Nizhniy Novgorod, September, 2003: "VolgaTelecom" Open Joint-Stock Company (RTS: NNSI, NNSIP) announces 2002 consolidated financial and operating results obtained in accordance with International Accounting Standards (IAS). In this report, we present the "VolgaTelecom" results with allowance for the attached (within the framework of the 2002 reorganization) regional telecom operators of the Volga Federal District (VFD in what follows) and subsidiary companies.
Audit of "VolgaTelecom" JSC 2002 consolidated financial accounting was performed by an independent auditor, Closed Joint-Stock Company "Ernst and Young Vneshaudit."
According to these reports, in 2002 the Company had the following financial and operating results:
- revenue $ 421 129.9 th;
- operating expenses$347 653.2 th;
- operating profit $73 476.7 th;
- EBITDA*- $ 134 326.6 th;
- profit before tax $72 347 th;
- net profit $29 188.1 th;
- income per common stock $0.109.
- long-term assets $545 161.6 th;
- current assets $78 433.3 th;
- stockholder equity $412 060.9 th;
- minority share in subsidiary companies $10 762.7 th;
- long-term liabilities $ 83 349.2 th;
- current liabilities $127 907 th;
- cash at the end of period $6 853.7 th
* EBITDA index is calculated as a sum of operating profit (profit before tax and interest payment) and depreciation and amortization.
Company income increased compared with RAS (Russian Accounting System) results by 21% primarily due to mobile business consolidation. Mobile income amounted to 10.8% of the total Company earnings in 2002, whereas the major part in the earnings, 32%, is from long-distance calls. 37% of the total earnings refers to services rendered to high-end business subscribers, which is one of the target market segments of the Company.
According to international standards, EBITDA exceeded the similar RAS figure by 1%. In this case, EBITDA margin was 32% compared with RAS's 38%. This is mainly due to different accounting rules. For example, different accounting of the labor expenses and other social payments, different accounting of the expenses on inventory purchase and network maintenance. Moreover, recalculation of the book value of fixed assets according to IAS due to the necessary indexation and smaller property depreciation period resulted in a significant increase in fixed asset value ( 39.6% increase compared with RAS), and, therefore, depreciation ( 90% increase compared with RAS).
Net profit before tax increased by 14% compared with RAS. Therefore, the 51% increase in expenses for interest payment was compensated by nonmonetary income including that from the change of the purchasing power of the rouble.
Different method of debt accounting in accordance with IAS (long-term and short-term debts of "VolgaTelecom" is $ 41 350.6 th according to RAS compared with $ 80 247.3 th according to IAS) lead to the fact that the following items are treated as interest expenses: interest payments related to construction-in-progress, interest on leasing obligations, and interest on long-term credit from suppliers.
Profit tax increase by 128% compared with RAS is among the main causes of the net margin decrease from 13% (RAS) to 7% (IAS).
As per the Consolidated Cash Flow Statement, by the end of 2002 the Company had $ 6 853.7 th, which is mainly due to significant cash flows from operations ($126 016.6 th).
Appendix 1: "VolgaTelecom" operating and investment activities
"VolgaTelecom" JSC is among the largest Russia telecom companies and was founded on November 30, 2003 as a result of consolidation of 11 regional telecom operators of Volga Federal District through exchange of the stocks of the consolidating companies by new issued stocks of Nizhniy Novgorod telecom operator "VolgaTelecom". As a result, the Company is the second largest from the viewpoint of the number of subscribers (of the order of 3.9 million in early 2003) and the fourth largest fixed-communications operator in Russia from the viewpoint of earnings. The Company has licenses and renders traditional wire telephonic communications services (local, long-distance, and international), document (telegraph) communications, and radio broadcasting. The strategic significant activity in recent years is the development of new high-return communications services such as Internet access, IP-telephony, intelligent network services, and cable TV. The Company has licenses for rendering mobile services in 4 VFD regions and has capital shares in 15 VFD cellular companies. As a whole, the "VolgaTelecom" operating area is over 665 thousand square km, which is about 4% of the Federal territory with 21 million population, over 15% of the total Russia population.
The main income comes from long-distance calls (32%), local calls (25%), access to telephone network (11%), and cellular communications (11%). The installed capacity of the Company exceeds 4.2 million numbers. The annual increase in the subscriber base is of the order of 200 thousand numbers. The Company share in the wire communications ranges from 56% to 99% from region to region. The average "VolgaTelecom" telephone density is 23.3 telephone sets per 100 people for local network and 10.5 sets for rural network.
Investments to fixed line network development in 2002 amounted to 3.5 billion roubles. The major part of the Company investments (67%) was for the development of the existing communications network, which allowed us to ensure the high-rank capacity commissioning - 404 thousand numbers.
12% of the total capital investments were spent on the development of new communications services with the major part of the funds invested to the data-transfer network development projects. Therefore, Nizhniy Novgorod branch already has a multiservice data-transfer network, and a similar interregional network is planned on the basis of the existing data-transfer networks in branches. According to the Company estimates the majority of the regional branches hold dominating position in the Internet market in the regions, and the total number of Internet users of "VolgaTelecom" was 109 thousand as of early 2003, which is a factor of 2 greater compared with 2002.
"VolgaTelecom" owns different stock packages in 13 cellular companies rendering services in the region near the Volga river. At present, "VolgaTelecom" analyzes the cellular assets and cellular business development routes. According to the Company estimates, the number of cellular subscribers is of the order of 450 thousand (with allowance for the companies in which "VolgaTelecom" has over 15 % of the authorized capital).
"VolgaTelecom" Authorized Shareholders" Capital is 1,639,764,970 roubles. It is divided into 245,969,590 common stocks and 81,983,404 preference stocks with par value of 5 roubles each. The Company common and preference stocks are mainly trading within the RTS under NNSI for common stocks and NNSIP for preference stocks tickers. In 1997, the Company issued level 1 ADR, which now amount to 6.3 % of the "VolgaTelecom" Authorized Capital and are trading at Berlin and Frankfurt stock exchanges, as well as at American kerb market.
In February 2003, at the start of interregional company, the International Rating Agency Standard and Poor"s revised and increased the international "VolgaTelecom" credit rating up to level B, forecast "stable". In August 2003, Standard and Poor"s awarded "VolgaTelecom" 5.8 Corporate Governance rating (RKU 5.8).
Appendix 2: Macro-region near the Volga River
The territory of the Volga Federal District is 1.024 mln sq. km., it is more than 7 % of the territory of this country. The District consists of 14 subjects of the Russian Federation (6 Republics, 8 Regions). The population is about 32,000,000, which is about a quarter of the population of the Russian Federation. 70 % of the population of the District live in cities and towns.
The industrial production share of the VFD in the Russia economy is 23.9 % (the highest level in the Russian Federation). Mechanical engineering and fuel and energy are the two main sectors of the economy.
85 % of Russian automotive companies, 65 % of aircraft construction business, and 40% of domestic petrochemical industry are concentrated in the District. The region"s agricultural production is over 25 % of the country total agricultural yield.
Nizhniy Novgorod is an ancient Russian city located in the center of Russia. Due to its favorable geographical position, the city was the central trading point of Russia and, due to the Nizhniy Novgorod Fair, was called "the pocket of Russia". Today, Nizhniy Novgorod is the third-largest city in Russia and the center of the Volga Federal District.
- The population is about 1.4 million people.
- 80 % of total production in the Nizhniy Novgorod region is industrial production.
- The largest sectors in the structure of manufacturing are mechanical engineering, metalworking, petrochemicals, and hi-tech industry.
- An advanced transport infrastructure: the international airport is connected by direct flights with European countries, railways and river stations, and main roads connecting it with Moscow and all of the largest cities of the Volga Region.
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