxes Differences between IFRS and statutory taxation and reporting regulations give rise to certain temporary differences between the carrying value of certain assets and liabilities for financial reporting purposes and for profits tax purposes. The tax effect of these temporary differences is recorded at the rate of 24% as at December 31, 2002:
page No 70 idated financial statements asatDecember31, 2002 (seealso financial statements idated tothedefer difference, whichisthemajorcontributor taxabletory accountingregulations. inturngivesrise toaverylarge Thisdifference temporary statu inaccordance with in accordance with tothetaxbasisvaluecomputed IFRS,ascompared valueoftheproperty,significant increase inthecarrying plantandequipmentbalancecalculated asatDecember31,2002.Thishasgivenrisetoavery to reflect constantpurchasing power withDecember 31,2002.Inaccordance IFRS,property, plantandequipmenthasbeenindexed valueoftheGroup's property,December 31,2002isthecarrying plantandequipmentasat taxliabilityThe mostsignificantfactorcontributing tothedeferred inthebalancesheetasat taxableentity.on thesame fiscalauthority incometaxliabilities totheincometaxesleviedbysame and deferred relate taxliabilities, deferred taxassetsagainstcurrent incometaxassets andthedeferred current taxassetsandliabilitiesDeferred areoffsetwhenthereisalegally righttosetoff enforceable since the reporting date andbefore thecompletion ofthesefinancialstatements. since thereportingdate involvingordinary ordinaryshares sharesor potential There havebeennoothertransactions dilutivesharesoutstanding. The Companyhasnopotential standing duringtheyear. averagenumberofordinaryshares out tributable toordinaryshareholdersbytheweighted bydividingthenetprofit fortheyearat earningspersharearecalculated Basic anddiluted Earnings share,Roubles (basicanddiluted) perordinary EPS average shares numberofordinary forbasicanddiluted Weighted Net incomeattributable EPS toordinary shareholdersforbasicanddiluted Net deferredtaxliability taxliability Gross deferred Other Investment valuationdifference Accounts receivable Inventories Property, plantandequipment Tax differences) effectsoffuturetaxliabilityitems(temporary taxasset Gross deferred Other Tax forward losscarry Investment valuationdifference Inventories Accounts receivable Accounts payable Property, plantandequipment Tax differences): effectsoffuturetaxdeductibleitems(temporary red taxliability intheseconsol asrecorded Note 6 ). 0.08 19,518,337,220 1,548 (20,087) (28,437) (1,782) (1,840) (260) (58) (24,497) 8,350 229 166 23 38 333 887 6,674 Earnings pershare as atDecember31,2002 differences temporary The taxeffectof 12. table earnings pershare Basic anddiluted 12. table Note Note 27 26 .1 .3 12. page No page No 27 . ] 71 Annual Report 2002 Svyazinvest Fair value Note 12.28.] Fair value is the amount at which a financial instrument could be exchanged in a current trans Fair value of financial action between willing parties, other than a forced liquidation, and is best evidenced by a quot instruments and risk ed market price. management For monetary assets and liabilities, the carrying amounts approximate their fair value and balance sheet items denominated in foreign currencies have been translated at appropriate period and exchange rates. The carrying amounts of cash and cash equivalents approximate their respective fair values due to their short term nature and negligible credit losses.
Interest rate risk Interest rate risk mainly relates to floating rate debt denominated primarily in US Dollars and Euros. At December 31, 2002, approximately 12% of the Group's total outstanding borrow ings carried floating interest rates. At December 31, 2002 the Group had outstanding borrowings of 31,936 of which approxi mately 3,698 bore interest at floating rates of interest. The interest rate on the Group's float ing rate debt is determined principally by reference to London inter bank offered rate (LIBOR), Frankfurt inter bank offered rate (FIBOR), Euro inter bank offered rate (EURIBOR) and Ger man export finance rate (Plafond C). The Group does not use financial instruments, such as interest rate swaps or forward rate agree ments, to manage this risk.
Foreign exchange risk Exchange rate risk relates to the Group's foreign currency indebtedness and, to a lesser extent, its foreign currency denominated receivables and foreign currency denominated revenues and costs. At December 31, 2002 13,386 of total outstanding borrowings were denominated in foreign currencies. Possible devaluation of the Russian Rouble will both increase the Group's effective cost of borrowings and make it more difficult to increase or re finance existing bor rowings. The Group does not use financial instruments, such as foreign exchange forward con tracts, foreign currency options, interest rate swaps or forward rate agreements, to manage this risk. The consolidated financial statements are denominated in Russian Roubles. However, approx imately 5% of the Group's revenues are denominated in currencies other than the Russian Rou ble, primarily the US Dollar and SDR. In addition, approximately 6% of the Group's costs are denominated in currencies other than the Russian Rouble, primarily the US Dollar and SDR. To the extent that the Group is not naturally hedged against changes in exchange rates, the Group is exposed to foreign exchange gains and losses. The Group does not engage in any active hedg ing of the foreign exchange risk arising out of its operating activities. Foreign currencies, in particular the US Dollar, play a significant role in the underlying eco nomics of many business transactions in Russia. The following table summarises the exchange rate of the Rouble to 1 US Dollar:
table 12.28.1 AS AT DECEMBER 31 EXCHANGE RATE Exchange rate of the Rouble to 1 US Dollar: 2002 31.78 2001 30.14 2000 28.16
The Central Bank of Russia has established strict currency control regulations designed to promote the commercial utilisation of the Rouble. Such regulations place restrictions on the conversion of Roubles into hard currencies and establish requirements for conversion of hard currency sales to Roubles. The Group has exchange rate exposure primarily with respect to indebtedness denominated in non rouble currencies. Of the Group's indebtedness, 13,387 is denominated in foreign curren cies, including 4,152 in US Dollars; 3,082 in Japanese Yens and 6,141 in Euros and other foreign currencies. During the period from January 1, 2003 to August 31, 2003 the Russian Rouble has increased in value as compared to the US Dollars by approximately 4%, has increased in value as com pared to Japanese Yens by approximately 2%, and has declined in value as compared to the
page No 72 vendors andbankborrowings. fromequipment that suchexpenditureswillbefinancedprincipally throughcredits received Managementbelieves undercontractual arrangements. and expansion hadbeencommitted and Ministry of Finance. Instances of inconsistent opinionsare notunusual. and MinistryofFinance.Instances ofinconsistent is subjecttotheopinions ofthe local,regionalandnational taxauthorities, the Central Bank interpretation andtheir The variouslegislationandregulations arenotalwaysclearly written orchanged. manyaspectsofthe newtaxcodewillbeinterpreted how unknown from thepriorlaw. Dueto the lackoftimeandexamination offindingsbytaxauthorities itis During 2002,theRussian Federation anewtaxcodewith significantmodifications enacted economy.ket oriented fromcontinue toevolveasthegovernmentmanagestransformation acommand to amar Legislation inRussia andregulations transactions regarding currency taxation andforeign Tax lawsandregulations economic reforms. to supervisory, bythegovernment'scontinuedactionswithregard legal,and cantly impacted outside ofRussia. Thecontinued successandstability oftheRussian economywillbesignifi controls tobeilliquid ofcurrency whichcausethenationalcurrency kets, andtheexistence lackofliquidity historicinflation, inthecapitalmar in thepastincludedhigherthannormal withthatofamarketintransition. have Thesecharacteristics display certaintraits consistent The Russian economywhiledeemedto General contingencies At December31,2002capitalexpenditures amountingto Capital commitments December 31,2002: Future asat minimumrentalspayable operating undernon cancellable leases areasfollows Operating leasecommitments–Groupaslessee ofthebanksinwhichsuchdepositsareworthiness made. its availablecashtoavarietyofRussian thecredit banksandmanagementperiodicallyreviews ance isnotofferedtobanksoperatinginRussia. To managethecredit risk, theGroupallocates Russian owned The Groupdepositsavailablecashwithseveral non state banks.Deposit insur tomers andotherdebtors. Group's large customerbaseandongoing procedures tomonitor ofcus thecredit worthiness Thecredit risktrade andotherreceivables. associated duetothe withtheseassetsislimited Financial instrumentsthatcouldexposetheGroup toconcentrations ofcredit risk aremainly cember 31,2002. lieves atDe therearenosignificantunprovided lossesrelatingtotheseorotherreceivables bypolitical isinfluenced andeconomic factors.Managementbe lection ofthesereceivables Col andotherpublicorganisations. A portion isfromState oftheGroup'saccountsreceivable Credit risk fall inthefuture. Considering instability oftheeconomicsituation inRussia thevalueofRussian Rouble may Euro byless than Total More thanfiveyears one yearbutnotmorethanfiveyears After Within one year 1% . These fluctuations decreasedtheRouble. Thesefluctuations by valueoftheborrowings be ofmarketstatusbeginningin2002,continuesto 19,800 relating to network upgrades relatingtonetwork 45 12 21 12 4,781 . Commitments Contingencies as atDecember31,2002 operating leases payable undernon cancellable Future minimumrentals 12. table Note Note Note Note 29 .1 12. 12. 30 29 page No page . . ] ]
73 Annual Report 2002 Svyazinvest The current regime of penalties and interest related to reported and discovered violations of Rus sia's laws, decrees and related regulations are severe. Interest and fines are levied when an un derstatement of tax liability is discovered. As a result, penalties and interest can result in amounts that are multiples of any unreported taxes. The Group believes that it has paid or accrued all taxes that are applicable. Where practice concerning the provision of taxes was unclear, the Group has accrued tax liabilities based on management's best estimate. The Group's policy is to accrue for contingencies in the accounting period in which a loss is deemed probable and the amount is reasonably determinable. No such accruals have been made as at December 31, 2002. Because of the uncertainties associated with the Russia tax and legal systems, the ultimate amount of taxes, penalties and interest assessed, if any, may be in excess of the amount expensed to date and accrued as at December 31, 2002. Subsequent to December 31, 2002, the Ministry of Taxes and Levies performed comprehensive tax inspection of Rostelecom covering the periods of 1999, 2000 and 2001. As a result of this inspection the Ministry of Taxes and Levies assessed 2,488 of additional taxes, including fines and penalties payable by Rostelecom. In the opinion of the management of the Group, the tax positions taken by Rostelecom are appropriate, and Rostelecom will prevail in court. Manage ment cannot measure reliably the total amount of potential losses. Accordingly, no accrual has been made for the assessment in the accompanying consolidated statement of operations.
Telecommunications industry restructuring Potential reforms both in tariff setting procedures, including those related to the full implementa tion of per minute billing for local calls, and in the regulation of interconnections within the Group and with alternative operators, may have a significant effect on the Group's future financial posi tion and operations. There have been a number of announcements by the Government and the Company with respect to the planned restructuring of the national telecommunications sector. In its "Programme of Deve lopment of the Telecommunications Industry", presented to the Federal Government in December 2000, the MinCom has indicated that it will not contemplate a change to the Group's status as a monopoly supplier of long distance and international communications until 2005 2006 at the earliest. This position is confirmed during the negotiations related to Russia's entrance into World Trade Organisation.
New Telecom law effective from 2004 The new law "On Telecommunications", approved by Council of the Russian Federation on June 25, 2003, will be in power from beginning of 2004. It defines and provides new conditions for tele communication services rendering, such as cooperation and relationship among operators at tached to the public telecom network and significant telecom operators, government regulation of the telecommunication sector, procedures of licensing, peculiarities of telecommunication ser vices and their payment, etc. The most significant innovation is definition of universal telecommunication services and universal telecommunication operators. According to a new law, a fund for universal services is created to compensate losses of universal telecommunication operators caused by rendering of universal ser vices. All communication operators must pay dues to the fund since January 1, 2004. The law "On Telecommunications" regulates relations between subscriber and telecommunication operator as concerning payment for access to the public telecom network. Communication servic es regulated by government are pointed out. The operator must allow a subscriber to pay for services with a 6 months delay. It can cause significant increase of accounts receivable, which is presented in financial statements. In addition, new payment rules are fixed for subscribers, who have privileges approved by the government. Starting from January 1, 2005, they are required to pay for communication services in full, with subsequent compensation from the budget. The law "On Telecommunications" contains detail description of licensing procedures. It establish es new licensing authority – Federal Executive Authority in telecom sector. Necessary documen tation for obtaining licenses, timing and procedures of license granting, canceling and other li cense modifications are also described. Another innovation is that significant telecommunication operators should fix a price for access to the telecom network services and traffic run through, furnished to other operators, as well as conditions for new telecom operators connecting. All services and connection conditions must be
page No 74 verse effecton ofoperationsorthefinancialposition oftheGroup. theresults ad resolution willnothaveamaterial Management believesthattheultimate ofthesematters The Groupissubjecttoanumber ofproceedings conduct arising ofitsbusiness. outofthenormal result theseuncertainties. from donotinclude anyadjustment thatmay future resultsofoperations.Thefinancialstatements ortheresulting effect ofanysuchdevelopmentsontheCompany'sfinancial conditionsystem or whatdevelopmentsmayoccur inrespectoftheRussianManagement isunabletoestimate legal of governmentalauthorities. legislation; and judges andcourtsininterpreting judicial andadministrative legislation; guidanceoninterpreting of variousstandards (GSM,NMT, CDMA)for number ofregionsRussian Federation. Thelicensesgavetheright toprovidewireless services cellularlicensesforoperations granted ina 1995and2002theGroupcompanieswere Between any, on theresultsofoperationsorfinancialposition oftheGroup. ofchangesinthesematters licences tootheroperators. theeffects,if international At present,itisnotpossibletodetermine industry,telecommunications whichmayinclude thegranting ofadditional distanceand long competitionwithin the topromote It isalso ofpublicrecord thattheGovernmentintends amatter will besuspendedorterminated. Management hasnoreason orthatanylicences tobelievethattheselicences willnotberenewed tion. Theprincipaloperatingandsubsidiary licencesexpireinyearsrangingfrom 2005to2012. bytheMinistryofRussiancences granted Federation forCommunicationsandInformatisa The majorportionoftheGroup's revenues pursuanttoli isderivedfromoperations conducted Licences capacity atanauctionorganized byFederal ExecutiveAuthority sector. inthetelecom tions ofsuchprocedures are describedinthelaw. operators Alltelecommunication getnumbering numberingcapacity.Starting withJanuary1,2004,thegovernmentregulates Timingandcondi operators. suchfeeforsignificanttelecommunication affiliated companies.Governmentregulates rendered tootheroperators atareasonable quality andwith astobranches price thesame and tions andotheracts; dential decrees,andRussian andlocal governmental,ministerial orders,decisions, andresolu The Russian ischaracterized by legal system Litigations, claimsandassessments adverseeffectonassets couldhaveamaterial theGroup'soperation andfinancial position. insurancecoverage, thereisariskthatthelossofdestructioncertain Group obtainsadequate age arisingfromaccidentsontheGroup's propertyorrelating totheGroup'soperations.Until partyliability orthird inrespectbases, businessinterruption, ofproperty orenvironmental dam property,not maintaininsurancecoverage onasignificantpartoftheir plantandequipmentasset notyetgenerally are available.During2002,theGroupdid common inotherpartsoftheworld ofinsurance protection The Russian andmanyforms insurance industryisinadevelopingstate Insurance landbyGroup companies. regarding theuseofsuchState owned theimpactoffuture legislationby theauthorities.Managementatthistimeisunabletoestimate use oflandbyRostelecom toSvyazinvestremoved andothercompaniestransferred in1997were As fortheRTOs toSvyazinvest andothercompaniestransferred in1995,theprivileges forthe Land not havesignificanteffecton theGroup'soperations. agement believesthatuntiltheuncertaintyisresolved, suchnon accrual andnon paymentwill Man accruals forcellularlicenseshavebeenincludedintheaccompanyingfinancialstatements. insignificantreduction liability.eventual feesduewillresult ofanypotential Accordingly, no payments asatDecember31,2002.Managementisconfident thatnegotiationsconcerningthe anyinvoicesanddidnotmake standard.TheCompanyhasnotyetreceived an appropriate anoticefromtheFederal ariseuponreceiving The obligation Associations would ofOperators lion The Groupwasobligedtomakethelicense feepaymentsinthetotalamountof USDollars)foralllicenses. 2 ) conflicting local, regionalandfederalrulesregulations; 1 ) 5 10 inconsistencies between and among laws, Presi andamonglaws, between inconsistencies years from the date oflicenseregistration. yearsfromthedate 5 ) ahighdegreeofdiscretion onthepart 4 ) therelativeinexperienceof 4,333 3 ) thelackof ( 136 mil page No page
75 Annual Report 2002 Svyazinvest a) Transactions with organisations financed by the State Note 12.31.] State organisations are a significant element in the Group's customer base, purchasing services Related parties both directly through numerous authorities and indirectly through their affiliates and commer disclosures cial organisations controlled by them. Entities financed by the State are users of the Group's network. These entities lease lines for which they are charged lower tariffs, approved by the Ministry of Antimonopoly, than those charged to other customers. In addition, the Government may by law require the Group to provide certain services to its entities in connection with na tional security and the detection of crime. Other state bodies ("Budget Organisations"), such as the Ministry of Defence and entities affiliated to the Government, primarily state controlled TV and radio companies use the Group's network to carry communications traffic and to broadcast across the country. In some cases, the service is in the nature of leased lines for which the Group charges below market rates. Government subscribers (which exclude commercial organisations controlled by the state) accounted for 11,850 that is approximately 10% of service revenues for the year ended De cember 31, 2002. Amounts outstanding from Government subscribers at December 31, 2002 were 1,864. Additionally, the Government of the Russian Federation has guaranteed certain foreign curren cy interest bearing loans related to property, plant and equipment purchases of the Group com panies, primarily Rostelecom.
b) Transactions with associates
MGTS In Moscow, Rostelecom owns the international and long distance switches and provides servic es to customers through MGTS. During 2002, Rostelecom had an agreement with MGTS whereby MGTS received approximately 877 for passing Rostelecom's international and long distance traffic through the local lines owned by MGTS. As at December 31, 2002 amounts due to MGTS of 83 are included in the balance sheet as "Trade accounts payable" (see Note 19) and the related costs are included into the statement of operations as "Interconnection charges – associated companies".
Other associates During 2002 the Group entered into a number of transactions with its other associated under takings that included provision of interconnection into the common use network, telecommuni cation and other services. The Group's consolidated balance sheet as at December 31, 2002 included the following bal ances of settlements with other associates:
table 12.31.1 Balances of settlements with other associates Accounts receivable from associates 16 as at December 31, 2002 Accounts payable to associates 92
The consolidated statement of operations for 2002 included the following transactions:
table 12.31.2 Transactions with associates for the year Revenue from associates 228 ended December 31, 2002 Other operating expenses payable to associates 161
c) Kuban GSM Kuban GSM is a former associated undertaking of STC (see Note 24). In 2002, Kuban GSM remains a related party to the Company, as the General Director of STC retains a position on the Board of Directors of Kuban GSM. The Group maintains several channel rent and traffic carriage agreements with Kuban GSM. Related income amounting to 131 and expenses amount ing to 11 were included in revenue and interconnect charges, respectively, in the accompanying consolidated statement of operations for the year ended December 31, 2002.
page No 76 During theyear2002Board members: ofDirectors ofSvyazinvest ofthefollowing consisted g) than a) result in: certainactions,whichwould perform Consortium agreement.Underthisagreement signedan additional theConsortium obliged to fundRostelecom Garantiya,In May2003Rostelecom, pension non state RTC Leasing andthe Additional agreementwiththeConsortium the yearendedDecember31,2002. parties(see and its related The Grouphadnoindividualcustomers,otherthantheGovernment oftheRussian Federation by geography. oftheRussianterritory Federation, thereforetheGroupdoes notdisclose segmentinformation andrevenue located isprincipally earnedwithinthe Substantially alloftheGroup'sassetsare closure asreportablesegments. below segmentswere banking, investingandleasingservices services, customers,resultofoperationsrevenues external orassetsofmobiletelecommunication from The Groupdoes notpresent segmentreportingbybusinesslines asrequiredbyIAS 14sincethe There wasnoremuneration oftheDirectors in2002. forapproximately phone G andMobileservice acquiredfromcertainmembersofmanagementsharesRadiotele In 2002Uralsvyazinform f) withMegafon: balancesandtransactions includethefollowing statements communication equipmenttoMegafonanditssubsidiaries. TheGroup's consolidated financial Megafon isanassociated companyofTelecominvest. During2002RTC Leasing leasedtele e) cominvest: with Tele balancesandtransactions thefollowing include consolidated financial statements –Telecominvest. withitsinvestee During 2002NWThadanumberoftransactions TheGroup's d) Management Directorsremuneration Megafon Telecominvest Interest income Interest –Non Current Lease receivable Lease –Current receivable Other operatingexpenses Revenue Promissory receivable notes Accounts payable Accounts receivable Decrease ofRostelecom's grosslease paymentstoRTC Leasing bytheamountofnot less Geovanis David Geovanis Borodin A.V. Anoshkin A.V. 1,800 (incl.VAT) oftheadditionalagreement; withinthesixmonthsperiodfrom date Note 31 ) that accounted for greater than forgreater ) thataccounted Gref G.O. Golomolzin A.N. Fatikov V.P. 3.04 million US Dollars( 10% Reiman L.D. Paperin S.D. Mitrofanov S.V. 10% 103 ofits revenueduring 273 308 333 88 121 7 13 18 thresholdfordis – see Note 4 ). balance sheetdate Events afterthe Segment reporting with Megafon and transactions Balances 12. table with Telecominvest Balances andtransactions 12. table of DirectorsSvyazinvest Members oftheBoard 12. table Note Note Note 31 31 31 .4 .3 .5 12. 12. 33 32 page No page . . ] ]
77 Annual Report 2002 Svyazinvest b) Sale of RTC Leasing ordinary shares owned by Rostelecom (27.12% of total number of ordinary shares) and non state pension fund Rostelecom Garantiya (3.02% of total number of ordinary shares) for the total amount of not less than 750 within the six months period from the date of the additional agreement; c) Cancellation of all guarantees and pledges provided by Rostelecom in respect of loans payable by RTC Leasing within the twelve month period from the date of the additional agreement. In June 2003 the Board of Directors of Rostelecom approved actions included in the additional agree ment with the Consortium. In September 2003 the Board of Directors of Rostelecom approved revising the majority finance lease agreements with RTC Leasing, amendments to which were signed in October 2003, and the sale of 1,129,873 ordinary shares (27.12% of total number of ordinary shares) of RTC Leasing owned by Rostelecom for not less than 735. In October 2003 RTC Leasing cancelled all guarantees provided by Rostelecom in respect to the loans payable by RTC Leasing, and all pledges under which equipment leased out by RTC Leasing to Rostelecom was used as collateral.
Sale of interest in SCS 900 In September 2003 the Board of Directors of Sibirtelecom approved the sale of its 30% share in SCS 900 (see Note 14) to MTS for 28.6 million US Dollars (approximately 871 million Roubles). As at August 31, 2003 the sale was not completed.
Sale of interest in Stavtelesot and Incombank loan extinguishment In January 2003 STC's subsidiary Stavtelecom entered into an agreement with OAO Vympelcom R to sell a 41% interest in Stavtelesot (see Note 14) for 17.5 million US Dollars (approximately 557 mil lion Roubles). The sale was completed at January 31, 2003. In 2003 the loan payable to Incombank (see Note 17) was purchased by ZAO Kollidiya ("Kollidiya"). In August 2003 the Board of Directors of STC approved transfer of its 10% interest in Stavtelesot valued at 4.3 million US Dollars (approximately 143 million Roubles) and additional payment of 2.7 million US Dollars (approximately 82 million Roubles) to Kollidiya in exchange of Incombank loan of 221 as at December 31, 2002 (see Note 14).
Sale of interest in MCC and Delta Telecom In September 2003 the Board of Directors of Rostelecom approved the sale of its 23.5% share in MCC to Sky Link. In September 2003 the Board of Directors of NWT approved the sale of its 43.12% share in Delta Telecom to Sky Link.
Fire at MGTS In February 2003 a fire occurred in one of the MGTS' switching stations, damaging the property of MGTS, Telmos and Golden Telecom. Management estimates damages from the fire to approximate 12.3 million US Dollars (390 million Roubles). The insurance compensation amounted to approxi mately 0.8 million US Dollars (25 million Roubles). In addition, management filed a lawsuit to prove negligence of a third party being the cause of the accident and will seek compensation of damages from this third party.
Acquisition of Tatincom T In July 2003 the Boards of Directors of VolgaTelecom and Uralsvyazinform approved the purchase of 5,704,620 ordinary shares of Tatincom T for 25 million US Dollars (approximately 760 million Roubles), which represents 83.4% of Tatincom T share capital. As at August 31, 2003 the acquisi tion was not completed.
Restructuring of Vnesheconombank debt In August–September 2003 the Boards of Directors of VolgaTelecom, Dalsvyaz, STC, Centretelecom, NWT, Sibirtelecom and Lensvyaz approved restructuring the debt payable to Vnesheconombank in total amount of 131.4 million Euro (92.2 million Euro excluding fines and penalties), which represents approximately 4,477 million Roubles (3,141 million Roubles excluding fines and penalties) by con verting it into 14 promissory notes issued to Alfa Bank repayable within 36 months in 6 equal semi annual instalments. As at August 31, 2003 the restructuring of the debt was not completed.
page No 78 Uralsvyazinform andDalsvyazapproved theissueof Uralsvyazinform NWT, 2003theBoardsIn April–June STC,Sibirtelecom, ofDirectors ofCentretelecom, Volgatelecom, Issueofbonds 749 ber 16,2003,Rostelecom's finesandpenaltiesintheamountof ofoperations fortheyearendedDecember31,2003. statement Dollars ( havetorefund Rostelecom byreturningAlfa Bank would scheduled forevery bonds with paymentpenalties,amountingto had MinFin notwritten offthelate promissory of bearinterest notes areThe promissory repayable toAlfa Bankwithin notes infull,andRostelecom repaid were defaultinrespect ofsuchdebt. accrued interest ceasedtobeintechnical building at7Tverskaya byTelegraph owned ofthe sold toUnicaInvest,andthereinstatement were ofthecontractseeking thevoidance ofApril 29,2003,inaccordance with whichsome ofthepremises inthe On June26, 2003Central Telegraph filed aclaim againstTelegraph UnicaInvest("UnicaInvest") andOOO of itsshare,CentralTelegraph isundertaking The share ofCentralTelegraph inTelegraph hadreduced since1997to under aclaimforcertainassetsofTelegraph filedbySvyazinvest. capital ofZAOgraph's tothecharter Telegraph buildingcontributed ("Telegraph"), asaninjunctiverelief On Arbitration June21,2003theMoscow CourtimposedanattachmentonapartoftheCentral Tele Litigation withZAO Telegraph in2003. formed Tariffs procedures slightly decreasedintheresultoftariffoptimisation per forlong distancecallswere way: increasedinthefollowing in general, tariffswere Effective fromMay–August For theGroup, 2003,MAPchangedtariffs services. forlocal telephony Tariffs forTelecom Services 4,700 million purchase ofOracle forthetotalamountof E BusinessSuite In May–June2003theGroupconcluded severalagreementswith ZAO OpenTechnologies Implementation ofOracle the placement.AsatAugust 31,2003theplacementof US Dollars(approximately into bank wasrestructuredbyconvertingit Yen denominated debt(principal of viously setbytheMAP. willbemadeusingtheTermination throughregional operators'networks Settlementtermination Rates pre bytheMAP,out usingtheLinearSettlement Rate determined oftraffic while settlements foreachminute of domesticlong distance traffic transit through every throughr andfortraffic termination com's network bothfortrafficThe newsettlement transit mechanism introduces direct paymentsystem through Rostele distance traffic. Rostelecombetween andregional operators fordomesticlong andapproved thenewsettlement system Effective from August Rate Settlement (ISR)forsettlements 1,2003,MAPabolished theexistingIntegral New settlementsystemwithRostelecom In June2003according tothe quo ante quo commercial organisations –by commercial organisations –by organisations financedbyState residential customers–by URBAN AREAS ) were written off. written ) were . 737 1,000 ). Theamountof Roubles). roubles face value each. Bonds have 6 coupons. Interest paymentspereachcouponare facevalueeach.Bonds Interest roubles have6coupons. 182 nd dayfromthe1stofplacement.Thedebenturesmature 2,992 million 29% 737 Government decision Government 21% 5.94% ; willberecognised asgainfrom debtrestructuring intheconsolidated 11,601 . 22% perannum.According ofagreement withAlfa Bank, totheterms Roubles). Rostelecom's Asaresult, debttoMinFinand principal promissory notes issuedtoAlfa Bankamounting promissory notes JapaneseYen ( ; certain measuresinanefforttoretaincontrol overthisasset. egional operators' networks. Settlements forone minute operators' networks. egional No 50 11,530,000 kilometers ofRostelecom's willbecarried kilometers network
10,530,000 2 commercial organisations –by commercial organisations –by financedbyState organisations residential customers–by RURAL AREAS 221 36 promissory amountingto notes 2,976 dated April 16,2003,Rostelecom's dated overdue months insixsemi annualinstalments.The According toMinFin'sresolution ofSeptem 2,837 million 153 million ) and accrued interest) toVnesheconom ) andaccruedinterest) documentary bearernon convertible bondswasperformed. 2,837 million 49.3% JapaneseYen (approximately USDollars(approximately . To preventfurtherdilution 30% JapaneseYen ( 21% ; 1,092 24.5 million . 98.6 million 22% 98 daysafter forthe ; status 720 US ), page No page
79 Annual Report 2002 Svyazinvest 13.] INFORMATION TO SHAREHOLDERS
The Company's Share Capital Structure Charter capital Rub 19,518,337,220 Outstanding shares 19,518,337,220 including: Ordinary registered shares 19,518,337,220 Nominal value of 1 share Rouble 1 Foreign (non residents) shareholders' shares 4,879,584,306
The Company's SHAREHOLDER LOCATION TOTAL NUMBER CAPITAL SHARE Shareholders OF SHARES
The Russian Property Ministry Moscow, Russia 9,759,168,611 50% +1 share
The Russian Federal Property Fund Moscow, Russia 4,879,584,303 25% - 2 shares
Mustcom Ltd. Nicosia, Cyprus 4,879,584,306 25% + 1 share
The Company's Registrars: ZAO "Registrator Svyaz" Licence π 10-000-1-00258 of 01/10/2002 Validity unlimited Address 107078, Kalantchevskaya St, 15a, P.O.Box 45 Telephone (095) 933 42 21 E mail address [email protected]
Annual General Meeting The Compnany's AGM was held on 27 June 2002 at 55, bld.2, Pluschikha St, 119121, Moscow, Russia.
page No 80 Svyazinvest
Chernogorodskiy Sergey Valerievich Contact Persons 2002 Report Annual Share Capital Department, Director Telephone: + 7 (095) 727 04 85, Fax: +7 (095) 248 06 41 [email protected]
Sokolenko Yuliana Yurievna IR section, Head Telephone: + 7 (095) 727 04 72, Fax: +7 (095) 727 04 75 [email protected]
OAO Svyazinvest 55, bld.2, Pluschikha St, 119121,Moscow, Russia Mail to ОАО Rostelecom 14, 1st Tverskaya-Yamskaya St, 125047, Moscow, Russia OAO CentreTelecom 6/2 Degtiarniy Pereulok, 125993, Moscow, Russia OAO North West Telecom 14/26, Gorohovaya St (26 Bolshaya Morskaya), 191186, St Petersburg, Russia OAO VolgaTelecom Post House, M. Gorkiy Sq, 603000, Nizhniy Novgorod, Russia OAO Southern Telecom 66, Karasunskaya St, 350000, Krasnodar, Russia OAO Uralsvyazinform 68, Lenina St, 614096 Perm, Russia OAO Sibirtelecom 53, M.Gorkogo St, 630099, Novosibirsk 99, Russia ОАО Dalsvyaz 57, Svetlanskaya St, 690950, Vladivostok, Russia OAO Komi Svyaz 60, Lenina St, 167981, Siktyvkar, Komi Republic, Russia OAO Lensvyaz 61, Bolshaya Morskaya St, 190000, St Petersburg, Russia OAO Kostromskaya GTS 6, Gagarina St,156026, Kostroma, Russia OAO Central Telegraph 7, Tverskaya St, 103375, Moscow, Russia OAO MGTS 12, Petrovskiy Boulevard, 127994, Moscow, Russia OAO Dagsvyazinform 3, Lenina Sq, 367012, Mahachkala, Republic of Dagestan
OAO Svyazinvest www.svyazinvest.ru Web Location OAO Rostelecom www.rt.ru OAO CentreTelecom www.centertelecom.ru OAO North West Telecom www.nwtelecom.ru OAO VolgaTelecom www.sviazinform.nnov.ru OAO Southern Telecom www.stcompany.ru OAO Uralsvyazinform www.uralsviazinform.ru OAO Sibirtelecom www.sibirtelecom.ru OAO Dalsvyaz www.dsv.ru OAO Komi Svyaz www.komitelecom.ru ОАО Lensvyaz www.lsi.ru ОАО Kostromskaya GTS www.kmtn.ru ОАО Central Telegraph www.cnt.ru ОАО MGTS www.mgts.ru ОАО Dagsvyazinform www.dinet.ru Non commercial partnership "Research Centre on Telecommu www.telecomresearch.ru nications Development Problems"
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