Description
The report for the financial year 2009 - 2010 of MTS.
Print manager | MTS
MTS Annual review 2009
Page 1 - Key Developments (http://annualreview2009.mtsgsm.com/overview/letter_to_shareholders/letter_to_shareholders/)
Letter to Shareholders
Dear Shareholders, Welcome to this year’s online annual review.
A Transformative Year
The year 2009 was a transformative year for MTS. Upon the backdrop of volatile macroeconomic environment, we embarked upon a number of initiatives to meet the challenges raised. Most importantly, we amended our corporate strategy, evolving from 3+2 to 3i – which refers to Integration, Innovation and Internet. Our 3i strategy firmly focuses MTS on offering integrated services, differentiating ourselves through an innovative product and service mix and leveraging greater Internet capabilities to capture further value. During the year, we made significant progress in the execution of our 3i strategy. This included the acquisition of a majority stake and controlling interest in Comstar-UTS (’Comstar’), a leading supplier of integrated telecommunication solutions in Russia and the CIS. Comstar is the ideal partner for us to address the growing commercial and residential broadband markets while jointly realizing value-accretive synergies in capital and operating expenditures and providing a foundation for the development of effective content platforms and services. We also acquired Eurotel, one of the leading federal transit operators in Russia, and continued the build-out of our own nationwide backbone network. This will allow us to accommodate the increasing demand levels for data services as we roll out 3G and realize OPEX savings on line rental by decreasing our reliance on other companies’ networks. We are building out a proprietary distribution network of MTS-owned and franchise stores as we recognize the competitive advantage of having a controlled retail network. During 2009, we acquired mobile retailers Telefon.Ru, Eldorado and Teleforum and continued our own organic expansion. This will enable us to more effectively service our clients, increase sales of handsets and accessories, reduce churn and bring the MTS brand closer to our customers. During the year, we began adding innovative and unique offerings into our product portfolio through the launch of Omlet.ru, our region’s first comprehensive online destination for the latest in digital media. This is an important step towards delivering the content and applications to our customers that will drive usage and increase customer loyalty in the coming years.
Stable Results in Uncertain Markets
Despite the challenges presented by volatile global and regional markets in 2009, we were able to realize strong results with relative growth in each of our core countries and business lines. Even though total Group revenue and OIBDA were down by 17% and 24% respectively in US dollar terms, the main drivers behind these declines can be attributed to the weakening of our core operating currencies versus the US dollar reporting currency. In four of our five operating markets, we witnessed gains in revenue and OIBDA and showcased positive operating indicators throughout. We were able to make substantial investments to develop the business in line with our 3i strategy whilst still maintaining healthy cash flows and attracting favorable financing in the capital markets when it has been necessary. Page 2 - Our Markets (http://annualreview2009.mtsgsm.com/overview/letter_to_shareholders/lettertoshareholders/)
Our Markets
Russia
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Print manager | MTS
Within our largest market, Russia, we delivered a gross revenue increase of 7.6% in ruble terms for our combined businesses, including our fixed and mobile operations. Our mobile segment grew in-line with the overall business, and was driven by strong subscriber additions and data consumption, as well as increasing sales of handsets and accessories. It is important to note that the second half of the year saw faster growth as we began realizing greater benefits from our expanding business. The fixed-line segment, which includes Comstar, Eurotel and StreamTV, also grew at a similar rate, and was up 7.2% year-over-year. Through the integration of Comstar and other fixed-line assets, MTS is evolving to meet the changes in the competitive landscape as it develops into an integrated operator, providing a greater spectrum of service offerings to an increasing customer base. Throughout 2009, we also continued to roll-out 3G networks in Russia, with expanded coverage in the Russian regions and a full launch in Moscow.
Ukraine
Within our markets of operation, Ukraine was the most affected by the global financial crisis. Revenue for the year decreased by 4.9% year-on-year, nearly all on accounts of national macroeconomic issues. However, in spite of this decline, MTS outperformed the market and our share of mobile revenue in the country increased slightly based on the reports from our peers. Our operating indicators in Ukraine remained relatively robust, with average revenue per user (ARPU) flat year-on-year, and minutes of use (MOU) up by 66% in 2009 when compared to 2008. While average price per minute (APPM) declined by 38% year-on-year, we reported relatively stable APPM during 2009 as market competition stabilized vis-à-vis previous years. MTS has been successful in promoting its value proposition in the marketplace, a fact which was highlighted by the significant network improvements made over the last few years that led to an increase in voice and data consumption, stronger brand perception and helped sustain our subscriber base level. This, in turn, translated into significant improvements in annual churn, which was reduced by 7.3 percentage points to 40.0% in 2009.
Uzbekistan, Turkmenistan & Armenia
In Uzbekistan, we were able to grow revenue by 3.4% for the year. While we witnessed rising churn levels as competition intensified during the year, we did manage to increase our subscriber base by almost 25% and have maintained our market share in terms of revenue and subscribers. The market in Turkmenistan continues to develop rapidly, and our revenue increased by 60% year-on year, with OIBDA up 56% when compared with 2008. We have a dominant market position, with an 85% share of subscribers, and grew our subscriber base by a further 830,000 in 2009 due to our attractive propositions in the country. We also maintained our leading position in Armenia. Revenue in Armenia grew by 2.3%, with OIBDA up by 3.4%, in spite of the challenging economic environment and increasing competition with a third player entering the market at the end of 2009. Page 3 - Outlook (http://annualreview2009.mtsgsm.com/overview/letter_to_shareholders/outlook/)
Outlook
Group Outlook for 2010
The key issue when considering the forecast for 2010 is the overall macroeconomic outlook, which still remains uncertain. However, we are encouraged by the general consensus expecting an improvement in GDP within our core operating countries, of around 5% for Russia* and 3-4% for Ukraine**. Should the local economies improve and competition remains stable, we expect positive developments within our operating markets. As our business depends on the overall level of business activity, we do see upside and believe that we will see Group top-line growth in the mid-to-high single digits, the bulk of which is likely to occur in the second half of the year. As we move forward, the three i’s of our strategy will remain core to our Company’s ongoing development: Integration – bringing convergent products and services to the market for consumers and corporate clients alike Internet – continuing the expansion of our 3G roll-out and building on the growth of content and traffic on our wireless broadband network Innovation – orienting our product mix towards devices and products that encourage greater adoption of data and content services As we continue our journey, I would like to thank all of our shareholders for their continued support through these turbulent times. I look forward to reporting on our growth and development to you again next year.
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Print manager | MTS
Yours sincerely, Mikhail Shamolin President & CEO * World Bank estimate, March 2010 ** National Bank of Ukraine estimate, April 2010 Page 4 - Key Financial Highlights (http://annualreview2009.mtsgsm.com/overview/2008_highlights/key_financial_highlights/)
Key Financial Highlights
In 2009, MTS focused on a number of key initiatives to realize its 3i strategy, which enabled the Company to develop and grow in each of its markets of operation. The Company adapted to the financial environment over the year and managed to sustain stable growth whilst maintaining access to attractive financing. MTS’ strong leadership in its areas of operations enables the Company to have a positive view when looking ahead to 2010, a year that will continue to bring opportunities for the Group to develop its business further and generate greater returns for shareholders. (US$ million, except share and per share amounts) Consolidated Statement of Operations Data Revenues - Revenue from mobile business - Sales of handsets and accessories - Revenue from fixed business Operating income Operating income margin Net income Net income margin Net income per share (US$) Consolidated Cash Flow Data Cash provided by operating activities Cash used in investing activities (of which capital expenditures) Cash provided by financing activities Consolidated Balance Sheet Data (end of period) Cash, cash equivalents & short-term investments Property and equipment, net Intangible assets, net Total assets Total debt including current portion Total liabilities Total shareholders’ equity 1,267.4 8,566.7 2,490.0 15,874.9 4,529.4 7,445.6 8,339.6 1,481.8 7,758.2 2,188.5 14,717.2 5,368.3 8,351.5 6,219.9 2,740.0 7,745.3 2,235.8 15,780.7 8,329.5 11,295.4 4,403.1 3,851.4 -3,247.3 -1,899.0 -258.1 5,030.0 -2,708.0 -2,612.8 -1,678.5 3,596.1 -2,384.7 -2,328.3 147.7 9,723.9 8,081.9 89.2 1,562.3 3,184.9 32.8% 2,087.4 21.5% 1.06 11,900.9 10,056.8 78.9 1,765.2 3,647.3 30.6% 2,000.1 16.8% 1.04 9,823.5 8,020.2 317.7 1,485.6 2,547.6 25.9% 1,004.5 10.2% 0.53 2007* 2008* 2009*
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Print manager | MTS
*Data restated due to retrospective consolidation of Comstar and changes in headquarter’s expenses allocation Page 5 - Key Operating Highlights (http://annualreview2009.mtsgsm.com/overview/2008_highlights/key_operating_highlights/)
Key Operating Highlights
Mobile
MTS continued to increase its overall subscriber base in 2009. At the end of the year, MTS serviced a total of 102.37 million mobile subscribers in Russia, Ukraine, Uzbekistan, Turkmenistan, Armenia and Belarus, a year-on-year increase of 7%. In the core market of Russia, the Company had 69.34 million mobile subscribers at the end of 2009, equating to an increase of 7.3% compared to 2008. MTS maintained its leading market share in Russia with 33% for the year. MTS also maintained a strong position in Ukraine in 2009 with a 32% market share. Voice consumption amongst MTS’ Russian subscribers increased by 2% in 2009, with minutes of use (MOU) rising from 208 to 213 on the back of stable demand for communication services and attractive offers delivered to the market by the Company. MTS is still recording usage growth, even with the already high penetration level of 143% reported in Russia at the end of 2009. Since 2006, MTS has seen an impressive growth in value added service (VAS) revenue. In 2009, Russian VAS revenue rose by 28% to 38.0 billion rubles. * Revenue from data traffic and data content grew by 58% and 47% to 10.2 billion rubles and 13.2 billion rubles respectively, indicating the tremendous potential of data services within MTS’ markets moving forward.
* VAS revenue is broken down into three categories – messaging, data traffic and content – and now includes roaming revenue that have been allocated accordingly. VAS revenue does not
include revenue from SMS and data bundles, which is included in airtime revenue. 2006 72.86 51.22 11.21 2.69 37.32 20.00 1.45 0.18 3.21 34% 41% 58% 83% 54% 2007 81.97 57.43 13.45 2.82 41.16 20.00 2.80 0.36 1.38 3.80 33% 36% 50% 88% 74%** 53% 2008 91.33 64.63 14.91 3.25 46.46 18.12 5.65 0.93 2.02 4.32 34% 33% 46% 87% 79% 52% 2009 97.81 69.34 13.59 3.72 52.03 17.56 7.07 1.76 2.07 4.56 33% 33% 45% 85% 75% 46%
Total consolidated subscribers at close of year Russia - Moscow and the Moscow region - St. Petersburg & Leningrad region - Other Russian regions Ukraine Uzbekistan Turkmenistan Armenia Belarus* Market Share Russia Ukraine Uzbekistan Turkmenistan Armenia Belarus* ARPU (US$)† Russia Ukraine Uzbekistan Turkmenistan Armenia
7.9 7.3 11.2 69.9 -
9.3 6.6 9.7 51.9 15.5**
10.5 7.2 7.7 17.1 12.6
7.8 4.7 5.3 10.0 9.0
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Print manager | MTS
Belarus* SAC (US$)† Russia Ukraine Uzbekistan Turkmenistan Armenia Belarus* MOU (minutes) † Russia Ukraine Uzbekistan Turkmenistan Armenia Belarus* Churn † Russia Ukraine Uzbekistan Turkmenistan Armenia Belarus* Total number of employees *MTS owns a 49% stake in Mobile TeleSystems LLC, a mobile operator in Belarus, which is not consolidated.
9.9
9.4
9.7
7.8
23.2 10.2 3.5 32.6 15.6
26.3 12.1 4.3 24.7 9.7** 16.3
27.3 11.1 7.7 8.0 19.3 18.3
19.3 6.9 7.7 4.6 17.4 16.2
129 142 437 225 436
157 154 516 250 464
208 279 536 258 178 483
213 462 495 233 203 468
23% 30% 50% 13% 19% 24,125
23% 49% 58% 24% 24% 24,693
27% 47% 21% 14% 28% 20% 26,343
38% 40% 30% 20% 44% 23% 36,136***
** Operating indicators not available until Q4 2007 when MTS Armenia adopted MTS Group policies on calculating figures and accounting for subscribers. Full year 2007 numbers are based on management reports. *** Includes employees of mobile operations and the MTS retail network.
† these terms are defined in the Glossary
Fixed
MTS acquired a controlling stake in Comstar-UTS (’Comstar’) in October 2009, and further increased its stake by 11.06 percentage points to 61.97% in December. Comstar is the leading residential fixed-line broadband operator in Russia with a subscriber market share of 28% * in the Moscow region as well as the leading pay-TV operator in the Russian regions. Through the integration of Comstar, MTS will be able to expand its service portfolio and strengthen its ties with its customers. In December 2009, MTS acquired a 100% stake in Eurotel, one of the leading federal transit operators in Russia. Eurotel has an extensive optical fiber network of 19.5 thousand kilometers. The network currently connects Moscow, St. Petersburg and other major cities in Russia. The acquisition will help MTS to better realize its 3i strategy and provide subscribers with the best possible customer experience.
* Q4 2009 data, based on AC&M Consulting estimate.
Traditional Segment in Moscow Residential subscribers
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2008
2009
Print manager | MTS
Number of subscribers/ active lines (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Corporate subscribers Number of subscribers (000's) incl. BB subscribers (000's) ARPU (RUR)1 ARPU (US$)1 Alternative Segment in Moscow Residential subscribers Number of subscribers (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Corporate subscribers Number of subscribers (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Alternative Segment in the Regions & CIS Residential subscribers Number of subscribers incl. pay-TV subscribers (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Corporate subscribers Number of subscribers (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Total number of households passed Total number of broadband internet subscribers Total number of pay-TV subscribers
1 Excluding revenue from points of interconnect
3,591 120 294 11.8 960 33 4,594 180.0 2008 6,990 664 337 13.6 300 18 10,844 436.8 2008 505 153 73 236 9.5 44 17 4,002 161.6 3,869 925 300
3,608 246 324 10.3 700 32 5,591 176.9 2009 6,070 601 442 14.0 270 15 13,676 432.8 2009 2,606 1,996 378 155 4.9 52 26 3,573 113.1 7,502 1,298 2,124
Page 6 - Company Profile (http://annualreview2009.mtsgsm.com/overview/company_profile/)
Company Profile
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Print manager | MTS
MTS is:
The leading telecommunications Group in Russia and the CIS A top-10 global mobile operator One of the 100 most powerful brands in the world * In Markets with a Total Population of over 230 Million, MTS has over 102 Million Subscribers & Continues to Grow MTS, together with its subsidiaries, expanded its total subscriber base to over 102 million as at December 31, 2009 The Russian regions, together with Ukraine, Uzbekistan, Turkmenistan, Armenia and Belarus, in which MTS and its associates and subsidiaries are licensed to provide mobile communications services, constitute a total population of more than 230 million people A Comprehensive & Integrated Service Portfolio MTS is focused on delivering the highest-quality mobile and fixed-line products and services to its customer base, including VAS services such as: - SMS and MMS - Mobile broadband - Content services, including Omlet.ru, an online content platform - Email solutions - Ring-back tones - Mobile advertising - Other services The Group’s products, services and VAS are enabled by GSM, CDMA and 3G/HSPA networks, with 3G services already available in 69* cities across Russia, five cities in Uzbekistan, nationwide in Armenia and nationwide in Ukraine through a CDMA-450 network Integrated telecommunication services through the acquisition of Comstar, including: - Fixed-line voice communications - Fixed and mobile broadband - Cable and pay-TV Wholesale network services through the acquisition of Eurotel Retail services, such as sales of handsets and accessories, mobile payments and money transfers
Ten Years on the New York Stock Exchange
MTS completed its IPO and listed its Level-III ADRs on the NYSE in June 2000, under the symbol MBT – the second-ever Russian company to list on the NYSE The Company’s shares have been listed locally on MICEX since November 2003, under the symbol MTSI The free float of the Company’s shares is approximately 46.7% MTS is 52.8% majority-owned by Sistema, the largest diversified public corporation in Russia and the CIS MTS has been SOX-compliant since 2007 MTS has been ranked as one of the most transparent companies in Russia by Standard & Poor’s Gaining International Recognition for our Brand, Services and Corporate Accomplishments In January 2010, MTS won the GSM Association’s 15 th Annual Global Mobile Award at the 2010 Mobile World Congress in Barcelona. MTS won the award in the ‘Best Billing & Customer Care Solution’ category for its ‘Your Individual Optimal Tariff Plan’ service In January 2010, MTS won H&H Webranking’s award ‘Best Corporate Website’ in Russia for the Company’s English website In October 2009, MTS won IR Magazine’s Russian and CIS ‘Best Overall IR Award’ In June 2009, MTS won the Thomson Reuters Extel Survey – Focus Russia 2009 award for the best IR officer and the best company in telecommunications In June 2009, the Company won the 2009 Global Telecoms Business Innovation Award in the ‘Services catalogue innovation’ category for the MTS Catalogue service In April 2009, MTS was ranked in BRANDZ™ Top-100 Most Powerful Brands for the second year in a row. The ranking is published by Financial Times and Millward Brown * As of April 1, 2010. Page 7 - Company History (http://annualreview2009.mtsgsm.com/overview/company_history/)
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Print manager | MTS
Company History
The 1990’s 1993:
MTS receives first license to provide mobile phone services using the GSM standard
1994:
MTS begins offering mobile phone services in Moscow and the surrounding region
1997:
MTS expands operations into Russian regions
The 2000’s 2000:
Initial Public Offering (IPO) of MTS securities on the New York Stock Exchange (NYSE)
2002:
MTS introduces pre-paid Jeans brand and begins expansion into neighboring CIS countries through joint venture in Belarus
2003:
MTS acquires UMC, a leading mobile phone operator in Ukraine
2004:
MTS receives additional licenses in Russia to extend its license coverage to include all but two regions of the country MTS enters Uzbekistan through the acquisition of Uzdunrobita, the country’s largest mobile phone operator
2005:
MTS enters Turkmenistan by acquiring Barash Communication Technologies, Inc. (BCTI), the leading telecommunications operator in the country
2006:
MTS launches new brand identity Adopts 3+1 Strategy
2007:
MTS launches 3+2 Strategy Enters Armenia through acquisition of leading operator, K-Telekom (VivaCell) Receives 3G licenses in Russia, Uzbekistan and Armenia Rebrands countrywide operations in Ukraine Launches mobile broadband in Ukraine
2008:
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Print manager | MTS
MTS named as one of the BrandZ™ World’s 100 Most Powerful Brands Launches 3G networks in Russia and Uzbekistan Signs strategic partnership with Vodafone Appoints Mikhail Shamolin as President & CEO
2009:
MTS acquires a majority and controlling stake in Comstar-UTS and 100% of Eurotel Introduces the 3i Strategy Enters strategic partnership with Nokia Commences 3G in Armenia and a full roll-out in Moscow Acquires mobile retailers Telefon.Ru, Eldorado & Teleforum Introduces MTS-branded handsets Appoints Ron Sommer as Chairman of the Board of Directors Launches Omlet.ru content portal Included in the BRANDZ™ Top-100 Most Powerful Brands for the second year in a row Page 8 - Geographic Coverage (http://annualreview2009.mtsgsm.com/overview/geographic_coverage/)
Geographic Coverage
Russia
Population – 141.4 mln** Population density – 8 per km 2 Mobile penetration – 143% MTS subscribers – 69.3 mln* Market share – 33.4%
Ukraine
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Print manager | MTS
Population – 45.6 mln** Population density – 76 per km 2 Mobile penetration – 121% MTS subscribers – 17.6 mln* Market share – 31.8%
Uzbekistan
Population – 27.7 mln** Population density – 62 per km 2 Mobile penetration – 57% MTS subscribers – 7.1 mln* Market share – 45%
Turkmenistan
Population – 5.4 mln** Population density – 11 per km 2 Mobile penetration – 41% MTS subscribers – 1.8 mln* Market share – 85%
Armenia
**
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Print manager | MTS
Population – 3.3 mln Population density – 111 per km 2 Mobile penetration – 86% MTS subscribers – 2.1 mln* Market share – 75%
Belarus
Population – 9.6 mln** Population density – 46 per km 2 Mobile penetration – 102% MTS subscribers – 4.6 mln* Market share – 46%
Note: MTS owns a 49% stake in Mobile TeleSystems LLC, a mobile operator in Belarus, which is not consolidated. * Subscriber data as of Dec. 31, 2009 **Population data sources: IMF, October 2009 Mobile penetration date as of Dec. 31, 2009, according to AC&M-Consulting. Market share data as of Dec. 31, 2009 in Russia and Ukraine according to AC&M-Consulting. Market share data in other CIS countries as of Dec. 31, 2009 according to MTS.
Page 9 - Market Trends (http://annualreview2009.mtsgsm.com/strategic_review/market_trends/)
Market Trends
Russia & CIS Markets Maintain Attractiveness in Tougher Macroeconomic Climate
As a Russia-based operator, MTS sees Russia and the CIS as the Company’s home market for a number of reasons, including: A shared recent history Common language and culture
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Print manager | MTS
Long-established business and economic ties 2009 was a challenging time for the Russian and CIS markets. However, despite a tougher macroeconomic climate, the high-growth potential of MTS’ markets of operation remains strong. The Company has put measures in place to continue the development of the mobile and broadband opportunities within its markets of operation. Overall, MTS has adapted its organizational strengths to the financial environment and management continues to see opportunities in the current market. With leading positions in four of the five largest markets in the CIS, MTS is well positioned to take advantage of the region’s continuing development and to seek further opportunities for expansion.
Underlying Trends in Core Markets Remains Strong
Russia and Ukraine are the two largest markets for MTS, both in terms of subscribers and revenue. In 2009, the underlying developments within these markets remained generally positive and included: Growing mobile penetration Strong sustained demand for mobile services Positive usage trends Growth in data consumption, aided by increased 3G coverage and higher smartphone penetration
However, these growth factors may be tempered by macroeconomic developments, many of which influenced the markets in 2009. These trends included:
Exchange rate volatility in functional currencies Flat or negative GDP growth trends Higher rates of unemployment Lower consumer spending Decrease in corporate spending and overall business activity MTS’ management team believes that as the macroeconomic situation becomes more stable, the underlying strength of the organization will lead to greater medium- and long-term growth and efficiency. The investments MTS is making today will provide the Group with greater revenue growth and value-accretive opportunities in the future. Page 10 - Russia (http://annualreview2009.mtsgsm.com/strategic_review/market_trends/market_russia/)
Russia
Positioning MTS for the Next Wave of Growth & Further Increases in Data Consumption
Russia has experienced rapid growth in the demand for wireless communications over the last ten years. At the end of 2009, overall mobile penetration in Russia stood at 143% (or 208 million subscribers) versus 129% (or 188 million subscribers) at the close of 2008, according to AC&M-Consulting. Key growth factors included: A growing economy and rising disposable incomes Relatively low fixed-line penetration The prevalence of multi SIM card usage Converging offering of mobile and fixed-line services In Russia, there are particularly high levels of mobile penetration in Moscow and St. Petersburg, with more than 191 and 187 subscribers per 100 residents respectively as of December 31, 2009. According to AC&M-Consulting, MTS accounted for 41.9% and 47.4% of subscribers in Moscow, 31.4% and 30.8% of subscribers in St. Petersburg and 33.4% and 34.4% of total Russian subscribers as of December 31, 2009 and 2008 respectively. The average mobile penetration rate in the regional Russian markets is 134 per 100 residents. Due to the fact that the Russian market is highly penetrated, the next wave of revenue growth for the overall market is likely to come from customers increasing their use of data and VAS. Over the coming years, a strong contributor to this growth will be the proliferation of smartphones, which will increase data usage for the market overall. To maintain strong market leadership in an evolving competitive market, MTS expanded its reach in the value chain in 2009. Through the acquisition of a fixed-line operator (Comstar), the build-out of a mono-brand retail distribution, and the launch of content portal, MTS is today a truly integrated operator in the Russian market. Comstar will further enhance MTS’ marketing capabilities, providing an opportunity for the Company to bundle offerings and services.
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Print manager | MTS
Comstar is the leading fixed broadband provider in Moscow with 830,000 subscribers and a 28% share of the market. While Moscow has a relatively high penetration of fixed broadband, the average penetration in Russia at the end of 2009 stood at approximately 20% of households, demonstrating the significant potential for growth. Broadband subscriber and penetration data sources: AC&M as of December 31, 2009.
The Leading Mobile Operator
While Russia is overall viewed as a market of three mobile operators, in fact there are a total of 10 operators of significance active in the market, with competition varying from region to region. MTS is the leading federal operator, as measured by both revenue and subscribers. Competition in the market is based upon: Local tariff prices Network coverage and quality Brand perception Level of customer service provided Roaming and international tariffs VAS MTS has a number of competitive advantages over its competitors: Integrated operator approach that drives value through content, fixed-access and a proprietary national distribution network Competitive pricing and cost-effective products for every consumer Premium quality and reliability of the network The largest network coverage area in the CIS Strong brand built on leadership attributes Unique customer segmentation strategy to attract a broad range of subscribers Investments in innovative services, such as 3G and VAS Leading position in the most lucrative market, Moscow, in terms of mobile, broadband and fixed-line services Expanding transport and backhaul networks augmented by the acquisition of Eurotel, one of the leading federal transit operators in Russia Partnership with Vodafone to provide customers with high-quality communications services and devices as well as draw on the expertise of the leading global operator In terms of retail distribution, the market has evolved from independent multi-brand retail to operator-controlled mono-brand distribution. MTS’ growing retail distribution will be an important driver of incremental revenue as the Company transitions itself to becoming an integrated operator. Through the successful roll-out of 3G and other data services, MTS continues to lead the development of telecom services in Russia. Page 11 - Ukraine (http://annualreview2009.mtsgsm.com/strategic_review/market_trends/market_ukraine/)
Ukraine
Outperforming a Competitive Market
The Ukrainian wireless telecommunications market has grown rapidly in recent years, but was severely affected by the economic downturn in 2009. The market was characterized by: National currency devaluation, which increased the cost of capital expenses Stable mobile penetration in 2009 of 121%, or approximately 55.3 million subscribers Intense competition between four national mobile operators VAS, including data services, were the main drivers of revenue growth The market share growth prospects was limited in 2009, with aggressive market pricing and high usage levels MTS Ukraine, one of the largest mobile operators in the country, generally outperformed its domestic peers and achieved a 32% market share * A slow recovery in the economy and service consumption is expected; however, the telecom industry’s share of GDP remains significant Competition in the market is primarily based on:
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Print manager | MTS
Brand and quality perception Promoting the best possible value proposition Service offering Network quality Extent of the transport network (MTS has a nationwide backbone network in Ukraine) Besides offering GSM-based mobile communications, MTS has built out a national high-speed CDMA-450 network that provides customers with data access in over 200 population centers, including all major cities and towns. MTS is waiting for regulatory approval to obtain a UMTS license in order to drive mobile broadband penetration in Ukraine. UMTS provides significant opportunities for future growth in the Ukrainian mobile market and the network roll-out will further improve the digital infrastructure of the country over time. The Company has been investing in its network and services and has now laid a foundation to build unique customer experiences by enhancing the overall quality of its business and extending the MTS brand further into the market. MTS is currently realizing the benefits of the investments made and the perception of the network quality has significantly increased, allowing the Company to provide its customers with attractive value propositions for its products and services.
* Source: AC&M-Consulting.
Page 12 - Uzbekistan, Turkmenistan and Armenia (http://annualreview2009.mtsgsm.com/strategic_review/market_trends/market_uzbekistan/)
Uzbekistan, Turkmenistan and Armenia
Uzbekistan: Continued Leadership Against a Backdrop of Growth & Increased Competition
MTS continues to sustain its leading position in the country, which is characterized by challenging market developments and ever-increasing competition. Since entering the country in 2004, the Uzbek market has expanded at a rapid pace, with wireless penetration reaching 57% in 2009, up from 44% only a year ago. In 2009, the mass market segment for mobile services has expanded significantly, which in turn has created greater value for consumers in terms of tariff and service offerings from mobile operators in the country. Given Uzbekistan’s low fixed-line and Internet penetration rates, MTS has begun to roll out a 3G network in Uzbekistan in order to stimulate data usage. MTS has already launched 3G services in the five largest cities, including Tashkent and Samarkand. MTS expects to see continued growth in this promising market, which covers a total population of over 28 million people. Uzbekistan has thus far been able to weather the current macroeconomic downturn relatively well, as the country has been less affected than many other countries within the CIS.
Turkmenistan: Impressive Growth Opportunities
Competing in a market of two, and with penetration levels of 41% at the end of 2009 compared to only 19% in 2008, MTS plays a key role in the development of Turkmenistan’s mobile telecommunications industry. MTS remained the top operator in the country during 2009, with an impressive market share of 85%. The Company’s subscriber base grew by 90%, exceeding 1.75 million customers by the close of the year. Turkmenistan’s mobile market has been less affected than other markets in the region as a result of the global economic crisis. The country’s economic growth and low fixed-line penetration provide every indication that Turkmenistan will continue to exhibit strong growth as the mobile telecommunications market develops over the coming years.
Armenia: Top Operator in a Market of Three
MTS entered Armenia in September 2007 through the acquisition of K-Telecom, the country’s leading mobile operator. The Armenian market is fairly developed, with relatively high penetration levels. In 2009, MTS maintained its market-leading position, even as a third operator entered the market towards the end of the year. MTS is well positioned to handle new competition in the market given the Company’s leading share of subscribers, strong brand attributes and investments in innovative services. MTS has remained the number one operator in terms of market share, which stood at 75% in 2009, and the Company now has 2.1 million subscribers in the country. MTS has been allocated a ten-year 3G license for the entire territory of Armenia and launched 3G services in April 2009 to stimulate data usage and better manage growth in voice usage. Armenia began to feel the impact of the global financial crisis in 2009, with the local currency experiencing significant volatility. However, the fundamentals of the mobile telecommunications market in Armenia remain strong, and MTS expects to see sustained subscriber growth, increased mobile penetration and growing data usage moving forward. Page 13 - Business Strategy (http://annualreview2009.mtsgsm.com/strategic_review/business_strategy/)
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Print manager | MTS
Business Strategy
MTS aims to maintain its position as a leading integrated telecommunications group in Russia and the CIS. The Company embraces opportunities to expand its network coverage where natural synergies can be found in Eastern Europe and Central Asia. In 2009, MTS introduced the 3i strategy and has focused on a number of key initiatives, such as the acquisition of a majority stake in fixed-line operator Comstar-UTS, the continued rollout of 3G, and the ongoing development of the Group’s retail sales channels as, well as the launch of the online portal Omlet.ru. During 2010, MTS will continue to drive the 3i strategy forward by launching new innovative products and services and continuing to roll out its broadband network. Over time, MTS’ management’s proactive integrated approach will enable the Company to expand along the value chain which will be accretive to both customers and shareholders, with Comstar being an integral part in this transformation. Page 14 - The 3i Strategy (http://annualreview2009.mtsgsm.com/strategic_review/business_strategy/the_3i_strategy/)
The 3i Strategy
Integration, Internet & Innovation
MTS’ primary goal is to be the leading communications operator in Russia and the CIS, providing its customers with mobile and fixed telephony, high-speed Internet access at home and on the move, cable TV and a variety of entertainment and content offers. In 2009, the Company moved beyond simple mobile access both horizontally and vertically, through the acquisition of Comstar-UTS (’Comstar’), the rapid build-out of a proprietary distribution network and the launch of its first online content platform, Omlet.ru. The development of MTS beyond mobile access is part of our strategic initiative “3i”. Our direction is based on three main principles: Integration – Developing New Pipelines & Customer Touch Points We aim to provide a comprehensive and integrated service portfolio for all of our customers’ communication needs, through both fixed-line and wireless access. The networks and platforms we develop will create a seamless – and unsurpassed – user experience. Internet – Offering Universal Connectivity Our customers increasingly expect faster and broader connectivity as more devices and services depend on integrated mobile and fixed networks. Our goal is to create smarter pipelines so customers can realize the full benefits of today’s technologies, while creating additional value for MTS. So-called ‘smart pipes’ will allow us to offer market-leading services, enable commercial transactions and bring us closer to our customers. Innovation – Differentiating MTS from its Competitors We aim to differentiate ourselves from the competitors by offering a unique mix of products and services. We will offer exclusive devices, distinct packages of services catering to all customer segments, and a market-leading end-to-end user experience at home, at work and on the move. Given our proven track record of delivering growth and value to both customers and shareholders alike, we believe our new strategic focus assures the continued successful development of the Company in the coming months and years. Page 15 - Operating Review (http://annualreview2009.mtsgsm.com/business_review/operating_review/)
Operating Review
2009: Transforming, Developing, Growing
The last year has been transformative for MTS’ operations. The launch of the 3i Strategy, the development of new retail channels and the acquisition of Comstar-UTS (’Comstar’) were some of the key initiatives carried out in 2009.
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The 3i strategy has been developed to move MTS beyond being a pure-play mobile operator. The strategy, which builds on the three focus areas of integration, Internet and innovation illustrates the direction MTS will take in the coming years. The acquisition of Comstar in 2009 was a strategically important transaction for MTS. As a fixed-line operator, Comstar has a balanced mix of residential, business and operator customers. MTS’ approach to the integration of Comstar will enable the combined Group to realize important strategic goals and cost synergies. The acquisition also leverages the scale and scope of MTS footprint with the depth of Comstar activities, and provides flexibility to manage legal and governance issues. The approach towards the integration has been developed to ensure that the core business and cash-generating functions are not disrupted. In 2009, MTS also acquired Eurotel, one of the leading federal transit operators in Russia, with an extensive fiber network of 19,500 kilometers. Both acquisitions are key initiatives towards becoming an integrated telecommunications company. Through the acquisitions of mobile retailers Telefon.Ru, Eldorado and Teleforum, MTS has significantly increased the number of consumer touch points. At the end of 2009, MTS owned and operated 2,010 retail shops across Russia, almost doubling the number of stores during the year. In addition to the Company-owned stores there are also around 1,000 franchise stores. The Company has also put in place an agreement with Svyaznoy, the leading mobile phone retailer in Russia, to oversee MTS’ distribution network. Thus, MTS is developing the channels which will promote its mono-brand and distribute the Company’s innovative and integrated products and services of the future. Despite the macroeconomic volatility in 2009, MTS managed to outperform its competitors in the Company’s regions of operations. The key drivers in 2009 were strong growth in the subscriber base, increased data usage and the benefits from the above-mentioned newly launched retail distribution network. Details of how MTS developed across its operating countries can be found in the following sections. Page 16 - Russia (http://annualreview2009.mtsgsm.com/business_review/operating_review/operational_russia/)
Russia
In 2009, MTS maintained its leading share in the Russian telecommunications market by leveraging attractive tariffs and a mix of proprietary and multi-brand distribution. To further develop and expand the Company’s offerings, MTS acquired Comstar-UTS (’Comstar’) and Eurotel in 2009. The acquisition of fixed-line operator Comstar provides MTS with access to strategic growth markets in broadband, enabling the Company to provide integrated and innovative services for its Russian subscribers. Eurotel, a leading federal transit operator, was acquired to meet the increasing demand for data services and to realize OPEX savings through decreased dependence on external providers. The acquisition more than doubled the size of MTS’ network by adding 19,500 kilometers of optical fiber cable to the network. MTS’ total network is now approximately 35,000 kilometers.
In 2009, MTS’ revenue grew by 8% in local currency terms, from 235.6 million rubles in 2008 to 253.4 rubles, of which 43.8 million rubles and 47.0 million rubles were attributable to the fixed-line business respectively. Key drivers for this growth were increased data consumption, subscriber additions and an increase in sales of handsets and accessories. Page 17 - Ukraine (http://annualreview2009.mtsgsm.com/business_review/operating_review/operational_ukraine/)
Ukraine
Within MTS’ geographic footprint, Ukraine was the country where the impact of the recession was felt most directly during the year, with revenue declining by 4.9% year-on-year in local
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currency terms in 2009. As a result of cost control measures, CAPEX in Ukraine was reduced by more than 37% year-on-year in USD. MTS’ initiatives and efforts to improve the customer experience had a positive effect on subscriber quality and the optimization of distribution throughout the year. In 2009, ARPU remained stable at 37 hryvna, while churn was reduced by 7.3 percentage points and MOU increased from 279 to 462 minutes, or 66% year-on-year.
Strong VAS Revenue Growth
During the year, MTS carried out numerous projects to develop and refine its VAS offerings. As a result, data content revenue increased by 14%, data traffic revenue rose by 98% and messaging revenue was up by 56%. In total, revenue from VAS increased by 34% to 1,598.4 million hryvna. VAS initiatives in 2009 included: Expansion of CDMA-450 data coverage to over 200 population centers, including all major cities and towns Launch of the MTS Connect Manager application for mobile Internet services, a tariff review and promotions that drove higher sales during the holiday season Tariff plans such as the MTS Infomania stimulated SMS usage, while the Super MTS Energy data package (10Mb of traffic per day for a monthly fee) drove increased data consumption rates Introduction of MTS Compass, a location-based service providing addresses of nearby restaurants, cinemas and ATMs directly to customer’s handsets New SMS games and contests such as the Valentine’s Day Love Is promotion Initiatives on the MTS WAP-portal such as chats with celebrities Branded content service such as MTS Click, with products including games, MP3s, pictures and more Promotion of BlackBerry® devices and tariffs, and new services specially tailored for smartphone users Creation and launch of mobile portal Muzon which offers music and downloads for both mobiles and PCs Page 18 - Uzbekistan (http://annualreview2009.mtsgsm.com/business_review/operating_review/operational_uzbekistan/)
Uzbekistan
Increase in Revenue Amidst Increasing Competition
The Uzbek telecommunications market has experienced rapid development and rising competition through the entry of new players over the last few years. However, MTS has maintained its leadership position since its entry into Uzbekistan in August 2004. During 2009, wireless penetration reached 57%, up from 44% in 2008. With a total population of almost 28 million people, MTS sees great prospects for capturing additional growth in this promising market. MTS experienced strong subscriber growth throughout the year, adding over 1.4 million customers in 2009, up from 5.7 million in 2008 to 7.1 million at the end of 2009. MOU decreased by 41 minutes to 495 minutes, down 8% compared to 2008. ARPU decreased by 31%, to $5.30, as macroeconomic factors led many subscribers to seek more affordable tariffs, creating an influx of lower-value customers. On the upside, annual revenue increased by 3% year-on-year to $404.9 million.
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The Company is continuing to invest in its core network to satisfy capacity and coverage needs in the country on the back of these high growth rates. MTS promotes data usage in all of its markets of operation and, to better serve the needs of its Uzbek customers, the Company continued the 3G network roll-out in 2009 by launching 3G services in Bukhara, Urgench and Khiva. Page 19 - Turkmenistan (http://annualreview2009.mtsgsm.com/business_review/operating_review/operational_turkmenistan/)
Turkmenistan
Strong Subscriber Additions in a Growing Market
MTS entered Turkmenistan through the acquisition of BCTI, the leading national mobile operator, in 2005. Since the acquisition, MTS’ market share has risen more than 10 percentage points through increased investments and better customer value propositions. The country’s penetration levels have now reached 41%, and MTS also provides data services using GPRS and EDGE technologies throughout Turkmenistan. At the end of 2009, MTS had a market share of 85% and is a key player in the development of the country’s telecommunications industry. Throughout the year, MTS experienced rapid subscriber growth of almost 90%, with 830,000 net additions. MTS realized revenue growth of 60% year-on-year in Turkmenistan, despite the incoming of lower-value mass market subscribers which were a significant factor in the 28% decrease in ARPU from 39.6 TMT in 2008 to 28.4 TMT in 2009.
Page 20 - Armenia (http://annualreview2009.mtsgsm.com/business_review/operating_review/armenia/)
Armenia
Top-line Expansion in a Competitive Market
MTS has successfully built on the accomplishments of its K-Telecom subsidiary since the Company’s entry into Armenia in September 2007. The acquisition left 20% of the company in the
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hands of local owners as an incentive to remain engaged in the organization and retain local management. This provides continuity and proximity to the local market as well as sustained value in the organization. During 2009, MTS increased its subscriber base in Armenia by almost 3%. The Company is building strong relationships with its customers in the country. An increased number of customer service centers and optimized tariff plans have stimulated usage, which in turn led to an increase in MOU of 14% compared to the previous year. ARPU declined by 15% in 2009 compared to 2008 as a result of economic volatility and increased competition. Annual revenue in the country reached AMD 80.3 billion in 2009, up 2% from 2008.
In October 2007, the Company was allocated a ten-year 3G license for the entire territory of Armenia. MTS launched 3G services in April 2009 to stimulate data usage and further increase the quality of service. This is a key initiative in providing mobile broadband in the CIS and an integral part of the 3i strategy. Page 21 - Revenue Growth (http://annualreview2009.mtsgsm.com/business_review/financial_review/revenue_growth/)
Revenue Growth
Revenue Growth in Challenging Market Environment
During 2009, MTS delivered strong operating performance in each of its respective markets as it continued to successfully execute upon its corporate strategy. With the backdrop of volatile and challenging macroeconomic conditions and a depreciation in the Company’s functional currencies, MTS reported lower top- and bottom-line results in US dollar terms. However, in the functional currencies within Russia and nearly all of MTS’ CIS operations, revenue increased, demonstrating the Company’s ability to adapt to market conditions and continue growing the business. For 2009, MTS’: Consolidated revenue declined by 17.5% to $9,823.5 million in 2009 from $11,900.9 million in 2008 Total revenue in Russia increased by 8.6% in ruble terms to 66,594.6 million in 2009 from 61,299.5 million in 2008 Operating income before depreciation and amortization (OIBDA) decreased by 23.5% year-on-year to $4,473.6 million from $5,848.4 million in 2008 Consolidated net income was down year-on-year by 49.8% to $1,004.5 million from $2,000.1 million Page 22 - Resilient Cash Flow Generation (http://annualreview2009.mtsgsm.com/business_review/financial_review/resilient_cash_flow/)
Resilient Cash Flow Generation
Resilient Cash Flow Generation in 2009
During 2009, MTS’ management team was able to significantly reduce the Group’s non-ruble denominated debt to 37% of total debt (including hedging) as at the end 2009, compared to 80% in 2008. Going forward, this will significantly reduce volatility in interest expenses. As part of the Company’s efforts to re-leverage its debt, MTS successfully placed two ruble bonds in 2009 amounting to 30 billion rubles. Net income decreased by 50% from $2 billion to $1 billion for the full-year 2009. This decline was affected by interest expenses and one-time and periodic charges, such as the write-off in investments related for the most part to the revaluation of the Svyazinvest stake held at the Comstar level, the write-off of obsolete equipment tied to the roll-out of the Company’s 3G
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networks, expenses related to the acquisition of Comstar and higher non-cash tax provisions in anticipation of the upstreaming of dividends from MTS’ foreign subsidiary companies as their markets mature. The Company’s interest expenses rose due to the increase in total debt levels for the purchase of the majority and controlling stake in Comstar-UTS. The resulting non-cash FOREX losses amounted to $252.9 million due to the decline in the value of the functional currencies in the Company’s markets of operation versus the US dollar. Through the continued execution of the 3i strategy, MTS was able to generate a resilient cash flow during the year, with free cash flow of $1.1 billion in 2009, down from $2.3 billion in 2008. Page 23 - CAPEX (http://annualreview2009.mtsgsm.com/business_review/financial_review/capex/)
CAPEX
CAPEX Investments of $2.3 billion in 2009, to Remain at 22-24% of Revenue in 2010
MTS’ CAPEX in 2009 amounted to $2.3 billion, down from $2.6 billion in 2008. The main drivers for these expenditures were the 3G investments made in Russia, along with investments in the Company’s existing core network. The Company also elected to accelerate spending in Central Asian markets, in particular Uzbekistan, to meet growing network needs and to better utilize cash we hold in the market in local currency.
The Company is planning to spend a total of approximately 22-24% of revenue on CAPEX in 2010, of which a significant portion will be spent on 3G networks and backbone infrastructure in Russia as a result of the very high demand for mobile broadband. Over time, the investments made will decrease operating costs. The prior years’ investment in the Ukrainian network will lead to a reduction in CAPEX in the country in 2010, whilst spending in Uzbekistan and Turkmenistan is expected to remain at a high level, as these markets still represent significant growth opportunities for MTS. Page 24 - Financial Position (http://annualreview2009.mtsgsm.com/business_review/financial_review/financial_position/)
Financial Position
Strong Balance Sheet & Manageable Debt Position
Overall, MTS’ debt levels increased during the year, with total Group debt amounting to $8.3 billion as of December 31, 2009. Despite the rise in debt, the balance sheet remains strong and, with a Net Debt/LTM OIBDA ratio of 1.2, the Company’s debt position remains manageable. Details of the Company’s debt instruments and credit ratings are listed in the following sections.
Debt Instruments
MTS maintains a balanced currency structure of liabilities, with a preference for ruble-denominated funding. Given the volatile macroeconomic conditions over the last few years, MTS began hedging some of its liabilities in cross-currency swaps in the second quarter of 2009. At the end of 2009, MTS’ debt financing comprised bonds, credit facilities and syndicated loans. MTS successfully placed two ruble bonds in 2009. In May, MTS placed a 15 billion ruble bond which matures in 2014. The bond’s coupons will be paid annually at the rate of 16.75%. The bond holders have the right under a two-year put option to sell the bonds back to MTS. The second ruble bond of the year, and MTS’ fifth in total, was placed in July. The bond, which is also worth 15 billion rubles, was placed on the MICEX and matures in 2016. Funds raised through the ruble bonds will be used for capital corporate purposes, including the funding of MTS’ CAPEX program and better rationalization of the Company’s debt structure. The Company’s five outstanding ruble-denominated bonds have been moved to the “A1” quotation list on the
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Moscow Interbank Currency Exchange (MICEX) in April 2010.
Additionally, MTS has two Eurobonds traded on the Luxembourg Stock Exchange. The bonds mature in October 2010 and January 2012. At the end of December 2008, MTS secured a credit facility with Gazprombank worth €300 million for general corporate needs. The credit facility initially had a maturity of 2.5 years. Later in the year, MTS amended the terms to the credit facility and the interest rate was decreased by four percentage points, with the maturity being extended by a year. MTS secured additional financing from Sberbank through two loans in the amount of 12 billion rubles and 47 billion rubles in August-September 2009. The funds were allocated to MTS’ overall investment programs, including the acquisition of Comstar-UTS. In May 2009, MTS signed a syndicated loan facility agreement to refinance the first tranche of an existing $1.33 billion syndicated loan facility in the amount of $630 million that was scheduled to mature later in the month. $295 million was raised for Facility A and €214 for Facility B. The facilities carry an interest rate of LIBOR + 6.5% with maturity in 2012. In July 2009, MTS announced the successful closing of the syndication for its syndicated term loan facility signed in May 2009. Due to additional demand, the facility was oversubscribed by nearly $100 million. In February 2010, MTS voluntarily prepaid the syndicated loan agreement originally signed in May 2009 and amended in June 2009. In accordance with the terms of the loan agreement, MTS prepaid the principal and loan interest amounts (without penalties) on facility A of $373.8 million and facility B of €247.6 million. Throughout the year, MTS also secured vendor financing for network development from the European Bank for Reconstruction and Development (EBRD), Nordic Investment Bank (NIB), European Investment Bank (EIB), Swedish Export Credit Agency (EKN), Export Development Canada (EDC) and China Export and Credit Insurance Corporation SINOSURE. The financing amounted to $1,504.9 million and €413 million in total.
Credit ratings
Moody’s, Standard & Poor’s and Fitch have assigned the following ratings to the Company’s debt in 2009: Moody’s: Ba2, outlook stable S&P: BB, outlook stable Fitch: BB+, outlook stable The Group is in a strong position despite the economic downturn that has affected its markets of operation. MTS continues to operate with the necessary flexibility in the current credit markets, the operations continue to provide strong and sustained cash flows, and the Group’s balance sheet is well managed. The Company is thus well placed to take advantage of the opportunities that are available in markets in the near- to medium-term. Page 25 - Share Structure & Performance (http://annualreview2009.mtsgsm.com/business_review/mts_shareholder_information/shares_structure_performance/)
Share Structure & Performance
Share Structure
Since November 2003, MTS’ common stock has been listed locally on the Moscow Interbank Currency Exchange (MICEX). American Depositary Receipts (ADRs), each representing five shares of the Company’s common stock, have been listed on the New York Stock Exchange under the symbol ‘MBT’ since June 30, 2000. MTS’ share capital comprises of 1,993,326,138 outstanding common shares, of which 76,456,876 are treasury shares, as of December 31, 2009. A total of 777,396,505 ordinary shares are in the form of ADRs.
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On May 3, 2010 MTS announced that it changed its ADR ratio to 1 ADR per 2 common shares from the previous ratio of 1 ADR per 5 common shares. The Company did not acquire any shares in 2009 as part of its existing repurchase program.
Share Performance
MTS’ management team believes that the stock performance in 2009 is reflective of the fact that the Company continued to outperform its peers in the majority of its markets of operation and also that the newly introduced 3i strategic framework, and related key developments such as the acquisition of a controlling stake in Comstar-UTS, have positioned MTS strongly as a leading integrated telecom operator in a global context. Page 26 - Dividends (http://annualreview2009.mtsgsm.com/business_review/mts_shareholder_information/dividends/)
Dividends
MTS continually seeks ways to create shareholder value through both its commercial and financial strategies, including both organic and inorganic development as well as the Company’s capital management practices. Since 2007, the Group has maintained a dividend policy that aims to make dividend payments to shareholders in the amount of at least 50% of MTS’ annual U.S. GAAP net income. The dividend can vary depending on a number of factors, such as cash flow from operations, capital expenditure requirements, the Group’s overall debt position, the outlook for earnings growth, as well as potential M&A opportunities. Potential annual dividend payments, so long as they do not exceed 100% of net income according to RAS, must be recommended by the Board of Directors and approved by the shareholders. For the fiscal year 2008, MTS paid a cash dividend of $1.16 billion (39.40 rubles), which equated to $2.96 per ADR and 20.15 rubles per ordinary share and equaled 60% of MTS’ US GAAP Net Income in 2008. Under Russian law, dividends paid to a non-resident holder of the shares generally will be subject to Russian withholding tax. Page 27 - Board of Directors (http://annualreview2009.mtsgsm.com/governance/board/)
Board of Directors
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Ron Sommer Chairman of the Board – Non-Executive Director
In June 2009, Ron Sommer was appointed as the Chairman of the Board of Directors of MTS. Between May 1995 and July 2002, Ron Sommer was CEO of Deutsche Telekom AG and, prior to this, held a number of positions with Sony Corporation, including as CEO of Sony Deutschland, COO of Sony Corporation of America and COO of Sony Europe. Mr. Sommer is also a member of the Board of Directors of Motorola, Tata Consultancy Services, Weather Investments, Munich Reinsurance and a member of the International Advisory Board of Blackstone Group. Since 2003, he has worked as Chairman of the International Advisory Board at Sistema, and in 2005, Mr. Sommer was elected to the Board of Directors at Sistema as an independent director. Mr. Sommer holds a PhD degree in mathematics from the University of Vienna.
Anton Abugov Non-Executive Director
Anton Abugov joined MTS’ Board of Directors in June 2008. Mr. Abugov serves as the First Vice President, Head of the Strategy and Development functional division of Sistema. Between 2003 and 2006, Mr. Abugov was Managing Director of AKB Rosbank, in charge of its Corporate Finance Department. Prior to joining Rosbank, he was a Partner in Eurasia Capital Partners, overseeing investment projects in Eastern European telecoms and Russian petrochemical businesses. From 1997 to 2006, he was Strategic Adviser to the TAIF Group of Companies, one of the biggest financial-industrial groups in Russia. In 1995, Mr. Abugov was involved in developing infrastructure and a regulatory framework for the securities market in Russia, and between 1995 and 2002 he was Head of Corporate Finance at UFG (United Financial Group), and was involved in a number of major fundraisings, strategic consultancy, and merger and acquisition projects in various industries in Russia and Eastern Europe. In 1999, he was an adviser to RAO UES. Mr. Abugov graduated from the National Economics Academy under the Government of the Russian Federation.
Alexei Buyanov Non-Executive Director
Mr. Alexei Buyanov was elected to MTS’ Board of Directors in June 2003. Since September 2002, Mr. Buyanov has served as Senior Vice President of Sistema, heading the company’s financial and investment group. Mr. Buyanov joined Sistema in 1994 and, until 1995, he worked in property management at the company. In 1995, he was appointed Head of the department of Sistema-Invest and then became Vice President of Sistema-Invest. From 1998 to 2002, Mr. Buyanov served as Vice President of MTS. In July 2002, he was appointed Vice President of Sistema to run the department for financial restructuring. Mr. Buyanov graduated from the Moscow Physical-Technical Institute (MFTI) in 1992 with a Degree in Applied Physics and Mathematics.
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Daniel Crawford Non-Executive Independent Director
Daniel Crawford was elected to MTS’ Board of Directors in October 2008. Mr. Crawford has a wealth of experience, having held senior level positions at various telecommunications companies for almost three decades. Until recently, he served on the Board of Directors at Avantel, having previously worked as the company’s Chief Operating Officer. From 2004 to 2006, Mr. Crawford served as International and Wholesale President at MCI. Between 1998 and 2004, he was the Chairman of the Board of Directors at Embratel Participacoes, the holding company that controls Embratel, Brazil’s premier national telecommunications company. He has previously served as the Chairman of the Board of Star One and President of various divisions at MCI. Mr. Crawford graduated with a Master of Science degree in electrical engineering from New York University.
Sergei Drozdov Vice Chairman of the Board – Non-Executive Director
Mr. Sergei Drozdov was elected to MTS’ Board of Directors in June 2007. Since 2002, he has served as Acting First Vice President and Head of the Department of Corporate Property at Sistema, and in September 2002 he was appointed Director and First Vice President of Sistema and Chief of the Property Complex. Mr. Drozdov joined Sistema in 1995, first managing the Department of Development and Investments from 1995 to 1998 and, between 1998 and 2002, serving as Vice President, Acting President and First Vice President of Sistema-Invest. Prior to joining Sistema, Mr. Drozdov was head of the Administration of Financial Innovations and Marketing with the City of Moscow’s Property Fund from 1994 to 1995. He holds a number of other senior corporate positions, including Chairman of the Boards of Detsky Mir, Reestr, Detsky Mir Center and NII Stali. Mr. Drozdov also serves on the Boards of Sistema Telecom, MGTS, CSC, Sistema-International, Medical Technology MTH, Olimpiyskaya Sistema, Intourist Hotel Group and M-Consult. Mr. Drozdov graduated from the S. Ordzhonikidze State Academy of Management in Economics.
Mohanbir Gyani Non-Executive Independent Director
Mohanbir Gyani was elected to MTS’ Board of Directors in June 2007. He has almost 30 years of experience in the telecommunications and wireless industry. He is currently the Vice Chairman of Roamware, Inc., a services provider for wireless operators, having formerly served as both its CEO and Chairman of the Board. From 2000 to 2003, he was the President and CEO of AT&T Wireless Mobility Services. From 2003 and until 2005, Mr. Gyani was Senior Advisor to the Chairman and CEO responsible for strategy, business development and operations at AT&T Wireless Group. Previously, following the Vodafone and AirTouch merger, Mr. Gyani was Head of Strategy and Corporate Development and a member of the Board of Directors for Vodafone AirTouch Plc in 1999. Prior to the merger, Mr. Gyani was Executive Vice President and Chief Financial Officer of AirTouch Communications from 1994 to 1999. Mr. Gyani began his career in 1978 with Pacific Telesis Group where he held various financial and operating positions. Currently, Mr. Gyani is a member of the Boards of Keynote Systems, Safeway, Sirf
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Technology and Union Banc of California, as well as a board member of private firms and non-profit organizations. He is a former member of the Board of Directors of the GSM Association and of CTIA (Cellular Telecommunications and Internet Association) and has been a Board member in numerous public and private enterprises in the past. Mr. Gyani graduated with B.A. in Business Administration and holds an MBA in finance from San Francisco State University.
Paul J. Ostling Non-Executive Independent Director
Paul J. Ostling was elected to MTS’ Board of Directors in June 2007. He serves as the Chief Executive Officer and General Director of KUNGUR Oilfield Equipment & Services. Prior to joining the company, Mr. Ostling served as the Global Chief Operating Officer at Ernst & Young from 2003 to 2007. From 1977 to 2007, he held a number of positions at Ernst & Young, including Global Executive Partner from 1994 to 2003; Vice Chairman and National Director of Human Resources from 1985 to 1994; and Associate and Assistant General Counsel from 1977 to 1985. Mr. Ostling serves on the Board of Directors and as the Chairman of the Audit Committee of United Services Organization; is the Chairman of the Business Council for International Understanding; is the Deputy Chairman of the Board of Directors of Cool nrg; is on the Board of Directors and also the Chairman of Remuneration and Positions Committee at PromSvyaz Bank; is on the Board of Directors and as Vice President for Finance at Boy Scouts of America Transatlantic Council; and is on the Board of Directors of URALCHEM. Previously, Mr. Osling was a member of the Board of the TransAtlantic Business Dialogue (TABD) and a Co-Chairman of the Ukraine Foreign Investment Advisory Council. Mr. Ostling holds a Law Degree from Fordham University School of Law and a B.S. in Mathematics and Philosophy from Fordham University.
Mikhail Shamolin President and Chief Executive Officer of MTS – Executive Director
Mikhail Shamolin was appointed President and Chief Executive Officer (CEO) of MTS Group in May 2008. Prior to his current role, Mr. Shamolin held the position of Vice President, Head of Business Unit “MTS Russia” since August 2006. In this capacity, Mr. Shamolin managed the largest MTS business unit, one which contributes roughly 75% of value to the Company. During his tenure, revenues grew 67% and operating efficiency improved considerably as Mr. Shamolin presided over sustained growth in voice usage and adoption of value-added services, both of which led to an over 50% rise in average revenue per user (ARPU). Mr. Shamolin joined MTS in July 2005 as Vice President for Sales and Customer Service. He has served as a member of the MTS Board of Directors since October 2008. Prior to joining MTS, Mr. Shamolin worked at McKinsey & Co. from 1998 to 2004. In 2004 and 2005, he worked at Interpipe Corp. (Ukraine) as Managing Director of the Ferroalloys Division. Mr. Shamolin graduated from the Russian Academy of Government Service under the President of the Russian Federation in 1993. From 1996 to 1997, he completed a finance and management course for top managers at the Wharton Business School.
Tatiana Yevtoushenkova Non-Executive Director
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Ms. Tatiana Yevtoushenkova was elected to MTS’ Board of Directors in June 2007. She is currently the Advisor to the President of Sberbank. Previously, Ms. Yevtoushenkova served as the Advisor to the President of MTS from 2007 to 2008. Prior to joining MTS in October 2002, Ms. Yevtoushenkova served as Director of the Investments department at Sistema Telecom from December 1999. Ms. Yevtoushenkova graduated the Finance Academy under the Government of the Russian Federation.
Page 28 - Executive Management (http://annualreview2009.mtsgsm.com/governance/exec_management/)
Executive Management
Mikhail Shamolin President and Chief Executive Officer
Mikhail Shamolin was appointed President and Chief Executive Officer (CEO) of MTS Group in May 2008. Prior to his current role, Mr. Shamolin held the position of Vice President, Head of Business Unit “MTS Russia” since August 2006. In this capacity, Mr. Shamolin managed the largest MTS business unit, one which contributes roughly 75% of value to the Company. During his tenure, revenues grew 67% and operating efficiency improved considerably as Mr. Shamolin presided over sustained growth in voice usage and adoption of value-added services, both of which led to an over 50% rise in average revenue per user (ARPU). Mr. Shamolin joined MTS in July 2005 as Vice President for Sales and Customer Service. He has served as a member of the MTS Board of Directors since October 2008. Prior to joining MTS, Mr. Shamolin worked at McKinsey & Co. from 1998 to 2004. In 2004 and 2005, he worked at Interpipe Corp. (Ukraine) as Managing Director of the Ferroalloys Division. Mr. Shamolin graduated from the Russian Academy of Government Service under the President of the Russian Federation in 1993. From 1996 to 1997, he completed a finance and management course for top managers at the Wharton Business School.
Dr. Michael Hecker Vice President for Strategy and Corporate Development
Dr. Michael Hecker joined MTS in May 2006, and he currently serves as Vice President for Strategy and Corporate Development. Prior to joining MTS, Dr. Hecker worked at A.T. Kearney Europe from 2000 to 2006, where he was occupied in the fields of strategy, marketing and finance in European telecommunication and consumer goods industries. Prior to that, he worked in several positions as a Junior Lawyer in Berlin and Brandenburg (Germany). Dr. Hecker is a graduate in International Politics and Administration of the Pierre-Mendez-France-University in Grenoble (France) and a graduate in Law (1. and 2. German State Exam) and Modern History of the Georg-August-University in Goettingen (Germany), where he holds a PhD in Constitutional History.
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Mikhail Gerchuk Vice President and Chief Commercial Officer
Mikhail Gerchuk was appointed Vice President and Chief Commercial Officer (CCO) of MTS in December 2008. As the CCO of the Company, Mr. Gerchuk is responsible for the development and implementation of the Company’s marketing, sales and customer service strategies, as well as the realization of overall revenue targets. Mr. Gerchuk joined MTS in August 2007 as the Group Marketing Director. In this capacity, he was responsible for the development and implementation of MTS’ marketing strategy and the attainment of revenue growth targets in all countries of operation. Prior to joining MTS, Mr. Gerchuk was Chief Commercial Officer at Vodafone Malta from 2006 to 2007, where he accomplished revenue growth and increased market share for the business. He held senior marketing positions at Vodafone Group, UK between 2002 and 2006, including Head of Voice Propositions between 2004 and 2006 and Senior Global Marketing Manager between 2002 and 2004. Mr. Gerchuk also worked as an Associate at Booz Allen Hamilton in London from 1999 to 2002 and, before that, as Category Marketing Manager at PepsiCo and Brand Manager at Mars, Inc. Mr. Gerchuk holds an MBA from INSEAD and an M.A. in Economic Geography and English from the Moscow State University.
Alexey Kornya Vice President and Chief Financial Officer
Alexey Kornya was appointed to the role of Vice President and Chief Financial Officer (CFO) of MTS in June 2010. He served as acting Vice President and Chief Financial Officer of MTS from July 2008 to June 2010. Alexey Kornya has been at MTS since July 2004. He started as the Chief Financial Officer of Macro-region “Ural” and since then served at various positions in the Company. Mr. Kornya served as the Chief Financial Controller from March 2007 to July 2008. Prior to joining MTS, Mr. Kornya worked at PricewaterhouseCoopers, OJSC North-West Telecom, and AIG-Brunswick Capital Management. He graduated from St. Petersburg University of Economics and Finance in 1998.
Yury Gromakov Vice President for Technology Development
Yury Gromakov joined MTS in 1994 and currently serves as Vice President for Technology Development. Prior to joining MTS, he worked at various enterprises of the industrial military complex in the telecommunications field. Mr. Gromakov has received a number of State awards in science and technology. He is Vice President of the Russian National Radio Association and is also a member of the governing bodies of the 3G Association and the Russian GSM Association. Mr. Gromakov is also a member of the International Academy of Network and the International Academy of Information Science, Processes and Technologies.
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Andrey Ushatskiy Vice President and Chief Technology Officer
Andrei Ushatskiy was appointed Vice President and Chief Technology Officer of MTS in April 2009. He is responsible for managing technology development, strengthening the efficiency of the Company’s networks and enforcing high quality standards across the MTS Group. Mr. Ushatskiy has been with MTS since 1996, advancing from a specialist position to a variety of network operations roles to becoming the Deputy Head of MTS Russia for Technology. He has graduated from the Moscow Power Engineering Institute in 1997 and received an executive MBA from the Academy of National Economy under the Government of the Russian Federation in 2004.
Oleg Raspopov Vice President and Head of Business Unit “MTS Foreign Subsidiaries”
Oleg Raspopov was appointed Vice President and Head of Business Unit” MTS Foreign Subsidiaries” in January 2008. He joined MTS in 2006 and served as the Director of External Resources Department until May 2007, when he was appointed Acting Vice President and Head of Business Unit “MTS Foreign Subsidiaries”. From 2001 to 2002, Mr. Raspopov served in legal positions at Gazprom Energoservice. From 2002 to 2004, he was an Advisor to the CFO in RAO “UES of Russia” and the member of the Board of Directors of several companies affiliated with RAO “UES of Russia”, such as “Ren-TV” and Leader Insurance Co. In 2004, Mr. Raspopov created and headed an insurance broker Energoprotection. In 2003, he graduated from the Federal Tax Police Academy specializing in law, and in 2006 he graduated the Finance Academy under the Government of the Russian Federation with a degree in economics.
Andrei Terebenin Vice-President for Corporate Communications
Andrei Terebenin has served as Vice President for Corporate Communications of MTS since January 2006, supervising public relations, investor relations and some aspects of government relations. Mr. Terebenin held a number of management positions at Ekonomicheskaya Gazeta, Dun and Bradstreet CIS and AIG Russia. In 1999, he joined Triangle Porter Novelli Communications Agency as a Partner. From 2003, Mr. Terebenin held the position of General Director and Partner of R. I. M. Porter Novelli Communications Holdings. In 1985, Mr. Terebenin graduated from the Moscow State Institute of International Affairs (MGIMO) majoring in International Economic Relations and Arabic.
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Ruslan Ibragimov Vice President for Corporate and Legal Matters
Ruslan Ibragimov joined MTS in June 2006 as the Director of Legal Department and was appointed Director for Corporate and Legal Matters in February 2007. From January 2008, Mr. Ibragimov served as Vice President for Corporate and Legal Matters. From 1992 to 1996, Mr. Ibragimov headed legal services in several commercial banks. From 1997 to 2002, he worked as a Deputy Director and Head of Tax and Legal Consultations Department in the company Top-audit. Prior to joining MTS, he worked in a legal firm Ibragimov, Kogan and Partners. Mr. Ibragimov graduated from the faculty of law at the Moscow State University in 1986 and pursued a postgraduate degree there. Mr. Ibragimov is a member of the Russian Tax Law Association.
Sergey Nikonov Vice President for Human Resources and Administration
Sergey Nikonov joined MTS in July 2006 as Vice President for Human Resources and Administration. Prior to joining MTS, Mr. Nikonov worked as Deputy Director of OJSC “Power Machines”, where he managed HR and administrative activity. From 2003 to 2005, Mr. Nikonov was the Deputy Director at ROSNO, where he headed the department of HR, administrative activity and internal control. From 1992 to 2002, he worked for the Federal Tax Police, where occupied a range of positions. Sergey Nikonov graduated from the Military Institute of the Ministry of Defense of the Russian Federation as a military interpreter.
Pavel Belik Vice President for Corporate Security
Pavel Belik was appointed Vice President for Corporate Security in October 2005. He joined MTS in February 2005 as Director of the Security Department of Macro-region Moscow. From 1992 to 2004, Mr. Belik served for the intelligence service of the Russian Federation and in the Department of Internal Security of the Russian Federal Security Service. In 1999, Mr. Belik graduated from the Academy of the Russian Federal Security Service as a lawyer. In 1987, he graduated from the High Military College of Kalinin, specializing in the operation of radio-relay and tropospheric communication systems.
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Frederic Vanoosthuyze Vice President for Information Technology
Frederic Vanoosthuyze joined MTS in February 2010 and currently serves as Vice President for Information Technology. Prior to joining MTS, Frederic Vanoosthuyze worked at Millicom International Cellular SA (Luxembourg) as Group Chief Information Officer from 2006 to 2010. Prior to that, he worked at BASE, KPN Orange, Alcatel Bell and Siemens Atea. Mr. Vanoosthuyze graduated from High School of Liege and University of Mons in Belgium with an Engineering degree in Electronics and Telecommunications in 1995 and Engineering degree in Computer Science and Management in 1999. He also received an Executive Master degree in IT Governance at the Solvay Business School in 2006.
Aleksander Popovskiy Head of Business Unit “MTS Russia”
Aleksander Popovskiy was appointed Head of Business Unit “MTS Russia” in August 2008. Prior to his current role, Mr. Popovskiy served as the Head of the South Macro-region of MTS Russia since June 2007. From July 2004 to June 2007, he was the Head of the Povolzhye North-West Macro-region. Mr. Popovskiy joined MTS in April 2001 as the Director of Operations in the town of Kirov. Mr. Popovskiy graduated from the Vyatsky State Technical University in 1999 with a degree in computing. In 2002, he received a postgraduate degree from the same university in system analysis. In 2005, Mr. Popovskiy received a Candidate of Science degree in engineering from the Moscow Aviation Institute. He also attended the Executive MBA program at the London Business School.
Andrei Dubovskov Head of Business Unit “MTS Ukraine”
Andrei Dubovskov has been the Head of Business Unit “MTS Ukraine” since January 2008. He joined MTS Ukraine in December 2007 as First Deputy of General Director. From 2006 to 2007, he was the Head of Macro-region Ural. From 2004 to 2006, he was head of MTS branch in Nizhny Novgorod. From 2002 to 2004, Mr. Dubovskov headed Tele2’s operations in Nizhny Novgorod. From 1993 onwards, he occupied a number of management positions in such companies as Millicom International Cellular S.A., Millicom International Cellular B.V., Regionalnaya Sotovaya Svyaz LLC and CJSC 800, as well as other companies in Moscow, Alma-Ata, Nizhny Novgorod and Perm. Mr. Dubovskov graduated in 1993 from the Gerasimov State Institute of Cinematography.
Page 29 - Corporate Governance (http://annualreview2009.mtsgsm.com/governance/corporate_governance/)
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Corporate Governance
MTS is committed to best practice in corporate governance, in order to maximize shareholder value and realize the Company’s business strategy. MTS was one of the first Russian companies to conduct an IPO on the New York Stock Exchange. In June 2010, MTS will celebrate its 10 th anniversary on the NYSE. The Company is considered a forerunner of Russian corporate governance and aims to provide unrestricted access to information and maintain transparency of reporting. Over the last few years, MTS’ corporate governance practices have been recognized by Standard & Poor’s as one of the most transparent companies in Russia and the CIS. MTS has also been SOX-compliant since 2007. With a strong track record in these areas, MTS aims to advance the stable development of the communities in which the Company is present, helping to increase prosperity and establish a competitive economy in Russia and the CIS. The Company is determined to develop its corporate governance practices to maintain transparent, sustainable and efficient management structures. These practices also ensure that MTS can better access resources for further development when approaching the global financial capital markets. Page 30 - Corporate Responsibility (http://annualreview2009.mtsgsm.com/governance/corporate_responsibility/)
Corporate Responsibility
As one of the largest companies in Russia and the CIS, MTS recognizes and addresses the impact of its decisions and actions. MTS’ business practices are governed by the Company’s ethical standards, which have been developed with regard to its operations, geographical reach and relevant stakeholders. These ethical standards are applicable to all of MTS’ relations with consumers, employees and other partners. They address focus areas such as the investment in a sustainable society, social health and prosperity, consideration of relevant stakeholders, regulations and practices in the markets in which the Company operates, enhancing corporate governance practices and facilitating greater information transparency.
Providing Access to Modern Technology
MTS has over 102 million subscribers across its markets of operation with a total population of more than 230 million. The Company aims to provide its customers with modern technology regardless of geographical boundaries and MTS’ growth strategy is based on significant investment in the development of telecommunications infrastructure. The Company’s aim is to provide access to the most innovative products and services with a seamless user experience. In 2009, MTS became the first Russian telecommunications company to be awarded the ISO9001:2008 Certificate for our Quality Management System. The certification assures that MTS’ business activities and internal quality management processes comply with the highest international standards. The certification covers all of the Company’s locations in Russia, Ukraine and Uzbekistan. MTS is actively working to deliver the benefits of modern technology across various spheres of life. For example, the Company is working with the Ministry of Health of Ukraine to enable data transfer between various health institutes and facilities in the country and to build a telemedicine network.
Developing & Maintaining Sustainable Initative
MTS aims to avoid or minimize any adverse impact on the environment and to actively develop new products and services to make both our own and our clients’ businesses more sustainable. In 2009, MTS teamed up with Moscow United Energy Company (MUEK) in a smart metering project in the Moscow neighborhood of Chertanovo. MUEK installed MTS SIM cards into energy and water readers which provides wireless monitoring to the user and is also utilized to collect data for MUEK. The smart metering can save up to 10% of energy usage for the customer and will decrease the numbers of journeys undertaken by MUEK servicemen. MTS has also been developing new ways of using alternative energy to power its base stations. In the Karelia region in Russia, the Company has utilized wind power, and in Krasnodar, Russia, solar cells have been employed. In Moscow, the Group launched a project to begin testing hydrogen power cells. MTS has also launched a pilot station in the Crimea Peninsula in Southern Ukraine using wind turbines.
Promoting Equal Opportunities
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MTS has made a commitment to the communities in which it operates. The Company actively supports and engages in initiatives that promote equal opportunities as well as participating in a number of charitable causes. In 2009, MTS provided the charity ‘Give a Life’ with mobile telephones. The charity helps raise money to treat children suffering from cancer and other serious illnesses. This service was also offered to Russian doctors treating injured children in Gaza, and enabled them to consult with colleagues in Russia. Later in the year, MTS facilitated the phone-in marathon ‘A Christmas Present’ in the Novgorod region. The event raised funds that were donated to Novgorod-based families with chronically ill children. Furthermore, MTS is the official partner of sports events on regional and federal level. MTS is a sponsor of the National Olympic Committees of Ukraine and Armenia and of the Football Federation of Armenia. The Company has sponsored a number of sporting events across the CIS, including the recent “Dakar Series” Silk Way Rally 2009 in Turkmenistan. Page 31 - Cooperation with Shareholders (http://annualreview2009.mtsgsm.com/governance/corporate_responsibility/cooperationwithshareholders/)
Cooperation with Shareholders
MTS aims to provide equal opportunities to all shareholders, including timely access to information and the protection of shareholders’ rights. The key aspect of MTS’ cooperation with shareholders is providing unrestricted access to information and transparency of reporting. In order to optimize the communications and processes of cooperation with its shareholders, MTS participates in international ratings on corporate management, informational transparency and credit ratings. For MTS, disclosure of information and cooperation with shareholders is determined by the requirements of the US Securities and Exchange Commission, the New York Stock Exchange, the Russian Federation legislation, and the Company’s own charter and internal regulations. MTS practices a precise and strict approach to the preparation of its financial reports, which guarantees a high level of public disclosure of information. All significant financial and operating information published by the Company is audited by external auditors. MTS’ Investor Relations department is responsible for developing and maintaining a dialogue with investors, shareholders, ratings agencies, financial analysts, international media and other external stakeholders. In addition, the department fulfils the disclosure requirements of a publicly-traded company and maintains one of the highest levels of information transparency in Russia and the CIS. The Investor Relations department leads MTS’ global outreach effort and provides a variety of services to internal MTS departments that facilitates greater interaction and cooperation with the Group’s stakeholders. Over the last few years, MTS has been recognized as one of the most transparent and open companies in Russia and the CIS according to evaluations by Standard & Poor’s. MTS’ Investor Relations department also won IR Magazine‘s Russian and CIS ‘Best Overall IR Award’ in 2009, the Thomson Reuters Extel Survey – Focus Russia 2009 award for the best IR officer and the best company in telecommunications, and H&H Webranking’s award for Best Corporate Website in Russia for MTS’ English IR website in January 2010. All price-sensitive and significant information is made publicly available through press releases, regulatory filings and on the corporate website. Page 32 - Auditor's Report (http://annualreview2009.mtsgsm.com/financial_statements/auditors_report/)
Auditor's Report
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Open Joint Stock Company “Mobile TeleSystems” We have audited the accompanying consolidated statements of financial position of Mobile TeleSystems, a Russian Open Joint Stock Company, and subsidiaries (the “Group”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
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disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2009, the Group changed its method of presentation and accounting for noncontrolling interests. As discussed in Note 2 to the consolidated financial statements, on October 12, 2009, the Group acquired 50.91% of Open Joint Stock Company “Comstar—United TeleSystems” from Joint Stock Financial Corporation “Sistema”, the majority shareholder of the Group, resulting in a change in reporting entity. The transaction was accounted for as a transaction under common control. Assets and liabilities were transferred at historical cost. The change in reporting entity was accounted for in a manner similar to a pooling of interests which has been reflected retrospectively from the first period presented herein. Further, as discussed in Note 14 to the consolidated financial statements, during the year ended December 31, 2009, the Group recognized an impairment charge on its investment in the shares of Open Joint Stock Company “Telecommunication Investment Company” (”Svyazinvest”) in the amount of $349 million. The carrying value of this investment was written down to $860 million as of December 31, 2009 based on the estimated fair value of the investment as of that date. In the absence of readily determinable fair value of the investment in Svyazinvest, management reached its conclusion based on the use of estimates incorporating various unobservable market inputs as discussed in Note 14. Because of the material uncertainties inherent in the valuation of Svyazinvest, the value the Group could realize had a disposal of this investment been made between a willing buyer and seller may differ materially from its resultant carrying amount. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as of December 31, 2009 based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 29, 2010 expressed an unqualified opinion on the Group’s internal control over financial reporting. Moscow, Russia April 29, 2010, except for Note 31, as to which the date is June 25, 2010 Page 33 - Balance Sheets (http://annualreview2009.mtsgsm.com/financial_statements/balance_sheet/)
Consolidated Statements of Financial Position As of December 31, 2009 and 2008
(Amounts in thousands of U.S. Dollars, except share and per share amounts) December 31, 2009 CURRENT ASSETS: Cash and cash equivalents (Note 4) Short-term investments, including related party amounts of $13,413 and $339,396 (Note 5) Trade receivables, net (Note 6) Accounts receivable, related parties (Note 25) Inventory and spare parts (Note 7) Prepaid expenses, including related party amounts of $1,146 and $12,883 Deferred tax assets (Note 23) VAT receivable Other current assets, including assets held for sale of $18,519 and $46,426 (Note 2) $2,522,831 217,210 593,102 19,973 238,693 356,530 212,687 109,928 124,002 $1,121,669 360,117 443,184 70,620 141,113 346,399 213,091 129,598 196,632 2008 (restated - see Note 2)
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Total current assets PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $5,095,168 and $4,038,053, including advances given to related parties of $30,667 and $22,485 (Note 8) LICENSES, net of accumulated amortization of $341,421 and $295,056 (Notes 3 and 10) GOODWILL (Notes 3 and 11) OTHER INTANGIBLE ASSETS, net of accumulated amortization of $1,277,417 and $971,106 (Notes 3 and 12) DEBT ISSUANCE COSTS, net of accumulated amortization of $114,251 and $83,360 INVESTMENTS IN AND ADVANCES TO ASSOCIATES (Note 13) INVESTMENTS IN SHARES OF SVYAZINVEST (Note 14) OTHER INVESTMENTS, including related party amounts of $73,987 and $85,720 (Note 15) OTHER NON-CURRENT ASSETS, , including restricted cash of $6,389 and $23,572 (Note 16), assets held for sale of $nil and $32,067 (Note 2), and deferred tax assets of $97,355 and $63,507 (Note 23) and related party amounts of $1,615 and $1,006 Total assets The accompanying notes are an integral part of these consolidated financial statements.
4,394,956 7,745,331 364,722 803,773 1,067,336 127,069 220,450 859,669 78,893
3,022,423 7,758,220 488,381 469,471 1,230,643 37,737 249,887 1,240,977 111,559
118,546 $15,780,745
107,881 $14,717,179
December 31, 2008 (restated see Note 2)
2009 CURRENT LIABILITIES: Accounts payable, related parties (Note 25) Trade accounts payable Deferred connection fees, current portion (Note 19) Subscriber prepayments and deposits Debt, current portion (Note 17), including related party amounts of $10,278 and $76,710 (Note 25) Notes payable, current portion (Note 17) Capital lease obligation, current portion, including related party amounts of $1,344 and $5,693 (Note 9) Income tax payable Accrued liabilities (Note 22) Bitel liability (Note 30) Other payables Total current liabilities LONG-TERM LIABILITIES: Notes payable, net of current portion (Note 17) Debt, net of current portion (Note 17), including related party amounts of $15,929 and $18,066 (Note 25) Capital lease obligation, net of current portion, including related party amounts of $146 and $1,352 (Note 25) Deferred connection fees, net of current portion (Note 19) Deferred taxes (Note 23) Retirement and post-retirement obligations (Note 27) Property, plant and equipment contributions (Note 20)
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$87,403 504,967 46,930 501,351 780,514 1,218,084 3,173 16,136 825,413 170,000 103,962 4,257,933 1,391,549 4,935,275 921 116,168 298,453 25,537
226,482 875,428 55,012 438,723 1,677,529 10,435 8,253 23,102 563,317 170,000 74,760 4,123,041 1,578,540 2,089,488 4,030 119,213 190,712 29,250
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90,349 Long term accounts payable, related parties (Note 25) Other long-term liabilities Total long-term liabilities Total liabilities COMMITMENTS AND CONTINGENCIES (Note 30) Redeemable noncontrolling interests SHAREHOLDERS’ EQUITY: Common stock (2,096,975,792 shares with a par value of 0.1 rubles authorized and 1,993,326,138 shares issued as of December 31, 2009 and 2008, 777,396,505 of which are in the form of ADS as of December 31, 2009 and 2008) (Note 26) Treasury stock (76,456,876 and 108,273,338 common shares at cost as of December 31, 2009 and 2008) Additional paid-in capital Accumulated other comprehensive (loss)/income Retained earnings Nonredeemable noncontrolling interest Total shareholders’ equity Total liabilities and shareholders’ equity The accompanying notes are an integral part of these consolidated financial statements. (754,524) 5,135,842 1,026,119 4,403,069 $15,780,745 50,558 (1,054,926) 38,273 140,957 7,037,482 11,295,415 — 82,261
93,197 36,807 87,246 4,228,483 8,351,524 — 145,748
50,558 (1,426,753) 1,090,521 (451,264) 5,642,856 1,313,989 6,219,907 $14,717,179
Page 34 - Statements of Operations (http://annualreview2009.mtsgsm.com/financial_statements/statement_of_operations/)
Consolidated Statements of Operations For the Years Ended December 31, 2009, 2008 and 2007
(Amounts in thousands of U.S. Dollars, except share and per share amounts) Years ended December 31, 2009 NET OPERATING REVENUE Services revenue and connection fees (including related party amounts of $72,149, $209,990 and $178,312, respectively) Sales of handsets and accessories(including related party amounts of $20,689, $1,500 and $nil, respectively) Cost of services, excluding depreciation and amortization shown separately below (including related party amounts of $50,389, $232,689 and $161,500, respectively) Cost of handsets and accessories General and administrative expenses (including related party amounts of $68,903, $53,870 and $43,416, respectively) (Note 28) Provision for doubtful accounts Impairment of long-lived assets $9,505,837 317,705 9,823,542 2,004,690 349,304 1,968,193 109,632 75,064 $11,822,006 78,928 11,900,934 2,447,210 169,925 2,159,777 154,782 1,333 $9,634,698 89,208 9,723,906 1,863,797 158,848 1,853,624 67,720 18,556 2008 (restated see Note 2) 2007 (restated see Note 2)
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Print manager | MTS
Impairment of goodwill Other operating expenses (including related party amounts of $12,207, $12,008 and $8,349, respectively) Sales and marketing expenses (including related party amounts of $156,733, $241,814 and $200,600, respectively) Depreciation and amortization expenses Net operating income CURRENCY EXCHANGE AND TRANSACTION LOSS/(GAIN) OTHER EXPENSES/(INCOME) Interest income (including related party amounts of $53,940, $55,018 and $26,377) Interest expense, net of capitalized interest (including related party amounts of $3,613, $9,400 and $4,270) Equity in net income of associates (Note 13) Change in fair value of derivatives (Note 21) Impairment of investments (including related party amounts of $349,370, $nil and $21,814) (Notes 14,15) Other expenses, net (including related party amounts of $nil, $2,967 gain and $5,919 loss) Total other expenses, net Income before provision for income taxes and noncontrolling interest PROVISION FOR INCOME TAXES (Note 23) NET INCOME NET (LOSS)/INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST NET INCOME ATTRIBUTABLE TO THE GROUP Weighted average number of common shares outstanding—basic ( Note 2) Weighted average number of common shares outstanding—diluted ( Note 2) Earnings per share, basic and diluted (Note 2) The accompanying notes to the consolidated financial statements are an integral part of these statements.
173,622 755,902 1,839,568 2,547,567 252,945 (108,543) 571,719 (60,313) 5,420 368,355 23,254 799,892 1,494,730 503,955 990,775 (13,704) 1,004,479 1,885,750,147 1,885,750,147 $0.53
49,891 188,310 931,245 2,151,125 3,647,336 565,663 (70,860) 233,863 (75,688) 41,554 — 22,745 151,614 2,930,059 742,881 2,187,178 187,059 2,000,119 1,921,934,091 1,921,934,091 $1.04
126,308 775,240 1,674,885 3,184,928 (161,856) (53,507) 192,237 (71,116) 145,860 22,691 38,781 274,946 3,071,838 852,015 2,219,823 132,408 2,087,415 1,973,354,348 1,974,074,908 $1.06
Page 35 - Changes in Shareholders' Equity (http://annualreview2009.mtsgsm.com/financial_statements/shareholder_equity/)
Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2009, 2008 and 2007
(Amounts in thousands of U.S. Dollars, except share amounts) Common Stock Treasury Stock Accumulated Other comprehensive Income Total Nonequity redeemable attributnonable to the controlling Group interest
Shares BALANCES, January 1, 2007
Amount
Shares
Amount
Additional paid-in Capital
Retained earnings
Total equity
Redeemable noncontrolling interest
1,993,326,138 $50,558
(15,922,128)
$(114,778) $1,148,074
$76,515 $3,578,787 $4,739,156
$1,231,058 $5,970,214
$—
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Print manager | MTS
Comprehensive income: Net income Currency translation adjustment, net of tax of $14,513 Effect of change in functional currency Change in fair value of interest rate swaps, net of tax of $352 (Note 21) Unrecognized actuarial gains, net of tax of $nil (Note 27) Total comprehensive income Dividends declared Stock options of MTS exercised (Note 24) Call option of Comstar-UTS exercised (Note 21) Acquisition of KTelecom, net of tax (Note 3) Accrued compensation costs (Note 24) Repurchase of common stock of MTS (Note 26) Increase in ownership in subsidiaries (Note 3) Distribution to the controlling shareholder of Stream-TV Effect of FIN No. 48 implementation — — — — — — 2,087,416 2,087,416 127,869 2,215,285 4,539
—
—
—
—
(214)
360,263
—
360,049
90,621
450,670
—
—
—
—
—
—
358,997
—
358,997
—
358,997
—
—
—
—
—
—
(1,114)
—
(1,114)
—
(1,114)
—
—
—
—
—
—
(4,781)
—
(4,781)
(4,308)
(9,089)
—
— —
— —
— —
— —
— —
— —
— (742,475)
2,800,567 (742,475)
214,182 (35,993)
3,014,749 (778,468)
— —
—
—
848,126
869
5,188
—
—
6,057
—
6,057
—
—
—
—
—
(1,756)
(4,169)
72,833
66,908
478,774
545,682
—
—
—
—
—
—
—
(76,069)
(76,069)
—
(76,069)
85,232
—
—
—
—
—
—
2,486
(309)
2,177
—
—
—
—
(17,402,835)
(254,443)
—
—
—
(254,443)
—
(254,443)
—
—
—
—
—
1,450
—
—
1,450
(63,071)
(61,621)
—
— —
— —
— —
— —
(8,473) —
— —
— (9,683)
(8,473) (9,683)
(7,635) (2,929)
(16,108) (12,612)
— —
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Print manager | MTS
BALANCES, December 31, 2007 Comprehensive income/(loss) Net income Currency translation adjustment, net of tax of $nil Change in fair value of interest rate swaps, net of tax of $3,826 (Note 21) Unrecognized actuarial gains, net of tax of $nil (Note 27) Total comprehensive income/(loss) Dividends declared Stock options of MTS exercised (Note 24) Put option of Comstar-UTS exercised (Note 21) Accrued compensation costs (Note 24) Repurchase of common stock (Note 26) Reorganization of Comstar Direct (Note 3) Change in fair value of noncontrolling interest of KTelecom Change in fair value of noncontrolling interest of
1,993,326,138 $50,558
(32,476,837)
$(368,352) $1,146,755
$785,711 $4,910,809 $6,525,481
$1,814,077 $8,339,558
$89,771
—
—
—
—
—
—
2,000,119
2,000,119
177,261
2,177,380
9,798
—
—
—
—
—
(1,233,846)
—
(1,233,846)
(303,866)
(1,537,712)
—
—
—
—
—
—
(16,359)
—
(16,359)
—
(16,359)
—
—
—
—
—
—
536
—
536
1,085
1,621
—
750,450 — — — — — — (1,221,893) (1,221,893)
(125,520) (38,196)
624,930 (1,260,089) —
—
—
1,397,256
1,432
7,751
—
—
9,183
—
9,183
—
—
—
—
—
(9,358)
12,694
—
3,336
(274,472)
(271,136)
—
—
—
—
—
3,489
—
—
3,489
—
3,489
—
—
—
(77,193,757)
(1,059,833)
—
—
—
(1,059,833)
—
(1,059,833)
—
—
—
—
—
(6,539)
—
—
(6,539)
(20,283)
(26,822)
—
—
—
—
—
—
—
(2,730)
(2,730)
—
(2,730)
2,730
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Print manager | MTS
Dagtelecom Increase in ownership in subsidiaries (Note 3) Cash paid by Comstar-UTS for the acquisition of Stream TV BALANCES, December 31, 2008 Comprehensive income/(loss) Net income/(loss) Currency translation adjustment, net of tax of of $7,910 Change in fair value of derivatives, net of tax of $5,895 (Note 21) Unrecognized actuarial losses, net of tax of $nil (Note 27) Total comprehensive income/(loss) Dividends declared Accrued compensation costs (Note 24) Acquisition of Comstar-UTS Legal acquisition of Stream-TV (Note 3) Change in fair value of noncontrolling interest of KTelecom Dividends paid to noncontrolling interest of KTelecom
—
—
—
—
—
—
(43,449)
(43,449)
—
(43,449)
43,449
—
—
—
—
—
—
—
—
(6,352)
(6,352)
—
—
—
—
—
(51,577)
—
—
(51,577)
(35,265)
(86,842)
—
1,993,326,138 $50,558 (108,273,338) $(1,426,753) $1,090,521 $(451,264) $5,642,856 $4,905,918
$1,313,989 $6,219,907
$145,748
—
—
—
—
—
—
1,004,479
1,004,479
(18,063)
986,416
4,359
—
—
—
—
—
(197,429)
—
(197,429)
(30,240)
(227,669)
(4,399)
—
—
—
—
—
(23,579)
—
(23,579)
—
(23,579)
—
—
—
—
—
—
1,003
—
1,003
1,808
2,811
—
784,474 — — — — — — (1,221,381) (1,221,381)
(46,495) (1,005)
737,979 (1,222,386) —
— —
— —
— —
— —
1,173 (1,079,559)
— —
— (242,699)
1,173 (1,322,258)
— —
1,173 (1,322,258)
— —
—
—
—
—
(1,616)
43
—
(1,573)
(1,470)
(3,043)
—
—
—
—
—
—
—
7,495
7,495
—
7,495
(7,495)
—
—
—
—
—
—
—
—
—
—
(12,503)
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Print manager | MTS
Increase in ownership in subsidiaries (Note 3) BALANCES, December 31, 2009
—
—
31,816,462
371,827
(10,519)
(83,298)
(54,908)
223,102
(238,900)
(15,798)
(43,449)
1,993,326,138 $50,558
(76,456,876) $(1,054,926)
$— $(754,524) $5,135,842 $3,376,950
$1,026,119 $4,403,069
$82,261
The accompanying notes are an integral part of the consolidated financial statements.
Page 36 - Statements of Cash Flows (http://annualreview2009.mtsgsm.com/financial_statements/cash_flow_statement/)
Consolidated Statements of Cash Flows For the Years Ended December 31, 2009, 2008 and 2007
(Amounts in thousands of U.S. Dollars) Years ended December 31, 2009 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Currency exchange and transaction loss/(gain) Impairment of investments Impairment of long-lived assets Impairment of goodwill Debt issuance cost amortization Amortization of deferred connection fees Equity in net income of associates Provision for doubtful accounts Inventory obsolescence expense and other provisions Deferred taxes Gain from deconsolidation of a subsidiary Write-off of not recoverable VAT receivable Change in fair value of derivatives Other non-cash items Changes in operating assets and liabilities: Increase in accounts receivable (Increase) / decrease in inventory (216,654) (111,998) (162,908) 7,273 (173,621) 67,262 1,839,568 212,761 368,355 75,064 — 36,892 (67,057) (60,313) 109,632 12,225 101,444 — 9,652 5,420 6,153 2,151,125 578,643 — 1,333 49,891 22,087 (95,080) (75,688) 154,782 3,599 (206,102) — 48,374 41,554 (10,367) 1,674,885 (168,083) 22,691 18,556 — 26,425 (122,707) (71,116) 67,720 4,932 (85,021) (8,874) 17,516 145,860 16,787 $990,775 $2,187,178 $2,219,823 2008 (restated see Note 2) 2007 (restated see Note 2)
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Print manager | MTS
Decrease / (increase) in prepaid expenses and other current assets Decrease in VAT receivable Increase in trade accounts payable, accrued liabilities and other current liabilities Dividends received Net cash provided by operating activities
14,676 8,914 235,244 25,355 3,596,108
(257,682) 128,335 436,915 26,692 5,029,954 Years ended December 31, 2009 2008 (restated see Note 2)
49,840 12,567 131,030 4,900 3,851,372
2007 (restated see Note 2)
CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of subsidiaries, net of cash acquired Purchases of property, plant and equipment Purchases of intangible assets Proceeds from sale of property, plant and equipment and assets held for sale Purchases of short-term investments Proceeds from sale of short-term investments Purchase of a derivative financial instrument Purchases of other investments Proceeds from sales of other investments Investments in and advances to associates Decrease/(increase) in restricted cash Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock options exercise Cash payments for the acquisition of Comstar-UTS, Stream TV and non-controlling interests (Note 3) Repurchase of Comstar-UTS shares (Note 3) Disposal of Comstar-UTS shares (Note 3) Contributions from SMM, related party Proceeds from issuance of notes Repurchase of common stock Repayment of notes Notes and debt issuance cost Capital lease obligation principal paid Dividends paid Proceeds from loans Loan principal paid Net cash provided by/ (used in) financing activities Effect of exchange rate changes on cash and cash equivalents NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of the year CASH AND CASH EQUIVALENTS, end of the year — (1,333,418) — — — 1,003,226 — (9,182) (105,137) (15,592) (1,261,728) 3,598,100 (1,728,544) 147,725 42,015 1,401,162 1,121,669 $2,522,831 9,183 (109,442) (100,000) — 4,439 986,004 (1,059,833) (565,074) (6,693) (14,785) (1,144,719) 894,803 (572,425) (1,678,542) (342,338) 301,085 820,584 $1,121,669 6,057 — (32) 322,237 — — (254,443) — (1,863) (22,146) (794,311) 1,362,695 (876,263) (258,069) 112,717 458,700 361,884 $820,584 (270,540) (1,942,402) (385,907) 28,606 (519,129) 642,164 — (613) 44,003 1,950 17,182 (2,384,686) (86,951) (2,207,861) (404,964) 35,636 (569,377) 590,579 (19,422) (49,922) 425 (3,654) 7,522 (2,707,989) (1,087,031) (1,633,942) (265,030) 26,710 (670,360) 364,440 — (18,574) 38,745 — (2,278) (3,247,320)
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Print manager | MTS
SUPPLEMENTAL INFORMATION: Income taxes paid Interest paid Non-cash investing and financing activities: Contributed property, plant and equipment Building contributed in the share capital of Sistema Mass Media Additions to network equipment and software under capital lease Purchase of Comstar UTS’ shares funded by issuing of the promissory note Equipment acquired through vendor financing Amounts owed for capital expenditures Payable related to business acquisitions $3,213 — 830 — 27,983 236,364 37,985 The accompanying notes are an integral part of the consolidated financial statements. $3,194 — 5,673 365,552 13,198 604,641 31,719 $6,299 4,751 6,037 — 2,770 383,834 14,639 $432,066 510,784 $1,035,095 285,212 $937,448 265,054
Page 37 - Note 1: Description of Business (http://annualreview2009.mtsgsm.com/financial_statements/notes/1_description_of_business/)
Note 1: Description of Business For the Years Ended December 31, 2009, 2008 and 2007
(Amounts in thousands of U.S. Dollars, unless otherwise stated) 1. DESCRIPTION OF BUSINESS Business of the Group—Open Joint Stock Company Mobile TeleSystems (”MTS OJSC”, or “the Company”) was incorporated on March 1, 2000, through the merger of MTS CJSC and RTC CJSC, its wholly owned subsidiary. MTS CJSC started its operations in the Moscow license area in 1994 and then began expanding through Russia and the CIS. In these notes, “MTS” or the “Group” refers to Mobile TeleSystems OJSC and its subsidiaries. The Group provides a wide range of telecommunications services, including voice and data transmission, internet access, various value added services through wireless and fixed lines as well as selling equipment and accessories. Group’s principal operations are located in Russia, Ukraine, Uzbekistan, Turkmenistan and Armenia. MTS completed its initial public offering in 2000 and listed its shares of common stock, represented by American Depositary Shares, or ADSs, on the New York Stock Exchange under the symbol “MBT”. Since 2003 common shares of MTS OJSC have been traded on the Moscow Interbank Currency Exchange (”MICEX”). During the year ended December 31, 2009 through a series of transactions the Group acquired a 61.97% stake in Open Joint Stock Company Comstar—United TeleSystems (”ComstarUTS”), a provider of fixed line telecommunication services in Russia and the CIS, from Joint Stock Financial Corporation Sistema (”Sistema”) (Note 3). Acquisition of Comstar-UTS provided access to important growth markets in commercial and residential broadband which gives rise to the development of convergent telecommunication services. During the year ended December 31, 2009, the Group started to expand its own retail network, operated by Russian Telephone Company CJSC, a wholly owned subsidiary of MTS OJSC. During 2009 following this strategy the Group acquired a number of Russian federal and regional mobile retailer operators (Note 3). Ownership—As of December 31, 2009 and 2008, MTS’ shareholders of record and their respective percentage direct interests in outstanding shares were as follows: December 31, 2009 Joint Stock Financial Corporation Sistema Sistema Holding Limited (“Sistema Holding”), a subsidiary of Sistema
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2008 33.2% 10.1% 33.7% 10.3%
Print manager | MTS
Invest Svyaz CJSC (“Invest Svyaz”), a subsidiary of Sistema VAST, Limited Liability Company (“VAST”), a subsidiary of Sistema ADS Holders Free float, GDR Holders and others
8.4% 3.1% 40.6% 4.6% 100.0%
8.5% 3.2% 41.2% 3.1% 100.0%
The effective ownership of Sistema in MTS was 54.8% and 55.7% as of December 31, 2009 and 2008, respectively.
Page 38 - Note 2: Summary of Significant Accounting Policies and New Accounting Pronouncements (http://annualreview2009.mtsgsm.com/financial_statements/notes/2_accounting_policies/)
Note 2: Summary of Significant Accounting Policies and New Accounting Pronouncements
Accounting principles—The Group’s entities maintain accounting books and records in local currencies of their domicile in accordance with the requirements of respective accounting and tax legislations. The accompanying consolidated financial statements have been prepared in order to present MTS financial position and its results of operations and cash flows in accordance with accounting principles generally accepted in the United States (”U.S. GAAP”) and are expressed in terms of U.S. Dollars. The accompanying consolidated financial statements differ from the financial statements used for statutory purposes in that they reflect certain adjustments, not recorded on the entities’ books, which are appropriate to present the financial position, results of operations and cash flows in accordance with U.S. GAAP. The principal adjustments are related to revenue recognition, foreign currency translation, deferred taxation, consolidation, acquisition accounting, depreciation and valuation of property, plant and equipment, intangible assets and investments. Basis of consolidation—Wholly owned and majority owned subsidiaries where the Group has operating and financial control are consolidated. All intercompany accounts and transactions are eliminated upon consolidation. Those ventures where the Group exercises significant influence but does not have operating and financial control are accounted for using the equity method. Investments in which the Group does not have the ability to exercise significant influence over operating and financial policies are accounted for under the cost method and included in other investments in the consolidated statements of financial position. The Group’s share in the net income of unconsolidated associates is included in other income in the accompanying consolidated statements of operations and disclosed in Note 13. Results of operations of subsidiaries acquired are included in the consolidated statements of operations from the date of their acquisition. The acquisition of Comstar-UTS, an entity under common control, in the fourth quarter of 2009 (Note 3) has resulted in change in the reporting entity. The consolidated financial statements presented for the periods subsequent to the acquisition include the accounts of MTS OJSC and its subsidiaries, in which MTS OJSC exercises control through the ownership of majority voting interest. As the Group and Comstar-UTS are under the common control of Sistema, the assets and liabilities acquired were recorded at the historical carrying value and the consolidated financial statements were retroactively restated to reflect the Group as if Comstar-UTS had been owned since the beginning of the earliest period presented. The following table presents the significant effects of this restatement. As previously reported As of December 31, 2008: Total current assets Goodwill Property, plant and equipment, net Intangible assets, net Investments in shares of Svyasinvest Other non-current assets Total assets Total current liabilities Total long-term liabilities $2,368,734 377,982 5,900,129 1,392,131 — 409,358 10,448,334 3,307,141 3,062,798 $673,577 91,489 1,858,091 230,050 1,240,977 98,143 4,192,327 852,192 1,133,836 $(19,888) — — 96,843 — (437) 76,518 (36,292) 31,849 $3,022,423 469,471 7,758,220 1,719,024 1,240,977 507,064 14,717,179 4,123,041 4,228,483 Comstar-UTS Eliminations and other* As restated
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Print manager | MTS
Total liabilities Redeemable noncontrolling interest Shareholders’ equity attributable to the Group Nonredeemable noncontrolling interests Total equity
6,369,939 — 4,054,896 23,499 $4,078,395
1,986,028 — 798,517 703,891 $1,502,408
(4,443) 145,748 52,505 586,599 $639,104
8,351,524 145,748 4,905,918 1,313,989 $6,219,907
* Includes the effect of implementation of the provisions of EITF Topic D-98 (see Recently adopted accounting pronouncements).
As previously reported For the year ended December 31, 2008: Net operating revenue Net operating income Income before provision for income taxes and noncontrolling interests Net income Net income attributable to the Group EPS, basic and diluted, U.S. Dollars For the year ended December 31, 2007: Net operating revenue Net operating income Income before provision for income taxes and noncontrolling interests Net income Net income attributable to the Group EPS, basic and diluted, U.S. Dollars $8,252,378 2,733,846 2,829,088 2,090,818 2,071,504 $1.05 $10,245,293 3,203,492 2,570,684 1,940,063 1,930,419 $1.00
Comstar-UTS
Eliminations and other*
As restated
$1,765,226 441,192 355,134 242,694 109,912
$(109,585) 2,652 4,241 4,421 (40,212)
$11,900,934 3,647,336 2,930,059 2,187,178 2,000,119 $1.04
$1,562,291 451,635 245,517 131,597 35,176
$(90,763) (553) (2,767) (2,592) (19,265)
$9,723,906 3,184,928 3,071,838 2,219,823 2,087,415 $1.06
* Includes the effect of implementation of the provisions of EITF Topic D-98 (see Recently adopted accounting pronouncements).
As of December 31, 2009 and 2008, the Company had investments in the following significant legal entities: December 31, Accounting method Sibintertelecom Dagtelecom Russian Telephone Company ("RTC") Evrotel Ukrainian Mobile Communications (“UMC”) MTS Finance(1) Uzdunrobita BCTI MTS Bermuda(2) K-Telekom Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated 2009 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 80.0% 2008 100.0% 74.9% 100.0% — 100.0% 100.0% 100.0% 100.0% 100.0% 80.0%
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Print manager | MTS
Comstar-UTS MTS Belarus TS-Retail (1) Represents beneficial ownership. (2) A wholly owned subsidiary established to repurchase the Group’s ADSs.
Consolidated Equity Equity
64.0% 49.0% 34.6%
59.4% 49.0% 33.9%
Functional currency translation methodology—As of December 31, 2009, the functional currencies of the Group entities were the following: • For entities incorporated in Russian Federation, MTS Bermuda and MTS Finance—Russian ruble (”RUB”); • For UMC—Ukrainian hryvnia; • For Turkmen branch of BCTI—Turkmenian manat; • For K-Telecom—Armenian dram; • For MTS-Belarus—Belarusian ruble; and • For Uzdunrobita and other entities—U.S. Dollar (”USD”). The Group’s reporting currency is U.S. Dollars. Remeasurement of financial statements into functional currencies where applicable and translation of financial statements into U.S. Dollars has been performed as follows: For entities whose records are not maintained in their functional currencies, monetary assets and liabilities have been remeasured at the period-end exchange rates. Non-monetary assets and liabilities have been remeasured at historical rates. Revenues, expenses and cash flows have been remeasured at average rates. Remeasurement differences resulting from the use of these rates have been accounted for as currency exchange and transaction gains and losses in the accompanying consolidated statements of operations. For entities whose records are maintained in their functional currency, which is other than the reporting currency, all year-end statement of financial position items have been translated into U.S. Dollars at the period-end exchange rate. Revenues and expenses have been translated at average exchange rate for the period. Translation differences resulting from the use of these rates are reported as a component of other comprehensive income. Management estimates—The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence, valuation of assets acquired and liabilities assumed in business combinations, income tax benefits, the recoverability of investments, goodwill, intangible assets and other long-lived assets, certain accrued liabilities and valuation of financial instruments. Cash and cash equivalents—Cash and cash equivalents represent cash on hand and in bank accounts and short-term investments, including term deposits, having original maturities of less than three months. Short-term investments and loans—Short-term investments generally represent investments in promissory notes, loans and time deposits which have original maturities in excess of three months but less than twelve months. These investments are being accounted for at amortized cost. Accounts receivable—Accounts receivable are stated net of allowance for doubtful accounts. Concentrations of credit risk with respect to trade receivables are limited due to a highly diversified customer base, which includes a large number of individuals, private businesses and state financed institutions. Provision for doubtful accounts—The Group provides an allowance for doubtful accounts based on management’s periodic review for recoverability of accounts receivable, advances given, loans and other receivables. Such allowance reflects either specific cases, collection trends or estimates based on evidence of collectibility. For changes in the provision for doubtful loans and accounts receivable see Notes 5 and 6, respectively. Prepaid expenses—Prepaid expenses primarily comprise advance payments made to vendors for inventory and services. Inventory—Inventory mainly consists of handsets and accessories held for sale, cables and spare parts to be used for equipment maintenance within the next twelve months and advertising
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Print manager | MTS
materials. Inventory is stated at the lower of cost or market value. Inventory cost is determined using the weighted average cost method. Handsets and accessories held for sale are expensed when sold. The Group periodically assesses its inventories for obsolete and slow-moving stock. Value added tax (”VAT”)—Value added tax related to sales is payable to the tax authorities on an accrual basis based upon invoices issued to the customer. VAT incurred for purchases may be reclaimed from the state, subject to certain restrictions, against VAT related to sales. Assets held for sale—In 2006, the Group management decided to discontinue use of certain telecommunication equipment (”Lucent equipment”) in accordance with the Group’s network development strategy. The Group accounts for Lucent equipment in accordance with the authoritative guidance on property, plant and equipment, and reports Lucent equipment at the lower of its carrying amount or fair value less costs to sell. The fair value of these assets held for sale was considered a Level 3 valuation as it was based on significant unobservable inputs. The equipment had a fair value less costs to sell of approximately $46.4 million and $67.4 million as of December 31, 2009 and 2008, respectively. The Group initially negotiated with a third party to sell this equipment during the year ended December 31, 2007. However, due to the wide range of geographical areas in which the equipment was located and its diversity, the Group reconsidered the time needed to sell the equipment in 2007 and, as a result, the original plan of sale was extended. The amount of Lucent equipment sold during 2008 and 2009 equaled $12.8 million and $25.2 million, respectively. The remaining part of Lucent equipment held for sale in the amount of $18.5 million is expected to be sold during 2010 and was classified as other current assets in the accompanying consolidated statement of financial position as of December 31, 2009. Due to the fact that the initial plan of sale was reconsidered, the fair value of Lucent equipment was determined using the discounted cash flows based on an updated expected timing of sale. As a result, an impairment loss on Lucent equipment in the amount of $6.8 million was recorded as other operating expenses in the Group’s consolidated statement of operations for the year ended December 31, 2007. This loss is entirely attributable to the “Russia Mobile” operating reportable segment. No impairment loss on Lucent equipment was recorded during the years ended December 31, 2008 and 2009. Long-term investments and loans—Long-term financial instruments consist primarily of long-term investments and loans and long-term debt. Since quoted market prices are not readily available for all of its long-term investments and loans, the Group estimates their fair values based on the use of estimates incorporating various unobservable market inputs. The Group does not discount promissory notes of and loans granted to related parties, interest rates on which are different from market rates. Accordingly, fair value of such notes and loans may be different from their carrying value. Property, plant and equipment—Property, plant and equipment, including improvements that extend useful lives, are stated at cost. Property, plant and equipment transferred to MGTS free of charge are capitalized at their fair value at the date of transfer, and corresponding liability is recorded and amortized to the consolidated statements of operations over the contributed asset’s useful life. Property, plant and equipment with a useful life of more than one year is capitalized at historical cost and depreciated on a straight-line basis over its expected useful life as follows: Mobile telecommunication equipment Fixed line telecommunication equipment Leasehold improvements Buildings and constructions Other fixed assets 5 - 12 years 7 - 31 years Lesser of estimated useful life and lease term (1 - 10 years) 20 - 50 years 3 - 25 years
Construction in progress and equipment held for installation is not depreciated until the constructed or installed asset is ready for its intended use. Maintenance and repair costs are expensed as incurred, while upgrades and improvements are capitalized. Interest expense incurred during the construction phase of MTS’ network is capitalized as part of property, plant and equipment until the relevant projects are completed and placed into service. Asset retirement obligations—The Group calculates asset retirement obligations and an associated asset retirement cost when the Group has a legal or constructive obligation in connection with the retirement of tangible long-lived assets. The Group’s obligations relate primarily to the cost of removing its equipment from sites. The Group recorded the present value of asset retirement obligations as other long-term liabilities in the consolidated statement of financial position. License costs—License costs are capitalized as a result of (a) the purchase price allocated to licenses acquired in business combinations and (b) licenses purchased directly from government organizations, which require license payments. The Group’s operating licenses do not provide for automatic renewal. As of December 31, 2009, all licenses covering the territories of the Russian Federation were renewed. The cost to renew the licenses was not significant. However, the Group has limited experience with the renewal of its existing licenses covering the territories of the Group’s foreign subsidiaries. Management believes that licenses required for the Group’s operations will be renewed upon expiration, though there is no assurance of such renewals and the Group has limited experience in seeking renewal of its licenses. License costs are being amortized during the initial license period without consideration of possible future renewals, subject to periodic review for impairment, on a straight-line basis over the
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Print manager | MTS
period of validity, which is from three to fifteen years. Other intangible assets and goodwill—Intangible assets represent various purchased software costs, telephone numbering capacity, acquired customer base, rights to use radio frequencies and rights to use premises. A part of the rights to use premises was contributed by shareholders to the Group’s charter capital. Telephone numbering capacity with a finite contractual life is being amortized over the contract period which varies from two to ten years. The rights to use premises are being amortized over five to fifteen years. Amortization of numbering capacity costs starts immediately upon the purchase of numbering capacity. Telephone numbering capacity with unlimited contractual life is not amortized, but is reviewed, at least annually, for impairment in accordance with the authoritative guidance on intangibles. For acquisitions before January 1, 2009 goodwill represents an excess of the consideration paid over the fair market value of net identifiable assets acquired in purchase business combination and is not amortized. For the acquisitions after January 1, 2009 goodwill is determined as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. Goodwill is reviewed for impairment at least annually or whenever it is determined that one or more impairment indicators exist. The Group determines whether impairment has occurred by assigning goodwill to the reporting unit identified in accordance with the authoritative guidance on intangibles, and comparing the carrying amount of the reporting unit to the fair value of the reporting unit. If an impairment of goodwill has occurred, the Group recognizes a loss for the difference between the carrying amount and the implied fair value of goodwill (see Note 11). Software and other intangible assets are amortized over one to fifty years. Customer bases are amortized on a straight-line basis over their respective estimated average subscriber life, being from 20 to 240 months. Rights to use radio frequencies are amortized over the period of their contractual life, being from two to fifteen years. All finite-life intangible assets are amortized using the straight-line method. Impairment of long-lived assets—MTS periodically evaluates the recoverability of the carrying amount of its long-lived assets. Whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable, MTS compares undiscounted net cash flows estimated to be generated by those assets to the carrying amount of those assets. When the undiscounted cash flows are less than the carrying amounts of the assets, MTS records impairment losses to write the asset down to fair value, measured by the estimated discounted net future cash flows expected to be generated from the use of the assets. Impairment of property, plant and equipment and intangible assets amounted to $75.1 million, $1.3 million and $10.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. The impairment amounts were reported within other operating expenses in the accompanying consolidated statement of operations. The losses are entirely attributable to the “Russia Mobile” operating reportable segment. Investments impairment—Management periodically assesses the recoverability of the carrying values of investments and, if necessary, records impairment losses to write the investments down to fair value (see Note 14 and 15). Leasing arrangements—Entities of the Group lease operating facilities which include switches, other network equipment, vehicles, premises and sites to install base stations equipment and towers. Rentals payable under operating leases are charged to the statements of operation on a straight line basis over the term of the relevant lease. For capital leases, the present value of future minimum lease payments at the inception of the lease is reflected as an asset and a liability in the statement of financial position. Amounts due within one year are classified as shortterm liabilities and the remaining balance as long-term liabilities. Subscriber prepayments—MTS requires the majority of its customers to pay in advance for telecommunication services. All amounts received in advance of services provided are recorded as a subscriber prepayment liability and are not recorded as revenues until the related services have been provided to the subscriber. Treasury stock—Shares of common stock repurchased by the Group are recorded at cost as treasury stock and reduce the shareholders’ equity in the Group’s consolidated financial statements. Revenue recognition—Revenue include all revenues from the ordinary business activities of MTS. Revenues are recorded net of value added tax. They are recognized in the accounting period in which they are earned in accordance with the realization principle: Revenues derived from wireless, local telephone, long distance, data and video services are recognized when services are provided. This is based upon either usage (minutes of traffic processed, volume of data transmitted) or period of time (monthly subscription fees). Upfront fees received for connection of new subscribers, installation and activation of wireless, wireline and data transmission services (”connection fees”) are deferred and recognized over the estimated average subscriber life, as follows: Mobile subscribers Residential wireline voice phone subscribers Residential subscribers of broadband internet service Other fixed line subscribers The Group calculates an average life of mobile subscribers for each region in which it operates and amortizes regional connection fees.
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14 - 60 months 15 years 1 year 3 - 5 years
Print manager | MTS
Sales of handsets and accessories—MTS sells wireless handsets and accessories to customers who are entering into contracts for service and also as separate distinct transactions. The Group recognizes revenues from the sale of wireless handsets and accessories when the products are delivered to and accepted by the customer, as it is considered to be a separate earnings process from the sale of wireless services in accordance with the authoritative guidance on multiple element arrangements. The costs of wireless handsets and accessories, whether sold to subscribers through the distribution channel or as part of the service contract, are expensed when the associated revenue is recognized. Customer incentives—Incentives provided to customers are usually offered on signing a new contract or as part of a promotional offering. Incentives, representing the reduction of the selling price of the service (free minutes and discounts) are recorded in the period to which they relate, when the respective revenue is recognized, as a reduction to both accounts receivable and revenue. However, if the sales incentive is a free product or service delivered at the time of sale, the cost of the free product or service is classified as an expense. In particular, MTS sells handsets at prices below cost to contract subscribers. Such subsidies are recognized in the cost of handsets and accessories when the sale is recorded. Prepaid cards—MTS sells prepaid cards to subscribers, separately from the handset. Prepaid cards, used as a method of cash collection, are accounted for as customer advances. These cards allow subscribers to make a predetermined allotment of wireless phone calls and/or take advantage of other services offered by the Group, such as short messages and value added services. Revenue from the sale of prepaid cards is deferred until the service is rendered to the customer uses the airtime or the card expires. Roaming discounts—Group entered into roaming discount agreements with a number of wireless operators. According to the terms of the agreements MTS is obliged to provide and entitled to receive a discount that is generally dependant on the volume of inter operator roaming traffic. The Group accounts for rebates received from and granted to roaming partners in accordance with the authoritative guidance on customer payments and incentives. The Group uses various estimates and assumptions, based on historical data and adjusted for known changes, to determine the amount of discount to be received or granted. Such estimates are adjusted monthly to reflect newly available information. The Group accounts for discounts received as a reduction of roaming expenses and rebates granted as reduction of roaming revenue. The Group considers terms of the various roaming discount agreements in order to determine the appropriate presentation of the amounts receivable from and payable to its roaming partners in consolidated statement of financial position. Income taxes—The Group recognizes income tax positions if it is more likely than not that they will be sustained on a tax audit, including resolution of related appeals or litigation processes, if any, and measures them as the largest amount which is more than 50% likely of being realized upon ultimate settlement. Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities, and for the loss or tax credit carry forwards using enacted tax rates expected to be in effect at the time these differences are realized. Valuation allowances are recorded for deferred tax assets for which it is more likely than not that the assets will not be realized (see Note 23). Interests and penalties related to uncertain tax positions are recognized in income tax expense. Sales and marketing expenses—Sales and marketing expenses consist primarily of dealers’ commissions and advertising costs. Dealers’ commissions are linked to revenues received during the six-month period from the date a new subscriber is activated by a dealer. MTS expenses these costs as incurred. Advertising costs for the years ended December 31, 2009, 2008 and 2007, were $336.3 million, $475.6 million and $422.9 million, respectively. Borrowing costs—Borrowing costs include interest incurred on existing indebtedness and debt issuance costs. Interest costs for assets that require a period of time to get them ready for their intended use are capitalized and amortized over the estimated useful lives of the related assets. The capitalized interest costs for the years ended December 31, 2009, 2008 and 2007 were $72.3 million, $84.5 million and $104.5 million, respectively. Debt issuance costs are capitalized and amortized over the term of the respective borrowings using the effective interest method. Interest expense net of amounts capitalized and amortization of debt issuance costs, for the years ended December 31, 2009, 2008 and 2007, were $534.3 million, $211.8 million and $187.4 million, respectively. Retirement benefit and social security costs—The Group contributes to the local state pension and social funds, on behalf of all its employees. In Russia all social contributions are represented by a unified social tax (”UST”) calculated by the application of a regressive rate from 26% to 2% of the annual gross remuneration of each employee. The UST is allocated to three social funds, including the pension fund, where the rate of contributions varies from 20% to 2%, depending on the annual gross salary of employee. These contributions are expensed as incurred. The amount of UST paid by the Group in Russia amounted to $95.2 million, $122.3 million and $99.6 million in 2009, 2008 and 2007, respectively. Effective January 1, 2010, UST was abolished and replaced with direct contributions to the Pension Fund of the Russian Federation, Social Security Fund of the Russian Federation and Medical Insurance Fund of the Russian Federation. MGTS, a subsidiary of the Group, has historically offered its employees certain benefits upon and after retirement. The cost of such benefits includes current service costs and amortization of prior service costs. The expense is recognized during an employee’s years of active service with MGTS. The recognition of expense for retirement pension plans is significantly impacted by estimates made by management such as discount rates used to value certain liabilities, expected return on assets, future rates of compensation increase and other related assumptions. The Group accounts for pension plans in accordance with the requirements of the authoritative guidance on retirement benefits. In Ukraine, Uzbekistan, Turkmenistan and Armenia the subsidiaries of the Group are required to contribute a specified percentage of each employee payroll up to a fixed limit to the local pension fund, unemployment and social security funds. Payments to the pension fund in Ukraine amounted to $64.9 million, $14.9 million and $12.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. Amounts contributed to the pension funds in Uzbekistan, Turkmenistan and Armenia were not significant. The Group does not participate in any pension funds other than described above.
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Print manager | MTS
Earnings per share—Basic earnings per share (”EPS”) have been determined using the weighted average number of MTS shares outstanding during the year. Diluted EPS reflect the potential dilutive effect of stock options granted to employees. Financial instruments and hedging activities—From time to time to optimize the structure of business acquisitions and to defer payment of the purchase price the Group enters into put and call option agreements to aquire noncontrolling stake in the existing subsidiary. These put and call option agreements are classified as redeemable securities and are accounted for at redemption value which is generally the fair value of redemable noncontrolling interests as of reporting date. Fair value of redeemable noncontrolling interests is assessed based on discounted future cash flows of the acquired entity (”Level 3” significant unobservable inputs of the hierarchy established by the U.S. GAAP guidance). Changes in redemption value of redemable noncontrolling interests are accounted for in the Group’s retained earnings. Redemable noncontrolling interests are presented as temporary equity in the consolidated statement of financial position. The Group uses derivative instruments, including swap, forward and option contracts to manage foreign currency and interest rate risk exposures. The Group measures derivatives at fair value and recognizes them as either other current or other non-current assets or liabilities in the consolidated statement of financial position. The Group reviews its fair value hierarchy classifications quarterly. Changes in significant observable valuation inputs identified during these reviews may trigger reclassification of fair value hierarchy levels of financial assets and liabilities. During the years ended December 31, 2009 and 2008 no reclassifications occurred. The fair value measurement of the Group’s hedging agreements is based on the observable yield curves for similar instruments. The Group designates derivatives as either fair value hedges or cash flow hedges in case the required criteria are met. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the consolidated statement of operations together with any changes in the fair value of the hedged asset or liability that is attributed to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in accumulated other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statement of operations. For derivatives that do not meet the conditions for hedge accounting, gains and losses from changes in the fair value are included in the consolidated statement of operations (Note 21). The Group does not use financial instruments for trading or speculative purposes. Fair value of financial instruments—The fair market value of financial instruments, consisting of cash and cash equivalents, short-term investments, accounts receivable and accounts payable, which are included in current assets and liabilities, approximates the carrying value of these items due to the short term nature of these amounts. The fair value of issued notes based on MICEX and the Luxembourg stock exchange quotes as of December 31, 2009, is disclosed in Note 21. Based on current market interest rates available to the Group for long-term borrowings with similar terms and maturities, the Group believes the fair value of other fixed rate debt including capital lease obligations and the fair value of variable rate debt approximated its carrying value as of December 31, 2009. Comprehensive income—Comprehensive income is defined as net income plus all other changes in net assets from non-owner sources. Stock based compensation—The Group accounts for stock based compensation under the authoritative guidance on stock compensations. Under the provisions of this guidance companies must calculate and record the cost of equity instruments, such as stock options awarded to employees for services received, in the statements of operation. The cost of the equity instruments is to be measured based on the fair value of the instruments on the date they are granted (with certain exceptions) and recognized over the period during which the employees are required to provide services in exchange for equity instruments. The Group adopted the guidance using the modified prospective application transition method. Under this transition method, compensation cost for all share based awards granted prior to, but not yet vested as of December 31, 2006, was determined based on the grant date fair value estimated using the same assumptions and taking into account the estimated forfeitures. Recently adopted accounting pronouncements—On January 1, 2008, the Group adopted the authoritative guidance issued by the Financial Accounting Standards Board (”FASB”) on fair value measurements for financial assets and liabilities which provides a single definition of fair value, establishes a framework for measuring fair value and expands disclosure requirements of fair value measurement. On January 1, 2009, the Group adopted this guidance for all non-financial instruments accounted for at fair value on a non-recurring basis. The full adoption of this guidance did not have a material impact on the Group’s consolidated financial position, results of operations or cash flows at the date of adoption. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB on business combinations, including assets acquired and liabilities assumed arising from contingencies. This guidance significantly changes the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Upon the adoption of this guidance, the Group was required to expense certain transaction costs and related fees associated with business combinations that were previously capitalized. In addition, with the adoption of this guidance, contingent consideration is to be recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations. Contingent consideration was previously accounted for as a subsequent adjustment of purchase price. Also, changes to valuation allowances for acquired deferred income tax assets and adjustments to unrecognized tax benefits acquired generally are to be recognized as adjustments to income tax expense rather than goodwill. The impact of the adoption of the new guidance on the Group’s consolidated financial statements is largely dependent on the size and nature of the future business combinations. In 2009 the Group recognized acquisition related costs in the amount of $11.3 million in the consolidated statement of operations and recorded a liability for contingent consideration in amount of $30.8 million in its consolidated statement of financial position as of December 31, 2009.
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Print manager | MTS
On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB that changes the accounting for noncontrolling interests in the consolidated financial statements. Noncontrolling interests (previously referred to as “minority interest”) are to be reported as part of consolidated net earnings, and the accumulated amount of noncontrolling interests is to be included as part of shareholders’ equity. In addition to these financial reporting changes, the guidance provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in the Group’s controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings. The adoption of the new guidance resulted in the reclassification of noncontrolling interests to equity and presentation of net income and other comprehensive income gross of amounts attributable to noncontrolling shareholders of the subsidiaries of the Group. In connection with the issuance of the guidance on noncontrolling interests, EITF Topic D-98, Classification and Measurement of Redeemable Securities, (further—”Topic D-98”) was revised to include the SEC Staff’s views regarding the interaction between Topic D-98 and the new guidance. The revised Topic D-98 indicates that the classification, measurement, and earningsper-share guidance required by Topic D-98 applies to noncontrolling interests (e.g., when the noncontrolling interest is redeemable at a fixed price or fair value by the holder or upon the occurrence of an event that is not solely within the control of the issuer). The revisions to Topic D-98 that are specific to accounting for noncontrolling interests should be applied no later than the effective date of the new guidance. The implementation of the provisions of Topic D-98 as of January 1, 2009 resulted in reduction of Group’s retained earnings by $122.2 million (there of $78.8 million related to the redeemable noncontrolling interest in K-Telecom and $43.5 million related to the redeemable noncontrolling interest in Dagtelecom). On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB relating to disclosures about derivative instruments and hedging activities which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The adoption of this guidance did not result in a significant impact of the Group’s financial position, results of operations and cash flows. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB which modifies the determination of the useful life of intangible assets from a requirement to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions to one that requires an entity consider its own historical experience in renewing similar arrangements, or a consideration of market participant assumptions in the absence of historical experience. This guidance also requires disclosure of information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and ability to renew or extend the arrangements. The adoption of this guidance did not result in a significant impact of the Group’s financial position, results of operations and cash flows for the year ended December 31, 2009. The Group expects that the new guidance will have an impact on its accounting for future acquisitions of intangible assets, but the effect is dependent upon the acquisitions that are made in the future. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB for intangible assets acquired in a business combination or asset acquisition that an entity does not intend to actively use but intends to hold as defensive intangible assets to prevent others from obtaining access to them, referred to as defensive intangible assets. Historically, these assets have been typically allocated little or no value. Under this guidance defensive intangible assets are required to be accounted for as a separate identifiable asset recognized at fair value with an assigned useful life. The adoption of this guidance did not result in a significant impact of the Group’s financial position, results of operations and cash flows for the year ended December 31, 2009. The Group expects that the new guidance will have an impact on its accounting for future acquisitions of intangible assets, but the effect is dependent upon the acquisitions that are made in the future. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB on equity method investment accounting considerations. This guidance considers the effects of the issuances of the new guidance related to business combinations and noncontrolling interests on an entity’s application of the equity method: determination of the initial carrying value of an equity method investment, impairment assessment of an underlying indefinite lived intangible asset of an equity method investment, accounting for issuance of shares by an equity investee, and accounting for a change in an investment from the equity method to the cost method. The adoption of this guidance did not result in a significant impact of the Group’s financial position, results of operations and cash flows. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB on an employer’s disclosures regarding plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures required under this guidance are to provide users of financial statements with an understanding of (a) how investment allocation decisions are made; (b) the major categories of plan assets; (c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period; and (e) significant concentrations of risk within plan assets. The adoption of this guidance had no material impact on the Group’s financial statements. On June 15, 2009, the Group prospectively adopted the authoritative guidance issued by the FASB regarding the accounting for, and disclosure of, events that occur after the statement of financial position date but before the financial statements are issued. The adoption of this guidance had no material impact on the Group’s financial statements. On July 1, 2009, the Group adopted the FASB Accounting Standards Codification (”the Codification”) and the revised guidance on Hierarchy of Generally Accepted Accounting Principles introduced by the FASB. The Codification became the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative. With the adoption of this codification the Group has accordingly updated the financial statements disclosures. On October 1, 2009, the Group adopted additional guidance on measuring the fair value of liabilities issued by the FASB in August 2009 and effective the first interim or annual reporting period beginning after August 28, 2009. The new guidance specifies that the entity determine whether a quoted price exists for an identical liability when traded as an asset (i.e. a Level 1
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Print manager | MTS
fair value measurement) and if not, the entity must use a valuation technique based on the quoted price of a similar liability traded as an asset, or another valuation technique (i.e. market approach or income approach) and that the entity should not make a separate adjustment for restrictions on the transfer of a liability in estimating fair value. The adoption of this guidance had no material impact on the Group’s financial statements. New accounting pronouncements—In June 2009, the FASB updated the guidance related to consolidation accounting for variable interest entities to require an enterprise to perform an analysis to determine whether the entity’s variable interest or interests give it a controlling interest in a variable interest entity. The Group does not maintain any variable interest entities and as such, the adoption of this guidance, effective January 1, 2010, is not expected to have an impact on the Group’s consolidated financial statements. In October 2009, the FASB amended the revenue recognition for multiple deliverable arrangements guidance to require the use of the relative selling price method when allocating revenue in these types of arrangements. This method allows a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This updated guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this guidance, effective January 1, 2011, is not expected to have a significant impact on the Group’s consolidated financial statements. In January 2010, the FASB issued additional guidance that requires new disclosures related to transfers into and out of Level 1 and Level 2 of fair value measurements and separate presentation of information about purchases, sales, issuances, and settlements in the roll forward for Level 3 inputs. The update also clarifies existing guidance for fair value measurements for each class of assets and liabilities as well as for disclosures about inputs and valuation techniques. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures related to purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for interim and annual periods beginning after December 15, 2010. The adoption of the revised guidance will impact disclosures and will not have an impact on the Group’s consolidated financial statements. In February 2010, the FASB updated the authoritative guidance on the accounting for, and disclosure of, subsequent events to remove the requirement for an entity that files or furnished financial statements with the SEC to disclose a date through which subsequent events have been evaluated in both originally issued and restated financial statements. Restated financial statements include financial statements revised as a result of correction of an error or retrospective application of US GAAP. The updated guidance removes potential conflicts with the SEC’s literature. The Group adopted the revised guidance in February 2010.
Page 39 - Note 3: Business Acquisitions and Disposals (http://annualreview2009.mtsgsm.com/financial_statements/notes/3_business_acquired/)
Note 3: Business Acquisitions and Disposals
Acquisitions of certain retail chains—In 2009, in conjunction with the development of its own retail network, MTS acquired controlling interests in the number of retail chains in Russia. The acquisitions were accounted for using the purchase method of accounting. The following table summarizes the purchase price allocation of the retail chains acquired as of the acquisition date: Telefon.ru Month of acquisition Ownership interest acquired Current assets Non-current assets Brand Goodwill Current liabilities Non-current liabilities Fair value of contingent consideration Consideration paid February 100% $48,979 2,315 — 123,333 (108,701) (5,926) — $60,000 Eldorado March 100% $2,467 911 374 29,875 (12,248) (115) (3,414) $17,850 Teleforum October 100% $2,953 745 — 9,050 (3,614) — (6,934) $2,200 $54,399 3,971 374 162,258 (124,563) (6,041) (10,348) $80,050 Total
The Group’s financial statements reflect the allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. Goodwill was mainly attributable to the synergies from the Group’s ability to optimize the dealers’ compensation structure and to maintain its subscriber market share in Russia. Goodwill is not deductible for income tax purposes and was assigned to “Russia Mobile” operating segment. Brand components are amortized over the periods of 6 months.
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Under the terms of the individual purchase agreements, the Group may have to pay additional consideration as follows: • up to $25 million during the period from 12 to 18 months for Telefon.ru; • up to $5 million in 12 months for Eldorado; and • up to $8.8 million in 12 months for Teleforum. The additional consideration may be reduced by the amount of tax liability related to the activities prior to the acquisition dates. The Group may also deduct amounts of any potential losses arising from the loss of control on any of Teleforum’s outlets from the amount of contingent consideration. The financial statements reflect management’s estimate of the fair value of the contingent consideration at the acquisition date. Eurotel acquisition—In December 2009, MTS acquired a 100% stake in Eurotel OJSC (”Eurotel”), a Russian federal back bone network operator, from a third party. The consideration paid comprised $90 million. Under the terms of agreement the Group shall pay contigent consideration of up to $20 million by the end of February 2011 should Eurotel complete the construction of certain fibre optic lines and the Group retain control over the technical support agreements in relation to the optic cable lines. At the acquisition date the estimated fair value of this contingent consideration was $20 million. The acquisition was accounted for using the purchase method. The purchase price allocation for the acquisition has not been finalized as of the date of these financial statements, as the Group has not completed the valuation of individual assets of Eurotel. The preliminary purchase price allocation for the acquisition was as follows: Current assets Non-current assets Goodwill Current liabilities Non-current liabilities Fair value of contingent consideration Consideration paid $15,517 62,792 103,754 (70,960) (1,103) (20,000) $90,000
The excess of the purchase price over the value of net assets acquired and the fair value of contingent consideration was preliminary allocated to goodwill which was assigned to the “Russia Fixed” operating segment and is not deductible for income tax purposes. Goodwill is mainly attributable to the synergies from reduction of interconnect and internet traffic expenses of the Group. Comstar-UTS acquisition—In October 2009, MTS acquired a 50.91% stake in Comstar-UTS, a provider of fixed line communication services in Russia, Ukraine and Armenia, from Sistema. Consideration paid amounted to RUB 39.15 billion ($1.32 billion as of October 12, 2009) or RUB 184.02 ($6.21) per global depositary receipt (”GDR”). This acquisition has been accounted for as a common control transaction at carrying amount. The excess of consideration over the carrying value of net assets received has been recorded as a decrease in additional paid-in capital of the Group in the amount of $1.080 billion and as a decrease in retained earnings in the amount of $242.7 million (see also Note 2). Further, in December 2009, in a series of transactions, the Group acquired a 14.2% stake in the Moscow City Networks OJSC (”MGTS”) in exchange for 31,816,462 ordinary MTS shares (equal to RUB 7.17 billion based on the MICEX price on December 17, 2009, or RUB 225.4 per share, per the terms of the agreement with MGTS shareholder), representing 1.6% shares outstanding, previously held in treasury and $7.3 million in cash. The MGTS stake, represented by 2,462,687 ordinary shares and 11,135,428 preferred shares, were held by a wholly owned subsidiary of Comstar-UTS. Simultaneously, MTS received 46,232,000 shares, representing 11.06% of total shares outstanding, of Comstar-UTS from MGTS Finance S.A., a wholly owned subsidiary of MGTS. In addition, MTS paid Comstar-UTS a cash consideration of $8.3 million. The transaction was accounted for directly in equity. Kolorit acquisition—In September 2009, MTS acquired a 100% stake in Kolorit Dizayn Inc (”Kolorit”), a company providing outdoor advertising services in the territory of Uzbekistan, for $39.7 million in cash. The acquisition was accounted for using the purchase method of accounting. The summary of the purchase price allocation for the acquisition was as follows: Current assets Non-current assets Brand Goodwill
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$993 11,788 2,097 27,109
Print manager | MTS
Current liabilities Non-current liabilities Consideration paid
(2,098) (235) ($39,654)
Goodwill is mainly attributable to synergies from advertising cost optimization. Goodwill is not deductible for income tax purposes and was assigned to the “Uzbekistan Mobile” operating segment. Dagtelecom acquisition—In January 2009, Glaxen Corp. (”Glaxen”), the minority shareholder of Dagtelecom, exercised its put option over its 25.5% stake in the company. Consideration payable by the Group on the put option agreement comprised $51.3 million. Payment made by the Group was reduced by $12.5 million to offset the loan receivable from Glaxen at the date of acquisition. The transaction was accounted for directly in equity. Acquisitions of controlling interests in regional fixed line operators—In 2008, as a part of its program of regional expansion, Comstar-UTS has acquired controlling interests in certain alternative fixed-line operators in several regions of Russia. The acquisitions were accounted for using the purchase method of accounting. The following table summarizes the purchase price allocation of the fixed-line operators acquired as of the acquisition dates: Interlink Group Month of acquisition Ownership interest acquired Current assets Property, plant and equipment Goodwill Subscriber base Current liabilities Non-current liabilities Deferred tax liabilities Consideration paid (910) $8,428 June 100% $994 7,042 4,230 — (2,928) Strategia (Urals Telephone Company (“UTC”) July 100% $4,194 15,135 27,846 12,553 (6,280) (5,253) (4,710) $43,485 $5,188 22,177 32,076 12,553 (9,208) (5,253) (5,620) $51,913 Total
Recognition of goodwill in the amounts of $4.2 million and $27.8 million from the acquisition of Interlink Group and UTC, respectively, was due to the economic potential of the markets the acquired companies operate in. Goodwill was recognized in the “Russia Fixed” operating segment. The Group’s financial statements reflect the allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. Goodwill is not deductible for tax purposes. Subscriber base components are amortized over the periods ranging from 9 to 17 years, depending on the type of subscribers. Acquisition of Stream-TV—In December 2008, as part of its regional expansion, Comstar-UTS entered into an agreement with Sistema Mass Media (”SMM”), a subsidiary of Sistema, to acquire all of SMM’s interest in certain of its subsidiaries (collectively referred to as “Stream-TV”) for a total cash consideration of RUB 3,544.5 million ($117.2 million as of December 31, 2009), determined by an independent appraiser and payable in installments between December 2008 and March 2009, including RUB 980.0 million ($32.4 million as of December 31, 2009) payable to Stream-TV and RUB 2,564.5 million ($84.8 million as of December 31, 2009) payable to SMM. RUB 2,460.8 million ($81.4 million as of December 31, 2009) and RUB 103.3 million ($3.4 million as of December 31, 2009) of the consideration was paid to SMM during the years ended December 31, 2008 and 2009, respectively. In addition, in December 2008 Stream-TV paid $19.1 million in cash to SMM for the controlling interests in certain regional subsidiaries acquired by Stream-TV from SMM in 2007. In the first quarter of 2009, legal title to the business and full control of Stream-TV transferred to Comstar-UTS. This acquisition was accounted for by Comstar, and therefore the Group in a like manner, as a common control transaction. These financial statements reflect retrospective application of this acquisition in a manner similar to a pooling of interests. The transaction was accounted for directly in equity. MSS acquisition—In February 2008, MTS acquired an additional 9% stake in its Omsk subsidiary, Mobilnye Sistemy Svyazi (”MSS”), from a private investor for $16.0 million in cash. As a result of this transaction, the Group’s ownership in the subsidiary increased to 100%. The transaction was accounted for using the purchase method. The allocation of the purchase price increased the recorded license cost by $8.8 million and customer base cost by $3.2 million. License costs are amortized over the remaining contractual terms of the license of approximately 3 years and the customer base is amortized on a straight-line basis over the estimated average subscriber’s life of approximately 5 years. Acquisitions of controlling interests in regional fixed line operators—In 2007, as a part of its program of regional expansion, Comstar-UTS has acquired controlling interests in a
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Print manager | MTS
number of alternative fixed-line operators in certain regions of Russia and Ukraine. The acquisitions were accounted for using the purchase method of accounting. The following table summarizes the purchase price allocation of the fixed-line operators acquired as of the acquisition dates: Sochi telecom service Month of acquisition Ownership interest acquired Current assets Property, plant and equipment Goodwill Subscriber base Trademark Current liabilities Non-current liabilities Noncontrolling interest Consideration paid August 100% $51 114 451 232 — (98) — — $750 Digital Telephone Networks— South November 100% $10,977 102,558 — 91,923 1,683 (6,873) (33,112) — $167,156 Regional Technical Centre December 88% $13,421 21,402 — 738 — (3,949) (3,377) (2,109) $26,126 Comstar Ukraine* May 25% $— — 543 — — — — 424 $967 $24,449 124,074 994 92,893 1,683 (10,920) (36,489) (1,685) $194,999 Total
* Acquisition of an additional 25% interest in the existing subsidiary, Comstar Ukraine, resulting in 100% ownership as of December 31, 2007. Goodwill is attributable to the economic potential of the markets the acquired companies operate in. Goodwill is not deductible for income tax purposes and was assigned to “Russia Fixed” operating segment. The Group’s financial statements reflect the allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. Subscriber base components are amortized over the periods ranging from 13 to 24 years, depending on the type of subscribers. Bashcell acquisition—In December 2007, MTS acquired a 100% of Bashcell, the GSM-1800 mobile services provider in the Republic of Bashkortostan situated in Russia’s Volga region, for $6.7 million in cash. In connection to the purchase MTS assumed debt in the amount of $31.9 million due from Bashcell to its previous shareholder. This acquisition was accounted for using the purchase method of accounting. The purchase price allocation for the acquisition was as follows: Current assets Non-current assets Customer base cost Goodwill Current liabilities Non-current liabilities Deferred taxes Consideration paid $5,645 13,156 2,260 21,077 (7,737) (31,918) 4,209 $6,692
Goodwill is mainly attributable to the synergy expected as a result of the acquisition and was assigned to the “Russia Mobile” operating segment. The amount of goodwill is not deductible for income tax purposes. The customer base is amortized on a straight-line basis over the estimated average subscriber’s life of 5 years. K-Telecom acquisition—In September 2007, MTS acquired an 80% stake in International Cell Holding Ltd, 100% indirect owner of K-Telecom, Armenia’s wireless telecommunication operator. Along with acquisition, the Group entered into a call and put option agreement for the remaining 20% stake to be exercised not earlier than July 2010 and not later than July 2012. In accordance with put and call option agreement, the exercise price shall be fair value, as determined by an independent investment bank at the date the option is exercised subject to a cap of €200.0 million (equivalent of $286.9 million as of December 31, 2009). K-Telecom operates under the VivaCell brand in the GSM-900/1800 standard covering the entire territory of Armenia. The license is valid until the end of 2019. In accordance with sale and purchase agreement, MTS paid €260.0 million ($361.2 million as of the date of acquisition) for 80% of K-Telecom and €50.0 million ($69.0 million as of the date of acquisition) shall be paid out to the sellers in the course of three years from 2008 to 2010 provided certain agreed financial targets are met by K-Telecom. In conjunction with the
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acquisition, MTS extended a €140.0 million ($194.5 million as of date of acquisition) loan to K-Telecom for repayment of payables for equipment and other liabilities due as of the date of acquisition to PMF Telecommunications, an entity affiliated to the sellers. As a result, K-Telekom’s liabilities to the seller and its affiliates were settled. The loan is eliminated in consolidation and is not part of the purchase price. Finders and consultants fees paid in connection with the business combination and included in the purchase price were $26.7 million. This acquisition was accounted for using the purchase method of accounting. The purchase price allocation for the acquisition was as follows: Current assets Non-current assets License costs Customer base cost Trademark Goodwill Current liabilities Non-current liabilities Deferred tax liabilities Noncontrolling interest Consideration paid $31,805 198,984 217,354 76,754 2,555 120,579 (25,138) (149,841) (59,722) (10,772) $402,558
In accordance with the terms of the sale and purchase agreement, based on K-Telekom’s financial results for the year ended December 31, 2008, €20.0 million ($28.2 million as of December 31, 2008) was accounted for as the adjustment to purchase price and recognized as a liability in the accompanying consolidated statement of financial position as of December 31, 2008. And based on K-Telekom’s financial results for the year ended December 31, 2009, €5.0 million ($7.2 million as of December 31, 2009) was accounted for as the adjustment to purchase price and recognized as a liability in the accompanying consolidated statement of financial position as of December 31, 2009. Goodwill is mainly attributable to the economic potential of Armenia, given the low mobile penetration level of the market. Goodwill is not deductible for income tax purposes and was assigned to the “Armenia Mobile” operating segment. The customer base is amortized on a straight-line basis over the estimated average subscriber’s life of 46 months. Uzdunrobita acquisition—In June 2007, MTS purchased an additional 26% stake in Uzdunrobita, a mobile telecom operator in Uzbekistan, from a private investor for $250.0 million in cash. Previously MTS owned 74% of Uzdunrobita. As a result of this transaction, MTS’ ownership increased to 100%. The transaction was accounted for using the purchase method. Allocation of the purchase price increased the recorded license cost by $155.7 million, customer base cost by $6.5 million, and property plant and equipment cost by $5.4 million. Additionally, $35.0 million was recognized as goodwill. Goodwill is not deductible for income tax purposes and is mainly attributable to the economic potential of the markets where Uzdunrobita operates. Goodwill was assigned to the “Uzbekistan Mobile” operating segment. License costs are amortized over the remaining contractual terms of the licenses of approximately 9 years and the customer base is amortized over the estimated average subscriber’s life of 20 months. Acquisition of minority interest in Golden Line—In April 2007 Comstar-UTS acquired 100% shares in Golden Line from Comstar Direct, a 52% owned subsidiary of Comstar-UTS, thus increasing its effective shareholding in Golden Line to 100%. Golden Line was a provider of dedicated leased access lines in Moscow to corporate clients using its fiber optic network and MGTS’ switches. The acquisition has been accounted for as a common control transaction, at carrying amounts with excess of the book value of the net assets acquired over the purchase price, recorded as an increase in the additional paid-in capital of the Group in the amount of $2.8 million. Disposal of shares in Metrocom—In March 2007, Comstar-UTS sold its 45% stake in Metrocom, an affiliate, to a third party for a total cash consideration of $20.0 million, resulting in a gain of $3.2 million recognized as other income in the accompanying consolidated statement of operations for the year ended December 31, 2007. Reorganization of Comstar Direct—Prior to December 2008, Comstar Direct was owned 52% by Comstar-UTS and 48% by Sistema Mass Media (”SMM”), a subsidiary of Sistema. In December 2008, Comstar Direct was split into two legal entities: SMM-Finance which became a 100% subsidiary of SMM, and Comstar Direct which became a 100% subsidiary of Comstar-UTS. The effect of this transaction was the disposal of $26.8 million of net assets of Comstar Direct and the acquisition of the remaining 48% minority interest in Comstar Direct from SMM by Comstar-UTS. The transaction was accounted for at cost as a transaction between entities under common control. The excess of the net assets disposed of and the noncontrolling interest acquired was recorded in additional paid-in capital.
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Summary of the assets and liabilities disposed of by Comstar-UTS and the acquisition of the remaining 48% minority interest in Comstar Direct is as follows: Cash and short-term investments and loans Inventory and other current assets Trade and other accounts receivable Long-term investments and loans Trade accounts payable Total assets and liabilities disposed, net Noncontrolling interest acquired Excess of the net assets disposed of and minority interest acquired $5,029 6,168 22,379 7,508 (14,264) 26,820 (15,813) $11,007
Pro forma results of operations (unaudited)—The following unaudited pro forma financial data for the years ended December 31, 2009 and 2008, gives effect to the acquisitions of Eurotel, Teleforum, Kolorit, Eldorado and Telefon.ru, as though these business combinations had been completed at the beginning of 2008. 2009 Pro forma: Net revenues Net operating income Net income $9,908,584 2,547,218 980,553 $12,729,516 3,644,378 1,964,364 2008
The pro forma information is based on various assumptions and estimates. The pro forma information is not necessarily indicative of the operating results that would have occurred if the Group acquisitions had been consummated as of January 1, 2008, nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any potential revenue enhancements or cost synergies or other operating efficiencies that could result from the acquisitions. The actual results of operations of these companies are included in the consolidated financial statements of the Group only from the respective dates of acquisition.
Page 40 - Note 4: Cash and Cash Equivalents (http://annualreview2009.mtsgsm.com/financial_statements/notes/4_cash_cash_equivalents/)
Note 4: Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2009 and 2008 comprised the following: December 31, 2009 Ruble current accounts Ruble deposit accounts U.S. Dollar current accounts U.S. Dollar deposit accounts Euro current accounts Euro deposit accounts Hryvna current accounts Hryvna deposit accounts Uzbek som current accounts Uzbek som deposit accounts
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2008 571,424 1,059,105 217,586 12,000 602,825 4,161 1,260 2,768 26,922 140,045 142,272 108,935 35 5,940 423,150 1,462 1,948 229,904
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662 Turkmenian manat current accounts Armenian dram current accounts Armenian dram deposit accounts Other Total cash and cash equivalents 21,020 2,683 — 415 2,522,831
57,430 1,496 — 4,162 4,890 1,121,669
Page 41 - Note 5: Short-term Investments (http://annualreview2009.mtsgsm.com/financial_statements/notes/5_shortterm_investments/)
Note 5: Short-term Investments
Short-term investments as of December 31, 2009 comprised the following: Type of investment Promissory notes Funds in trust management Deposit Loan Agreement Deposit Deposit Deposit Deposit Other Total Contractor Sberbank (Note 17) Gazprombank VTB TS-Retail (Note 25) VTB UniBank Converse Bank AreximBank Annual interest rate 6.0% 9.0% 8.8% 13.0% 8.5% 7.0%-9.0% 8.0%–8.5% 9.0% Maturity date March – June 2010 October 2010 March 2010 August 2010 March 2010 January – June 2010 January – July 2010 January 2010 Amount $143,300 20,077 16,532 12,421 9,919 7,666 1,600 1,000 4,695 $217,210
Short-term investments as of December 31, 2008 comprised the following: Type of investment Deposit Deposit Promissory notes Promissory notes Promissory notes Funds in trust management Loan agreement Funds transferred to the investment broker Loan agreement Other Total
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Contractor MBRD (Note 25) MBRD (Note 25) Alt (Note 25) Delfa (Note 25) Finexcort (Note 25) MBRD (Note 25) Sistema-Hals (Note 25) IFC Metropol Sky Link and subsidiaries (Note 25)
Annual interest rate 10.3% 7.5% 18.0% 18.0% 16.5% 16.0% 11.0% 0.0% 11.0%
Maturity Date July 2009 June 2009 January 2009 January 2009 January 2009 March 2009 December 2009 March 2009 Various
Amount $30,000 15,000 85,091 68,073 68,073 45,949 16,688 11,981 10,522 8,740 $360,117
Print manager | MTS
Beta Link—During the year ended December 31, 2008 the Group granted a short-term loan in the amount of $28.2 million to Beta Link with a maturity date of December 2, 2009 and related interest of 9.0%. The Group had 49.0% of shares of Beta Link assigned as collateral pursuant to the loan agreement. As of December 31, 2008, the Group’s management became aware of the deteriorated financial position of Beta Link. Further, in March 2009, Beta Link filed a bankruptcy petition to the Arbitration Court of Moscow. The Group’s management believes that a probable risk exists that such loan may not be recovered. Accordingly, an allowance for the entire loan amount was recorded in the provision for doubtful accounts in the accompanying statement of operations for the year ended December 31, 2008.
Page 42 - Note 6: Trade Receivables, Net (http://annualreview2009.mtsgsm.com/financial_statements/notes/6_trade_receivables_net/)
Note 6: Trade Receivables, Net
Trade receivables as of December 31, 2009 and 2008 comprised the following: December 31, 2009 Subscribers Interconnect Dealers Roaming Other Allowance for doubtful accounts Trade receivables, net 323,135 108,376 61,827 159,119 37,982 (97,337) 593,102 2008 239,782 105,430 86,821 33,958 46,247 (69,054) 443,184
The following table summarizes the changes in the allowance for doubtful accounts receivable for the years ended December 31, 2009, 2008 and 2007: 2009 Balance, beginning of the year Provision for doubtful accounts Accounts receivable written off Currency translation adjustment Balance, end of the year 69,054 104,125 (75,280) (562) 97,337 2008 69,716 97,459 (84,363) (13,758) 69,054 2007 67,708 63,966 (66,096) 4,138 69,716
Page 43 - Note 7: Inventory and Spare Parts (http://annualreview2009.mtsgsm.com/financial_statements/notes/7_inventory_spare_parts/)
Note 7: Inventory and Spare Parts
Inventory and spare parts as of December 31, 2009 and 2008, comprised the following: December 31, 2009 Spare parts for telecommunication equipment SIM cards and prepaid phone cards
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2008 $26,928 23,821 $69,008 24,026
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Equipment for resale Advertising materials Other materials Total inventory and spare parts
164,974 2,195 20,775 $238,693
36,694 2,966 8,419 $141,113
Obsolescence expense for the years ended December 31, 2009, 2008 and 2007, amounted to $4.1 million, $3.9 million and $4.9 million, respectively, and was included in general and administrative expenses in the accompanying consolidated statements of operations.
Page 44 - Note 8: Property, Plant and Equipment (http://annualreview2009.mtsgsm.com/financial_statements/notes/8_property_plant_equipment/)
Note 8: Property, Plant and Equipment
The net book value of property, plant and equipment as of December 31, 2009 and 2008, was as follows: December 31, 2009 Network, base station equipment and related leasehold improvements Office equipment, computers and other Buildings and related leasehold improvements Vehicles Property, plant and equipment, at cost Accumulated depreciation Construction in progress and equipment for installation Property, plant and equipment, net $9,391,656 1,047,753 890,913 54,105 11,384,427 (5,095,168) 1,456,072 $7,745,331 2008 $8,080,872 881,580 802,655 54,855 9,819,962 (4,038,053) 1,976,311 $7,758,220
Depreciation expenses during the years ended December 31, 2009, 2008 and 2007, amounted to $1,387.0 million, $1,537.1 million and $1,145.7 million, respectively.
Page 45 - Note 9: Capital Lease Obligations (http://annualreview2009.mtsgsm.com/financial_statements/notes/9_capital_lease_obligations/)
Note 9: Capital Lease Obligations
MGTS entered into several agreements for the lease of telecommunication equipment with InvestSvyazHolding, a subsidiary of Sistema. The agreements expire on various dates in 20082010 and provide for transfer of ownership of the equipment to the Group after the last lease payment is made. The interest rate implicit in the leases varies from 10% to 14%. Respective obligations are denominated in Euro. In addition to the agreements with InvestSvyazHolding, the Group has certain other leasing agreements with third parties; assets capitalized under these agreements and respective liabilities are not material. The following is a summary of leased assets and respective depreciation as of December 31, 2009 and 2008: 2009 Telecommunications equipment Vehicles Buildings
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2008 $68,547 9,995 171 $70,563 12,114 171
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Improvement Leased assets, at cost Accumulated depreciation Leased assets, net
1,096 $79,809 (36,380) $43,429
— $82,848 (28,377) $54,471
Depreciation of the assets recorded under capital leases is included in depreciation and amortization in the accompanying consolidated statements of operations. Interest expense accrued on capital lease obligations for the years ended December 31, 2009, 2008 and 2007 amounted to $1.5 million, $2.0 and $3.3 million, respectively. The following table presents future minimum lease payments under capital leases together with the present value of the net minimum lease payments: Payments due in the period ended December 31, 2010 2011 2012 2013 2014 After 2014 Total minimum lease payments (undiscounted) Less amount representing interest Present value of net minimum lease payments Less current portion of lease obligations Non-current portion of lease obligations $3,598 1,066 173 172 172 241 5,422 (1,328) 4,094 (3,173) $921
Page 46 - Note 10: Licenses (http://annualreview2009.mtsgsm.com/financial_statements/notes/10_licenses/)
Note 10: Licenses
In connection with providing telecommunication services, the Group has been issued various GSM operating licenses by the Russian Ministry of Information Technologies and Communications. In addition to the licenses received directly from the Russian Ministry of Information Technologies and Communications, the Group has been granted access to various telecommunication licenses through acquisitions. In foreign subsidiaries, the licenses are granted by the local communication authorities. As of December 31, 2009 and 2008, the recorded values of the Group’s telecommunication licenses were as follows: December 31, 2009 Russia Uzbekistan Armenia Ukraine Turkmenistan Licenses, at cost Accumulated amortization Licenses, net
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2008 $264,387 196,517 196,193 49,046 — 706,143 (341,421) $275,883 196,517 241,710 50,642 18,685 783,437 (295,056)
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$364,722 Amortization expense for the years ended December 31, 2009, 2008 and 2007, amounted to $78.7 million, $154.7 million and $200.5 million, respectively.
$488,381
As of December 31, 2009, operating license related to Turkmenistan was fully amortized and its respective cost and accumulated amortization was written off from the consolidated statement of financial position. Based on the cost of amortizable operating licenses existing at December 31, 2009, the estimated future amortization expenses are $70.2 million during 2010, $51.3 million during 2011, $35.2 million during 2012, $30.6 million during 2013, $29.8 million during 2014 and $147.6 million thereafter. The actual amortization expense reported in future periods could differ from these estimates as a result of new intangible assets acquisitions, changes in useful lives and other relevant factors. Operating licenses contain a number of requirements and conditions specified by legislation. The requirements generally include the targets for start date of service, territorial coverage and expiration date. Management believes that the Group is in compliance with all material terms of its licenses. Licenses that expired during the year ended December 31, 2009 and 2008 were renewed, however their carrying value in accompanying consolidated statements of financial position is immaterial due to low cost of renewal. Management does not presently assume renewals in its determination of the useful lives of its licenses as the Group has limited experience with renewal of licenses.
Page 47 - Note 11: Goodwill (http://annualreview2009.mtsgsm.com/financial_statements/notes/11_goodwill/)
Note 11: Goodwill
The change in the net carrying amount of goodwill for 2009 and 2008 by reportable segments was as follows: Russia Mobile Balance at January 1, 2008 Acquisitions (Note 3) Impairment Currency translation adjustment Balance at December 31, 2008 Acquisitions (Note 3) Finalization of purchase accounting Currency translation adjustment Balance at December 31, 2009 $134,818 16,366 — (23,873) 127,311 189,842 — (3,636) $313,517 Ukraine Mobile $8,000 — — (2,492) 5,508 — — (197) $5,311 Russia Fixed $163,099 3,550 (49,891) (25,269) 91,489 104,439 41,835 (1,397) $236,366 Other $216,632 29,222 — (691) 245,163 34,283 — (30,867) $248,579 Total $522,549 49,138 (49,891) (52,325) 469,471 328,564 41,835 (36,097) $803,773
Based on goodwill impairment testing, as of December 31, 2008 the Group recorded an impairment loss of $49.9 million included in other operating expenses in the accompanying statement of operations for the year ended December 31, 2008 and related to the acquisition of United Cable Networks by Sistema Mass Media in 2006. United Cable Networks were acquired by the Group in 2009 as part of acquisition of Stream-TV (see Note 3). The impairment loss was primarily caused by changes in management forecasts with respect to regional markets and increase in weighted average cost of capital due to the economic crisis. The fair value of the reporting units was measured using a combination of present value techniques, the Gordon model and earnings multiples. As of December 31, 2009 no impairment of goodwill allocated to “Russia Fixed” reportable segment was recognized based on the goodwill impairment test. The fair value of the reporting unit was measured using a combination of present value techniques, the Gordon model and earnings multiples involving the assumptions that are based upon what management believes a hypothetical marketplace participant would use in estimating fair value on the measurement date. The most significant of these assumptions are as follows: (i) cost of capital was estimated at 14% based on internally calculated weighted average cost of capital and cost of capital estimated for Comstar-UTS by major market analysts; (ii) growth rate into perpetuity reflects the level of economic growth from the last forecasted period into perpetuity and reflects the long-term expectations for inflation. Management estimates these rates based on observable market data;
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(iii) operating expenses are forecasted with reference to the historic absolute and relative levels of expenses the Group has incurred in generating revenue in each reporting unit, operating strategies, specific forecasted operating expenses to be incurred and expectations on what these expenses would be like for an average market participant. Estimates of the forecasted operating expenses are developed from a number of internal and external sources, in combination with a process of on-going consultation with operational management; and (iv) forecasted capital expenditures, both recurring expenditure to replace retired assets and investments in new projects, are forecasted based on current strategies and specific forecast expenditures to be incurred, as well as expectations on what these costs would be like for an average market participant. Estimates of the forecasted capital expenditures are developed from a number of internal and external sources, in combination with a process of on-going consultation with operational management.
Page 48 - Note 12: Other Intangible Assets (http://annualreview2009.mtsgsm.com/financial_statements/notes/12_other_intangible_assets/)
Note 12: Other Intangible Assets
Intangible assets as of December 31, 2009 and 2008 comprised the following: December 31, 2009 Gross carrying value Net carrying value Gross carrying value December 31, 2008 Net carrying value
Useful lives, months Amortized intangible assets Billing and telecommunication software Acquired customer base Rights to use radio frequencies Accounting software Numbering capacity with finite contractual life Office software Other Unamortized intangible assets Numbering capacity with indefinite contractual life Total other intangible assets 13 to 240 20 to 240 24 to 180 13 to 60 24 to 120 13 to 60 36 to 600
Accumulated amortization
Accumulated amortization
$1,461,834 221,536 239,475 134,292 90,266 71,997 77,616 2,297,016
$(896,243) (74,320) (75,762) (79,480) (80,822) (41,110) (29,680) (1,277,417)
$565,591 147,216 163,713 54,812 9,444 30,887 47,936 1,019,599
$1,293,005 381,054 205,923 94,026 89,273 57,833 40,648 2,161,762
$(710,988) (63,823) (48,622) (41,140) (76,727) (20,366) (9,440) (971,106)
$582,017 317,231 157,301 52,886 12,546 37,467 31,208 1,190,656
47,737 $2,344,753
— $(1,277,417)
47,737 $1,067,336
39,987 $2,201,749
— $(971,106)
39,987 $1,230,643
As a result of the limited availability of local telephone numbering capacity in Moscow and the Moscow region, MTS has been required to enter into agreements for the use of telephone numbering capacity with several telecommunication operators in Moscow. The costs of acquired numbering capacity with a finite contractual life are amortized over a period of two to ten years in accordance with the terms of the contracts to acquire such capacity. Numbering capacity with an indefinite contractual life is not amortized. Amortization expense for the years ended December 31, 2009, 2008 and 2007 amounted to $373.9 million, $459.3 million and $328.7 million, respectively. Based on the amortizable intangible assets existing at December 31, 2009, the estimated amortization expense is $370.0 million for 2010, $248.5 million for 2011, $149.4 million for 2012, $85.0 million for 2013, $36.4 million for 2014 and $130.3 million thereafter. The actual amortization expense reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives and other relevant factors.
Page 49 - Note 13: Investments in and Advances to Associates (http://annualreview2009.mtsgsm.com/financial_statements/notes/13_investments_advances_to_associates/)
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Note 13: Investments in and Advances to Associates
As of December 31, 2009 and 2008, the Group’s investments in and advances to associates comprised the following: December 31, 2009 MTS Belarus—equity investment MTS Belarus—loans receivable Coral/Sistema Strategic Fund—equity investment Receivables from other investee companies Total investments in and advances to associates $220,350 100 — — $220,450 2008 $237,427 2,050 10,041 369 $249,887
MTS Belarus—In April 2008 the Group entered into a credit facility agreement with MTS Belarus valid till March 15, 2009. The facility allowed MTS Belarus borrowing up to $33.0 million and bears an interest of 10.0%. In 2009 the maturity date was extended to March 15, 2010 and the total allowable amount was increased to $46.0 million. As of December 31, 2009, the balance outstanding under the facility was $0.1 million. After the statement of financial position date the agreement with MTS Belarus was prolonged till March 15, 2011. The financial position and results of operations of MTS Belarus as of and for the year ended December 31, 2009 were as follows: (unaudited) Total assets Total liabilities Net income $498,278 56,736 143,061
Coral/Sistema Strategic Fund—In the years ended December 31, 2007 and 2008, the Group purchased an equity interests in a limited partnership organized by Sistema. The purpose of the strategic fund was to invest in various projects in the telecommunications and high-technology area. The Group exercised significant influence over Coral and therefore the investment was accounted for using equity method. As of December 31, 2009 the management of the Group determined that the investment was fully impaired, consequently the carrying value of the investment was written off in the amount of $7.4 million and recorded in equity in net income/loss of associates in the accompanying consolidated statement of operations for the year then ended. As of December 31, 2009 the Group did not have any further commitment to invest in Coral according to the restructuring agreement which was signed by the partners of the fund in September 2009. TS-Retail—As discussed in Note 25, in the year ended December 31, 2007 the Group invested in TS-Retail, an equity investee, $5.6 million. As of December 31, 2007 the investment was written off to $nil. The Group’s share in the earnings or losses of associates was included in other income in the accompanying consolidated statements of operations. For the years ended December 31, 2009, 2008 and 2007, this share amounted to $60.3 million, $75.7 million and $71.1 million, respectively.
Page 50 - Note 14: Investment in Shares of Svyazinvest (http://annualreview2009.mtsgsm.com/financial_statements/notes/14_investment_shares_svyazinvest/)
Note 14: Investment in Shares of Svyazinvest
In December 2006, as a part of its program of regional expansion, Comstar-UTS acquired a 25% stake plus one share in Telecommunication Investment Joint Stock Company (”Svyazinvest”) from Mustcom Limited for a total consideration of approximately $1,390.0 million, including cash of $1,300.0 million and the fair value of the call and put option of $90.0 million. Comstar-UTS and MGTS Finance S.A., a subsidiary of MGTS, have acquired 4,879,584,306 ordinary shares of Svyazinvest, with Comstar-UTS buying 3,378,173,750 shares, which represent 17.3% of total outstanding shares of Svyazinvest, and MGTS Finance S.A. buying 1,501,410,556 shares, representing 7.7% of total outstanding shares of Svyazinvest. Svyazinvest is a holding company that holds controlling stakes in seven publicly traded fixed-line operators (”MRKs”) based in seven federal districts of Russia. Based on the analysis of all relevant factors, the management determined that the acquisition of 25% plus one share of Svyazinvest does not allow the Group to exercise significant influence over this entity due to its legal structure and certain limitations imposed by Svyazinvest charter documents. Accordingly, the Group accounts for its investment in Svyazinvest under the cost
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method. In November 2009, the Group, Sistema and Svyazinvest (”the Parties”) signed a non-binding memorandum of understanding (”MOU”), under which the Parties agreed to enter in the series of transactions which would ultimately result in (i) disposal of the Group’s investment in Svyazinvest to a state controlled enterprise; (ii) noncash extinguishment of the Group’s indebtedness to Sberbank (see Note 17); (iii) increase in Sistema’s ownership in Sky Link Group (currently a 50% affiliate of Sistema, see also Note 25) to 100% and disposal of this investment to a state controlled enterprise; and (iv) disposal of 28% of MGTS’ common stock owned by Svyazinvest to Sistema. In addition, certain cash consideration, the amount of which is yet to be negotiated between the parties, is to be paid to Svyazinvest under the MOU. The 28% stake in MGTS is then intended to be transferred to the Group. Based on the estimated fair values of the elements of the assets to be exchanged and liabilities to be extinguished under the MOU and other relevant factors, management believes that as of December 31, 2009 there were indicators of potential impairment of the Group’s investment in Svyazinvest. Svyazinvest is a non-public entity and the Group has no access to consolidated financial information of Svyazinvest at a level of detail necessary to perform a complete fair value assessment of the Svyazinvest business directly, based on estimated future cash flows or otherwise. As a result, management has determined that the best estimate of the fair value of the Group’s investment in Svyazinvest is the amount determined based on the MOU. Based on the MOU, the estimated fair value of the investment, which included significant unobservable inputs (Level 3 measurement), is approximately RUB 26.0 billion ($859.7 million as of December 31, 2009). The following table represents carrying value of investment in Svyazinvest as of December 31, 2009 and 2008: Balance at December 31,2008 Impairment loss Currency translation adjustment Balance at December 31,2009 $1,240,977 (349,370) (31,938) $859,669
At the date of these consolidated financial statements, the Group did not have a legally binding commitment to enter into the transaction contemplated by the MOU and there is an uncertainty as to the ability of the Group to complete the transaction in a near future. Further, due to material uncertainties inherent in the valuation of Svyazinvest, the result could be materially different from the valuation performed by another party or using information which management of the Group does not have the ability to access, or from the amount the Group would be able to realize in an exchange transaction involving the investment in Svyazinvest.
Page 51 - Note 15: Other Investments (http://annualreview2009.mtsgsm.com/financial_statements/notes/15_other_investments/)
Note 15: Other Investments
As of December 31, 2009 and 2008, the Group’s other investments comprised of the following: Annual interest rate Loans receivable from TS-Retail (Note 25) Investment in Tammaron Ltd Promissory notes of Sistema Telecom (Note 25) Investments in ordinary shares (Note 25) Loan receivable from Intellect Telecom (Note 25) Promissory notes of Sistema (Note 25) Other Total other investments 11.0-15.0% — 3.0-4.4% — 7.0-11.0% 0.0% Maturity Date August 2011 on demand various in 2009 — July-August 2012 2017 December 31, 2009 30,192 — — 11,724 12,808 20,449 3,720 78,893 December 31, 2008 11,156 21,230 51,966 12,091 11,717 — 3,399 111,559
During the year ended December 31, 2008, the Group deposited in Tammaron Ltd., a company incorporated under the laws of the British Virgin Islands, an amount of $21.2 million for the a potential business acquisition. During 2009 based on the analysis of the current Russian and global financial markets situation management believes that a significant uncertainty exists with regard to the completion of such transaction and accordingly a reserve for the entire amount has been provided by the Group as an impairment of investments in the Group’s consolidated statement of operations for the year ended December 31, 2009.
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Page 52 - Note 16: Restricted Cash (http://annualreview2009.mtsgsm.com/financial_statements/notes/16_restricted_cash/)
Note 16: Restricted Cash
Restricted cash of $6.4 million and $23.6 million, as of December 31, 2009 and 2008, respectively, consists of cash deposited by Uzdunrobita in a special bank account which was created to be in compliance with the government regulation for local currency conversion into foreign currencies. The cash deposited will be converted from Uzbek Som into U.S. Dollars and used for settlements with suppliers of equipment and software.
Page 53 - Note 17: Borrowings (http://annualreview2009.mtsgsm.com/financial_statements/notes/17_borrowings/)
Note 17: Borrowings
Notes—As of December 31, 2009 and 2008, the Group’s notes consisted of the following: Currency MTS OJSC Notes due 2016 MTS OJSC Notes due 2014 MTS Finance Notes due 2012 MTS Finance Notes due 2010 MTS OJSC Notes due 2018 MTS OJSC Notes due 2015 MTS OJSC Notes due 2013 MGTS Notes due 2010 MGTS Notes due 2009 Less: unamortized discount Total notes Less: current portion Total notes, long-term RUB RUB USD USD RUB RUB RUB RUB RUB Interest rate 14.25% 16.75% 8.00% 8.38% 8.70% 14.01% 14.01% 16.00% 7.10% 2009 $495,963 495,963 400,000 400,000 323,698 248,213 247,981 402 $— (2,587) $2,609,633 (1,218,084) $1,391,549 2008 $— $— 400,000 400,000 268,544 255,272 255,272 5,202 5,233 (548) $1,588,975 (10,435) $1,578,540
The Group has an unconditional obligation to repurchase MTS OJSC Notes at par value if claimed by the noteholders subsequent to the announcement of the sequential coupon. The dates of the announcement for each particular note issue are as follows: MTS MTS MTS MTS MTS OJSC OJSC OJSC OJSC OJSC Notes Notes Notes Notes Notes due due due due due 2013 2014 2015 2016 2018 April May April June June 2010 2011 2010 2012 2010
The notes therefore can be defined as callable obligations under the FASB authoritative guidance on debt, as the holders have the unilateral right to demand repurchase of the notes at par value upon announcement of new coupons. The FASB authoritative guidance on debt requires callable obligations to be disclosed as maturing in the reporting period, when the demand for repurchase could be submitted disregarding the expectations of the Group about the intentions of the noteholders. The Group discloses the notes as maturing in 2010 (MTS OJSC Notes due
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2013, 2015, 2018), in 2011 (MTS OJSC Notes due 2015) and in 2012 (MTS OJSC Notes due 2016) in the aggregated maturities schedule as these are the reporting periods when the noteholders will first have the unilateral right to demand repurchase. The fair values of notes based on the market quotes as of December 31, 2009 at the stock exchanges where they are traded were as follows: Stock exchange MTS OJSC Notes due 2016 MTS OJSC Notes due 2014 MTS Finance Notes due 2012 MTS Finance Notes due 2010 MTS OJSC Notes due 2018 MTS OJSC Notes due 2015 MTS OJSC Notes due 2013 MGTS Notes due 2010 Total notes, long-term MICEX MICEX Luxembourg stock exchange Luxembourg stock exchange MICEX MICEX MICEX MICEX % of par 110.1 108.3 104.6 103.3 99.9 101.7 102.0 98.4 Fair value $546,055 537,127 418,400 413,200 323,375 252,432 252,941 396 $2,743,926
Subject to certain exceptions and qualifications, the indentures governing MTS Finance Notes contain covenants limiting the Group’s ability to incur debt, create liens, sell or transfer lease properties, enter into loan transactions with affiliates, merge or consolidate with another person or convey its properties and assets to another person, and sell or transfer any of its GSM licenses for the Moscow, St. Petersburg, Krasnodar and Ukraine license areas. In addition, if the Group experiences certain types of mergers, consolidations or other changes in control, noteholders will have the right to require the Group to redeem the notes at 101% of their principal amount, plus accrued interest. The notes also have cross default provisions with publicly traded debt issued by Sistema, the shareholder of the Group. The Group is also required to take all commercially reasonable steps necessary to maintain a rating of the notes from Moody’s or Standard & Poor’s. If the Group fails to meet these covenants, after certain notice and cure periods, the noteholders can accelerate the debt to be immediately due and payable. The indenture governing MTS OJSC Notes contains certain covenants which limit the Group’s ability to delist the notes from the quotation lists and delay the coupon payments. Management believes that the Group is in compliance with all restrictive note covenants as of December 31, 2009. Bank loans—As of December 31, 2009 and 2008, the Group’s loans from banks and financial institutions consisted of the following: December 31, Maturity USD-denominated: Syndicated Loan Facility granted to MTS OJSC in 2006 Syndicated Loan Facility granted to MTS OJSC in 2009 Skandinavska Enskilda Banken AB EBRD HSBC Bank plc and ING BHF Bank AG Citibank International plc and ING Bank N.V. HSBC Bank plc, ING Bank and Bayerische Landesbank Commerzbank AG, ING Bank AG and HSBC Bank plc Barclays ABN AMRO Bank N.V. Promissory note Access Telecommunications Cooperatief U.A. Other 2010–2011 2011–2012 2010–2017 2010–2014 2010–2014 2010–2013 2010–2015 2010–2014 2010–2014 2010–2013 2009 2010–2013 LIBOR+1.15% (1.58%) LIBOR+6.5% (6.93%) LIBOR+0.23%–1.8% (0.66%–2.23%) LIBOR+1.51%–3.1% (1.94%–3.53%) LIBOR+0.3% (0.73%) LIBOR+0.43% (0.86%) LIBOR+0.3% (0.73%) LIBOR+0.3% (0.73%) LIBOR+0.13%–0.15% (0.56%–0.58%) LIBOR+0.35% (0.78%) — various $323,077 360,000 279,519 150,000 90,985 84,560 76,180 66,557 59,203 25,149 — 21,694 $1,536,924 $1,168,462 — 159,047 183,333 110,727 106,358 92,789 81,348 72,360 31,436 263,552 17,938 $2,287,350 Annual interest rate (actual rate at December 31, 2008) 2009 2008
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EUR-denominated: Syndicated Loan Facility granted to MTS OJSC in 2009 EBRD European Investment Bank Gasprombank Nordic Investment Bank ABN AMRO Bank N.V. Other RUB-denominated: Sberbank Sberbank Sberbank Gasprombank Other Debt-related parties Total bank loans Less: current portion Total bank loans, long-term 2010–2012 2012–2013 2011 2012 2010–2012 2010–2056 13.35% 11.75% Refinancing rate of the Central Bank of Russia+2.25% (11.0%) 13.0% various various various 859,669 1,554,017 396,770 213,600 25,241 $3,049,297 26,207 $26,207 $5,715,789 (780,514) $4,935,275 884,944 — — — 35,966 $920,910 94,776 $94,776 $3,767,017 (1,677,529) $2,089,488 2011–2012 2010–2016 2010–2016 2011 2010–2016 2010–2013 2010–2012 EURIBOR+6.5% (7.49%) EURIBOR+6.5%–6.9% (7.49%–7.89%) EURIBOR+6.4% (7.39%) 8.0% EURIBOR+6.5%–6.9% (7.49%–7.89%) EURIBOR+0.35% (1.34%) various 341,580 312,743 164,979 143,460 114,768 19,859 5,972 $1,103,361 — — — 423,150 — 24,406 16,425 $463,981
Interest rate of Sberbank loan maturing in 2012-2013 is set as 11.75% till March 27, 2010. For the subsequent periods (quarters) the rate is determined as a total of base rate (11.75%), rate A and rate B. Rate A and B depend on the average daily bank account balance for the period maintained by MTS OJSC and RTC with Sberbank. In case the balance maintained by MTS OJSC and RTC is below RUB 1.0 billion and RUB 0.5 billion, respectively, rates A and B are set at 0.5% each. No extra interest is charged if the average daily bank account balance maintained is equal or above RUB 1.0 billion for MTS OJSC and RUB 0.5 billion for RTC. The loans of the Group are subject to certain restrictive covenants, including, but not limited to, certain financial ratios, limitations on dispositions of assets and limitations on transactions with associates, requirements to maintain ownership in certain subsidiaries. Management believes that as of December 31, 2009 the Group is in compliance with all existing bank loan covenants. Pledges—The loan facility of RUB 26 billion (equivalent of $859.7 million as of December 31, 2009) from Sberbank granted to Comstar-UTS is secured by pledge of a 25.0% plus one share stake in Svyazinvest and two RUB-denominated promissory notes of Sberbank purchased by Comstar-UTS in the total amount of RUB 4,334 million ($143.3 million as of December 31, 2009). The loan facility of RUB 25 billion (equivalent of $826.6 million as of December 31, 2009) from Sberbank granted to MTS OJSC is sequred by the pledge of 50.18% stake in Comstar-UTS as well as equipment with a net book value of RUB 30 billion as of December 31, 2009 (equivalent of $991.9 million as of reporting date), with assigned pledge value of RUB 21 billion (equivalent of $694.3 million as of reporting date). The equipment with the fair value of approximately RUB 421.8 million ($13.9 million as of December 31, 2009) acquired by Comstar-UTS under the vendor financing agreement with Cisco Capital is pledged as collateral against the outstanding liability of RUB 408.8 million ($13.5 million as of December 31, 2009). The vendor financing agreement between K-Telecom and Intracom, a related party, with total outstanding amount as of December 31, 2009 of $23.2 million is secured by the telecommunication equipment and other assets supplied under the agreement with carrying value of $17.1 million. Available credit facilities—As of December 31, 2009, the Group’s total available credit facilities amounted to $1,666 million and related to the following credit lines: Maturity Interest rate Commitment fees Available till Available amount (USD equivalent)
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Calyon, ING Bank N.V. and Nordea Bank AB Bank of China (BNP Paribas) Export Development Canada (EDC) Gazprombank Landesbank Baden Wuerttemberg Gazprombank Total available credit facilities
2019/2020 2016 2012 2012 2016 2012
LIBOR +1.15% EURIBOR+1.95% LIBOR +4.5% 8.0% EURIBOR+0.75% 13.0%
0.40% 0.60% 1.50% 0.75% 0.45% 0.00%
August 2011/December 2012 December 2011 December 2010 January 2012 March 2010 March 2010
$1,073,371 212,500 165,000 143,460 53,590 17,849 $1,665,770
The following table presents the aggregated scheduled maturities of the notes and bank loans principal outstanding as of December 31, 2009: Notes Payments due in the year ended December 31, 2010 2011 2012 2013 2014 Thereafter Total $1,218,084 495,963 895,586 — $— — $2,609,633 $780,514 1,872,512 1,834,103 893,030 149,222 186,408 $5,715,789 Bank loans
On February 24, 2010, subsequent to the statement of financial position date, the Group repaid the full amount due under the Syndicated Loan Facility granted to MTS OJSC in 2009 with an original maturity in 2011-2012. In the maturity schedule presented above, the principal outstanding as of December 31, 2009 under this facility and totaling $701.6 million is included in payments due in the years ended December 31, 2011 and 2012 in the amounts of $467.7 million and $233.9 million, respectively, in accordance with their original maturity.
Page 54 - Note 18: Asset Retirement Obligations (http://annualreview2009.mtsgsm.com/financial_statements/notes/18_asset_retirement_obligations/)
Note 18: Asset Retirement Obligations
As of December 31, 2009 and 2008, the estimated present value of the Group’s asset retirement obligations and change in liabilities were as follows: 2009 Balance, beginning of the year Liabilities incurred in the current period Accretion expense Revisions in estimated cash flows Currency translation adjustment Balance, end of the year Revisions in estimated cash flows are attributable to the change in the estimated future useful life of the assets. $62,053 3,923 6,518 17,693 (1,504) $88,683 2008 $59,527 3,840 6,026 3,383 (10,723) $62,053
Page 55 - Note 19: Deferred Connection Fees (http://annualreview2009.mtsgsm.com/financial_statements/notes/19_deferred_connection_fees/)
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Note 19: Deferred Connection Fees
Deferred connection fees for the years ended December 31, 2009 and 2008, were as follows: 2009 Balance, at the beginning of the year Payments received and deferred during the year Amounts amortized and recognized as revenue during the year Currency translation adjustment Balance, end of the year Less: current portion Non-current portion $174,225 60,590 (67,057) (4,660) 163,098 (46,930) $116,168 2008 $216,511 89,195 (95,080) (36,401) 174,225 (55,012) $119,213
MTS defers initial connection fees paid by subscribers for the activation of network service as well as one time activation fees received for connection to various value added services. These fees are recognized as revenue over the estimated average subscriber life (Note 2).
Page 56 - Note 20: Property, Plant and Equipment Contributions (http://annualreview2009.mtsgsm.com/financial_statements/notes/20_property_plant_equipment/)
Note 20: Property, Plant and Equipment Contributions
MGTS receives telecommunication infrastructure which is intended to operate as an integral part of the Moscow city wire line network from the real estate constructors free of charge as provided by the regulations of the city government. Property, plant and equipment contributions received by MGTS during the years ended December 31, 2009 and 2008 were as follows: 2009 Unamortized property, plant and equipment contributions, beginning of the year Contributions received during the year Amortization for the year Currency translation effect Unamortized property, plant and equipment contributions, end of the year $93,197 3,213 (3,408) (2,653) $90,349 2008 $112,779 3,194 (4,381) (18,395) $93,197
Page 57 - Note 21: Derivative Financial Instruments (http://annualreview2009.mtsgsm.com/financial_statements/notes/21_derivative_financial_instruments/)
Note 21: Derivative Financial Instruments
Cash flow hedging In 2009, 2008 and 2007 the Group entered into variable-to-fixed interest rate swap agreements to manage the exposure of changes in variable interest rate related to its debt obligations. The instruments are qualified for cash flow hedge accounting under the U.S. GAAP requirements. Each interest rate swap matches the exact maturity dates of the underlying debt allowing for highly effective hedges. Interest rate swap contracts outstanding as of December 31, 2009 mature in 2012-2015. Further, in 2009 the Group entered into several cross currency interest rate swap agreements. These contracts hedge the risk of both interest rate and currency fluctuations and assume
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Print manager | MTS
periodical exchanges of both principal and interest payments from RUB-denominated amounts to USD- and Euro-denominated amounts to be exchanged at a specified rate. The rate was determined by the market spot rate upon issuance. These contracts also include an interest rate swap of a fixed USD- and Euro-denominated interest rate to a fixed RUB-denominated interest rate. The instruments are qualified for cash flow hedge accounting under the U.S. GAAP requirements. Each cross currency interest swap matches the interest and principal payments of the underlying debt allowing for highly effective hedges. Cross currency interest rate swap contracts outstanding as of December 31, 2009 mature in 2010-2011. The following table presents the fair value of Group’s derivative instruments designated as hedges in the consolidated statements of financial position as of December 31, 2009 and 2008. December 31, Statement of financial position location Asset derivatives Interest rate swaps Total Liability derivatives Interest rate swaps Cross currency interest rate swaps Cross currency interest rate swaps Total Other long-term liabilities Other payables Other long-term liabilities $(32,636) (9,211) (17,348) $(59,195) $(20,892) — — $(20,892) Other non-current assets $3,391 $3,391 — — 2009 2008
The following table presents the effect of Group’s derivative instruments designated as hedges on the consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007. Year ended December 31, Location of loss recognised Interest rate swaps Cross currency interest rate swaps Total Interest expense Currency exchange and transaction loss 2009 $(8,392) (24,299) $(32,691) 2008 $(2,002) — $(2,002) 2007 — — —
The ineffective portion of interest rate swap arrangements in amount of $0.9 million was included in interest expense in consolidated statement of operations for the year ended December 31, 2009. The ineffective portion of cross currency interest rate swap arrangements in amount of $4.5 million was included in currency exchange and transaction loss in consolidated statement of operations for the year ended December 31, 2009. The following table presents the effect of Group’s derivative instruments designated as hedges on accumulated other comprehensive income for the years ended December 31, 2009, 2008 and 2007. 2009 Accumulated derivatives (loss)/gain, beginning of the year Fair value adjustments on hedging derivatives, net of tax Amounts reclassified into earnings during the period, net of tax Accumulated derivatives loss, end of the year $(16,714) (28,764) 5,185 $(40,293) 2008 $(355) (18,361) 2,002 $(16,714) 2007 $759 (1,114) — $(355)
As of December 31, 2009, the outstanding hedge instruments were highly effective. Approximately $48.6 million of net loss is expected to be reclassified into net income during the next twelve months. Cash inflows and outflows related to hedge instruments were included in the cash flows from operating activities in the consolidated statement of cash flows for the years ended December 31, 2009, 2008 and 2007.
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Print manager | MTS
Non-designated derivative instruments Foreign currency options—In 2009 the Group entered into foreign currency option agreements to manage the exposure to changes in currency exchange rates related to USD-denominated debt obligations. According to the agreements the Group has a combination of put and call option rights to acquire $80.0 million of USD at rates within a range specified in contracts. These contracts were not designated for hedge accounting purposes. These currency option agreements will mature in 2010-2011. Purchased call option—In the third quarter of 2008 in order to mitigate the exposure resulting from the employee phantom option program introduced in April 2008 (see Note 24), ComstarUTS acquired a phantom call option on its GDRs for $19.4 million from an investment bank. The amount of cash paid was included in the cash flows from investing activities in the consolidated statement of cash flows for the year ended December 31, 2008. The agreement entitles Comstar-UTS to receive in the second quarter of 2010 a payment equal to the difference between the average of daily volume weighted average trading prices of GDRs on the London Stock Exchange for the period between February 1 and March 31, 2010 and the phantom option exercise price of USD 10.2368, if positive, multiplied by 9,000,000. Subsequent to the acquisition of the instrument, the Group estimates the fair value of the respective asset using an option pricing model and re-measures it as of each reporting date. In April 2010 the purchased call option expired unexercised as it was out-of-money. Written call and put option—In 2006, simultaneously with the acquisition of the 25% stake plus one share in Svyazinvest (see Note 14), MGTS Finance S.A. and “2711 Centerville Cooperatief U.A.” (”2711 UA”), an affiliate of Mustcom Limited, signed a call and put option agreement, which gives 2711 UA a right to purchase 46,232,000 shares of Comstar-UTS, representing 11.06% of total issued shares, from MGTS Finance S.A and sell them back to MGTS Finance S.A. The call option acquired by 2711 UA could be exercised at a strike price of USD 6.97 per share at any time following the signing of the agreement with respect to 10.5% of Comstar UTS’ shares. The call option for the remaining 0.56% stake could be exercised at any time beginning from April 1, 2007. The call option was to expire in one year from the date of signing of the agreement. 2711 UA had a right to exercise its put option at any time within two years from the date of exercising the call option at a strike price, which will be calculated based on a weighted average price of Comstar UTS’ GDRs during the 90 trading days period preceding the exercise of the put option. Fair value of the call and put option as of December 11, 2006, the grant date, was estimated at $90.0 million and included in cost of investment in Svyazinvest. The Group was estimating the fair value of the respective liability using an option pricing model and was re-measuring it as of each reporting date. On December 7, 2007, Access Telecommunications Cooperatief U.A. (”Access”, previously known as 2711 UA) has exercised the call option for 46,232,000 shares and paid $322.2 million in cash to the Group. On August 25, 2008, Access has initiated the process of exercising the put option, and on November 26, 2008 has sold MGTS Finance S.A. 46,232,000 shares of Comstar-UTS for the total of $463.6 million, $100.0 million of which had been paid on November 26, 2008 in cash, and the remaining portion had been restructured in the form of an interest bearing promissory note repayable in four monthly installments. Cash payment in the amount of $100.0 million was included in financing activities’ section in the Group’ consolidated statement of cash flows for the year ended December 31, 2008. Currency forward—In December 2008, to mitigate foreign currency risks under the USD-denominated notes payable to Access (see Note 25) Comstar-UTS entered into forward contracts with MBRD to acquire $32.0 and $68.0 million of U.S. Dollars in January and February 2009, respectively, at a rate of RUB 27.85 per one USD. In the year ended December 31, 2009 the instrument was redeemed. Net cash proceeds from the redemption of the instrument in the amount of $20.2 million were included in the cash flows from operating activities in the consolidated statement of cash flows. The following table presents the fair value of Group’s derivative instruments not designated as hedges in the consolidated statements of financial position as of December 31, 2009 and 2008. December 31, Statement of financial position location Asset derivatives Purchased call option Currency forward Total Liability derivatives Foreign currency options Foreign currency options Total Other payables Other long-term liabilities $(2,654) (1,627) $(4,281) — — — Other non-current assets Other current assets — — — $5,830 9,734 $15,564 2009 2008
The following table presents the effect of Group’s derivative instruments not designated as hedges on the consolidated statements of operations for the years ended December 31, 2009,
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Print manager | MTS
2008 and 2007. Year ended December 31, Location of gain/(loss) recognised Foreign currency options Purchased call option Currency forward Written call and put option Total Fair value of derivative instruments The following fair value hierarchy table presents information regarding Group’s assets and liabilities associated with derivative agreements measured at fair value on a recurring basis as of December 31, 2009: Quoted prices in active markets for identical assets or liabilities (Level 1) Assets: Interest rate swap agreements Liabilities: Interest rate swap agreements Cross currency interest rate swap agreements Currency option agreements — — — $(32,636) (26,559) (4,281) — — — $(32,636) (26,559) (4,281) — $3,391 — $3,391 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Balance as of December 31, 2009 Currency exchange and transaction loss Change in fair value of derivatives Currency exchange and transaction gain Change in fair value of derivatives 2009 $(4,280) (5,420) 12,788 — $3,088 2008 $— (13,614) 10,165 (27,940) $(31,389) 2007 $— — — (145,860) $(145,860)
Page 58 - Note 22: Accrued Liabilities (http://annualreview2009.mtsgsm.com/financial_statements/notes/22_accrued_liabilities/)
Note 22: Accrued Liabilities
December 31, 2009 Accruals for services Accrued payroll and vacation Accruals for taxes Accruals for payments to social funds Interest payable on debt Total accrued liabilities $232,897 210,329 241,838 12,396 127,953 $825,413 2008 $224,803 146,698 131,971 10,134 49,711 $563,317
Page 59 - Note 23: Income Tax (http://annualreview2009.mtsgsm.com/financial_statements/notes/23_income_tax/)
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Print manager | MTS
Note 23: Income Tax
Provision for income taxes for the years ended December 31, 2009, 2008 and 2007 was as follows: December 31, 2009 Current provision for income taxes Deferred income tax benefit Total provision for income taxes $402,511 101,444 $503,955 2008 $948,983 (206,102) $742,881 2007 $937,036 (85,021) $852,015
The statutory income tax rates in jurisdictions in which the Group operates for 2009 were as follows: Russia—20.0%, Ukraine—25.0%, Uzbekistan—3.4%, Turkmenistan—20.0%, and Armenia—20.0%. The statutory income tax rate reconciled to the Group’s effective income tax rate for the years ended December 31, 2009, 2008 and 2007 was as follows: 2009 Statutory income tax rate for the year Adjustments: Expenses not deductible for tax purposes Currency exchange and transaction loss Income tax provision Settlements with tax authoroties on prior period income tax (2005 - 2008) Revaluation of UMC tax base Different tax rate of foreign subsidiaries Earnings distribution from subsidiaries Disposal of treasury stock Impairment of goodwill Change in fair value of derivative financial instruments Change in valuation allowance Comstar corporate reorganization Increase in deferred tax liability subject to registration Other Effective income tax rate 4.9 0.5 (0.2) (2.9) — (2.0) 6.8 (4.1) — (0.1) 10.3 0.4 — 0.1 33.7% 2.1 1.0 0.3 — (1.8) (1.2) — — 0.4 0.3 (0.2) — — 0.5 25.4% 2.1 0.2 0.6 — — 0.1 — — — 1.1 (0.2) — (0.3) 0.1 27.7% 20.0% 2008 24.0% 2007 24.0%
Temporary differences between the tax and accounting bases of assets and liabilities gave rise to the following deferred tax assets and liabilities as of December 31, 2009 and 2008: December 31, 2009 Assets/(liabilities) arising from tax effect of: Deferred tax assets Depreciation of property, plant and equipment Other intangible assets Deferred connection fees
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2008
$212,606 12,770 33,610
$197,879 8,967 35,873
Print manager | MTS
Subscriber prepayments Accrued expenses Provision for doubtful accounts Inventory obsolescence Loss carryforward Impairment of property, plant and equipment Valuation of investment in Svyazinvest Other Valuation allowance Total deferred tax assets Deferred tax liabilities Licenses acquired Depreciation of property, plant and equipment Customer base Other intangible assets Debt issuance cost Potential distributions from/to Group’s subsidiaries/associates Other Total deferred tax liabilities Net deferred tax asset Net deferred tax asset, current Net deferred tax asset, non-current Net deferred tax liability, long-term
16,663 130,603 3,603 3,046 111,784 19,906 78,761 23,147 (182,308) 464,191 $(59,746) (188,611) (2,695) (59,227) (22,690) (118,608) (1,025) (452,602) 11,589 $212,687 $97,355 $(298,453)
17,057 155,508 13,827 2,004 24,130 — — 13,365 (26,744) 441,866 $(104,443) (127,616) (1,773) (75,040) (7,446) — (39,662) (355,980) 85,886 $213,091 $63,507 $(190,712)
In 2009, to streamline the ownership structure within Comstar group and to enable legal merger of certain its subsidiaries, certain of Comstar’s subsidiaries were sold to Comstar-UTS. As a result, deferred tax assets on tax losses carried forward of $6.8 million were written down. The Group has the following significant balances for income tax losses carried forward as of December 31, 2009 and 2008: Jurisdiction Luxembourg (MGTS Finance S.A.) Russia (Comstar-UTS, RTC and other) USA Total not limited 2011-2019 not limited Period for carry forward 2009 $94,163 17,048 573 $111,784 2008 $12,773 4,392 6,965 $24,130
Management established a valuation allowance against tax loss carry forwards of MGTS Finance S.A. and $30.9 million of deferred tax asset on valuation of investment in Svyazinvest which is allocable to MGTS Finance S.A. because there will be no sufficient future taxable income to realize those deferred tax assets. Management also established a valuation allowance for the remaining $47.9 million of deferred tax asset on valuation of investment in Svyazinvest relating to Comstar-UTS, because such impairment loss, if realized, could be offset only against gains from disposal of Comstar UTS’ shares in subsidiaries and other investments, which, management believes, are not likely to arise in the foreseeable future. In 2009 the Group recognized deferred income tax liabilities of $70.5 million for income taxes on future dividend distributions from foreign subsidiaries (UMC and K-Telecom) which are based on $1,431.9 million cumulative undistributed earnings of those foreign subsidiaries in accordance with local statutory accounting regulations (unaudited) because such earnings are intended to be repatriated. The Group did not record any deferred tax liabilities related to undistributed earnings of these subsidiaries in prior periods as there was no intention to repatriate the earnings. No deferred tax liability was recognized on undistributed earnings of Uzdunrobita as of December 31, 2009 as the Group plans to indefinitely reinvest those. As of December 31, 2009 and
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Print manager | MTS
2008 the amount of undistributed earnings of Uzdunrobita in accordance with local statutory accounting regulations amounted to $530.7 million and $401.6 million, respectively (unaudited). Potential earnings distributions from BCTI are tax free, so that no deferred tax liability arises in this regard. As of December 31, 2009, 2008 and 2007, the Group included accruals for uncertain tax positions in the amount of $10.6 million, $12.4 million and $35.8 million, respectively, as a component of income tax payable. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 2009 Balance, beginning of the year Additions based on tax position related to the current year Additions based on tax positions related to prior years Additions based on tax of acquired entities Reduction in tax positions related to prior years Settlements with tax authorities Currency translation adjustment Balance, end of the year $12,360 2,094 — 1,521 (1,778) (3,305) (258) $10,634 2008 $35,752 20,006 — — (11,692) (31,456) (250) $12,360 2007 12,183 23,828 5,933 — (2,963) (3,628) 399 35,752
Accrued penalties and interest related to unrecognized tax benefits as a component of income tax expense for the years ended December 31, 2009, 2008 and 2007 amounted to ($0.6) million, ($1.0) million and ($2.0) million, respectively, and are included in income tax expense in the accompanying consolidated statements of operations. Accrued interest and penalties were included in income tax payable in the accompanying consolidated statements of financial position and totalled to $4.3 million and $4.6 million as of December 31, 2009 and 2008, respectively. The Group does not expect the unrecognized tax benefits to change significantly over the next twelve months.
Page 60 - Note 24: Share Based Compensation (http://annualreview2009.mtsgsm.com/financial_statements/notes/24_share_based_compensation/)
Note 24: Share Based Compensation
MTS
The Stock Option Plan
In 2000, MTS established a stock bonus plan and stock option plan (”the Stock Option Plan”) for selected officers and key employees. During its initial public offering in 2000 MTS allotted 9,966,631 shares of its common stock to fund the Stock Option Plan. Since 2002, MTS has made several grants pursuant to its stock option plan to employees and directors of the Group. These options generally vest over a two year period from the date of the grant, contingent on continued employment of the grantee with MTS. The options are exercisable within two weeks after the vesting date, and, if not exercised, are forfeited. The exercise price of the options equaled the average market share price during the one hundred day period preceding the grant date. In April 2008, the Board of Directors allotted an additional 651,035 ADSs (or 3,255,175 shares) to fund a Stock Option award to MTS’ chief executive officer. The award vesting period is up to two years contingent upon employment with MTS. The award will vest only if at the end of the vesting period MTS is among the top 20 mobile operators in the world and top mobile operator in Russia and the CIS, in each case in terms of revenue, and cumulative percentage of MTS’ market capitalization growth since the grant date exceeds the predetermined threshold of 15%. A summary of the status of the Group’s Stock Option Plan is presented below: Weighted average exercise price (per share), U.S. Dollars Weighted average grant date fair value of options (per share), U.S. Dollars
Number of shares
Aggregate intrinsic value
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Print manager | MTS
Outstanding at December 31, 2006 Granted Exercised Forfeited Outstanding at December 31, 2007 Granted Exercised Forfeited Outstanding at December 31, 2008 Granted Exercised Forfeited Outstanding at December 31, 2009
1,435,001 1,778,694 (848,126) (968,313) 1,397,256 1,302,070 (1,397,256) — 1,302,070 — — — 1,302,070
$6.89 6.31 6.89 6.66 $6.31 15.93 6.31 — $15.93 — — — $15.93
$1.74 5.95 1.74 2.65 $4.05 2.44 4.05 — $2.44 — — — $2.44
$743
$5,236
$—
$—
The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $nil, $7.4 million and $0.4 million, respectively. Stock options outstanding as of December 31, 2009 will vest during the period ended July 1, 2010. None of the stock options outstanding as of December 31, 2009, 2008 were exercisable and therefore had a negative intrinsic value. None of the stock options outstanding as of December 31, 2007 were exercisable. Compensation cost under Stock Option Plan of $1.2 million, $3.5 million and $2.8 million was recognized in consolidated statements of operations during the years ended December 31, 2009, 2008 and 2007 respectively. Related deferred tax benefit amounted to $0.2 million, $0.7 million and $0.6 million for the years ended December 2009, 2008 and 2007, respectively. The fair value of options granted during the year ended December 31, 2007 was estimated using the lattice model based on the following assumptions: 2007 Risk free rate Expected dividend yield Expected volatility Expected life, years Fair value of options (per share), U.S. Dollar The fair value of options granted during the year ended December 31, 2008 was estimated using the Monte Carlo simulation model based on the following assumptions: 2008 Risk free rate Present value of expected dividends, U.S. Dollars Expected volatility Expected life, years Fair value of options (per share), U.S. Dollar Expected volatilities were based on historical volatility of the MTS’ ADSs. The Group is required to estimate expected forfeiture rate, as well as the probability that performance conditions that affect the vesting of the Stock Option Plan awards will be achieved and only recognize expense for those awards expected to vest. The effect of the estimated forfeitures on Group’s operations was $nil, $2.3 million and $1.7 million in 2009, 2008 and 2007, respectively. As of December 31, 2009, there was $0.6 million of total unrecognized compensation cost related to non-vested stock based compensation awards under the Stock Option Plan. This amount will be recognized over the period through July 1, 2010.
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3.1% 0.3% 40.3% 2 $5.95
2.3% $4.17 40.0% 2 $2.44
Print manager | MTS
The Phantom Stock Plan In June 2007, MTS’ Board of Directors approved the Phantom Stock Plan to provide deferred compensation to certain key employees (the “Participants”) of the Group during 2007-2011. The plan is based on units equivalent to MTS ADSs (the “Phantom ADSs”). Each Phantom ADS is the equivalent of five MTS common shares. Under the Phantom Stock Plan, the Participants are entitled to a cash payment equal to the difference between the initial grant price and the price of Phantom ADSs determined based on average market share price during the one hundred day period preceding the vesting date, multiplied by the number of Phantom ADSs granted, upon vesting of the award. The average vesting period is two years from the grant date, contingent upon the continuing employment of the Participants by the Group. Further, the award shall vest only if at the end of the vesting period the cumulative percentage of MTS market capitalization growth since the grant date exceeds the cumulative cost of equity determined by the Board of Directors for the same period. In April 2008, the Phantom Stock Plan was amended to increase the number of Phantom ADSs available under the plan from the initial 3,600,000 to 9,556,716 ADSs and to increase the number of Participants potentially eligible for the Plan to up to 420 top- and mid-level managers of the Group. Further, under the amended Plan, the Phantom ADSs granted in 2008 and thereafter will vest only if at the end of the vesting period MTS is among the top 20 mobile operators in the world and top mobile operator in Russia and the CIS, in each case in terms of revenue, and the cumulative percentage of MTS’ market capitalization growth since the grant date exceeds the predetermined threshold of 15%. At the end of the vesting period, participants are entitled to a cash payment equal to the difference between the initial grant price and the price of Phantom ADSs determined based on average market share price during the one hundred day period preceding the vesting date, multiplied by the number of Phantom ADSs granted and adjusted by the ratio that reflects actual market capitalization growth rate. During the year ended December 31, 2008, 6,676,716 ADSs were granted to the participants, 4,562,830 of which were granted on May 1, 2008 (Phantom Grant 2008 (I)) and 2,113,886 ADSs were granted on July 1, 2008 (Phantom Grant 2008 (II)).The Phantom Grant 2008 (I) was expired on July 1, 2009 and non of the Phantom Shares under the Phantom Grant 2008 (I) were exercisable as of the expiration date. Phantom Grant 2008 (II) will vest in 24 months after the grant date, contingent upon the continuing employment of the Participants. A summary of the status of the Group’s Phantom Stock Plan is presented below: Weighted average exercise price (per ADS), U.S. Dollar — 720,000 — (36,664) 683,336 6,676,716 — (1,346,442) 6,013,610 — — (3,883,144) (531,833) 1,598,633 — 56.79 — 56.79 $56.79 76.64 — 72.02 $75.41 — — 73.51 76.62 79.63 Weighted average fair value of options (per ADS), U.S. Dollar — 44.00 — 44.00 $44.0 0.68 — 0.88 $0.78 — — — 0.03 0.06 — $— $30,750
Number of ADSs Outstanding at December 31, 2006 Granted Exercised Forfeited Outstanding at December 31, 2007 Granted Exercised Forfeited Outstanding at December 31, 2008 Granted Exercised Expired Forfeited Outstanding at December 31, 2009
Aggregate intrinsic value —
None of the Phantom ADSs expired during the year ended December 31, 2009 were exercisable as of the expiration date which is July 1, 2009 for the Phantom Stock Grant 2007 and 2008 (I). All Phantom ADSs outstanding as of December 31, 2009 are non-vested and will vest during the period ended July 1, 2010. None of the Phantom Shares were exercisable as of December 31, 2009 and therefore had a negative intrinsic value. The fair value of the liability under the Phantom Stock Plan as of December 31, 2009 was estimated using the Monte Carlo simulation technique based on the following assumptions: Phantom Grant 2008 (II) Risk free rate Ranged from 0.05% to 0.2%
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Print manager | MTS
Present value of expected dividends, U.S. Dollars Expected volatility Remaining vesting period, years Fair value of phantom share award (per phantom share), U.S. Dollar
1.62 50% 0.5 0.06
The fair value of the liability under the Phantom Stock Plan as of December 31, 2008 was estimated using the Monte Carlo simulation technique based on the following assumptions: Phantom Grant 2007 Risk free rate Present value of expected dividends, U.S. Dollars Expected volatility Remaining vesting period, years Fair value of phantom share award (per phantom share), U.S. Dollar 0.2% 2.7 135% 0.5 2.00 Phantom Grant 2008 (I) 0.4% 2.7 90% 0.5 0.07 Phantom Grant 2008 (II) 0.4% 4.1 90% 1.5 1.99
The fair value of the liability under the Phantom Stock Plan as of December 31, 2007 was estimated using the Monte Carlo simulation technique based on the following assumptions: Phantom Grant 2007 Risk free rate Present value of expected dividends, U.S. Dollars Expected volatility Remaining vesting period, years Fair value of phantom share award (per share), U.S. Dollar Expected volatilities were based on historical and implied volatility of the MTS’ ADSs. For the year ended December 31, 2009 a reversal of previously recorded expense under the Phantom Stock Grant 2007, 2008 (I) and 2008 (II) in the amount of $0.5 million, $0.1 million and $0.8 million, respectively, was recognized in the consolidated statements of operations as a result of underlying stock price decrease. Related deferred tax expense amounted to $0.3 million. For the year ended December 31, 2008 a reversal of previously recorded expense in the amount of $8.9 million under the Phantom Stock Grant 2007 was recognized in the consolidated statements of operations as a result of underlying stock price decrease. Related deferred tax expense amounted to $1.8 million. The compensation cost under the Phantom Stock Grant 2008 (I) and (II) recognized in the consolidated statement of operations for the year ended December 31, 2008 amounted to $1.3 million and the related deferred tax benefit amounted to $0.3 million. The compensation cost under the Phantom Stock Plan recognized in consolidated statement of operations for the year ended December 31, 2007 amounted to $7.6 million and the related deferred tax benefit amounted to $1.8 million. As of December 31, 2009, there was $0.02 million of total unrecognized compensation cost related to non-vested Phantom ADSs. This amount is expected to be recognized over a weighted average period of 0.5 years. The Group is required to estimate expected forfeiture rate, as well as the probability that performance conditions that affect the vesting of the Phantom ADSs awards will be achieved and only recognize expense for those awards expected to vest. The Group’s estimated forfeiture rate was 5.1%. The effect of forfeitures amounted to $nil, $1.5 and $2.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. Comstar-UTS The 2006 Program On September 15, 2006, the Extraordinary General Meeting of shareholders approved the stock option and stock bonus program (”the 2006 Program”) for the Board of Directors and senior management of Comstar-UTS. The 2006 Program was being implemented based on separate decisions of the Board of Directors. In November 2006, the Board of Directors of Comstar-UTS approved the grant of stock options to certain members of the Board of Directors and senior management of Comstar-UTS. The exercise price for these options is RUB 122.3 per one GDR (approximately USD 4.6 as of the grant date). These stock options were to cliff-vest in two years from the date of the grant and were exercisable over a period of 1 month after vesting. The
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3.1% $5.3 40.3% 1.5 $8.8
Print manager | MTS
2006 Program provided for the ability of Comstar-UTS to repurchase the GDRs issued under the 2006 Program from the participants, subject to separate decision of the Board of Directors. Management believed that possibility of such repurchase was remote; accordingly, the 2006 Program originally was classified as equity. In March 2008, the Board of Directors of ComstarUTS has approved the repurchase of the GDRs purchased by the participants at the exercise of the options back to Comstar-UTS at a price equal to an average price of one GDR for the 60 calendar days preceding the date of exercise weighted by trading volumes of Comstar-UTS GDRs on the London Stock Exchange. Accordingly, as of December 31, 2007 Comstar-UTS changed its estimate and re-classified the option program as liability. During the year ended December 31, 2008 certain options have been forfeited, as employment of certain members of management and the Board of Directors has been terminated. In June 2008, General shareholder meeting of Comstar-UTS has taken the decision to denominate the exercise price in USD at USD 4.60 per share. The change did not have a significant impact on compensation expense recognized by Comstar-UTS. In November 2008, the participants of the 2006 Program fully exercised their vested options, acquired 2,403,159 GDRs from Comstar-UTS for USD 4.60 per one GDR. The GDRs were then repurchased by Comstar-UTS at USD 5.34 per one GDR, and the 2006 Program was closed. Total intrinsic value of the exercised options, taking into account the repurchase feature, amounted to $1.8 million. The costs recognized in accordance with the 2006 Program for the years ended December 31, 2008 approximated ($9.2) million (a reversal). The following table summarizes information about non-vested common stock options during the year ended December 31, 2008: Quantity Non-vested options at January 1, 2008 Options granted Options vested Options forfeited Non-vested options at December 31, 2008 Phantom Option Program In March 2008, the Board of Directors of Comstar-UTS approved the employee phantom option program. Each phantom option is subject to the successful attainment of multiple market and performance conditions, such as shareholder return, market position and revenue growth. The compensation expense for these awards may be adjusted for subsequent changes in the estimated or actual outcome of the performance conditions of Comstar-UTS. The phantom options granted during 2008 vest on March 31, 2010. Upon vesting, the participants will be entitled to a cash compensation equal to the difference between weighted average price of one GDR for the 60 calendar days preceding March 31, 2010 and April 1, 2008, respectively, if positive, timed by the number of phantom options granted. The following table summarizes information about phantom options during the years ended December 31, 2009 and 2008: Quantity Outstanding at January 1, 2008 Granted Forfeited Outstanding at December 31, 2008 (all non-vested) Granted Forfeited Outstanding at December 31, 2009 (all non-vested) — 13,065,882 (940,000) 12,125,882 — (1,580,000) 10,545,882 Exercise price, U.S. Dollar — 10.2368 10.2368 10.2368 — 10.2368 10.2368 Weighted average grant- date fair value, U.S. Dollar — 2.36 2.37 2.36 — 2.37 2.35 2,403,159 — (2,403,159) — — Exercise price, U.S. Dollar n/a — 4.60 — — Weighted average grant- date fair value, U.S. Dollar 3.16 — 3.16 — —
Comstar-UTS estimates the fair value of the phantom options using stock option pricing model based on Monte Carlo simulation technique. The following assumptions were used in the option pricing model as of December 31, 2009 and 2008: 2009 Risk-free interest rate Expected residual option life (months) Expected dividends
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2008 0.1% 3 Nil 2.4% 15 Notional
Print manager | MTS
Expected volatility Fair value of options (per share) as of December 31
97% USD 0.03
82% USD 0.36
Expected volatility as of December 31, 2009 was based on historical volatility of the GDRs of Comstar-UTS in the fourth quarter of 2009. The costs recognized in accordance with phantom option plan for the years ended December 31, 2009 and 2008 amounted to negative $2.0 million and $2.3 million, respectively. Total expected future compensation cost related to non-vested awards not yet recognized as of December 31, 2009 which will be recognized on a straight-line basis over the three months ending March 31, 2010 was immaterial.
Page 61 - Note 25: Related Parties (http://annualreview2009.mtsgsm.com/financial_statements/notes/25_related_parties/)
Note 25: Related Parties
Related parties include entities under common ownership and control with the Group, affiliated companies and Svyazinvest, in which the Group owns 25% plus one share stake (see Note 14) and which owns approximately 28% voting shares in MGTS, a subsidiary of Comstar-UTS. As of December 31, 2009 and 2008, accounts receivable from and accounts payable to related parties were as follows: December 31, 2009 Accounts receivable: Sky Link and subsidiaries, an affiliate of Sistema Svyazinvest and subsidiaries TS-Retail, a subsidiary of Sistema Sitronics, a subsidiary of Sistema Intellect Telecom, a subsidiary of Sistema Sistema Mass Media, a subsidiary of Sistema Glaxen, a minority shareholder of a subsidiary of the Group Mezhregion Tranzit Telecom, an affiliate of Sistema Other related parties Total accounts receivable, related parties Accounts payable: Sitronics, a subsidiary of Sistema Maxima, a subsidiary of Sistema TS-Retail, a subsidiary of Sistema Svyazinvest and subsidiaries Mezhregion Tranzit Telecom, an affiliate of Sistema Mediaplanning, a subsidiary of Sistema Sistema Telecom, a subsidiary of Sistema Sistema Mass Media, a subsidiary of Sistema Sky Link and subsidiaries, an affiliate of Sistema Other related parties Total accounts payable, related parties $68,296 6,511 5,739 2,299 — — 861 — 488 3,209 $87,403 $162,906 15,168 — 6,387 18,257 6,118 2,697 7,675 — 7,274 $226,482 $7,467 4,446 3,278 1,933 622 204 — — 2,023 $19,973 $4,319 9,334 16,271 — 1,073 14,416 12,215 8,323 4,669 $70,620 2008
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Print manager | MTS
The Group does not have the intent and ability to offset the outstanding accounts payable and accounts receivable with related parties under the terms of existing agreements with them. Operating Transactions For the years ended December 31, 2009, 2008 and 2007, operating transactions with related parties are as follows: 2009 Revenues from related parties: Svyazinvest and subsidiaries (interconnection, commission for provision of DLD/ILD services to the Group’s subscribers and other) TS-Retail, a subsidiary of Sistema (Sales of handsets and accessories) Mezhregion Tranzit Telecom, an affiliate of Sistema (interconnection, line rental, commission for provision of DLD/ILD services to the Group’s subscribers, and other) Sky Link and subsidiaries, an affiliate of Sistema (interconnection and other) Other related parties Total revenues to related parties Operating expenses incurred on transactions with related parties: RA Maxima, a subsidiary of Sistema (advertising) Sitronics, a subsidiary of Sistema (IT consulting) Svyazinvest and subsidiaries (interconnection and other) Mediaplanning, a subsidiary of Sistema (advertising) Mezhregion Tranzit Telecom, an affiliate of Sistema (interconnection, line rental and other) TS-Retail, a subsidiary of Sistema (dealer commision) Sistema Telecom, a subsidiary of Sistema (use of the brand name) City Hals, a subsidiary of Sistema (rent, repair, maintenance and cleaning services) AB Safety, an affiliate of Sistema (security services) Other related parties Total operating expenses incurred on transactions with related parties $102,005 52,211 28,997 23,782 18,115 17,889 11,738 9,988 5,576 17,931 $138,756 39,646 41,533 82,036 191,155 4,448 14,676 13,835 — 14,296 $134,878 35,889 36,663 48,756 121,355 133 14,556 9,466 — 12,199 $43,174 20,689 11,465 9,857 7,653 $63,147 1,500 128,560 7,977 10,306 $69,094 — 93,224 9,857 6,137 2008 2007
$92,838 $211,490 $178,312
$288,232 $540,381 $413,865
In addition to above, for the years ended December 31, 2009, 2008 and 2007 the Group received dividends from Svyazinvest totaling $nil, $2.4 million and $1.9 million, respectively. In the year ended December 31, 2007 Comstar Direct, a subsidiary of Comstar-UTS, sold substantially all TV content and certain property, plant and equipment to Sistema Mass Media for $14.8 million (exclusive of VAT). Respective gains totalling $2.7 million were included in other income in the accompanying consolidated statement of operations. In the year ended December 31, 2008, respective receivables were transferred to SMM in the course of reorganization of Comstar Direct (see Note 3). Investing and financing transactions During the years ended December 31, 2009 and 2008 the Group made certain investments in and loans to related parties. Respective balances are summarized as follows: December 31, 2009 Loans to, promissory notes and investments in shares of related parties: Short-term investments (Note 5) TS-Retail, a subsidiary of Sistema MBRD, a subsidiary of Sistema Alt, a related party of Sistema
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2008
$12,421 992 —
— $90,949 85,091
Print manager | MTS
Delfa, a related party of Sistema Finexcort, a subsidiary of Sistema Sistema-Hals, an affiliate of Sistema Sky Link and subsidiaries, an affiliate of Sistema Total short-term investments to related parties Other investments (Note 15) TS-Retail, a subsidiary of Sistema Sistema Intellect Telecom, a subsidiary of Sistema Sistema Telecom, a subsidiary of Sistema Total other investments to related parties Investments in shares (Note 15) MBRD, a subsidiary of Sistema Sistema Mass Media, a subsidiary of Sistema Other Total investments in shares of related parties
— — — — $13,413
68,073 68,073 16,688 10,522 $339,396
30,192 20,449 12,808 — $63,449
11,156 — 11,717 51,966 $74,839
5,248 3,856 1,434 $10,538
5,401 3,970 1,510 $10,881
Moscow Bank of Reconstruction and Development (”MBRD”)—The Group has a number of loan agreements and also maintains certain bank and deposit accounts with MBRD, whose major shareholder is Sistema. As of December 31, 2009 and 2008, the Group cash position at MBRD amounted to $963.6 million and $242.4 million in current accounts, respectively. Deposit accounts at MBRD amounted to $1.0 million and $195.7 million as of December 31, 2009 and 2008, respectively. Deposit accounts in MBRD included deposit accounts with original maturities in excess of three months but less than twelve months totaling $1.0 million and $90.9 million as of December 31, 2009 and 2008, respectively, which are classified as short-term investments in the accompanying consolidated statements of financial position. The interest accrued on the deposits for the years ended December 31, 2009, 2008 and 2007, amounted to $25.1 million, $43.2 million and $22.8 million, respectively, and was included as a component of interest income in the accompanying consolidated statements of operations. Loans payable to MBRD amounted to $1.2 million and $8.6 million as of December 31, 2009 and 2008, respectively. Interest expense on these loans for the years ended December 31, 2009 and 2008, 2007 amounted to $0.8 million, $1.3 million and $1.0 million, respectively. Sistema—In November 2009, the Group accepted a promissory note from Sistema as repayment of a loan principle and interest accrued to date under the agreement with Sistema-Hals (see Note 5). The note has zero interest rate and is repayable in 2017. As of December 31, 2009 the amount receivable of $20.4 million was included in other investments in the accompanying consolidated statement of financial position. In the year ended December 31, 2000 following the indemnification obtained from Sistema to repay debt from Ericsson Project Finance, the Group entered into a long-term, RUBdenominated promissory notes with zero interest rate and maturities from 2049 to 2056 to reimburse payments made by Sistema. As of December 31, 2009 and 2008 the carrying values of these notes amounted to $1.8 million and $nil, respectively. Sistema Mass Media (”SMM”)—In 2008 and 2009, the Group had various loans and promissory notes payable to SMM, a subsidiary of Sistema. As of December 31, 2009 these loans and notes were fully repaid. Interest expense on these loans and notes for the years ended December 31, 2009 and 2008, 2007 amounted to $1.4 million, $8.1 million and $1.5 million, respectively. Intellect Telecom—During the years ended December 31, 2009 MGTS, a subsidiary of Comstar-UTS, and MTS itself granted loans to Intellect Telecom, a subsidiary of Sistema. Loans bear interest of 7.0% and 11.0%, respectively, and mature in 2012. Sistema Telecom—In June 2009, the Group transferred RUB-denominated promissory notes of Sistema Telecom, a subsidiary of Sistema, for the total amount of $8.7 million to SMM for partial extinguishment of the Group’s debt payable to SMM. In December 2009 the remaining portions of the notes were partly offset against the Group’s payables to Sistema Telecom and partly repaid in cash by Sistema Telecom. Investments in ordinary shares—As of December 31, 2009 and 2008 the Group had several investments in share capitals of subsidiaries and affiliates of Sistema for $10.5 million and $10.9 million, respectively, which were individually immaterial. The main investments related to two subsidiaries of Sistema: MBRD of 4.56% and Sistema Mass Media of 3.14%. Promissory notes of Alt, Delfa and Finexcort—In December 2008, the Group purchased promissory notes of Alt, Delfa, related parties of Sistema, and Finexcort, a subsidiary of Sistema. As of December 31, 2008 the total amount of $221.2 was included in short-term investments in the accompanying consolidated statements of financial position. The notes, together with
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Print manager | MTS
interest accrued, were redeemed in the first quarter of 2009. Sky Link and subsidiaries—In 2009 and 2008, Sky Link, an affiliate of Sistema, repaid the Group $14.3 million and $3.4 million, respectively, of outstanding indebtedness, which resulted in partial reversal of a provision for uncollectible loans recorded by the Group in 2007 and recognition of a gain of $4.3 million in the accompanying consolidated statement of operations for the year ended December 31, 2009. Sitronics—During the years ended December 31, 2009, 2008 and 2007, the Group acquired from Sitronics Group, a subsidiary of Sistema, telecommunications equipment, software and billing systems (FORIS) for approximately $190.1 million, $357.6 million and $222.1 million, respectively. In addition during the years ended December 31, 2009, 2008 and 2007, the Group purchased SIM cards and prepaid phone cards from Sitronics Smart Technologies, a subsidiary of Sitronics, for approximately $32.4 million, $39.6 million and $19.2 million, respectively. As of December 31, 2009 and 2008 the advances given to Sitronics and its subsidiaries amounted to $23.7 million and $1.7 million, respectively. These amounts were included into property, plant and equipment in the accompanying consolidated statements of financial position. Sistema-Hals—In October 2008, the Group entered into an agreement for the construction of an aerial system in Moscow metro with Sistema-Hals, an affiliate of Sistema. As of December 31, 2009 and 2008 the advances given to Sistema-Hals under this agreement amounted to $6.7 million and $11.7 million, respectively. These amounts were included into property, plant and equipment in the accompanying consolidated statements of financial position. MGTS, a subsidiary of Comstar-UTS, entered into a series of agreements with Sistema-Hals, a subsidiary of Sistema, on project development and reconstruction of buildings which house MGTS’ automatic telephone exchanges. As of December 31, 2009 and 2008, as a result of the work performed by Sistema-Hals under these contracts, MGTS recorded a liability of $38.3 million and $36.8 million, respectively, payable to Sistema-Hals that was recorded in the accompanying consolidated statements of financial position. TS-Retail—In November 2006, MTS established a wholly owned subsidiary, TS-Retail, with a registered capital of $1.1 million for further expansion of Group’s retail operations. In December 2007, MTS’ stake in this company decreased from 100% to 25% following an increase of share capital by TS-Retail by $14.0 million, which was paid by the Group and certain subsidiaries of Sistema. MTS deconsolidated TS-Retail in December 2007 and subsequently accounted for this investment under the equity method. During the years ended December 31, 2009 and 2008, the Group granted loans in total amount of $42.6 million at 11.0%-15.0% annual interest rates maturing in 2010-2011. InvestSvyazHolding—MTS itself and MGTS, a subsidiary of Comstar-UTS, entered into agreements with InvestSvyazHolding, a subsidiary of Sistema, for leasing of network equipment and billing system. These leases were recorded as capital leases in compliance with the authoritative guidance on leases and disclosed in Note 9. Svyazinvest—In 2008, the Group paid $3.6 million dividends to Svyazinvest.
Page 62 - Note 26: Stockholders' Equity (http://annualreview2009.mtsgsm.com/financial_statements/notes/26_stockholders_equity/)
Note 26: Stockholders' Equity
Share capital—MTS’ share capital comprises 1,916,869,262 and 1,885,052,800 of outstanding common shares, net of treasury shares, as of December 31, 2009 and 2008. The total shares in treasury stock of the Group comprised 76,456,876 and 108,273,338 as of December 31, 2009 and 2008, respectively. Each ADS initially represented 20 shares of common stock of the Company. Effective January 2005, the ratio was changed from 1 ADS per 20 ordinary shares to 1 ADS per 5 ordinary shares. The Company initially issued a total of 17,262,204 ADSs (69,048,816 ADSs recalculated using new ratio), representing 345,244,080 common shares. As of December 31, 2009 MTS repurchased 13,599,067 ADSs. Noncontrolling interest—MTS’ equity was affected by changes in subsidiaries’ ownership interests as follows: December 31, 2009 Net income attributable to the Group Transfers from the noncontrolling interest Increase in MTS equity due to acquisition of noncontrolling interest in Comstar-UTS Decrease in MTS paid-in capital due to exercise of the put option on Comstar-UTS shares Increase in MTS equity due to exercise of the call option on Comstar-UTS shares Increase in MTS equity due to acquisition of noncontrolling interest in MGTS
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2008 $2,000,119 — (9,358) — —
2007 $2,087,415 — — 71,060 —
$1,004,479 45,284 — — 269,281
Print manager | MTS
Decrease in MTS paid-in capital due to acquisition of noncontrolling interest in Dagtelecom Decrease in MTS paid-in capital due to reorganisation of Comstar Direct Increase in MTS paid-in capital due to acquisition of noncontrolling interest in Golden Line Decrease in MTS paid-in capital due to acquisition of noncontrolling interest in other subsidiaries Net transfers from the noncontrolling interest Net income attributable to the Group and transfers from the noncontrolling interest:
(7,679) — — (487) 306,399 $1,310,878
— (6,539) — — (15,897) $1,984,222
— — 1,467 — 72,527 $2,159,942
Dividends—In 2007, the Board of Directors approved a dividend policy, whereby the Group shall aim to make dividend payments to shareholders in the amount of at least 50% of annual net income under U.S. GAAP. The dividend can vary depending on a number of factors, including the outlook for earnings growth, capital expenditure requirements, cash flow from operations, potential acquisition opportunities, as well as the Group’s debt position. Annual dividend payments, if any, must be recommended by the Board of Directors and approved by the shareholders. In accordance with the Russian laws, earnings available for dividends are limited to profits determined in accordance with Russian statutory accounting regulations, denominated in rubles, after certain deductions. The net income of MTS OJSC for the years ended December 31, 2009, 2008 and 2007 that is distributable under Russian legislation totaled RUB 33,480 million ($1,055.4 million), RUB 40,554 million ($1,631.6 million) and RUB 37,696 million ($1,473.8 million), respectively. The following table summarizes the Group’s declared cash dividends in the years ended December 31, 2009, 2008 and 2007: 2009 Dividends declared (including dividends on treasury shares of $45,631, $36,529 and $5,967, respectively) Dividends, U.S. Dollars per ADS Dividends, U.S. Dollars per share As of December 31, 2009 and 2008, dividends payable were $1.1 million and $0.6 million, respectively. MGTS’ preferred stock—MGTS, a subsidiary of Comstar-UTS, had 15,965,850 preferred shares outstanding at December 31, 2009. MGTS’ preferred shares carry guaranteed noncumulative dividend rights amounting to the higher of (a) 10% of MGTS’ net profit as determined under Russian accounting regulations and (b) the dividends paid on common shares. No dividends may be declared on common shares before dividends on preferred shares are declared. If the preferred dividend is not paid in full in any year the preferred shares also obtain voting rights, which will lapse after the first payment of the dividend in full. Otherwise, preferred shares carry no voting rights except on resolutions regarding liquidation or reorganization of MGTS and changes/amendments to MGTS’ charter restricting the rights of holders of preferred shares. Such resolutions require the approval of 75% of the preferred shareholders. In the event of liquidation, dividends to preferred shareholders that have been declared but not paid have priority over ordinary shareholders. In June 2009, the general shareholders’ meeting of MGTS approved zero dividend payment for 2008. Accordingly, the preferred shares obtained voting rights which will lapse after the first payment of the dividend in full. In December 2009, the Group has acquired 11,135,428 preferred shares of MGTS (see Note 3). $1,265,544 3.2 0.647 2008 $1,257,453 3.2 0.631 2007 $747,213 1.9 0.375
Page 63 - Note 27: Retirement and Post Retirement Obligations (http://annualreview2009.mtsgsm.com/financial_statements/notes/27_retirement_and_post_retirement_obligations/)
Note 27: Retirement and Post Retirement Obligations
MGTS has historically provided certain benefits to employees upon their retirement and afterwards, which include monthly regular pension, death-in-service payments, lump-sum upon retirement payments, death while pensioner payments and 50% monthly telephone subsidy for the pensioners who served more than 30 years at MGTS. As of December 31, 2009, there were 10,010 active employees eligible to the program. The pension plan is terminally funded, i.e., upon retirement MGTS transfers all its obligations to a national pension fund “Sistema” (NPF “Sistema”), a subsidiary of Sistema, and from that moment onwards has no more obligations towards the pensioner regarding the pension plan. All other program benefits are financed on a pay-as-you-go basis. MGTS’ pension obligations are measured as of December 31. The following are the key assumptions used in determining the projected benefit obligation and net periodic pension expense:
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Print manager | MTS
Discount rate Expected return on plan assets Projected salary growth Discount rate used for annuity contracts calculation Rate at which pension payment are assumed to be indexed Long-term inflation Staff turnover (for ages below 50)
9.00% p.a. 9.22% p.a. 9.72% p.a. 7.00% p.a. 0.00% p.a. 5.50% p.a. 5.00% p.a.
The change in the projected benefit obligation and the change in plan assets for the years ended December 31, 2009 and 2008 are presented in the following table: 2009 Old age pension Change in projected benefit obligation Projected benefit obligation, beginning of the year Service cost Interest cost Plan amendments losses Actuarial (gains)/losses Benefit payment Settlement and curtailment gain Termination benefits Foreign currency translation effect Projected benefit obligation, end of the year Change in fair value of plan asset Fair value of plan assets, beginning of the year Correction of asset value, beginning of year Actual return on plan assets Employer contributions Benefits paid Settlement Foreign currency translation effect Fair value of plan assets, end of the year Unfunded status of the plan, end of the year, net $471 (188) — 1,733 — (1,245) 1 $772 $(10,997) $— — — 3,044 (3,044) — — $— $(14,540) $471 (188) — 4,777 (3,044) (1,245) 1 $772 $(25,537) $2,473 — 187 604 — (2,689) (104) $471 $(11,453) $— — — 5,701 (5,701) — — $— $(17,797) $2,473 — 187 6,305 (5,701) (2,689) (104) $471 $(29,250) $11,924 491 914 — 17 — (1,245) — (332) $11,769 $17,797 737 1,371 — (1,686) (3,043) — — (636) $14,540 $29,721 1,228 2,285 — (1,669) (3,043) (1,245) — (968) $26,309 $17,381 807 1,102 66 (2,355) — (2,689) — (2,388) $11,924 $20,909 794 1,083 1,844 265 (5,701) — 2,102 (3,499) $17,797 $38,290 1,601 2,185 1,910 (2,090) (5,701) (2,689) 2,102 (5,887) $29,721 Other benefits Total Old age pension 2008 Other benefits Total
Reconciliations of the unfunded status of the plan for the years ended December 31, 2009 and 2008 are as follows: 2009 Old age pension Unfunded status of the plan, beginning of the year Net periodic benefit cost Contributions made (Credit)/charge to other comprehensive income/(loss), net $11,453 2,115 (1,733) (505) Other benefits $17,797 2,726 (3,044) (2,303) Total $29,250 4,841 (4,777) (2,808) Old age pension $14,908 2,570 (604) (3,137) 2008 Other benefits $20,909 4,576 (5,701) 1,512 Total $35,817 7,146 (6,305) (1,625)
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Print manager | MTS
Foreign currency translation effect Unfunded status of the plan, end of the year
(333) $10,997
(636) $14,540
(969) $25,537
(2,284) $11,453
(3,499) $17,797
(5,783) $29,250
The components of the net periodic pension expense for the years ended December 31, 2009 and 2008 are as follows: 2009 Old age pension Service cost Interest cost Return on assets Termination benefits in connection with established staff reduction program Net actuarial loss recognized in a year Amortization of prior service cost Correction of asset value, beginning of year Net periodic pension expense $491 914 — — 582 (60) 188 $2,115 Other benefits $737 1,371 — — 438 180 — $2,726 Total $1,228 2,285 — — 1,020 120 188 $4,841 Old age pension $807 1,102 (187) — 933 (85) — $2,570 2008 Other benefits $794 1,083 — 2,102 597 — — $4,576 Total $1,601 2,185 (187) 2,102 1,530 (85) — $7,146
Amounts recognized in other comprehensive income for the years ended December 31, 2009 and 2008 are as follows: 2009 Old age pension Unrecognized gains Unrecognized prior service cost/(credit) Total recognized in other comprehensive income $(565) 60 $(505) Other benefits $(2,123) (180) $(2,303) Total $(2,688) (120) $(2,808) Old age pension $(3,289) 152 $(3,137) 2008 Other benefits $(331) 1,843 $1,512 Total $(3,620) 1,995 $(1,625)
The estimated net loss and prior service credit for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2010 are $0.5 million and $0.1 million, respectively. The Group’s management expects contributions to the plan during the year ended December 31, 2010 to amount to $3.0 million. The future benefit payments to retirees under the defined benefit plan are expected to be as follows: 2010—$1.8 million; 2011—$2.0 million, 2012—$2.3 million, 2013—$3.2 million, 2014— $3.5 million and an aggregate of $20.6 million in 2015 to 2019. NPF “Sistema” does not allocate any separately identifiable assets to its clients such as MGTS. Instead, it operates a pool of investments where it invests the funds from the pension solidarity and individual accounts. The pool of investments includes primarily investments in Russian corporate bonds, Russian governmental bonds and shares of Russian issuers.
Page 64 - Note 28: General and Administrative Expenses (http://annualreview2009.mtsgsm.com/financial_statements/notes/28_general_administrative_expenses/)
Note 28: General and Administrative Expenses
General and administrative expenses for the years ended December 31, 2009, 2008 and 2007, comprised the following: 2009 Salaries and social contributions Rent 991,568 278,536 2008 1,094,148 243,837 2007 922,652 190,690
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Print manager | MTS
General and administrative Taxes other than income Repair and maintenance Billing and data processing Consulting expenses Business acquisitions related costs Insurance Provision for obsolescence Total
213,255 180,775 157,932 64,169 58,931 11,353 7,561 4,113 1,968,193
256,731 215,570 221,192 62,203 50,774 — 11,452 3,870 2,159,777
239,250 172,684 218,824 45,097 40,157 — 19,339 4,931 1,853,624
Page 65 - Note 29: Segment Information (http://annualreview2009.mtsgsm.com/financial_statements/notes/29_segment_information/)
Note 29: Segment Information
Historically, the Group has reflected its reportable segments on a geographical basis. Management has taken this approach as this was effectively how the business was managed. In 2009, since the acquisition of Comstar-UTS the Group’s management determined a new operating segment and identified three reportable segments: Russia Mobile, Russia Fixed and Ukraine Mobile. These segments have been determined based on different geographical areas of business activities and the nature of their operations: mobile includes activities for the providing of wireless telecommunication services to the Group’s subscribers and distribution of mobile handsets and accessories; fixed line includes all activities for providing wireline telecommunication services, broadband and consumer Internet. Information about other business activities and operating segments that are not reportable due to non materiality of business activity was combined and disclosed in the “Other” category separately from other reconciling items. Also, historically, the Group included corporate headquarters expenses to “Russia” reportable segment as the chief operating decision maker assessed the performance of the segments on such basis. In 2009, since the acquisition of Comstar-UTS, the chief operating decision maker has changed the approach to the allocation of corporate headquarters expenses and such changes have been reflected in the financial information the chief operating decision maker now reviews. According to the new approach corporate headquarters expenses which are not directly attributable to the reportable segments are included into “Other” category. The accompanying consolidated financial statements reflect these changes for all periods presented. Intercompany eliminations presented below consist primarily of sales transactions between segments conducted under the normal course of operations. Financial information by reportable segment is presented below: December 31, 2009 Revenue: Russia Mobile Russia Fixed Ukraine Mobile Other Intercompany eliminations Total revenue Depreciation and amortization: Russia Mobile Russia Fixed Ukraine Mobile $1,107,593 193,357 352,037 $1,312,406 214,288 437,988 $1,076,586 185,337 324,976 $6,636,568 1,485,590 1,048,751 787,543 (134,910) $9,823,542 $7,840,225 1,765,226 1,661,951 779,520 (145,988) $11,900,934 $6,181,023 1,562,291 1,608,021 483,499 (110,928) $9,723,906 2008 2007
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Other Total depreciation and amortization Operating income: Russia Mobile Russia Fixed Ukraine Mobile Other Intercompany eliminations Net operating income Net operating income Currency exchange and transaction loss (gain) Interest income Interest expense Change in fair value of derivatives Impairment of investments Equity in net income of associates Other expense, net Income before provision for income taxes and minority interest
186,581 $1,839,568
186,443 $2,151,125
87,986 $1,674,885
$1,941,174 406,995 120,248 82,257 (3,107) $2,547,567 $2,547,567 252,945 (108,543) 571,719 5,420 368,355 (60,313) 23,254 $1,494,730
$2,836,660 440,441 321,328 45,503 3,404 $3,647,336 $3,647,336 565,663 (70,860) 233,863 41,554 — (75,688) 22,745 $2,930,059
$2,251,259 450,907 456,778 25,808 176 $3,184,928 $3,184,928 (161,856) (53,507) 192,237 145,860 22,691 (71,116) 38,781 $3,071,838
2009 Additions to long-lived assets: Russia Mobile Russia Fixed Ukraine Mobile Other Total additions to long-lived assets Long-lived assets: Russia Mobile Russia Fixed Ukraine Mobile Other Total long-lived assets Total assets: Russia Mobile Russia Fixed Ukraine Mobile Other Total assets $8,662,850 3,881,353 1,567,563 1,668,979 $15,780,745 $4,821,658 2,268,116 1,365,686 1,525,702 $9,981,162 $1,247,307 120,036 259,388 463,624 $2,090,355
2008 $1,595,643 353,975 405,127 313,002 $2,667,747
$4,840,847 2,276,474 1,484,317 1,345,077 $9,946,715
$6,971,541 4,282,381 1,669,996 1,793,261 $14,717,179
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Page 66 - Note 30: Commitments and Contingencies (http://annualreview2009.mtsgsm.com/financial_statements/notes/30_commitments_contingencies/)
Note 30: Commitments and Contingencies
Recent volatility in global and Russian financial markets—During 2009, a number of major economies around the world continued to experience volatile capital and credit markets. A number of major global financial institutions have been placed into bankruptcy, taken over by other financial institutions and/or supported by government funding. As at the date these consolidated financial statements are authorized for issue as a consequence of the market turmoil in capital and credit markets both globally and in Russia, notwithstanding any potential economic stabilization measures that may be put into place by the Russian Government, there exists economic uncertainties surrounding the continual availability, and cost, of credit facilities, the potential for economic uncertainties to continue in the foreseeable future. The crisis may also damage purchasing power of the Group’s customers mainly in business sector and thus lead to decline in revenue streams and cash generation. While management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group’s results and financial position in a manner not currently determinable. Operating environment—The economies in Russia and the CIS countries, while deemed to be market economies, continue to display certain traits consistent with that of an emerging market. These characteristics have in the past included higher than normal inflation, insufficient liquidity of the capital markets, and the existence of currency controls. The further development of the Russian and CIS countries’ economies will be subject to their government’s continued actions with regard to supervisory, legal and economic reforms. Capital commitments—As of December 31, 2009, the Group had executed purchase agreements of approximately $200.2 million to acquire property, plant and equipment, and intangible assets and costs related thereto. Agreement with Apple—In August 2008, the Group entered into an unconditional purchase agreement with Apple Sales International to buy 1.5 million iPhone handsets at list prices at the dates of respective purchases over the three year period. Pursuant to the agreement the Group shall also incur certain iPhone promotion costs. In 2009 and 2008, the Group made 0.4% and 7.2% of its total purchase installment contemplated by the agreement, respectively. Total amount paid for handsets purchased under the agreement for the years ended December 31, 2009 and 2008 amounted to $3.4 million and $65.4 million, respectively. MGTS long-term investment program—In December 2003, MGTS announced its long-term investment program for the period from 2004 to 2012, providing for extensive capital expenditures, including expansion and full digitalization of the Moscow telephone network. The program was approved by the resolution of the Moscow City Government on December 16, 2003. At the inception of the investment program, capital expenditures were estimated to be approximately $1,600.0 million and included reconstruction of 350 local telephone stations and installation of 4.3 million of new phone lines. As a result of implementation of the investment program, new digital equipment is being installed in the buildings housing the telephone nodes, and a substantial amount of floor space will become available after the replacement of analogue switching equipment. The additional free floor space after reconstruction is expected to be sold to third parties or rented out. There are 113 automatic telephone station buildings which are to be reconstructed or rebuilt in the course of the investment program. Currently, the management had not made a decision whether to sell the free floor space created in the course of the investment program or to rent it out. In November 2006, MGTS signed an agreement with the Moscow City Government, under which MGTS’ investment program was approved. Under the agreement, the Moscow City Government is entitled to receive not less than 30% of the market value of additional floor space constructed during the course of the investment program. The obligation arises at the time the reconstruction of specified properties is completed. In December 2005, MGTS made a prepayment to the Moscow City Government under this program which will be offset against the future liability arising as a result of the investment program. In the course of implementation of the investment program, MGTS entered into a series of agreements with Sistema-Hals, a subsidiary of Sistema, related to project development and reconstruction of buildings housing the telephone stations. The main part of the work under these contracts was to be performed between 2006 and 2012. Under the agreements, SistemaHals was to prepare the project documentation and perform construction works on behalf of MGTS, and MGTS was to reimburse all the expenses incurred in relation to the construction process with a margin of 4.75% on such expenses and to pay a fixed fee of $0.04 million per one building. During 2009 and 2008, project development and site preparation works were performed by Sistema-Hals on 96 sites, which resulted in $2.8 million and $11.0 million addition to construction in-progress in 2009 and 2008, respectively, and recognition of payable to Sistema-Hals (see Note 25). No construction or other works were performed in relation to the other sites in 2009, as the business plans are still under development. In February 2009, the Board of Directors of MGTS approved the cancellation of agreements with Sistema-Hals with respect to 26 sites, which also extinguishes the respective portion of MGTS’ liability to Sistema-Hals, and signing of 26 new agreements with investor companies. Under the new agreements, the investor companies would perform all necessary reconstruction work and obtain the property rights for the reconstructed buildings except for the premises locating the digitalized nodes which would remain MGTS property. In addition, within 12 months after transfer of the building into the investment project, MGTS is to receive cash payment equal to MGTS’ share in the value of the building before reconstruction as appraised by an independent valuation firm in 2008, plus interest at 20% per annum accrued for the period from transfer of the building into the project and the date of payment. As of December 31, 2009, cancellation of 2 out of aforementioned 26 agreements was signed by Sistema-Hals.
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Operating leases—The Group has entered into non-cancellable agreements to lease the space for telecommunication equipment, offices and transmission channels, which expire in various years up to 2058. Rental expenses under the operating leases of $278.5 million, $243.8 million and $190.7 million for the years ended December 31, 2009, 2008 and 2007, respectively, are included in operating expenses in the accompanying consolidated statements of operations. Rental expenses under the operating leases of $168.7 million, $175.8 million and $129.1 million for the years ended December 31, 2009, 2008 and 2007, respectively, are included in cost of services in the accompanying consolidated statements of operations. Future minimum lease payments due under these leases at December 31, 2009 are as follows: Payments due in the years ended December 31, 2010 2011 2012 2013 2014 Thereafter Total $196,858 33,741 25,768 11,707 8,313 93,609 $369,996
Taxation—Russia and the CIS countries currently have a number of laws related to various taxes imposed by both federal and regional governmental authorities. Applicable taxes include VAT, corporate income tax (profits tax), a number of turnover based taxes, and payroll (social) taxes. Laws related to these taxes have not been in force for significant periods, in contrast to more developed market economies; therefore, the government’s implementation of these regulations is often inconsistent or nonexistent. Accordingly, few precedents with regard to tax rulings have been established. Tax declarations, together with other legal compliance areas (for example, customs and currency control matters), are subject to review and investigation by a number of authorities, which are enabled by law to impose extremely severe fines, penalties and interest charges. These facts create tax risks in Russia and the CIS countries that are more significant than typically found in countries with more developed tax systems. Generally, according to Russian tax legislation, tax declarations remain open and subject to inspection for a period of three years following the tax year. As of December 31, 2009, tax declarations of MTS OJSC and other subsidiaries in Russia for the preceding three fiscal years were open for further review. In October 2009, the Russian tax authorities completed the tax audit of Sibintertelecom for the years ended December 31, 2006, 2007 and 2008. Based on the results of this audit, the Russian tax authorities assessed that RUB 174.5 million ($5.8 million as of December 31, 2009) of additional taxes, penalties and fines were payable by the Group. The resolution has not come into force yet as the Group has prepared and filed an appeal with the Federal Tax Service to recognize the tax authorities’ resolution to be invalid. As of December 31, 2009, no provision was recorded in the consolidated financial statements in respect of this matter, as the management believes the decision to be favorable. The Group purchases supplemental software from foreign suppliers of telecommunication equipment in the ordinary course of business. The Group’s management believes that custom duties are calculated in compliance with the applicable legislation. However there is a risk that the customs authorities may take a different view and impose additional custom duties. As of December 31, 2009 and 2008, no provision was recorded in the consolidated financial statements in respect of such additional duties. Pricing of revenue and expenses between each of the Group’s subsidiaries and various discounts and bonuses to Group’s subscribers in the course of performing its marketing activities might be a subject to transfer pricing rules. The Group’s management believes that taxes payable are calculated in compliance with the applicable tax regulations relating to transfer pricing. However there is a risk that the tax authorities may take a different view and impose additional tax liabilities. As of December 31, 2009 and 2008, no provision was recorded in the consolidated financial statements in respect of such additional claims. Management believes that it has adequately provided for tax and customs liabilities in the accompanying consolidated financial statements. As of December 31, 2009 and 2008, the provision accrued amounted to $68.2 million and $27.6 million, respectively. In addition, the accrual for unrecognized income tax benefits, potential penalties and interest recorded in accordance with the authoritative guidance on income taxes totaled $4.2 million and $8.0 million as of December 31, 2009 and 2008, respectively. However, the risk remains that the relevant authorities could take differing positions with regard to interpretive issues and the effect could be significant. 3G license—In May 2007, the Federal Service for Supervision in the Area of Communications and Mass Media awarded MTS a license to provide 3G services in the Russian Federation. The 3G license was granted subject to certain capital and other commitments. The major conditions are that MTS will have to build a certain number of base stations that support 3G standards and will have to start providing services in the Russian Federation by certain date, and also will have to build a certain number of base stations by the end of the third, fourth and fifth years from the date of granting the license. Management believes that as of December 31, 2009 MTS is in compliance with these conditions. Issued guarantees—In 2006, MGTS became a guarantor under a credit facility provided to InvestSvyazHolding, a subsidiary of Sistema, by Komercni banka, a.s., Prague. The credit line for the total amount of €10.4 million matures in April 2011. MGTS’ guarantee amounted to $6.7 million as of December 31, 2009. In 2006, MGTS became a guarantor under a credit facility provided to MBRD, a subsidiary of Sistema, by Bankgesellschaft Berlin AG, Berlin. The credit line for the total amount of €2.1 million matures in June 2011. MGTS’ guarantee amounted to $0.9 million as of December 31, 2009.
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Under these guarantees the Group could be potentially liable for a maximum amount of $7.6 million in case of borrowers’ default under the obligations. As of December 31, 2009, no event of default has occurred under any of the guarantees issued by the Group. The Group does not recognize a liability at inception for the fair value of the guarantor’s obligation, as provisions of the authoritative guidance on guarantees do not apply to the guarantees issued between corporations under common control. Bitel—In December 2005, MTS Finance acquired a 51.0% stake in Tarino Limited (”Tarino”), from Nomihold Securities Inc. (”Nomihold”), for $150.0 million in cash based on the belief that Tarino was at that time the indirect owner, through its wholly owned subsidiaries, of Bitel LLC (”Bitel”), a Kyrgyz company holding a GSM 900/1800 license for the entire territory of Kyrgyzstan. Following the purchase of the 51.0% stake, MTS Finance entered into a put and call option agreement with Nomihold for “Option Shares,” representing the remaining 49.0% interest in Tarino shares and a proportional interest in Bitel shares. The call option was exercisable by MTS Finance from November 22, 2005 to November 17, 2006, and the put option was exercisable by Nomihold from November 18, 2006 to December 8, 2006. The call and put option price was $170.0 million. Following a decision of the Kyrgyz Supreme Court on December 15, 2005, Bitel’s corporate offices were seized by a third party. As the Group did not regain operational control over Bitel’s operations in 2005, it accounted for its 51.0% investment in Bitel at cost as at December 31, 2005. The Group appealed the decision of the Kyrgyz Supreme Court in 2006, but the court did not act within the time period permitted for appeal. The Group subsequently sought the review of this dispute over the ownership of Bitel by the Prosecutor General of Kyrgyzstan to determine whether further investigation could be undertaken by the Kyrgyz authorities. In January 2007, the Prosecutor General informed the Group that there were no grounds for involvement by the Prosecutor General’s office in the dispute and that no legal basis existed for the Group to appeal the decision of the Kyrgyz Supreme Court. Consequently, the Group decided to write off the costs relating to the purchase of the 51.0% stake in Bitel, which was reflected in its audited annual consolidated financial statements for the year ended December 31, 2006. Furthermore, with the impairment of the underlying asset, a liability of $170.0 million was recorded with an associated charge to non-operating expenses. In November 2006, MTS Finance received a letter from Nomihold purporting to exercise the put option and sell the Option Shares for $170.0 million to MTS Finance. In January 2007, Nomihold commenced an arbitration proceeding against MTS Finance in the London Court of International Arbitration in order to compel MTS Finance to purchase the Option Shares. Nomihold seeks specific performance of the put option, unspecified monetary damages, interest, and costs. The matter is currently pending. MTS Finance is vigorously contesting this action and has asked the arbitration tribunal to dismiss Nomihold’s claim. In connection with the above mentioned put option exercise and the uncertainty as to the resolution of the dispute with Nomihold, the Group recognized a liability in the amount of $170.0 million in its audited annual consolidated financial statements with a corresponding charge to other non-operating expenses as of December 31, 2006 and for the year then ended. In addition, three Isle of Man companies affiliated with the Group (the “KFG Companies”), have been named defendants in lawsuits filed by Bitel in the Isle of Man seeking the return of dividends received by these three companies in the first quarter of 2005 from Bitel in the amount of approximately $25.2 million plus compensatory damages, and to recover approximately $3.7 million in losses and accrued interest. In the event that the defendants do not prevail in these lawsuits, the Group may be liable to Bitel for such claims. The KFG Companies have also asserted counterclaims against Bitel, and claims against other defendants including Altimo LLC (”Altimo”), and Altimo Holdings & Investments Limited (”Altimo Holding”), for the wrongful appropriation and control of Bitel. On November 30, 2007 the High Court of Justice of the Isle of Man set aside orders it had previously issued granting leave to serve the non-Manx defendants out of the jurisdiction as to the KFG Companies’ counterclaims on the basis of a lack of jurisdiction. The KFG Companies appealed that ruling to the Isle of Man Staff of Government and the appeal hearing took place in July 2008. On November 28, 2008, the Staff of Government reversed the High Court and ruled that the case should proceed in the Isle of Man. The defendants have sought leave to appeal from the Judicial Committee of the Privy Council of the House of Lords of the United Kingdom. It is not possible at this time to predict the ultimate outcome or resolution of these claims. In a separate arbitration proceeding initiated against the KFG Companies by Kyrgyzstan Mobitel Investment Company Limited (”KMIC”), under the rules of the London Court of International Arbitration, the arbitration tribunal in its award found that the KFG Companies breached a transfer agreement dated May 31, 2003 (the “Transfer Agreement”), concerning the shares of Bitel. The Transfer Agreement was made between the KFG Companies and IPOC International Growth Fund Limited (”IPOC”), although IPOC subsequently assigned its interest to KMIC, and KMIC was the claimant in the arbitration. The tribunal ruled that the KFG Companies breached the Transfer Agreement when they failed to establish a date on which the equity interests in Bitel were to be transferred to KMIC and by failing to take other steps to transfer the Bitel interests. This breach occurred prior to MTS Finance’s acquisition of the KFG Companies. The arbitration tribunal ruled that KMIC is entitled only to damages in an amount to be determined in future proceedings. At the request of the parties, the tribunal agreed to stay the damages phase of the proceedings pending the resolution of the appeals process now before the second instance court in the Isle of Man, as described above. The Group is not able to predict the outcome of these proceedings or the amount of damages to be paid, if any. Beta Link—On August 12, 2009, Beta Link CJSC (”Beta Link”) filed a claim against MTS, seeking (i) payment of RUB 238.5 million ($7.9 million as of December 31, 2009) in dealer commission, (ii) payment of $10.0 million in penalties for breach of dealers’ agreement and (iii) payment of $2.7 million of unrealized potential benefits. On December 11, 2009, Moscow Arbitration Court ruled against MTS enacting to pay an amount of RUB 118.6 million ($3.9 million as of December 31, 2009) and $10 million in penalties. MTS prepared and filed an appeal in response of Moscow Arbitration Court ruling, which resulted in a judgment in favor of the Group on March 23, 2010. Beta Link, in return, prepared the further appeal against MTS. Group’s management is unable to predict the outcome of this claim at this time. As of December 31, 2009, the provision for the entire amount totaled to $13.9 million was recorded in the consolidated financial statements in respect of this claim.
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Other litigations—In the ordinary course of business, the Group may be party to various legal, tax and customs proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which MTS operates. Management believes that the Group’s liability, if any, in all such pending litigation, other legal proceeding or other matters will not have a material effect upon its financial condition, results of operations or liquidity of the Group.
Page 67 - Note 31: Subsequent Events (http://annualreview2009.mtsgsm.com/financial_statements/notes/31_subsequent_events/)
Note 31: Subsequent Events
For the purpose of the accompanying consolidated financial statements, subsequent events have been evaluated through April 29, 2010, which is the date these financial statements were available to be issued. Increase in MGTS Tariffs—In January 2010, the Federal Tariff Service approved new tariffs for MGTS residential and corporate subscribers effective February 1, 2010. The tariffs for subscribers increased at an average rate of 10.3% in RUB. Non-controlling interest in EuroTel—In February 2010, the Group completed the cash acquisitions of the outstanding 20% minority stake in Yekaterinburg based cable-TV and communications operator EuroTel LLC and a 25% minority stake in Management and Leasing LLC, which owns communication infrastructure in Yekaterinburg. The Group now owns 100% of the issued share capital in both companies. The total cash consideration for the two related acquisitions is RUB 100 million ($3.3 million at the date of acquisition). Acquisition of Tenzor Telecom—In February 2010, the Group acquired 100% in Tenzor Telecom, an alternative telecommunications operator based in Yaroslavl in Central Russia, for RUB 220 million ($7.3 million as of the date of acquisition). The acquisition was made in frame of regional expansion program of the Group. Decrease in interest rates Gazprombank—In February 2010 MTS reached an agreement with Gazprombank to reduce the interest rates on the outstanding loans. The interest rate on the EURO 100.0 million credit facility with original maturity in September 2012 was reduced from an annual rate of 8% to 7%. The interest rate on the facility of RUB 6.46 billion with maturity in September 2012 was reduced from an annual rate of 13% to 10.95%. MTS also reduced the interest rate on the revolving credit line in the amount of €100.0 million with maturity in September 2012 from 8% to 7%. Raising of financing from Credit Agricole Corporate and Investment Bank and BNP Paribas—On February 18, 2010 the Group entered into a credit facility agreement in amount of up to $97.0 million with Credit Agricole Corporate and Investment Bank and BNP Paribas backed by Hermes. $55.1 million of the facility is available till April 15, 2010, the rest $41.9 million till March 30, 2011. The funds are to be used for purchase of telecommunication software and equipment from Alcatel Lucent Deutschland. The facility matures in 2017 and bears an interest of EURIBOR + 1.65%. The related commitment fee is set at 0.825% on undrawn balance of the facility. Legal proceedings by anti-monopoly authorities—In March 2010, the Federal Anti-Monopoly Service of Russia (”FAS”) started legal proceedings against MTS, VimpelCom OJSC and Megafon OJSC about their alleged violation of antimonopoly legislation by charging artificially high prices for roaming services. The Group does not possess information related to the date that this case will be considered by the FAS. In case roaming tariffs of the Group are found to be in violation of applicable legislation, the Group may face certain fines of up to 15% of the revenue from the services provided in violation of the legislation. Management believes that there was no violation of the anti-monopoly legislation and no amounts have been accrued in the accompanying consolidated financial statements in relation to this claim. Amendment to Sberbank Credit Line Facility—In March 2010, Comstar-UTS agreed to amend the repayment schedule of Sberbank credit line facility (see Note 17). Under the new schedule, the loan principal is repayable in eight quarterly installments of RUB 3,250.0 million ($107.5 million as of December 31, 2009) each starting from September 2010. In addition, nominal interest rate was decreased to 10.5% per annum for the period from March 1, 2010 till September 27, 2010 and to 11.75% per annum thereafter. Approval of new credit facility from Sberbank—In March 2010 Sberbank approved a new RUB 5.8 billion ($191.8 million as of December 31, 2009) credit facility for Comstar. This facility can be utilized by the end of 2010, has an interest rate of 10.5% and the repayments of the amounts borrowed under the facility start in 2012. MGTS dividend—In March 2010, the extraordinary general shareholders’ meeting of MGTS approved dividend on preferred shares of MGTS for the total amount of RUB 321.9 million (approximately $10.7 million). The dividends are due to be paid until the end of May 2010. Upon dividend payment, preferred shares of MGTS will become non-voting. Voluntary partial repayment of RUB 12 billion Sberbank facility—On April 5, 2010 the Group voluntarily repaid RUB 6 billion (equivalent of $205.3 million as of the date of repayment) of its 12 billion Sberbank facility. Raising of financing from the Bank of Moscow—On April 6, 2010 the Group signed a credit agreement with the Bank of Moscow in amount of RUB 22 billion. The terms of the agreement stipulate a three-year maturity with one-year extension option and an annual interest of up to 10.25%. The credit line can be drawn down until October 1, 2010. The facility carries no commitment fees or any other upfront fees payable at signing. However, the Group is to pay fee of 0.2% from each amount drawn under the agreement.
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Decrease in interest rates Sberbank—On April 13, 2010, the Group lowered interest rates on MTS’ Sberbank facilities. The interest rate for RUB 47 billion facility closed in September 2009 was set at 10.65%, the interest rate for RUB 12 billion facility closed in August 2009 (partially repaid in April 2010) was set at 9.75%. Repurchase of MTS OJSC Notes due 2013—In April 2010 the Group set a new 7.0% coupon rate for the coupon payments to be made on MTS OJSC Notes due 2013 until maturity. On April 26, 2010, upon demand of certain noteholders, the Group repurchased 7.1 million of MTS OJSC Notes due 2013 at nominal value of RUB 7.1 billion ($242.5 million as of the date of the transaction). Repurchase of MTS OJSC Notes due 2015—In April 2010 the Group set a new 7.75% coupon rate for the coupon payments to be made on MTS OJSC Notes due 2015 until maturity. On April 29, 2010, upon demand of certain noteholders, the Group repurchased 6.3 million of MTS OJSC Notes due 2015 at nominal value of RUB 6.3 billion ($214.5 million as of the date of the transaction). Change of ADS ratio—Effective May 3, 2010, the ratio of Company’s ADSs changed from 1 ADS per 5 common shares to 1 ADS per 2 common shares. Agreement to sell Svyazinvest stake to Rostelecom—On May 20, 2010, Comstar-UTS, MGTS Finance S.A., a company controlled by Comstar-UTS, and Rostelecom entered into agreements involving the sale of a 25% + 1 share of Svyazinvest to Rostelecom for RUB 26 billion. The closing of the transactions is subject to a number of conditions including, inter alia, obtaining the necessary corporate approvals by the parties involved, regulatory clearances, including those from the FAS, and the entry by Sistema and Svyazinvest into an exchange transaction, upon completion of which, Svyazinvest will control 100% of the share capital in Sky Link and Sistema will acquire the 23.33% stake in MGTS controlled by Svyazinvest. The precise terms and consummation of this and certain additional related transactions remain subject to the negotiation and execution of definitive binding documentation by these and other parties. The agreements signed on May 20, 2010 are in line with the previously announced non-binding memorandum of understanding (”MOU”) concluded by Comstar-UTS with Sistema and Svyazinvest in November 2009 (see Note 14). Repayment of EBRD, Nordic Investment Bank and European Investment Bank loans—On May 26, 2010 the Group repaid loans from EBRD, Nordic Investment Bank and European Investment Bank totalling EUR 413.0 million and accrued interest totalling EUR 13.9 million. Notes issue—On June 22, 2010, the Group issued U.S. Dollar denominated loan participation notes in the amount of $750.0 million with an annual interest rate of 8.625% and a maturity in June 2020. The notes were issued by MTS International Funding Limited, a private company organized and existing as a private limited company under the laws of Ireland, and are listed on the Irish Stock Exchange. Dividends—On June 24, 2010, the annual general meeting of the Company’s shareholders approved dividends of RUB 15.40 per ordinary share for the fiscal year ended December 31, 2009 amounting to a total of RUB 30.70 billion ($991.3 million at the exchange rate as of June 24, 2010). Repurchase of MTS OJSC Notes due 2018—In June 2010 the Group set a new 8.0% coupon rate for the coupon payments to be made on MTS OJSC Notes due 2018 until maturity. On June 24, 2010, upon demand of certain noteholders, the Group repurchased the Notes in the amount of 179.5 million rubles ($5.8 million as of the date of the transaction). Proposed merger of MTS and Comstar-UTS—On June 25, 2010, MTS announced that the MTS and Comstar-UTS Boards of Directors approved the merger (”prisoedinenie” under Russian law) of MTS and Comstar-UTS. The merger is conditional on the approval of 75% of the shareholders present at each company’s Extraordinary Shareholders Meeting (EGM), the receipt of regulatory clearance and other closing conditions. MTS and Comstar-UTS expect to convene EGMs on December 23, 2010, at which MTS’ and Comstar UTS’s respective shareholders will vote on the merger. If approved, the companies expect to complete the merger transaction in the second quarter of 2011. MTS and Comstar-UTS shareholders who vote against or do not vote on the merger will have the right to sell their shares back to MTS or Comstar-UTS, respectively, for cash at a price set by the respective companies’ Boards of Directors, subject to the statutory limit of 10% of each company’s Net Asset Value under Russian Accounting Standards. MTS also announced contemporaneously with the merger its intent to launch a voluntary tender offer for up to 9.0% of Comstar UTS’s issued share capital at RUR 220.0 per Comstar-UTS ordinary share. The tender offer has been submitted to the Federal Commission on the Securities Market for review and will be delivered to Comstar-UTS shareholders following this review.
Page 68 - Financial Downloads (http://annualreview2009.mtsgsm.com/financial_statements/financial_downloads/)
Financial Downloads
Financial Statements
Download balance sheet (103KB)
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Contacts
INVESTOR CONTACTS
If you have any questions or require further information on MTS, please contact the Investor Relations Department: Joshua Tulgan, Director, Investor Relations Danny Khoussainov, Deputy Director, Investor Relations Telephone: +7 (495) 223-20-25 Fax: +7 (495) 911-65-67 E-mail: [email protected] Address: Investor Relations Department, Mobile TeleSystems, Ul. Vorontsovskaya 5, Bldg. 2, 109147 Moscow, Russia.
MEDIA CONTACTS
For any media or events questions, please contact: Arseny Tseytlin Telephone: +7 (495) 223-20-25 E-mail: [email protected]
BUSINESS CONTACTS
For information on marketing, advertising, new technologies and value-added services, please contact: Telephone: +7 (495) 911-65-56 Fax: +7 (495) 911-65-25
CUSTOMER CONTACTS
For information on network operation, tariffs and services, payment and billing, please contact our MTS’ Contact Center: Telephone: +7 (495) 766-01-66
MTS SPEAKER REQUEST FORM
To request a speaker for an event, please complete our MTS Speaker Request Form here: http://www.mtsgsm.com/news/contact/prform/. Page 70 - Glossary (http://annualreview2009.mtsgsm.com/other_information/glossary/)
Glossary
Active Line (fixed line services)
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A line is considered “active” if the subscriber has used the service within the last 30 days.
ADS (ADR)
Listed shares of common stock, represented by American Depositary Receipts (also called American Depositary Shares), or ADR, on the New York Stock Exchange under the symbol “MBT.” Each ADR represents five underlying shares of the Company’s common stock. Prior to January 1, 2005, each ADR represented 20 shares.
ARPU
Average monthly service revenue per subscriber is calculated by dividing the Company’s service revenue for a given period, including guest roaming and interconnect fees, by the average number of subscribers during that period and dividing by the number of months in that period. As of June 30, 2006, the methodology for reporting average revenue per user for our Russian subscribers was changed to include interconnect revenue in the calculation.
CAPEX
Or capital expenditures, includes the Company’s purchases of property, plant and equipment and intangible assets.
CDMA450
A third generation digital cellular telephony technology that is used by the Company in Ukraine for the provision of wireless services in a 450 MHz frequency range. The technology allows speeds of up to 1.8 MBit/s of uplink and up to 3.1 MBit/s of downlink connection.
Churn
Defined as the total number of subscribers who cease to be a subscriber (as defined above) during the period (whether involuntarily due to non-payment or voluntarily, at such subscriber’s request), expressed as a percentage of the average number of our subscribers during that period.
GSM
Or Global System for Mobile communications, is a second-generation digital cellular telephony technology that can be used for the provision of wireless services.
IMT-2000/3G/UMTS
A third generation digital cellular telephony technology that can be used for the provision of wireless services and allows subscribers to achieve faster data download speeds with top download capacity using HSPA (High Speed Packet Access) technology of up to 3.6 MBit/s.
Last mile
The last portion of the telephone access line that is installed between a local telephone company switching facility and the customer’s premises.
MOU
Average monthly minutes of usage per subscriber is calculated by dividing the total number of minutes of usage during a given period by the average number of subscribers during the period and dividing by the number of months in that period.
Net debt
Represents total debt less cash and cash equivalents and short-term investments.
OIBDA
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Represents operating income before depreciation and amortization. The Company’s OIBDA may not be similar to OIBDA measures of other companies; is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions of mobile operators and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our OIBDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the wireless telecommunications industry.
ROIC
Or Return on Invested Capital, is measured as net income plus interest expense plus depreciation expense divided by closing equity plus minority interest plus long-term financial obligations.
SAC
Subscriber acquisition costs are calculated as total sales and marketing expenses and handset subsidies for a given period divided by the total number of gross subscribers added during that period.
Subscriber
Defined as an individual or organization whose account shows chargeable activity within sixty one days in the case of post-paid tariffs, or one hundred and eighty three days in the case of our pre-paid tariffs, or whose account does not have a negative balance for more than this period.
Total debt
Comprised of the current portion of debt, current capital lease obligations, long-term debt and long-term capital lease obligations.
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Using This Site
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Disclaimer
Some of the information in this document may contain projections or other forward-looking statements regarding future events or the future financial performance of MTS, as defined in the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify forward looking statements by terms such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “will,” “could,” “may” or “might,” and the negative of such terms or other similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not undertake or intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. We refer you to the documents MTS files from time to time with the U.S. Securities and Exchange Commission, specifically the Company’s most recent Form 20-F. These documents contain and identify important factors, including those contained in the section captioned “Risk Factors” that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, the severity and duration of current economic and financial conditions, including volatility in interest and exchange rates, commodity and equity prices and the value of financial assets; the impact of Russian, U.S. and other foreign government programs to restore liquidity and stimulate national and global economies, our ability to maintain our current credit rating and the impact on our funding costs and competitive position if we do not do so, strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses, including Comstar-UTS, potential fluctuations in quarterly results, our competitive environment, dependence on new service development and tariff structures, rapid technological and market change, acquisition strategy, risks associated with telecommunications infrastructure, governmental regulation of the telecommunications industries and other risks associated with operating in Russia and the CIS, volatility of stock price, financial risk management and future growth subject to risks.
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doc_358506385.pdf
The report for the financial year 2009 - 2010 of MTS.
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MTS Annual review 2009
Page 1 - Key Developments (http://annualreview2009.mtsgsm.com/overview/letter_to_shareholders/letter_to_shareholders/)
Letter to Shareholders
Dear Shareholders, Welcome to this year’s online annual review.
A Transformative Year
The year 2009 was a transformative year for MTS. Upon the backdrop of volatile macroeconomic environment, we embarked upon a number of initiatives to meet the challenges raised. Most importantly, we amended our corporate strategy, evolving from 3+2 to 3i – which refers to Integration, Innovation and Internet. Our 3i strategy firmly focuses MTS on offering integrated services, differentiating ourselves through an innovative product and service mix and leveraging greater Internet capabilities to capture further value. During the year, we made significant progress in the execution of our 3i strategy. This included the acquisition of a majority stake and controlling interest in Comstar-UTS (’Comstar’), a leading supplier of integrated telecommunication solutions in Russia and the CIS. Comstar is the ideal partner for us to address the growing commercial and residential broadband markets while jointly realizing value-accretive synergies in capital and operating expenditures and providing a foundation for the development of effective content platforms and services. We also acquired Eurotel, one of the leading federal transit operators in Russia, and continued the build-out of our own nationwide backbone network. This will allow us to accommodate the increasing demand levels for data services as we roll out 3G and realize OPEX savings on line rental by decreasing our reliance on other companies’ networks. We are building out a proprietary distribution network of MTS-owned and franchise stores as we recognize the competitive advantage of having a controlled retail network. During 2009, we acquired mobile retailers Telefon.Ru, Eldorado and Teleforum and continued our own organic expansion. This will enable us to more effectively service our clients, increase sales of handsets and accessories, reduce churn and bring the MTS brand closer to our customers. During the year, we began adding innovative and unique offerings into our product portfolio through the launch of Omlet.ru, our region’s first comprehensive online destination for the latest in digital media. This is an important step towards delivering the content and applications to our customers that will drive usage and increase customer loyalty in the coming years.
Stable Results in Uncertain Markets
Despite the challenges presented by volatile global and regional markets in 2009, we were able to realize strong results with relative growth in each of our core countries and business lines. Even though total Group revenue and OIBDA were down by 17% and 24% respectively in US dollar terms, the main drivers behind these declines can be attributed to the weakening of our core operating currencies versus the US dollar reporting currency. In four of our five operating markets, we witnessed gains in revenue and OIBDA and showcased positive operating indicators throughout. We were able to make substantial investments to develop the business in line with our 3i strategy whilst still maintaining healthy cash flows and attracting favorable financing in the capital markets when it has been necessary. Page 2 - Our Markets (http://annualreview2009.mtsgsm.com/overview/letter_to_shareholders/lettertoshareholders/)
Our Markets
Russia
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Within our largest market, Russia, we delivered a gross revenue increase of 7.6% in ruble terms for our combined businesses, including our fixed and mobile operations. Our mobile segment grew in-line with the overall business, and was driven by strong subscriber additions and data consumption, as well as increasing sales of handsets and accessories. It is important to note that the second half of the year saw faster growth as we began realizing greater benefits from our expanding business. The fixed-line segment, which includes Comstar, Eurotel and StreamTV, also grew at a similar rate, and was up 7.2% year-over-year. Through the integration of Comstar and other fixed-line assets, MTS is evolving to meet the changes in the competitive landscape as it develops into an integrated operator, providing a greater spectrum of service offerings to an increasing customer base. Throughout 2009, we also continued to roll-out 3G networks in Russia, with expanded coverage in the Russian regions and a full launch in Moscow.
Ukraine
Within our markets of operation, Ukraine was the most affected by the global financial crisis. Revenue for the year decreased by 4.9% year-on-year, nearly all on accounts of national macroeconomic issues. However, in spite of this decline, MTS outperformed the market and our share of mobile revenue in the country increased slightly based on the reports from our peers. Our operating indicators in Ukraine remained relatively robust, with average revenue per user (ARPU) flat year-on-year, and minutes of use (MOU) up by 66% in 2009 when compared to 2008. While average price per minute (APPM) declined by 38% year-on-year, we reported relatively stable APPM during 2009 as market competition stabilized vis-à-vis previous years. MTS has been successful in promoting its value proposition in the marketplace, a fact which was highlighted by the significant network improvements made over the last few years that led to an increase in voice and data consumption, stronger brand perception and helped sustain our subscriber base level. This, in turn, translated into significant improvements in annual churn, which was reduced by 7.3 percentage points to 40.0% in 2009.
Uzbekistan, Turkmenistan & Armenia
In Uzbekistan, we were able to grow revenue by 3.4% for the year. While we witnessed rising churn levels as competition intensified during the year, we did manage to increase our subscriber base by almost 25% and have maintained our market share in terms of revenue and subscribers. The market in Turkmenistan continues to develop rapidly, and our revenue increased by 60% year-on year, with OIBDA up 56% when compared with 2008. We have a dominant market position, with an 85% share of subscribers, and grew our subscriber base by a further 830,000 in 2009 due to our attractive propositions in the country. We also maintained our leading position in Armenia. Revenue in Armenia grew by 2.3%, with OIBDA up by 3.4%, in spite of the challenging economic environment and increasing competition with a third player entering the market at the end of 2009. Page 3 - Outlook (http://annualreview2009.mtsgsm.com/overview/letter_to_shareholders/outlook/)
Outlook
Group Outlook for 2010
The key issue when considering the forecast for 2010 is the overall macroeconomic outlook, which still remains uncertain. However, we are encouraged by the general consensus expecting an improvement in GDP within our core operating countries, of around 5% for Russia* and 3-4% for Ukraine**. Should the local economies improve and competition remains stable, we expect positive developments within our operating markets. As our business depends on the overall level of business activity, we do see upside and believe that we will see Group top-line growth in the mid-to-high single digits, the bulk of which is likely to occur in the second half of the year. As we move forward, the three i’s of our strategy will remain core to our Company’s ongoing development: Integration – bringing convergent products and services to the market for consumers and corporate clients alike Internet – continuing the expansion of our 3G roll-out and building on the growth of content and traffic on our wireless broadband network Innovation – orienting our product mix towards devices and products that encourage greater adoption of data and content services As we continue our journey, I would like to thank all of our shareholders for their continued support through these turbulent times. I look forward to reporting on our growth and development to you again next year.
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Yours sincerely, Mikhail Shamolin President & CEO * World Bank estimate, March 2010 ** National Bank of Ukraine estimate, April 2010 Page 4 - Key Financial Highlights (http://annualreview2009.mtsgsm.com/overview/2008_highlights/key_financial_highlights/)
Key Financial Highlights
In 2009, MTS focused on a number of key initiatives to realize its 3i strategy, which enabled the Company to develop and grow in each of its markets of operation. The Company adapted to the financial environment over the year and managed to sustain stable growth whilst maintaining access to attractive financing. MTS’ strong leadership in its areas of operations enables the Company to have a positive view when looking ahead to 2010, a year that will continue to bring opportunities for the Group to develop its business further and generate greater returns for shareholders. (US$ million, except share and per share amounts) Consolidated Statement of Operations Data Revenues - Revenue from mobile business - Sales of handsets and accessories - Revenue from fixed business Operating income Operating income margin Net income Net income margin Net income per share (US$) Consolidated Cash Flow Data Cash provided by operating activities Cash used in investing activities (of which capital expenditures) Cash provided by financing activities Consolidated Balance Sheet Data (end of period) Cash, cash equivalents & short-term investments Property and equipment, net Intangible assets, net Total assets Total debt including current portion Total liabilities Total shareholders’ equity 1,267.4 8,566.7 2,490.0 15,874.9 4,529.4 7,445.6 8,339.6 1,481.8 7,758.2 2,188.5 14,717.2 5,368.3 8,351.5 6,219.9 2,740.0 7,745.3 2,235.8 15,780.7 8,329.5 11,295.4 4,403.1 3,851.4 -3,247.3 -1,899.0 -258.1 5,030.0 -2,708.0 -2,612.8 -1,678.5 3,596.1 -2,384.7 -2,328.3 147.7 9,723.9 8,081.9 89.2 1,562.3 3,184.9 32.8% 2,087.4 21.5% 1.06 11,900.9 10,056.8 78.9 1,765.2 3,647.3 30.6% 2,000.1 16.8% 1.04 9,823.5 8,020.2 317.7 1,485.6 2,547.6 25.9% 1,004.5 10.2% 0.53 2007* 2008* 2009*
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*Data restated due to retrospective consolidation of Comstar and changes in headquarter’s expenses allocation Page 5 - Key Operating Highlights (http://annualreview2009.mtsgsm.com/overview/2008_highlights/key_operating_highlights/)
Key Operating Highlights
Mobile
MTS continued to increase its overall subscriber base in 2009. At the end of the year, MTS serviced a total of 102.37 million mobile subscribers in Russia, Ukraine, Uzbekistan, Turkmenistan, Armenia and Belarus, a year-on-year increase of 7%. In the core market of Russia, the Company had 69.34 million mobile subscribers at the end of 2009, equating to an increase of 7.3% compared to 2008. MTS maintained its leading market share in Russia with 33% for the year. MTS also maintained a strong position in Ukraine in 2009 with a 32% market share. Voice consumption amongst MTS’ Russian subscribers increased by 2% in 2009, with minutes of use (MOU) rising from 208 to 213 on the back of stable demand for communication services and attractive offers delivered to the market by the Company. MTS is still recording usage growth, even with the already high penetration level of 143% reported in Russia at the end of 2009. Since 2006, MTS has seen an impressive growth in value added service (VAS) revenue. In 2009, Russian VAS revenue rose by 28% to 38.0 billion rubles. * Revenue from data traffic and data content grew by 58% and 47% to 10.2 billion rubles and 13.2 billion rubles respectively, indicating the tremendous potential of data services within MTS’ markets moving forward.
* VAS revenue is broken down into three categories – messaging, data traffic and content – and now includes roaming revenue that have been allocated accordingly. VAS revenue does not
include revenue from SMS and data bundles, which is included in airtime revenue. 2006 72.86 51.22 11.21 2.69 37.32 20.00 1.45 0.18 3.21 34% 41% 58% 83% 54% 2007 81.97 57.43 13.45 2.82 41.16 20.00 2.80 0.36 1.38 3.80 33% 36% 50% 88% 74%** 53% 2008 91.33 64.63 14.91 3.25 46.46 18.12 5.65 0.93 2.02 4.32 34% 33% 46% 87% 79% 52% 2009 97.81 69.34 13.59 3.72 52.03 17.56 7.07 1.76 2.07 4.56 33% 33% 45% 85% 75% 46%
Total consolidated subscribers at close of year Russia - Moscow and the Moscow region - St. Petersburg & Leningrad region - Other Russian regions Ukraine Uzbekistan Turkmenistan Armenia Belarus* Market Share Russia Ukraine Uzbekistan Turkmenistan Armenia Belarus* ARPU (US$)† Russia Ukraine Uzbekistan Turkmenistan Armenia
7.9 7.3 11.2 69.9 -
9.3 6.6 9.7 51.9 15.5**
10.5 7.2 7.7 17.1 12.6
7.8 4.7 5.3 10.0 9.0
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Belarus* SAC (US$)† Russia Ukraine Uzbekistan Turkmenistan Armenia Belarus* MOU (minutes) † Russia Ukraine Uzbekistan Turkmenistan Armenia Belarus* Churn † Russia Ukraine Uzbekistan Turkmenistan Armenia Belarus* Total number of employees *MTS owns a 49% stake in Mobile TeleSystems LLC, a mobile operator in Belarus, which is not consolidated.
9.9
9.4
9.7
7.8
23.2 10.2 3.5 32.6 15.6
26.3 12.1 4.3 24.7 9.7** 16.3
27.3 11.1 7.7 8.0 19.3 18.3
19.3 6.9 7.7 4.6 17.4 16.2
129 142 437 225 436
157 154 516 250 464
208 279 536 258 178 483
213 462 495 233 203 468
23% 30% 50% 13% 19% 24,125
23% 49% 58% 24% 24% 24,693
27% 47% 21% 14% 28% 20% 26,343
38% 40% 30% 20% 44% 23% 36,136***
** Operating indicators not available until Q4 2007 when MTS Armenia adopted MTS Group policies on calculating figures and accounting for subscribers. Full year 2007 numbers are based on management reports. *** Includes employees of mobile operations and the MTS retail network.
† these terms are defined in the Glossary
Fixed
MTS acquired a controlling stake in Comstar-UTS (’Comstar’) in October 2009, and further increased its stake by 11.06 percentage points to 61.97% in December. Comstar is the leading residential fixed-line broadband operator in Russia with a subscriber market share of 28% * in the Moscow region as well as the leading pay-TV operator in the Russian regions. Through the integration of Comstar, MTS will be able to expand its service portfolio and strengthen its ties with its customers. In December 2009, MTS acquired a 100% stake in Eurotel, one of the leading federal transit operators in Russia. Eurotel has an extensive optical fiber network of 19.5 thousand kilometers. The network currently connects Moscow, St. Petersburg and other major cities in Russia. The acquisition will help MTS to better realize its 3i strategy and provide subscribers with the best possible customer experience.
* Q4 2009 data, based on AC&M Consulting estimate.
Traditional Segment in Moscow Residential subscribers
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2008
2009
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Number of subscribers/ active lines (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Corporate subscribers Number of subscribers (000's) incl. BB subscribers (000's) ARPU (RUR)1 ARPU (US$)1 Alternative Segment in Moscow Residential subscribers Number of subscribers (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Corporate subscribers Number of subscribers (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Alternative Segment in the Regions & CIS Residential subscribers Number of subscribers incl. pay-TV subscribers (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Corporate subscribers Number of subscribers (000's) incl. BB subscribers (000's) ARPU (RUR) ARPU (US$) Total number of households passed Total number of broadband internet subscribers Total number of pay-TV subscribers
1 Excluding revenue from points of interconnect
3,591 120 294 11.8 960 33 4,594 180.0 2008 6,990 664 337 13.6 300 18 10,844 436.8 2008 505 153 73 236 9.5 44 17 4,002 161.6 3,869 925 300
3,608 246 324 10.3 700 32 5,591 176.9 2009 6,070 601 442 14.0 270 15 13,676 432.8 2009 2,606 1,996 378 155 4.9 52 26 3,573 113.1 7,502 1,298 2,124
Page 6 - Company Profile (http://annualreview2009.mtsgsm.com/overview/company_profile/)
Company Profile
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MTS is:
The leading telecommunications Group in Russia and the CIS A top-10 global mobile operator One of the 100 most powerful brands in the world * In Markets with a Total Population of over 230 Million, MTS has over 102 Million Subscribers & Continues to Grow MTS, together with its subsidiaries, expanded its total subscriber base to over 102 million as at December 31, 2009 The Russian regions, together with Ukraine, Uzbekistan, Turkmenistan, Armenia and Belarus, in which MTS and its associates and subsidiaries are licensed to provide mobile communications services, constitute a total population of more than 230 million people A Comprehensive & Integrated Service Portfolio MTS is focused on delivering the highest-quality mobile and fixed-line products and services to its customer base, including VAS services such as: - SMS and MMS - Mobile broadband - Content services, including Omlet.ru, an online content platform - Email solutions - Ring-back tones - Mobile advertising - Other services The Group’s products, services and VAS are enabled by GSM, CDMA and 3G/HSPA networks, with 3G services already available in 69* cities across Russia, five cities in Uzbekistan, nationwide in Armenia and nationwide in Ukraine through a CDMA-450 network Integrated telecommunication services through the acquisition of Comstar, including: - Fixed-line voice communications - Fixed and mobile broadband - Cable and pay-TV Wholesale network services through the acquisition of Eurotel Retail services, such as sales of handsets and accessories, mobile payments and money transfers
Ten Years on the New York Stock Exchange
MTS completed its IPO and listed its Level-III ADRs on the NYSE in June 2000, under the symbol MBT – the second-ever Russian company to list on the NYSE The Company’s shares have been listed locally on MICEX since November 2003, under the symbol MTSI The free float of the Company’s shares is approximately 46.7% MTS is 52.8% majority-owned by Sistema, the largest diversified public corporation in Russia and the CIS MTS has been SOX-compliant since 2007 MTS has been ranked as one of the most transparent companies in Russia by Standard & Poor’s Gaining International Recognition for our Brand, Services and Corporate Accomplishments In January 2010, MTS won the GSM Association’s 15 th Annual Global Mobile Award at the 2010 Mobile World Congress in Barcelona. MTS won the award in the ‘Best Billing & Customer Care Solution’ category for its ‘Your Individual Optimal Tariff Plan’ service In January 2010, MTS won H&H Webranking’s award ‘Best Corporate Website’ in Russia for the Company’s English website In October 2009, MTS won IR Magazine’s Russian and CIS ‘Best Overall IR Award’ In June 2009, MTS won the Thomson Reuters Extel Survey – Focus Russia 2009 award for the best IR officer and the best company in telecommunications In June 2009, the Company won the 2009 Global Telecoms Business Innovation Award in the ‘Services catalogue innovation’ category for the MTS Catalogue service In April 2009, MTS was ranked in BRANDZ™ Top-100 Most Powerful Brands for the second year in a row. The ranking is published by Financial Times and Millward Brown * As of April 1, 2010. Page 7 - Company History (http://annualreview2009.mtsgsm.com/overview/company_history/)
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Company History
The 1990’s 1993:
MTS receives first license to provide mobile phone services using the GSM standard
1994:
MTS begins offering mobile phone services in Moscow and the surrounding region
1997:
MTS expands operations into Russian regions
The 2000’s 2000:
Initial Public Offering (IPO) of MTS securities on the New York Stock Exchange (NYSE)
2002:
MTS introduces pre-paid Jeans brand and begins expansion into neighboring CIS countries through joint venture in Belarus
2003:
MTS acquires UMC, a leading mobile phone operator in Ukraine
2004:
MTS receives additional licenses in Russia to extend its license coverage to include all but two regions of the country MTS enters Uzbekistan through the acquisition of Uzdunrobita, the country’s largest mobile phone operator
2005:
MTS enters Turkmenistan by acquiring Barash Communication Technologies, Inc. (BCTI), the leading telecommunications operator in the country
2006:
MTS launches new brand identity Adopts 3+1 Strategy
2007:
MTS launches 3+2 Strategy Enters Armenia through acquisition of leading operator, K-Telekom (VivaCell) Receives 3G licenses in Russia, Uzbekistan and Armenia Rebrands countrywide operations in Ukraine Launches mobile broadband in Ukraine
2008:
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Print manager | MTS
MTS named as one of the BrandZ™ World’s 100 Most Powerful Brands Launches 3G networks in Russia and Uzbekistan Signs strategic partnership with Vodafone Appoints Mikhail Shamolin as President & CEO
2009:
MTS acquires a majority and controlling stake in Comstar-UTS and 100% of Eurotel Introduces the 3i Strategy Enters strategic partnership with Nokia Commences 3G in Armenia and a full roll-out in Moscow Acquires mobile retailers Telefon.Ru, Eldorado & Teleforum Introduces MTS-branded handsets Appoints Ron Sommer as Chairman of the Board of Directors Launches Omlet.ru content portal Included in the BRANDZ™ Top-100 Most Powerful Brands for the second year in a row Page 8 - Geographic Coverage (http://annualreview2009.mtsgsm.com/overview/geographic_coverage/)
Geographic Coverage
Russia
Population – 141.4 mln** Population density – 8 per km 2 Mobile penetration – 143% MTS subscribers – 69.3 mln* Market share – 33.4%
Ukraine
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Population – 45.6 mln** Population density – 76 per km 2 Mobile penetration – 121% MTS subscribers – 17.6 mln* Market share – 31.8%
Uzbekistan
Population – 27.7 mln** Population density – 62 per km 2 Mobile penetration – 57% MTS subscribers – 7.1 mln* Market share – 45%
Turkmenistan
Population – 5.4 mln** Population density – 11 per km 2 Mobile penetration – 41% MTS subscribers – 1.8 mln* Market share – 85%
Armenia
**
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Population – 3.3 mln Population density – 111 per km 2 Mobile penetration – 86% MTS subscribers – 2.1 mln* Market share – 75%
Belarus
Population – 9.6 mln** Population density – 46 per km 2 Mobile penetration – 102% MTS subscribers – 4.6 mln* Market share – 46%
Note: MTS owns a 49% stake in Mobile TeleSystems LLC, a mobile operator in Belarus, which is not consolidated. * Subscriber data as of Dec. 31, 2009 **Population data sources: IMF, October 2009 Mobile penetration date as of Dec. 31, 2009, according to AC&M-Consulting. Market share data as of Dec. 31, 2009 in Russia and Ukraine according to AC&M-Consulting. Market share data in other CIS countries as of Dec. 31, 2009 according to MTS.
Page 9 - Market Trends (http://annualreview2009.mtsgsm.com/strategic_review/market_trends/)
Market Trends
Russia & CIS Markets Maintain Attractiveness in Tougher Macroeconomic Climate
As a Russia-based operator, MTS sees Russia and the CIS as the Company’s home market for a number of reasons, including: A shared recent history Common language and culture
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Long-established business and economic ties 2009 was a challenging time for the Russian and CIS markets. However, despite a tougher macroeconomic climate, the high-growth potential of MTS’ markets of operation remains strong. The Company has put measures in place to continue the development of the mobile and broadband opportunities within its markets of operation. Overall, MTS has adapted its organizational strengths to the financial environment and management continues to see opportunities in the current market. With leading positions in four of the five largest markets in the CIS, MTS is well positioned to take advantage of the region’s continuing development and to seek further opportunities for expansion.
Underlying Trends in Core Markets Remains Strong
Russia and Ukraine are the two largest markets for MTS, both in terms of subscribers and revenue. In 2009, the underlying developments within these markets remained generally positive and included: Growing mobile penetration Strong sustained demand for mobile services Positive usage trends Growth in data consumption, aided by increased 3G coverage and higher smartphone penetration
However, these growth factors may be tempered by macroeconomic developments, many of which influenced the markets in 2009. These trends included:
Exchange rate volatility in functional currencies Flat or negative GDP growth trends Higher rates of unemployment Lower consumer spending Decrease in corporate spending and overall business activity MTS’ management team believes that as the macroeconomic situation becomes more stable, the underlying strength of the organization will lead to greater medium- and long-term growth and efficiency. The investments MTS is making today will provide the Group with greater revenue growth and value-accretive opportunities in the future. Page 10 - Russia (http://annualreview2009.mtsgsm.com/strategic_review/market_trends/market_russia/)
Russia
Positioning MTS for the Next Wave of Growth & Further Increases in Data Consumption
Russia has experienced rapid growth in the demand for wireless communications over the last ten years. At the end of 2009, overall mobile penetration in Russia stood at 143% (or 208 million subscribers) versus 129% (or 188 million subscribers) at the close of 2008, according to AC&M-Consulting. Key growth factors included: A growing economy and rising disposable incomes Relatively low fixed-line penetration The prevalence of multi SIM card usage Converging offering of mobile and fixed-line services In Russia, there are particularly high levels of mobile penetration in Moscow and St. Petersburg, with more than 191 and 187 subscribers per 100 residents respectively as of December 31, 2009. According to AC&M-Consulting, MTS accounted for 41.9% and 47.4% of subscribers in Moscow, 31.4% and 30.8% of subscribers in St. Petersburg and 33.4% and 34.4% of total Russian subscribers as of December 31, 2009 and 2008 respectively. The average mobile penetration rate in the regional Russian markets is 134 per 100 residents. Due to the fact that the Russian market is highly penetrated, the next wave of revenue growth for the overall market is likely to come from customers increasing their use of data and VAS. Over the coming years, a strong contributor to this growth will be the proliferation of smartphones, which will increase data usage for the market overall. To maintain strong market leadership in an evolving competitive market, MTS expanded its reach in the value chain in 2009. Through the acquisition of a fixed-line operator (Comstar), the build-out of a mono-brand retail distribution, and the launch of content portal, MTS is today a truly integrated operator in the Russian market. Comstar will further enhance MTS’ marketing capabilities, providing an opportunity for the Company to bundle offerings and services.
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Comstar is the leading fixed broadband provider in Moscow with 830,000 subscribers and a 28% share of the market. While Moscow has a relatively high penetration of fixed broadband, the average penetration in Russia at the end of 2009 stood at approximately 20% of households, demonstrating the significant potential for growth. Broadband subscriber and penetration data sources: AC&M as of December 31, 2009.
The Leading Mobile Operator
While Russia is overall viewed as a market of three mobile operators, in fact there are a total of 10 operators of significance active in the market, with competition varying from region to region. MTS is the leading federal operator, as measured by both revenue and subscribers. Competition in the market is based upon: Local tariff prices Network coverage and quality Brand perception Level of customer service provided Roaming and international tariffs VAS MTS has a number of competitive advantages over its competitors: Integrated operator approach that drives value through content, fixed-access and a proprietary national distribution network Competitive pricing and cost-effective products for every consumer Premium quality and reliability of the network The largest network coverage area in the CIS Strong brand built on leadership attributes Unique customer segmentation strategy to attract a broad range of subscribers Investments in innovative services, such as 3G and VAS Leading position in the most lucrative market, Moscow, in terms of mobile, broadband and fixed-line services Expanding transport and backhaul networks augmented by the acquisition of Eurotel, one of the leading federal transit operators in Russia Partnership with Vodafone to provide customers with high-quality communications services and devices as well as draw on the expertise of the leading global operator In terms of retail distribution, the market has evolved from independent multi-brand retail to operator-controlled mono-brand distribution. MTS’ growing retail distribution will be an important driver of incremental revenue as the Company transitions itself to becoming an integrated operator. Through the successful roll-out of 3G and other data services, MTS continues to lead the development of telecom services in Russia. Page 11 - Ukraine (http://annualreview2009.mtsgsm.com/strategic_review/market_trends/market_ukraine/)
Ukraine
Outperforming a Competitive Market
The Ukrainian wireless telecommunications market has grown rapidly in recent years, but was severely affected by the economic downturn in 2009. The market was characterized by: National currency devaluation, which increased the cost of capital expenses Stable mobile penetration in 2009 of 121%, or approximately 55.3 million subscribers Intense competition between four national mobile operators VAS, including data services, were the main drivers of revenue growth The market share growth prospects was limited in 2009, with aggressive market pricing and high usage levels MTS Ukraine, one of the largest mobile operators in the country, generally outperformed its domestic peers and achieved a 32% market share * A slow recovery in the economy and service consumption is expected; however, the telecom industry’s share of GDP remains significant Competition in the market is primarily based on:
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Brand and quality perception Promoting the best possible value proposition Service offering Network quality Extent of the transport network (MTS has a nationwide backbone network in Ukraine) Besides offering GSM-based mobile communications, MTS has built out a national high-speed CDMA-450 network that provides customers with data access in over 200 population centers, including all major cities and towns. MTS is waiting for regulatory approval to obtain a UMTS license in order to drive mobile broadband penetration in Ukraine. UMTS provides significant opportunities for future growth in the Ukrainian mobile market and the network roll-out will further improve the digital infrastructure of the country over time. The Company has been investing in its network and services and has now laid a foundation to build unique customer experiences by enhancing the overall quality of its business and extending the MTS brand further into the market. MTS is currently realizing the benefits of the investments made and the perception of the network quality has significantly increased, allowing the Company to provide its customers with attractive value propositions for its products and services.
* Source: AC&M-Consulting.
Page 12 - Uzbekistan, Turkmenistan and Armenia (http://annualreview2009.mtsgsm.com/strategic_review/market_trends/market_uzbekistan/)
Uzbekistan, Turkmenistan and Armenia
Uzbekistan: Continued Leadership Against a Backdrop of Growth & Increased Competition
MTS continues to sustain its leading position in the country, which is characterized by challenging market developments and ever-increasing competition. Since entering the country in 2004, the Uzbek market has expanded at a rapid pace, with wireless penetration reaching 57% in 2009, up from 44% only a year ago. In 2009, the mass market segment for mobile services has expanded significantly, which in turn has created greater value for consumers in terms of tariff and service offerings from mobile operators in the country. Given Uzbekistan’s low fixed-line and Internet penetration rates, MTS has begun to roll out a 3G network in Uzbekistan in order to stimulate data usage. MTS has already launched 3G services in the five largest cities, including Tashkent and Samarkand. MTS expects to see continued growth in this promising market, which covers a total population of over 28 million people. Uzbekistan has thus far been able to weather the current macroeconomic downturn relatively well, as the country has been less affected than many other countries within the CIS.
Turkmenistan: Impressive Growth Opportunities
Competing in a market of two, and with penetration levels of 41% at the end of 2009 compared to only 19% in 2008, MTS plays a key role in the development of Turkmenistan’s mobile telecommunications industry. MTS remained the top operator in the country during 2009, with an impressive market share of 85%. The Company’s subscriber base grew by 90%, exceeding 1.75 million customers by the close of the year. Turkmenistan’s mobile market has been less affected than other markets in the region as a result of the global economic crisis. The country’s economic growth and low fixed-line penetration provide every indication that Turkmenistan will continue to exhibit strong growth as the mobile telecommunications market develops over the coming years.
Armenia: Top Operator in a Market of Three
MTS entered Armenia in September 2007 through the acquisition of K-Telecom, the country’s leading mobile operator. The Armenian market is fairly developed, with relatively high penetration levels. In 2009, MTS maintained its market-leading position, even as a third operator entered the market towards the end of the year. MTS is well positioned to handle new competition in the market given the Company’s leading share of subscribers, strong brand attributes and investments in innovative services. MTS has remained the number one operator in terms of market share, which stood at 75% in 2009, and the Company now has 2.1 million subscribers in the country. MTS has been allocated a ten-year 3G license for the entire territory of Armenia and launched 3G services in April 2009 to stimulate data usage and better manage growth in voice usage. Armenia began to feel the impact of the global financial crisis in 2009, with the local currency experiencing significant volatility. However, the fundamentals of the mobile telecommunications market in Armenia remain strong, and MTS expects to see sustained subscriber growth, increased mobile penetration and growing data usage moving forward. Page 13 - Business Strategy (http://annualreview2009.mtsgsm.com/strategic_review/business_strategy/)
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Print manager | MTS
Business Strategy
MTS aims to maintain its position as a leading integrated telecommunications group in Russia and the CIS. The Company embraces opportunities to expand its network coverage where natural synergies can be found in Eastern Europe and Central Asia. In 2009, MTS introduced the 3i strategy and has focused on a number of key initiatives, such as the acquisition of a majority stake in fixed-line operator Comstar-UTS, the continued rollout of 3G, and the ongoing development of the Group’s retail sales channels as, well as the launch of the online portal Omlet.ru. During 2010, MTS will continue to drive the 3i strategy forward by launching new innovative products and services and continuing to roll out its broadband network. Over time, MTS’ management’s proactive integrated approach will enable the Company to expand along the value chain which will be accretive to both customers and shareholders, with Comstar being an integral part in this transformation. Page 14 - The 3i Strategy (http://annualreview2009.mtsgsm.com/strategic_review/business_strategy/the_3i_strategy/)
The 3i Strategy
Integration, Internet & Innovation
MTS’ primary goal is to be the leading communications operator in Russia and the CIS, providing its customers with mobile and fixed telephony, high-speed Internet access at home and on the move, cable TV and a variety of entertainment and content offers. In 2009, the Company moved beyond simple mobile access both horizontally and vertically, through the acquisition of Comstar-UTS (’Comstar’), the rapid build-out of a proprietary distribution network and the launch of its first online content platform, Omlet.ru. The development of MTS beyond mobile access is part of our strategic initiative “3i”. Our direction is based on three main principles: Integration – Developing New Pipelines & Customer Touch Points We aim to provide a comprehensive and integrated service portfolio for all of our customers’ communication needs, through both fixed-line and wireless access. The networks and platforms we develop will create a seamless – and unsurpassed – user experience. Internet – Offering Universal Connectivity Our customers increasingly expect faster and broader connectivity as more devices and services depend on integrated mobile and fixed networks. Our goal is to create smarter pipelines so customers can realize the full benefits of today’s technologies, while creating additional value for MTS. So-called ‘smart pipes’ will allow us to offer market-leading services, enable commercial transactions and bring us closer to our customers. Innovation – Differentiating MTS from its Competitors We aim to differentiate ourselves from the competitors by offering a unique mix of products and services. We will offer exclusive devices, distinct packages of services catering to all customer segments, and a market-leading end-to-end user experience at home, at work and on the move. Given our proven track record of delivering growth and value to both customers and shareholders alike, we believe our new strategic focus assures the continued successful development of the Company in the coming months and years. Page 15 - Operating Review (http://annualreview2009.mtsgsm.com/business_review/operating_review/)
Operating Review
2009: Transforming, Developing, Growing
The last year has been transformative for MTS’ operations. The launch of the 3i Strategy, the development of new retail channels and the acquisition of Comstar-UTS (’Comstar’) were some of the key initiatives carried out in 2009.
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The 3i strategy has been developed to move MTS beyond being a pure-play mobile operator. The strategy, which builds on the three focus areas of integration, Internet and innovation illustrates the direction MTS will take in the coming years. The acquisition of Comstar in 2009 was a strategically important transaction for MTS. As a fixed-line operator, Comstar has a balanced mix of residential, business and operator customers. MTS’ approach to the integration of Comstar will enable the combined Group to realize important strategic goals and cost synergies. The acquisition also leverages the scale and scope of MTS footprint with the depth of Comstar activities, and provides flexibility to manage legal and governance issues. The approach towards the integration has been developed to ensure that the core business and cash-generating functions are not disrupted. In 2009, MTS also acquired Eurotel, one of the leading federal transit operators in Russia, with an extensive fiber network of 19,500 kilometers. Both acquisitions are key initiatives towards becoming an integrated telecommunications company. Through the acquisitions of mobile retailers Telefon.Ru, Eldorado and Teleforum, MTS has significantly increased the number of consumer touch points. At the end of 2009, MTS owned and operated 2,010 retail shops across Russia, almost doubling the number of stores during the year. In addition to the Company-owned stores there are also around 1,000 franchise stores. The Company has also put in place an agreement with Svyaznoy, the leading mobile phone retailer in Russia, to oversee MTS’ distribution network. Thus, MTS is developing the channels which will promote its mono-brand and distribute the Company’s innovative and integrated products and services of the future. Despite the macroeconomic volatility in 2009, MTS managed to outperform its competitors in the Company’s regions of operations. The key drivers in 2009 were strong growth in the subscriber base, increased data usage and the benefits from the above-mentioned newly launched retail distribution network. Details of how MTS developed across its operating countries can be found in the following sections. Page 16 - Russia (http://annualreview2009.mtsgsm.com/business_review/operating_review/operational_russia/)
Russia
In 2009, MTS maintained its leading share in the Russian telecommunications market by leveraging attractive tariffs and a mix of proprietary and multi-brand distribution. To further develop and expand the Company’s offerings, MTS acquired Comstar-UTS (’Comstar’) and Eurotel in 2009. The acquisition of fixed-line operator Comstar provides MTS with access to strategic growth markets in broadband, enabling the Company to provide integrated and innovative services for its Russian subscribers. Eurotel, a leading federal transit operator, was acquired to meet the increasing demand for data services and to realize OPEX savings through decreased dependence on external providers. The acquisition more than doubled the size of MTS’ network by adding 19,500 kilometers of optical fiber cable to the network. MTS’ total network is now approximately 35,000 kilometers.
In 2009, MTS’ revenue grew by 8% in local currency terms, from 235.6 million rubles in 2008 to 253.4 rubles, of which 43.8 million rubles and 47.0 million rubles were attributable to the fixed-line business respectively. Key drivers for this growth were increased data consumption, subscriber additions and an increase in sales of handsets and accessories. Page 17 - Ukraine (http://annualreview2009.mtsgsm.com/business_review/operating_review/operational_ukraine/)
Ukraine
Within MTS’ geographic footprint, Ukraine was the country where the impact of the recession was felt most directly during the year, with revenue declining by 4.9% year-on-year in local
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currency terms in 2009. As a result of cost control measures, CAPEX in Ukraine was reduced by more than 37% year-on-year in USD. MTS’ initiatives and efforts to improve the customer experience had a positive effect on subscriber quality and the optimization of distribution throughout the year. In 2009, ARPU remained stable at 37 hryvna, while churn was reduced by 7.3 percentage points and MOU increased from 279 to 462 minutes, or 66% year-on-year.
Strong VAS Revenue Growth
During the year, MTS carried out numerous projects to develop and refine its VAS offerings. As a result, data content revenue increased by 14%, data traffic revenue rose by 98% and messaging revenue was up by 56%. In total, revenue from VAS increased by 34% to 1,598.4 million hryvna. VAS initiatives in 2009 included: Expansion of CDMA-450 data coverage to over 200 population centers, including all major cities and towns Launch of the MTS Connect Manager application for mobile Internet services, a tariff review and promotions that drove higher sales during the holiday season Tariff plans such as the MTS Infomania stimulated SMS usage, while the Super MTS Energy data package (10Mb of traffic per day for a monthly fee) drove increased data consumption rates Introduction of MTS Compass, a location-based service providing addresses of nearby restaurants, cinemas and ATMs directly to customer’s handsets New SMS games and contests such as the Valentine’s Day Love Is promotion Initiatives on the MTS WAP-portal such as chats with celebrities Branded content service such as MTS Click, with products including games, MP3s, pictures and more Promotion of BlackBerry® devices and tariffs, and new services specially tailored for smartphone users Creation and launch of mobile portal Muzon which offers music and downloads for both mobiles and PCs Page 18 - Uzbekistan (http://annualreview2009.mtsgsm.com/business_review/operating_review/operational_uzbekistan/)
Uzbekistan
Increase in Revenue Amidst Increasing Competition
The Uzbek telecommunications market has experienced rapid development and rising competition through the entry of new players over the last few years. However, MTS has maintained its leadership position since its entry into Uzbekistan in August 2004. During 2009, wireless penetration reached 57%, up from 44% in 2008. With a total population of almost 28 million people, MTS sees great prospects for capturing additional growth in this promising market. MTS experienced strong subscriber growth throughout the year, adding over 1.4 million customers in 2009, up from 5.7 million in 2008 to 7.1 million at the end of 2009. MOU decreased by 41 minutes to 495 minutes, down 8% compared to 2008. ARPU decreased by 31%, to $5.30, as macroeconomic factors led many subscribers to seek more affordable tariffs, creating an influx of lower-value customers. On the upside, annual revenue increased by 3% year-on-year to $404.9 million.
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Print manager | MTS
The Company is continuing to invest in its core network to satisfy capacity and coverage needs in the country on the back of these high growth rates. MTS promotes data usage in all of its markets of operation and, to better serve the needs of its Uzbek customers, the Company continued the 3G network roll-out in 2009 by launching 3G services in Bukhara, Urgench and Khiva. Page 19 - Turkmenistan (http://annualreview2009.mtsgsm.com/business_review/operating_review/operational_turkmenistan/)
Turkmenistan
Strong Subscriber Additions in a Growing Market
MTS entered Turkmenistan through the acquisition of BCTI, the leading national mobile operator, in 2005. Since the acquisition, MTS’ market share has risen more than 10 percentage points through increased investments and better customer value propositions. The country’s penetration levels have now reached 41%, and MTS also provides data services using GPRS and EDGE technologies throughout Turkmenistan. At the end of 2009, MTS had a market share of 85% and is a key player in the development of the country’s telecommunications industry. Throughout the year, MTS experienced rapid subscriber growth of almost 90%, with 830,000 net additions. MTS realized revenue growth of 60% year-on-year in Turkmenistan, despite the incoming of lower-value mass market subscribers which were a significant factor in the 28% decrease in ARPU from 39.6 TMT in 2008 to 28.4 TMT in 2009.
Page 20 - Armenia (http://annualreview2009.mtsgsm.com/business_review/operating_review/armenia/)
Armenia
Top-line Expansion in a Competitive Market
MTS has successfully built on the accomplishments of its K-Telecom subsidiary since the Company’s entry into Armenia in September 2007. The acquisition left 20% of the company in the
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Print manager | MTS
hands of local owners as an incentive to remain engaged in the organization and retain local management. This provides continuity and proximity to the local market as well as sustained value in the organization. During 2009, MTS increased its subscriber base in Armenia by almost 3%. The Company is building strong relationships with its customers in the country. An increased number of customer service centers and optimized tariff plans have stimulated usage, which in turn led to an increase in MOU of 14% compared to the previous year. ARPU declined by 15% in 2009 compared to 2008 as a result of economic volatility and increased competition. Annual revenue in the country reached AMD 80.3 billion in 2009, up 2% from 2008.
In October 2007, the Company was allocated a ten-year 3G license for the entire territory of Armenia. MTS launched 3G services in April 2009 to stimulate data usage and further increase the quality of service. This is a key initiative in providing mobile broadband in the CIS and an integral part of the 3i strategy. Page 21 - Revenue Growth (http://annualreview2009.mtsgsm.com/business_review/financial_review/revenue_growth/)
Revenue Growth
Revenue Growth in Challenging Market Environment
During 2009, MTS delivered strong operating performance in each of its respective markets as it continued to successfully execute upon its corporate strategy. With the backdrop of volatile and challenging macroeconomic conditions and a depreciation in the Company’s functional currencies, MTS reported lower top- and bottom-line results in US dollar terms. However, in the functional currencies within Russia and nearly all of MTS’ CIS operations, revenue increased, demonstrating the Company’s ability to adapt to market conditions and continue growing the business. For 2009, MTS’: Consolidated revenue declined by 17.5% to $9,823.5 million in 2009 from $11,900.9 million in 2008 Total revenue in Russia increased by 8.6% in ruble terms to 66,594.6 million in 2009 from 61,299.5 million in 2008 Operating income before depreciation and amortization (OIBDA) decreased by 23.5% year-on-year to $4,473.6 million from $5,848.4 million in 2008 Consolidated net income was down year-on-year by 49.8% to $1,004.5 million from $2,000.1 million Page 22 - Resilient Cash Flow Generation (http://annualreview2009.mtsgsm.com/business_review/financial_review/resilient_cash_flow/)
Resilient Cash Flow Generation
Resilient Cash Flow Generation in 2009
During 2009, MTS’ management team was able to significantly reduce the Group’s non-ruble denominated debt to 37% of total debt (including hedging) as at the end 2009, compared to 80% in 2008. Going forward, this will significantly reduce volatility in interest expenses. As part of the Company’s efforts to re-leverage its debt, MTS successfully placed two ruble bonds in 2009 amounting to 30 billion rubles. Net income decreased by 50% from $2 billion to $1 billion for the full-year 2009. This decline was affected by interest expenses and one-time and periodic charges, such as the write-off in investments related for the most part to the revaluation of the Svyazinvest stake held at the Comstar level, the write-off of obsolete equipment tied to the roll-out of the Company’s 3G
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Print manager | MTS
networks, expenses related to the acquisition of Comstar and higher non-cash tax provisions in anticipation of the upstreaming of dividends from MTS’ foreign subsidiary companies as their markets mature. The Company’s interest expenses rose due to the increase in total debt levels for the purchase of the majority and controlling stake in Comstar-UTS. The resulting non-cash FOREX losses amounted to $252.9 million due to the decline in the value of the functional currencies in the Company’s markets of operation versus the US dollar. Through the continued execution of the 3i strategy, MTS was able to generate a resilient cash flow during the year, with free cash flow of $1.1 billion in 2009, down from $2.3 billion in 2008. Page 23 - CAPEX (http://annualreview2009.mtsgsm.com/business_review/financial_review/capex/)
CAPEX
CAPEX Investments of $2.3 billion in 2009, to Remain at 22-24% of Revenue in 2010
MTS’ CAPEX in 2009 amounted to $2.3 billion, down from $2.6 billion in 2008. The main drivers for these expenditures were the 3G investments made in Russia, along with investments in the Company’s existing core network. The Company also elected to accelerate spending in Central Asian markets, in particular Uzbekistan, to meet growing network needs and to better utilize cash we hold in the market in local currency.
The Company is planning to spend a total of approximately 22-24% of revenue on CAPEX in 2010, of which a significant portion will be spent on 3G networks and backbone infrastructure in Russia as a result of the very high demand for mobile broadband. Over time, the investments made will decrease operating costs. The prior years’ investment in the Ukrainian network will lead to a reduction in CAPEX in the country in 2010, whilst spending in Uzbekistan and Turkmenistan is expected to remain at a high level, as these markets still represent significant growth opportunities for MTS. Page 24 - Financial Position (http://annualreview2009.mtsgsm.com/business_review/financial_review/financial_position/)
Financial Position
Strong Balance Sheet & Manageable Debt Position
Overall, MTS’ debt levels increased during the year, with total Group debt amounting to $8.3 billion as of December 31, 2009. Despite the rise in debt, the balance sheet remains strong and, with a Net Debt/LTM OIBDA ratio of 1.2, the Company’s debt position remains manageable. Details of the Company’s debt instruments and credit ratings are listed in the following sections.
Debt Instruments
MTS maintains a balanced currency structure of liabilities, with a preference for ruble-denominated funding. Given the volatile macroeconomic conditions over the last few years, MTS began hedging some of its liabilities in cross-currency swaps in the second quarter of 2009. At the end of 2009, MTS’ debt financing comprised bonds, credit facilities and syndicated loans. MTS successfully placed two ruble bonds in 2009. In May, MTS placed a 15 billion ruble bond which matures in 2014. The bond’s coupons will be paid annually at the rate of 16.75%. The bond holders have the right under a two-year put option to sell the bonds back to MTS. The second ruble bond of the year, and MTS’ fifth in total, was placed in July. The bond, which is also worth 15 billion rubles, was placed on the MICEX and matures in 2016. Funds raised through the ruble bonds will be used for capital corporate purposes, including the funding of MTS’ CAPEX program and better rationalization of the Company’s debt structure. The Company’s five outstanding ruble-denominated bonds have been moved to the “A1” quotation list on the
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Moscow Interbank Currency Exchange (MICEX) in April 2010.
Additionally, MTS has two Eurobonds traded on the Luxembourg Stock Exchange. The bonds mature in October 2010 and January 2012. At the end of December 2008, MTS secured a credit facility with Gazprombank worth €300 million for general corporate needs. The credit facility initially had a maturity of 2.5 years. Later in the year, MTS amended the terms to the credit facility and the interest rate was decreased by four percentage points, with the maturity being extended by a year. MTS secured additional financing from Sberbank through two loans in the amount of 12 billion rubles and 47 billion rubles in August-September 2009. The funds were allocated to MTS’ overall investment programs, including the acquisition of Comstar-UTS. In May 2009, MTS signed a syndicated loan facility agreement to refinance the first tranche of an existing $1.33 billion syndicated loan facility in the amount of $630 million that was scheduled to mature later in the month. $295 million was raised for Facility A and €214 for Facility B. The facilities carry an interest rate of LIBOR + 6.5% with maturity in 2012. In July 2009, MTS announced the successful closing of the syndication for its syndicated term loan facility signed in May 2009. Due to additional demand, the facility was oversubscribed by nearly $100 million. In February 2010, MTS voluntarily prepaid the syndicated loan agreement originally signed in May 2009 and amended in June 2009. In accordance with the terms of the loan agreement, MTS prepaid the principal and loan interest amounts (without penalties) on facility A of $373.8 million and facility B of €247.6 million. Throughout the year, MTS also secured vendor financing for network development from the European Bank for Reconstruction and Development (EBRD), Nordic Investment Bank (NIB), European Investment Bank (EIB), Swedish Export Credit Agency (EKN), Export Development Canada (EDC) and China Export and Credit Insurance Corporation SINOSURE. The financing amounted to $1,504.9 million and €413 million in total.
Credit ratings
Moody’s, Standard & Poor’s and Fitch have assigned the following ratings to the Company’s debt in 2009: Moody’s: Ba2, outlook stable S&P: BB, outlook stable Fitch: BB+, outlook stable The Group is in a strong position despite the economic downturn that has affected its markets of operation. MTS continues to operate with the necessary flexibility in the current credit markets, the operations continue to provide strong and sustained cash flows, and the Group’s balance sheet is well managed. The Company is thus well placed to take advantage of the opportunities that are available in markets in the near- to medium-term. Page 25 - Share Structure & Performance (http://annualreview2009.mtsgsm.com/business_review/mts_shareholder_information/shares_structure_performance/)
Share Structure & Performance
Share Structure
Since November 2003, MTS’ common stock has been listed locally on the Moscow Interbank Currency Exchange (MICEX). American Depositary Receipts (ADRs), each representing five shares of the Company’s common stock, have been listed on the New York Stock Exchange under the symbol ‘MBT’ since June 30, 2000. MTS’ share capital comprises of 1,993,326,138 outstanding common shares, of which 76,456,876 are treasury shares, as of December 31, 2009. A total of 777,396,505 ordinary shares are in the form of ADRs.
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On May 3, 2010 MTS announced that it changed its ADR ratio to 1 ADR per 2 common shares from the previous ratio of 1 ADR per 5 common shares. The Company did not acquire any shares in 2009 as part of its existing repurchase program.
Share Performance
MTS’ management team believes that the stock performance in 2009 is reflective of the fact that the Company continued to outperform its peers in the majority of its markets of operation and also that the newly introduced 3i strategic framework, and related key developments such as the acquisition of a controlling stake in Comstar-UTS, have positioned MTS strongly as a leading integrated telecom operator in a global context. Page 26 - Dividends (http://annualreview2009.mtsgsm.com/business_review/mts_shareholder_information/dividends/)
Dividends
MTS continually seeks ways to create shareholder value through both its commercial and financial strategies, including both organic and inorganic development as well as the Company’s capital management practices. Since 2007, the Group has maintained a dividend policy that aims to make dividend payments to shareholders in the amount of at least 50% of MTS’ annual U.S. GAAP net income. The dividend can vary depending on a number of factors, such as cash flow from operations, capital expenditure requirements, the Group’s overall debt position, the outlook for earnings growth, as well as potential M&A opportunities. Potential annual dividend payments, so long as they do not exceed 100% of net income according to RAS, must be recommended by the Board of Directors and approved by the shareholders. For the fiscal year 2008, MTS paid a cash dividend of $1.16 billion (39.40 rubles), which equated to $2.96 per ADR and 20.15 rubles per ordinary share and equaled 60% of MTS’ US GAAP Net Income in 2008. Under Russian law, dividends paid to a non-resident holder of the shares generally will be subject to Russian withholding tax. Page 27 - Board of Directors (http://annualreview2009.mtsgsm.com/governance/board/)
Board of Directors
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Ron Sommer Chairman of the Board – Non-Executive Director
In June 2009, Ron Sommer was appointed as the Chairman of the Board of Directors of MTS. Between May 1995 and July 2002, Ron Sommer was CEO of Deutsche Telekom AG and, prior to this, held a number of positions with Sony Corporation, including as CEO of Sony Deutschland, COO of Sony Corporation of America and COO of Sony Europe. Mr. Sommer is also a member of the Board of Directors of Motorola, Tata Consultancy Services, Weather Investments, Munich Reinsurance and a member of the International Advisory Board of Blackstone Group. Since 2003, he has worked as Chairman of the International Advisory Board at Sistema, and in 2005, Mr. Sommer was elected to the Board of Directors at Sistema as an independent director. Mr. Sommer holds a PhD degree in mathematics from the University of Vienna.
Anton Abugov Non-Executive Director
Anton Abugov joined MTS’ Board of Directors in June 2008. Mr. Abugov serves as the First Vice President, Head of the Strategy and Development functional division of Sistema. Between 2003 and 2006, Mr. Abugov was Managing Director of AKB Rosbank, in charge of its Corporate Finance Department. Prior to joining Rosbank, he was a Partner in Eurasia Capital Partners, overseeing investment projects in Eastern European telecoms and Russian petrochemical businesses. From 1997 to 2006, he was Strategic Adviser to the TAIF Group of Companies, one of the biggest financial-industrial groups in Russia. In 1995, Mr. Abugov was involved in developing infrastructure and a regulatory framework for the securities market in Russia, and between 1995 and 2002 he was Head of Corporate Finance at UFG (United Financial Group), and was involved in a number of major fundraisings, strategic consultancy, and merger and acquisition projects in various industries in Russia and Eastern Europe. In 1999, he was an adviser to RAO UES. Mr. Abugov graduated from the National Economics Academy under the Government of the Russian Federation.
Alexei Buyanov Non-Executive Director
Mr. Alexei Buyanov was elected to MTS’ Board of Directors in June 2003. Since September 2002, Mr. Buyanov has served as Senior Vice President of Sistema, heading the company’s financial and investment group. Mr. Buyanov joined Sistema in 1994 and, until 1995, he worked in property management at the company. In 1995, he was appointed Head of the department of Sistema-Invest and then became Vice President of Sistema-Invest. From 1998 to 2002, Mr. Buyanov served as Vice President of MTS. In July 2002, he was appointed Vice President of Sistema to run the department for financial restructuring. Mr. Buyanov graduated from the Moscow Physical-Technical Institute (MFTI) in 1992 with a Degree in Applied Physics and Mathematics.
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Daniel Crawford Non-Executive Independent Director
Daniel Crawford was elected to MTS’ Board of Directors in October 2008. Mr. Crawford has a wealth of experience, having held senior level positions at various telecommunications companies for almost three decades. Until recently, he served on the Board of Directors at Avantel, having previously worked as the company’s Chief Operating Officer. From 2004 to 2006, Mr. Crawford served as International and Wholesale President at MCI. Between 1998 and 2004, he was the Chairman of the Board of Directors at Embratel Participacoes, the holding company that controls Embratel, Brazil’s premier national telecommunications company. He has previously served as the Chairman of the Board of Star One and President of various divisions at MCI. Mr. Crawford graduated with a Master of Science degree in electrical engineering from New York University.
Sergei Drozdov Vice Chairman of the Board – Non-Executive Director
Mr. Sergei Drozdov was elected to MTS’ Board of Directors in June 2007. Since 2002, he has served as Acting First Vice President and Head of the Department of Corporate Property at Sistema, and in September 2002 he was appointed Director and First Vice President of Sistema and Chief of the Property Complex. Mr. Drozdov joined Sistema in 1995, first managing the Department of Development and Investments from 1995 to 1998 and, between 1998 and 2002, serving as Vice President, Acting President and First Vice President of Sistema-Invest. Prior to joining Sistema, Mr. Drozdov was head of the Administration of Financial Innovations and Marketing with the City of Moscow’s Property Fund from 1994 to 1995. He holds a number of other senior corporate positions, including Chairman of the Boards of Detsky Mir, Reestr, Detsky Mir Center and NII Stali. Mr. Drozdov also serves on the Boards of Sistema Telecom, MGTS, CSC, Sistema-International, Medical Technology MTH, Olimpiyskaya Sistema, Intourist Hotel Group and M-Consult. Mr. Drozdov graduated from the S. Ordzhonikidze State Academy of Management in Economics.
Mohanbir Gyani Non-Executive Independent Director
Mohanbir Gyani was elected to MTS’ Board of Directors in June 2007. He has almost 30 years of experience in the telecommunications and wireless industry. He is currently the Vice Chairman of Roamware, Inc., a services provider for wireless operators, having formerly served as both its CEO and Chairman of the Board. From 2000 to 2003, he was the President and CEO of AT&T Wireless Mobility Services. From 2003 and until 2005, Mr. Gyani was Senior Advisor to the Chairman and CEO responsible for strategy, business development and operations at AT&T Wireless Group. Previously, following the Vodafone and AirTouch merger, Mr. Gyani was Head of Strategy and Corporate Development and a member of the Board of Directors for Vodafone AirTouch Plc in 1999. Prior to the merger, Mr. Gyani was Executive Vice President and Chief Financial Officer of AirTouch Communications from 1994 to 1999. Mr. Gyani began his career in 1978 with Pacific Telesis Group where he held various financial and operating positions. Currently, Mr. Gyani is a member of the Boards of Keynote Systems, Safeway, Sirf
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Technology and Union Banc of California, as well as a board member of private firms and non-profit organizations. He is a former member of the Board of Directors of the GSM Association and of CTIA (Cellular Telecommunications and Internet Association) and has been a Board member in numerous public and private enterprises in the past. Mr. Gyani graduated with B.A. in Business Administration and holds an MBA in finance from San Francisco State University.
Paul J. Ostling Non-Executive Independent Director
Paul J. Ostling was elected to MTS’ Board of Directors in June 2007. He serves as the Chief Executive Officer and General Director of KUNGUR Oilfield Equipment & Services. Prior to joining the company, Mr. Ostling served as the Global Chief Operating Officer at Ernst & Young from 2003 to 2007. From 1977 to 2007, he held a number of positions at Ernst & Young, including Global Executive Partner from 1994 to 2003; Vice Chairman and National Director of Human Resources from 1985 to 1994; and Associate and Assistant General Counsel from 1977 to 1985. Mr. Ostling serves on the Board of Directors and as the Chairman of the Audit Committee of United Services Organization; is the Chairman of the Business Council for International Understanding; is the Deputy Chairman of the Board of Directors of Cool nrg; is on the Board of Directors and also the Chairman of Remuneration and Positions Committee at PromSvyaz Bank; is on the Board of Directors and as Vice President for Finance at Boy Scouts of America Transatlantic Council; and is on the Board of Directors of URALCHEM. Previously, Mr. Osling was a member of the Board of the TransAtlantic Business Dialogue (TABD) and a Co-Chairman of the Ukraine Foreign Investment Advisory Council. Mr. Ostling holds a Law Degree from Fordham University School of Law and a B.S. in Mathematics and Philosophy from Fordham University.
Mikhail Shamolin President and Chief Executive Officer of MTS – Executive Director
Mikhail Shamolin was appointed President and Chief Executive Officer (CEO) of MTS Group in May 2008. Prior to his current role, Mr. Shamolin held the position of Vice President, Head of Business Unit “MTS Russia” since August 2006. In this capacity, Mr. Shamolin managed the largest MTS business unit, one which contributes roughly 75% of value to the Company. During his tenure, revenues grew 67% and operating efficiency improved considerably as Mr. Shamolin presided over sustained growth in voice usage and adoption of value-added services, both of which led to an over 50% rise in average revenue per user (ARPU). Mr. Shamolin joined MTS in July 2005 as Vice President for Sales and Customer Service. He has served as a member of the MTS Board of Directors since October 2008. Prior to joining MTS, Mr. Shamolin worked at McKinsey & Co. from 1998 to 2004. In 2004 and 2005, he worked at Interpipe Corp. (Ukraine) as Managing Director of the Ferroalloys Division. Mr. Shamolin graduated from the Russian Academy of Government Service under the President of the Russian Federation in 1993. From 1996 to 1997, he completed a finance and management course for top managers at the Wharton Business School.
Tatiana Yevtoushenkova Non-Executive Director
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Ms. Tatiana Yevtoushenkova was elected to MTS’ Board of Directors in June 2007. She is currently the Advisor to the President of Sberbank. Previously, Ms. Yevtoushenkova served as the Advisor to the President of MTS from 2007 to 2008. Prior to joining MTS in October 2002, Ms. Yevtoushenkova served as Director of the Investments department at Sistema Telecom from December 1999. Ms. Yevtoushenkova graduated the Finance Academy under the Government of the Russian Federation.
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Executive Management
Mikhail Shamolin President and Chief Executive Officer
Mikhail Shamolin was appointed President and Chief Executive Officer (CEO) of MTS Group in May 2008. Prior to his current role, Mr. Shamolin held the position of Vice President, Head of Business Unit “MTS Russia” since August 2006. In this capacity, Mr. Shamolin managed the largest MTS business unit, one which contributes roughly 75% of value to the Company. During his tenure, revenues grew 67% and operating efficiency improved considerably as Mr. Shamolin presided over sustained growth in voice usage and adoption of value-added services, both of which led to an over 50% rise in average revenue per user (ARPU). Mr. Shamolin joined MTS in July 2005 as Vice President for Sales and Customer Service. He has served as a member of the MTS Board of Directors since October 2008. Prior to joining MTS, Mr. Shamolin worked at McKinsey & Co. from 1998 to 2004. In 2004 and 2005, he worked at Interpipe Corp. (Ukraine) as Managing Director of the Ferroalloys Division. Mr. Shamolin graduated from the Russian Academy of Government Service under the President of the Russian Federation in 1993. From 1996 to 1997, he completed a finance and management course for top managers at the Wharton Business School.
Dr. Michael Hecker Vice President for Strategy and Corporate Development
Dr. Michael Hecker joined MTS in May 2006, and he currently serves as Vice President for Strategy and Corporate Development. Prior to joining MTS, Dr. Hecker worked at A.T. Kearney Europe from 2000 to 2006, where he was occupied in the fields of strategy, marketing and finance in European telecommunication and consumer goods industries. Prior to that, he worked in several positions as a Junior Lawyer in Berlin and Brandenburg (Germany). Dr. Hecker is a graduate in International Politics and Administration of the Pierre-Mendez-France-University in Grenoble (France) and a graduate in Law (1. and 2. German State Exam) and Modern History of the Georg-August-University in Goettingen (Germany), where he holds a PhD in Constitutional History.
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Mikhail Gerchuk Vice President and Chief Commercial Officer
Mikhail Gerchuk was appointed Vice President and Chief Commercial Officer (CCO) of MTS in December 2008. As the CCO of the Company, Mr. Gerchuk is responsible for the development and implementation of the Company’s marketing, sales and customer service strategies, as well as the realization of overall revenue targets. Mr. Gerchuk joined MTS in August 2007 as the Group Marketing Director. In this capacity, he was responsible for the development and implementation of MTS’ marketing strategy and the attainment of revenue growth targets in all countries of operation. Prior to joining MTS, Mr. Gerchuk was Chief Commercial Officer at Vodafone Malta from 2006 to 2007, where he accomplished revenue growth and increased market share for the business. He held senior marketing positions at Vodafone Group, UK between 2002 and 2006, including Head of Voice Propositions between 2004 and 2006 and Senior Global Marketing Manager between 2002 and 2004. Mr. Gerchuk also worked as an Associate at Booz Allen Hamilton in London from 1999 to 2002 and, before that, as Category Marketing Manager at PepsiCo and Brand Manager at Mars, Inc. Mr. Gerchuk holds an MBA from INSEAD and an M.A. in Economic Geography and English from the Moscow State University.
Alexey Kornya Vice President and Chief Financial Officer
Alexey Kornya was appointed to the role of Vice President and Chief Financial Officer (CFO) of MTS in June 2010. He served as acting Vice President and Chief Financial Officer of MTS from July 2008 to June 2010. Alexey Kornya has been at MTS since July 2004. He started as the Chief Financial Officer of Macro-region “Ural” and since then served at various positions in the Company. Mr. Kornya served as the Chief Financial Controller from March 2007 to July 2008. Prior to joining MTS, Mr. Kornya worked at PricewaterhouseCoopers, OJSC North-West Telecom, and AIG-Brunswick Capital Management. He graduated from St. Petersburg University of Economics and Finance in 1998.
Yury Gromakov Vice President for Technology Development
Yury Gromakov joined MTS in 1994 and currently serves as Vice President for Technology Development. Prior to joining MTS, he worked at various enterprises of the industrial military complex in the telecommunications field. Mr. Gromakov has received a number of State awards in science and technology. He is Vice President of the Russian National Radio Association and is also a member of the governing bodies of the 3G Association and the Russian GSM Association. Mr. Gromakov is also a member of the International Academy of Network and the International Academy of Information Science, Processes and Technologies.
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Andrey Ushatskiy Vice President and Chief Technology Officer
Andrei Ushatskiy was appointed Vice President and Chief Technology Officer of MTS in April 2009. He is responsible for managing technology development, strengthening the efficiency of the Company’s networks and enforcing high quality standards across the MTS Group. Mr. Ushatskiy has been with MTS since 1996, advancing from a specialist position to a variety of network operations roles to becoming the Deputy Head of MTS Russia for Technology. He has graduated from the Moscow Power Engineering Institute in 1997 and received an executive MBA from the Academy of National Economy under the Government of the Russian Federation in 2004.
Oleg Raspopov Vice President and Head of Business Unit “MTS Foreign Subsidiaries”
Oleg Raspopov was appointed Vice President and Head of Business Unit” MTS Foreign Subsidiaries” in January 2008. He joined MTS in 2006 and served as the Director of External Resources Department until May 2007, when he was appointed Acting Vice President and Head of Business Unit “MTS Foreign Subsidiaries”. From 2001 to 2002, Mr. Raspopov served in legal positions at Gazprom Energoservice. From 2002 to 2004, he was an Advisor to the CFO in RAO “UES of Russia” and the member of the Board of Directors of several companies affiliated with RAO “UES of Russia”, such as “Ren-TV” and Leader Insurance Co. In 2004, Mr. Raspopov created and headed an insurance broker Energoprotection. In 2003, he graduated from the Federal Tax Police Academy specializing in law, and in 2006 he graduated the Finance Academy under the Government of the Russian Federation with a degree in economics.
Andrei Terebenin Vice-President for Corporate Communications
Andrei Terebenin has served as Vice President for Corporate Communications of MTS since January 2006, supervising public relations, investor relations and some aspects of government relations. Mr. Terebenin held a number of management positions at Ekonomicheskaya Gazeta, Dun and Bradstreet CIS and AIG Russia. In 1999, he joined Triangle Porter Novelli Communications Agency as a Partner. From 2003, Mr. Terebenin held the position of General Director and Partner of R. I. M. Porter Novelli Communications Holdings. In 1985, Mr. Terebenin graduated from the Moscow State Institute of International Affairs (MGIMO) majoring in International Economic Relations and Arabic.
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Ruslan Ibragimov Vice President for Corporate and Legal Matters
Ruslan Ibragimov joined MTS in June 2006 as the Director of Legal Department and was appointed Director for Corporate and Legal Matters in February 2007. From January 2008, Mr. Ibragimov served as Vice President for Corporate and Legal Matters. From 1992 to 1996, Mr. Ibragimov headed legal services in several commercial banks. From 1997 to 2002, he worked as a Deputy Director and Head of Tax and Legal Consultations Department in the company Top-audit. Prior to joining MTS, he worked in a legal firm Ibragimov, Kogan and Partners. Mr. Ibragimov graduated from the faculty of law at the Moscow State University in 1986 and pursued a postgraduate degree there. Mr. Ibragimov is a member of the Russian Tax Law Association.
Sergey Nikonov Vice President for Human Resources and Administration
Sergey Nikonov joined MTS in July 2006 as Vice President for Human Resources and Administration. Prior to joining MTS, Mr. Nikonov worked as Deputy Director of OJSC “Power Machines”, where he managed HR and administrative activity. From 2003 to 2005, Mr. Nikonov was the Deputy Director at ROSNO, where he headed the department of HR, administrative activity and internal control. From 1992 to 2002, he worked for the Federal Tax Police, where occupied a range of positions. Sergey Nikonov graduated from the Military Institute of the Ministry of Defense of the Russian Federation as a military interpreter.
Pavel Belik Vice President for Corporate Security
Pavel Belik was appointed Vice President for Corporate Security in October 2005. He joined MTS in February 2005 as Director of the Security Department of Macro-region Moscow. From 1992 to 2004, Mr. Belik served for the intelligence service of the Russian Federation and in the Department of Internal Security of the Russian Federal Security Service. In 1999, Mr. Belik graduated from the Academy of the Russian Federal Security Service as a lawyer. In 1987, he graduated from the High Military College of Kalinin, specializing in the operation of radio-relay and tropospheric communication systems.
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Frederic Vanoosthuyze Vice President for Information Technology
Frederic Vanoosthuyze joined MTS in February 2010 and currently serves as Vice President for Information Technology. Prior to joining MTS, Frederic Vanoosthuyze worked at Millicom International Cellular SA (Luxembourg) as Group Chief Information Officer from 2006 to 2010. Prior to that, he worked at BASE, KPN Orange, Alcatel Bell and Siemens Atea. Mr. Vanoosthuyze graduated from High School of Liege and University of Mons in Belgium with an Engineering degree in Electronics and Telecommunications in 1995 and Engineering degree in Computer Science and Management in 1999. He also received an Executive Master degree in IT Governance at the Solvay Business School in 2006.
Aleksander Popovskiy Head of Business Unit “MTS Russia”
Aleksander Popovskiy was appointed Head of Business Unit “MTS Russia” in August 2008. Prior to his current role, Mr. Popovskiy served as the Head of the South Macro-region of MTS Russia since June 2007. From July 2004 to June 2007, he was the Head of the Povolzhye North-West Macro-region. Mr. Popovskiy joined MTS in April 2001 as the Director of Operations in the town of Kirov. Mr. Popovskiy graduated from the Vyatsky State Technical University in 1999 with a degree in computing. In 2002, he received a postgraduate degree from the same university in system analysis. In 2005, Mr. Popovskiy received a Candidate of Science degree in engineering from the Moscow Aviation Institute. He also attended the Executive MBA program at the London Business School.
Andrei Dubovskov Head of Business Unit “MTS Ukraine”
Andrei Dubovskov has been the Head of Business Unit “MTS Ukraine” since January 2008. He joined MTS Ukraine in December 2007 as First Deputy of General Director. From 2006 to 2007, he was the Head of Macro-region Ural. From 2004 to 2006, he was head of MTS branch in Nizhny Novgorod. From 2002 to 2004, Mr. Dubovskov headed Tele2’s operations in Nizhny Novgorod. From 1993 onwards, he occupied a number of management positions in such companies as Millicom International Cellular S.A., Millicom International Cellular B.V., Regionalnaya Sotovaya Svyaz LLC and CJSC 800, as well as other companies in Moscow, Alma-Ata, Nizhny Novgorod and Perm. Mr. Dubovskov graduated in 1993 from the Gerasimov State Institute of Cinematography.
Page 29 - Corporate Governance (http://annualreview2009.mtsgsm.com/governance/corporate_governance/)
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Corporate Governance
MTS is committed to best practice in corporate governance, in order to maximize shareholder value and realize the Company’s business strategy. MTS was one of the first Russian companies to conduct an IPO on the New York Stock Exchange. In June 2010, MTS will celebrate its 10 th anniversary on the NYSE. The Company is considered a forerunner of Russian corporate governance and aims to provide unrestricted access to information and maintain transparency of reporting. Over the last few years, MTS’ corporate governance practices have been recognized by Standard & Poor’s as one of the most transparent companies in Russia and the CIS. MTS has also been SOX-compliant since 2007. With a strong track record in these areas, MTS aims to advance the stable development of the communities in which the Company is present, helping to increase prosperity and establish a competitive economy in Russia and the CIS. The Company is determined to develop its corporate governance practices to maintain transparent, sustainable and efficient management structures. These practices also ensure that MTS can better access resources for further development when approaching the global financial capital markets. Page 30 - Corporate Responsibility (http://annualreview2009.mtsgsm.com/governance/corporate_responsibility/)
Corporate Responsibility
As one of the largest companies in Russia and the CIS, MTS recognizes and addresses the impact of its decisions and actions. MTS’ business practices are governed by the Company’s ethical standards, which have been developed with regard to its operations, geographical reach and relevant stakeholders. These ethical standards are applicable to all of MTS’ relations with consumers, employees and other partners. They address focus areas such as the investment in a sustainable society, social health and prosperity, consideration of relevant stakeholders, regulations and practices in the markets in which the Company operates, enhancing corporate governance practices and facilitating greater information transparency.
Providing Access to Modern Technology
MTS has over 102 million subscribers across its markets of operation with a total population of more than 230 million. The Company aims to provide its customers with modern technology regardless of geographical boundaries and MTS’ growth strategy is based on significant investment in the development of telecommunications infrastructure. The Company’s aim is to provide access to the most innovative products and services with a seamless user experience. In 2009, MTS became the first Russian telecommunications company to be awarded the ISO9001:2008 Certificate for our Quality Management System. The certification assures that MTS’ business activities and internal quality management processes comply with the highest international standards. The certification covers all of the Company’s locations in Russia, Ukraine and Uzbekistan. MTS is actively working to deliver the benefits of modern technology across various spheres of life. For example, the Company is working with the Ministry of Health of Ukraine to enable data transfer between various health institutes and facilities in the country and to build a telemedicine network.
Developing & Maintaining Sustainable Initative
MTS aims to avoid or minimize any adverse impact on the environment and to actively develop new products and services to make both our own and our clients’ businesses more sustainable. In 2009, MTS teamed up with Moscow United Energy Company (MUEK) in a smart metering project in the Moscow neighborhood of Chertanovo. MUEK installed MTS SIM cards into energy and water readers which provides wireless monitoring to the user and is also utilized to collect data for MUEK. The smart metering can save up to 10% of energy usage for the customer and will decrease the numbers of journeys undertaken by MUEK servicemen. MTS has also been developing new ways of using alternative energy to power its base stations. In the Karelia region in Russia, the Company has utilized wind power, and in Krasnodar, Russia, solar cells have been employed. In Moscow, the Group launched a project to begin testing hydrogen power cells. MTS has also launched a pilot station in the Crimea Peninsula in Southern Ukraine using wind turbines.
Promoting Equal Opportunities
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MTS has made a commitment to the communities in which it operates. The Company actively supports and engages in initiatives that promote equal opportunities as well as participating in a number of charitable causes. In 2009, MTS provided the charity ‘Give a Life’ with mobile telephones. The charity helps raise money to treat children suffering from cancer and other serious illnesses. This service was also offered to Russian doctors treating injured children in Gaza, and enabled them to consult with colleagues in Russia. Later in the year, MTS facilitated the phone-in marathon ‘A Christmas Present’ in the Novgorod region. The event raised funds that were donated to Novgorod-based families with chronically ill children. Furthermore, MTS is the official partner of sports events on regional and federal level. MTS is a sponsor of the National Olympic Committees of Ukraine and Armenia and of the Football Federation of Armenia. The Company has sponsored a number of sporting events across the CIS, including the recent “Dakar Series” Silk Way Rally 2009 in Turkmenistan. Page 31 - Cooperation with Shareholders (http://annualreview2009.mtsgsm.com/governance/corporate_responsibility/cooperationwithshareholders/)
Cooperation with Shareholders
MTS aims to provide equal opportunities to all shareholders, including timely access to information and the protection of shareholders’ rights. The key aspect of MTS’ cooperation with shareholders is providing unrestricted access to information and transparency of reporting. In order to optimize the communications and processes of cooperation with its shareholders, MTS participates in international ratings on corporate management, informational transparency and credit ratings. For MTS, disclosure of information and cooperation with shareholders is determined by the requirements of the US Securities and Exchange Commission, the New York Stock Exchange, the Russian Federation legislation, and the Company’s own charter and internal regulations. MTS practices a precise and strict approach to the preparation of its financial reports, which guarantees a high level of public disclosure of information. All significant financial and operating information published by the Company is audited by external auditors. MTS’ Investor Relations department is responsible for developing and maintaining a dialogue with investors, shareholders, ratings agencies, financial analysts, international media and other external stakeholders. In addition, the department fulfils the disclosure requirements of a publicly-traded company and maintains one of the highest levels of information transparency in Russia and the CIS. The Investor Relations department leads MTS’ global outreach effort and provides a variety of services to internal MTS departments that facilitates greater interaction and cooperation with the Group’s stakeholders. Over the last few years, MTS has been recognized as one of the most transparent and open companies in Russia and the CIS according to evaluations by Standard & Poor’s. MTS’ Investor Relations department also won IR Magazine‘s Russian and CIS ‘Best Overall IR Award’ in 2009, the Thomson Reuters Extel Survey – Focus Russia 2009 award for the best IR officer and the best company in telecommunications, and H&H Webranking’s award for Best Corporate Website in Russia for MTS’ English IR website in January 2010. All price-sensitive and significant information is made publicly available through press releases, regulatory filings and on the corporate website. Page 32 - Auditor's Report (http://annualreview2009.mtsgsm.com/financial_statements/auditors_report/)
Auditor's Report
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Open Joint Stock Company “Mobile TeleSystems” We have audited the accompanying consolidated statements of financial position of Mobile TeleSystems, a Russian Open Joint Stock Company, and subsidiaries (the “Group”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
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Print manager | MTS
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2009, the Group changed its method of presentation and accounting for noncontrolling interests. As discussed in Note 2 to the consolidated financial statements, on October 12, 2009, the Group acquired 50.91% of Open Joint Stock Company “Comstar—United TeleSystems” from Joint Stock Financial Corporation “Sistema”, the majority shareholder of the Group, resulting in a change in reporting entity. The transaction was accounted for as a transaction under common control. Assets and liabilities were transferred at historical cost. The change in reporting entity was accounted for in a manner similar to a pooling of interests which has been reflected retrospectively from the first period presented herein. Further, as discussed in Note 14 to the consolidated financial statements, during the year ended December 31, 2009, the Group recognized an impairment charge on its investment in the shares of Open Joint Stock Company “Telecommunication Investment Company” (”Svyazinvest”) in the amount of $349 million. The carrying value of this investment was written down to $860 million as of December 31, 2009 based on the estimated fair value of the investment as of that date. In the absence of readily determinable fair value of the investment in Svyazinvest, management reached its conclusion based on the use of estimates incorporating various unobservable market inputs as discussed in Note 14. Because of the material uncertainties inherent in the valuation of Svyazinvest, the value the Group could realize had a disposal of this investment been made between a willing buyer and seller may differ materially from its resultant carrying amount. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as of December 31, 2009 based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 29, 2010 expressed an unqualified opinion on the Group’s internal control over financial reporting. Moscow, Russia April 29, 2010, except for Note 31, as to which the date is June 25, 2010 Page 33 - Balance Sheets (http://annualreview2009.mtsgsm.com/financial_statements/balance_sheet/)
Consolidated Statements of Financial Position As of December 31, 2009 and 2008
(Amounts in thousands of U.S. Dollars, except share and per share amounts) December 31, 2009 CURRENT ASSETS: Cash and cash equivalents (Note 4) Short-term investments, including related party amounts of $13,413 and $339,396 (Note 5) Trade receivables, net (Note 6) Accounts receivable, related parties (Note 25) Inventory and spare parts (Note 7) Prepaid expenses, including related party amounts of $1,146 and $12,883 Deferred tax assets (Note 23) VAT receivable Other current assets, including assets held for sale of $18,519 and $46,426 (Note 2) $2,522,831 217,210 593,102 19,973 238,693 356,530 212,687 109,928 124,002 $1,121,669 360,117 443,184 70,620 141,113 346,399 213,091 129,598 196,632 2008 (restated - see Note 2)
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Total current assets PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $5,095,168 and $4,038,053, including advances given to related parties of $30,667 and $22,485 (Note 8) LICENSES, net of accumulated amortization of $341,421 and $295,056 (Notes 3 and 10) GOODWILL (Notes 3 and 11) OTHER INTANGIBLE ASSETS, net of accumulated amortization of $1,277,417 and $971,106 (Notes 3 and 12) DEBT ISSUANCE COSTS, net of accumulated amortization of $114,251 and $83,360 INVESTMENTS IN AND ADVANCES TO ASSOCIATES (Note 13) INVESTMENTS IN SHARES OF SVYAZINVEST (Note 14) OTHER INVESTMENTS, including related party amounts of $73,987 and $85,720 (Note 15) OTHER NON-CURRENT ASSETS, , including restricted cash of $6,389 and $23,572 (Note 16), assets held for sale of $nil and $32,067 (Note 2), and deferred tax assets of $97,355 and $63,507 (Note 23) and related party amounts of $1,615 and $1,006 Total assets The accompanying notes are an integral part of these consolidated financial statements.
4,394,956 7,745,331 364,722 803,773 1,067,336 127,069 220,450 859,669 78,893
3,022,423 7,758,220 488,381 469,471 1,230,643 37,737 249,887 1,240,977 111,559
118,546 $15,780,745
107,881 $14,717,179
December 31, 2008 (restated see Note 2)
2009 CURRENT LIABILITIES: Accounts payable, related parties (Note 25) Trade accounts payable Deferred connection fees, current portion (Note 19) Subscriber prepayments and deposits Debt, current portion (Note 17), including related party amounts of $10,278 and $76,710 (Note 25) Notes payable, current portion (Note 17) Capital lease obligation, current portion, including related party amounts of $1,344 and $5,693 (Note 9) Income tax payable Accrued liabilities (Note 22) Bitel liability (Note 30) Other payables Total current liabilities LONG-TERM LIABILITIES: Notes payable, net of current portion (Note 17) Debt, net of current portion (Note 17), including related party amounts of $15,929 and $18,066 (Note 25) Capital lease obligation, net of current portion, including related party amounts of $146 and $1,352 (Note 25) Deferred connection fees, net of current portion (Note 19) Deferred taxes (Note 23) Retirement and post-retirement obligations (Note 27) Property, plant and equipment contributions (Note 20)
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$87,403 504,967 46,930 501,351 780,514 1,218,084 3,173 16,136 825,413 170,000 103,962 4,257,933 1,391,549 4,935,275 921 116,168 298,453 25,537
226,482 875,428 55,012 438,723 1,677,529 10,435 8,253 23,102 563,317 170,000 74,760 4,123,041 1,578,540 2,089,488 4,030 119,213 190,712 29,250
Print manager | MTS
90,349 Long term accounts payable, related parties (Note 25) Other long-term liabilities Total long-term liabilities Total liabilities COMMITMENTS AND CONTINGENCIES (Note 30) Redeemable noncontrolling interests SHAREHOLDERS’ EQUITY: Common stock (2,096,975,792 shares with a par value of 0.1 rubles authorized and 1,993,326,138 shares issued as of December 31, 2009 and 2008, 777,396,505 of which are in the form of ADS as of December 31, 2009 and 2008) (Note 26) Treasury stock (76,456,876 and 108,273,338 common shares at cost as of December 31, 2009 and 2008) Additional paid-in capital Accumulated other comprehensive (loss)/income Retained earnings Nonredeemable noncontrolling interest Total shareholders’ equity Total liabilities and shareholders’ equity The accompanying notes are an integral part of these consolidated financial statements. (754,524) 5,135,842 1,026,119 4,403,069 $15,780,745 50,558 (1,054,926) 38,273 140,957 7,037,482 11,295,415 — 82,261
93,197 36,807 87,246 4,228,483 8,351,524 — 145,748
50,558 (1,426,753) 1,090,521 (451,264) 5,642,856 1,313,989 6,219,907 $14,717,179
Page 34 - Statements of Operations (http://annualreview2009.mtsgsm.com/financial_statements/statement_of_operations/)
Consolidated Statements of Operations For the Years Ended December 31, 2009, 2008 and 2007
(Amounts in thousands of U.S. Dollars, except share and per share amounts) Years ended December 31, 2009 NET OPERATING REVENUE Services revenue and connection fees (including related party amounts of $72,149, $209,990 and $178,312, respectively) Sales of handsets and accessories(including related party amounts of $20,689, $1,500 and $nil, respectively) Cost of services, excluding depreciation and amortization shown separately below (including related party amounts of $50,389, $232,689 and $161,500, respectively) Cost of handsets and accessories General and administrative expenses (including related party amounts of $68,903, $53,870 and $43,416, respectively) (Note 28) Provision for doubtful accounts Impairment of long-lived assets $9,505,837 317,705 9,823,542 2,004,690 349,304 1,968,193 109,632 75,064 $11,822,006 78,928 11,900,934 2,447,210 169,925 2,159,777 154,782 1,333 $9,634,698 89,208 9,723,906 1,863,797 158,848 1,853,624 67,720 18,556 2008 (restated see Note 2) 2007 (restated see Note 2)
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Print manager | MTS
Impairment of goodwill Other operating expenses (including related party amounts of $12,207, $12,008 and $8,349, respectively) Sales and marketing expenses (including related party amounts of $156,733, $241,814 and $200,600, respectively) Depreciation and amortization expenses Net operating income CURRENCY EXCHANGE AND TRANSACTION LOSS/(GAIN) OTHER EXPENSES/(INCOME) Interest income (including related party amounts of $53,940, $55,018 and $26,377) Interest expense, net of capitalized interest (including related party amounts of $3,613, $9,400 and $4,270) Equity in net income of associates (Note 13) Change in fair value of derivatives (Note 21) Impairment of investments (including related party amounts of $349,370, $nil and $21,814) (Notes 14,15) Other expenses, net (including related party amounts of $nil, $2,967 gain and $5,919 loss) Total other expenses, net Income before provision for income taxes and noncontrolling interest PROVISION FOR INCOME TAXES (Note 23) NET INCOME NET (LOSS)/INCOME ATTRIBUTABLE TO THE NONCONTROLLING INTEREST NET INCOME ATTRIBUTABLE TO THE GROUP Weighted average number of common shares outstanding—basic ( Note 2) Weighted average number of common shares outstanding—diluted ( Note 2) Earnings per share, basic and diluted (Note 2) The accompanying notes to the consolidated financial statements are an integral part of these statements.
173,622 755,902 1,839,568 2,547,567 252,945 (108,543) 571,719 (60,313) 5,420 368,355 23,254 799,892 1,494,730 503,955 990,775 (13,704) 1,004,479 1,885,750,147 1,885,750,147 $0.53
49,891 188,310 931,245 2,151,125 3,647,336 565,663 (70,860) 233,863 (75,688) 41,554 — 22,745 151,614 2,930,059 742,881 2,187,178 187,059 2,000,119 1,921,934,091 1,921,934,091 $1.04
126,308 775,240 1,674,885 3,184,928 (161,856) (53,507) 192,237 (71,116) 145,860 22,691 38,781 274,946 3,071,838 852,015 2,219,823 132,408 2,087,415 1,973,354,348 1,974,074,908 $1.06
Page 35 - Changes in Shareholders' Equity (http://annualreview2009.mtsgsm.com/financial_statements/shareholder_equity/)
Consolidated Statements of Changes in Shareholders' Equity For the Years Ended December 31, 2009, 2008 and 2007
(Amounts in thousands of U.S. Dollars, except share amounts) Common Stock Treasury Stock Accumulated Other comprehensive Income Total Nonequity redeemable attributnonable to the controlling Group interest
Shares BALANCES, January 1, 2007
Amount
Shares
Amount
Additional paid-in Capital
Retained earnings
Total equity
Redeemable noncontrolling interest
1,993,326,138 $50,558
(15,922,128)
$(114,778) $1,148,074
$76,515 $3,578,787 $4,739,156
$1,231,058 $5,970,214
$—
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Print manager | MTS
Comprehensive income: Net income Currency translation adjustment, net of tax of $14,513 Effect of change in functional currency Change in fair value of interest rate swaps, net of tax of $352 (Note 21) Unrecognized actuarial gains, net of tax of $nil (Note 27) Total comprehensive income Dividends declared Stock options of MTS exercised (Note 24) Call option of Comstar-UTS exercised (Note 21) Acquisition of KTelecom, net of tax (Note 3) Accrued compensation costs (Note 24) Repurchase of common stock of MTS (Note 26) Increase in ownership in subsidiaries (Note 3) Distribution to the controlling shareholder of Stream-TV Effect of FIN No. 48 implementation — — — — — — 2,087,416 2,087,416 127,869 2,215,285 4,539
—
—
—
—
(214)
360,263
—
360,049
90,621
450,670
—
—
—
—
—
—
358,997
—
358,997
—
358,997
—
—
—
—
—
—
(1,114)
—
(1,114)
—
(1,114)
—
—
—
—
—
—
(4,781)
—
(4,781)
(4,308)
(9,089)
—
— —
— —
— —
— —
— —
— —
— (742,475)
2,800,567 (742,475)
214,182 (35,993)
3,014,749 (778,468)
— —
—
—
848,126
869
5,188
—
—
6,057
—
6,057
—
—
—
—
—
(1,756)
(4,169)
72,833
66,908
478,774
545,682
—
—
—
—
—
—
—
(76,069)
(76,069)
—
(76,069)
85,232
—
—
—
—
—
—
2,486
(309)
2,177
—
—
—
—
(17,402,835)
(254,443)
—
—
—
(254,443)
—
(254,443)
—
—
—
—
—
1,450
—
—
1,450
(63,071)
(61,621)
—
— —
— —
— —
— —
(8,473) —
— —
— (9,683)
(8,473) (9,683)
(7,635) (2,929)
(16,108) (12,612)
— —
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Print manager | MTS
BALANCES, December 31, 2007 Comprehensive income/(loss) Net income Currency translation adjustment, net of tax of $nil Change in fair value of interest rate swaps, net of tax of $3,826 (Note 21) Unrecognized actuarial gains, net of tax of $nil (Note 27) Total comprehensive income/(loss) Dividends declared Stock options of MTS exercised (Note 24) Put option of Comstar-UTS exercised (Note 21) Accrued compensation costs (Note 24) Repurchase of common stock (Note 26) Reorganization of Comstar Direct (Note 3) Change in fair value of noncontrolling interest of KTelecom Change in fair value of noncontrolling interest of
1,993,326,138 $50,558
(32,476,837)
$(368,352) $1,146,755
$785,711 $4,910,809 $6,525,481
$1,814,077 $8,339,558
$89,771
—
—
—
—
—
—
2,000,119
2,000,119
177,261
2,177,380
9,798
—
—
—
—
—
(1,233,846)
—
(1,233,846)
(303,866)
(1,537,712)
—
—
—
—
—
—
(16,359)
—
(16,359)
—
(16,359)
—
—
—
—
—
—
536
—
536
1,085
1,621
—
750,450 — — — — — — (1,221,893) (1,221,893)
(125,520) (38,196)
624,930 (1,260,089) —
—
—
1,397,256
1,432
7,751
—
—
9,183
—
9,183
—
—
—
—
—
(9,358)
12,694
—
3,336
(274,472)
(271,136)
—
—
—
—
—
3,489
—
—
3,489
—
3,489
—
—
—
(77,193,757)
(1,059,833)
—
—
—
(1,059,833)
—
(1,059,833)
—
—
—
—
—
(6,539)
—
—
(6,539)
(20,283)
(26,822)
—
—
—
—
—
—
—
(2,730)
(2,730)
—
(2,730)
2,730
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Print manager | MTS
Dagtelecom Increase in ownership in subsidiaries (Note 3) Cash paid by Comstar-UTS for the acquisition of Stream TV BALANCES, December 31, 2008 Comprehensive income/(loss) Net income/(loss) Currency translation adjustment, net of tax of of $7,910 Change in fair value of derivatives, net of tax of $5,895 (Note 21) Unrecognized actuarial losses, net of tax of $nil (Note 27) Total comprehensive income/(loss) Dividends declared Accrued compensation costs (Note 24) Acquisition of Comstar-UTS Legal acquisition of Stream-TV (Note 3) Change in fair value of noncontrolling interest of KTelecom Dividends paid to noncontrolling interest of KTelecom
—
—
—
—
—
—
(43,449)
(43,449)
—
(43,449)
43,449
—
—
—
—
—
—
—
—
(6,352)
(6,352)
—
—
—
—
—
(51,577)
—
—
(51,577)
(35,265)
(86,842)
—
1,993,326,138 $50,558 (108,273,338) $(1,426,753) $1,090,521 $(451,264) $5,642,856 $4,905,918
$1,313,989 $6,219,907
$145,748
—
—
—
—
—
—
1,004,479
1,004,479
(18,063)
986,416
4,359
—
—
—
—
—
(197,429)
—
(197,429)
(30,240)
(227,669)
(4,399)
—
—
—
—
—
(23,579)
—
(23,579)
—
(23,579)
—
—
—
—
—
—
1,003
—
1,003
1,808
2,811
—
784,474 — — — — — — (1,221,381) (1,221,381)
(46,495) (1,005)
737,979 (1,222,386) —
— —
— —
— —
— —
1,173 (1,079,559)
— —
— (242,699)
1,173 (1,322,258)
— —
1,173 (1,322,258)
— —
—
—
—
—
(1,616)
43
—
(1,573)
(1,470)
(3,043)
—
—
—
—
—
—
—
7,495
7,495
—
7,495
(7,495)
—
—
—
—
—
—
—
—
—
—
(12,503)
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Print manager | MTS
Increase in ownership in subsidiaries (Note 3) BALANCES, December 31, 2009
—
—
31,816,462
371,827
(10,519)
(83,298)
(54,908)
223,102
(238,900)
(15,798)
(43,449)
1,993,326,138 $50,558
(76,456,876) $(1,054,926)
$— $(754,524) $5,135,842 $3,376,950
$1,026,119 $4,403,069
$82,261
The accompanying notes are an integral part of the consolidated financial statements.
Page 36 - Statements of Cash Flows (http://annualreview2009.mtsgsm.com/financial_statements/cash_flow_statement/)
Consolidated Statements of Cash Flows For the Years Ended December 31, 2009, 2008 and 2007
(Amounts in thousands of U.S. Dollars) Years ended December 31, 2009 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Currency exchange and transaction loss/(gain) Impairment of investments Impairment of long-lived assets Impairment of goodwill Debt issuance cost amortization Amortization of deferred connection fees Equity in net income of associates Provision for doubtful accounts Inventory obsolescence expense and other provisions Deferred taxes Gain from deconsolidation of a subsidiary Write-off of not recoverable VAT receivable Change in fair value of derivatives Other non-cash items Changes in operating assets and liabilities: Increase in accounts receivable (Increase) / decrease in inventory (216,654) (111,998) (162,908) 7,273 (173,621) 67,262 1,839,568 212,761 368,355 75,064 — 36,892 (67,057) (60,313) 109,632 12,225 101,444 — 9,652 5,420 6,153 2,151,125 578,643 — 1,333 49,891 22,087 (95,080) (75,688) 154,782 3,599 (206,102) — 48,374 41,554 (10,367) 1,674,885 (168,083) 22,691 18,556 — 26,425 (122,707) (71,116) 67,720 4,932 (85,021) (8,874) 17,516 145,860 16,787 $990,775 $2,187,178 $2,219,823 2008 (restated see Note 2) 2007 (restated see Note 2)
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Decrease / (increase) in prepaid expenses and other current assets Decrease in VAT receivable Increase in trade accounts payable, accrued liabilities and other current liabilities Dividends received Net cash provided by operating activities
14,676 8,914 235,244 25,355 3,596,108
(257,682) 128,335 436,915 26,692 5,029,954 Years ended December 31, 2009 2008 (restated see Note 2)
49,840 12,567 131,030 4,900 3,851,372
2007 (restated see Note 2)
CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of subsidiaries, net of cash acquired Purchases of property, plant and equipment Purchases of intangible assets Proceeds from sale of property, plant and equipment and assets held for sale Purchases of short-term investments Proceeds from sale of short-term investments Purchase of a derivative financial instrument Purchases of other investments Proceeds from sales of other investments Investments in and advances to associates Decrease/(increase) in restricted cash Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from stock options exercise Cash payments for the acquisition of Comstar-UTS, Stream TV and non-controlling interests (Note 3) Repurchase of Comstar-UTS shares (Note 3) Disposal of Comstar-UTS shares (Note 3) Contributions from SMM, related party Proceeds from issuance of notes Repurchase of common stock Repayment of notes Notes and debt issuance cost Capital lease obligation principal paid Dividends paid Proceeds from loans Loan principal paid Net cash provided by/ (used in) financing activities Effect of exchange rate changes on cash and cash equivalents NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of the year CASH AND CASH EQUIVALENTS, end of the year — (1,333,418) — — — 1,003,226 — (9,182) (105,137) (15,592) (1,261,728) 3,598,100 (1,728,544) 147,725 42,015 1,401,162 1,121,669 $2,522,831 9,183 (109,442) (100,000) — 4,439 986,004 (1,059,833) (565,074) (6,693) (14,785) (1,144,719) 894,803 (572,425) (1,678,542) (342,338) 301,085 820,584 $1,121,669 6,057 — (32) 322,237 — — (254,443) — (1,863) (22,146) (794,311) 1,362,695 (876,263) (258,069) 112,717 458,700 361,884 $820,584 (270,540) (1,942,402) (385,907) 28,606 (519,129) 642,164 — (613) 44,003 1,950 17,182 (2,384,686) (86,951) (2,207,861) (404,964) 35,636 (569,377) 590,579 (19,422) (49,922) 425 (3,654) 7,522 (2,707,989) (1,087,031) (1,633,942) (265,030) 26,710 (670,360) 364,440 — (18,574) 38,745 — (2,278) (3,247,320)
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Print manager | MTS
SUPPLEMENTAL INFORMATION: Income taxes paid Interest paid Non-cash investing and financing activities: Contributed property, plant and equipment Building contributed in the share capital of Sistema Mass Media Additions to network equipment and software under capital lease Purchase of Comstar UTS’ shares funded by issuing of the promissory note Equipment acquired through vendor financing Amounts owed for capital expenditures Payable related to business acquisitions $3,213 — 830 — 27,983 236,364 37,985 The accompanying notes are an integral part of the consolidated financial statements. $3,194 — 5,673 365,552 13,198 604,641 31,719 $6,299 4,751 6,037 — 2,770 383,834 14,639 $432,066 510,784 $1,035,095 285,212 $937,448 265,054
Page 37 - Note 1: Description of Business (http://annualreview2009.mtsgsm.com/financial_statements/notes/1_description_of_business/)
Note 1: Description of Business For the Years Ended December 31, 2009, 2008 and 2007
(Amounts in thousands of U.S. Dollars, unless otherwise stated) 1. DESCRIPTION OF BUSINESS Business of the Group—Open Joint Stock Company Mobile TeleSystems (”MTS OJSC”, or “the Company”) was incorporated on March 1, 2000, through the merger of MTS CJSC and RTC CJSC, its wholly owned subsidiary. MTS CJSC started its operations in the Moscow license area in 1994 and then began expanding through Russia and the CIS. In these notes, “MTS” or the “Group” refers to Mobile TeleSystems OJSC and its subsidiaries. The Group provides a wide range of telecommunications services, including voice and data transmission, internet access, various value added services through wireless and fixed lines as well as selling equipment and accessories. Group’s principal operations are located in Russia, Ukraine, Uzbekistan, Turkmenistan and Armenia. MTS completed its initial public offering in 2000 and listed its shares of common stock, represented by American Depositary Shares, or ADSs, on the New York Stock Exchange under the symbol “MBT”. Since 2003 common shares of MTS OJSC have been traded on the Moscow Interbank Currency Exchange (”MICEX”). During the year ended December 31, 2009 through a series of transactions the Group acquired a 61.97% stake in Open Joint Stock Company Comstar—United TeleSystems (”ComstarUTS”), a provider of fixed line telecommunication services in Russia and the CIS, from Joint Stock Financial Corporation Sistema (”Sistema”) (Note 3). Acquisition of Comstar-UTS provided access to important growth markets in commercial and residential broadband which gives rise to the development of convergent telecommunication services. During the year ended December 31, 2009, the Group started to expand its own retail network, operated by Russian Telephone Company CJSC, a wholly owned subsidiary of MTS OJSC. During 2009 following this strategy the Group acquired a number of Russian federal and regional mobile retailer operators (Note 3). Ownership—As of December 31, 2009 and 2008, MTS’ shareholders of record and their respective percentage direct interests in outstanding shares were as follows: December 31, 2009 Joint Stock Financial Corporation Sistema Sistema Holding Limited (“Sistema Holding”), a subsidiary of Sistema
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2008 33.2% 10.1% 33.7% 10.3%
Print manager | MTS
Invest Svyaz CJSC (“Invest Svyaz”), a subsidiary of Sistema VAST, Limited Liability Company (“VAST”), a subsidiary of Sistema ADS Holders Free float, GDR Holders and others
8.4% 3.1% 40.6% 4.6% 100.0%
8.5% 3.2% 41.2% 3.1% 100.0%
The effective ownership of Sistema in MTS was 54.8% and 55.7% as of December 31, 2009 and 2008, respectively.
Page 38 - Note 2: Summary of Significant Accounting Policies and New Accounting Pronouncements (http://annualreview2009.mtsgsm.com/financial_statements/notes/2_accounting_policies/)
Note 2: Summary of Significant Accounting Policies and New Accounting Pronouncements
Accounting principles—The Group’s entities maintain accounting books and records in local currencies of their domicile in accordance with the requirements of respective accounting and tax legislations. The accompanying consolidated financial statements have been prepared in order to present MTS financial position and its results of operations and cash flows in accordance with accounting principles generally accepted in the United States (”U.S. GAAP”) and are expressed in terms of U.S. Dollars. The accompanying consolidated financial statements differ from the financial statements used for statutory purposes in that they reflect certain adjustments, not recorded on the entities’ books, which are appropriate to present the financial position, results of operations and cash flows in accordance with U.S. GAAP. The principal adjustments are related to revenue recognition, foreign currency translation, deferred taxation, consolidation, acquisition accounting, depreciation and valuation of property, plant and equipment, intangible assets and investments. Basis of consolidation—Wholly owned and majority owned subsidiaries where the Group has operating and financial control are consolidated. All intercompany accounts and transactions are eliminated upon consolidation. Those ventures where the Group exercises significant influence but does not have operating and financial control are accounted for using the equity method. Investments in which the Group does not have the ability to exercise significant influence over operating and financial policies are accounted for under the cost method and included in other investments in the consolidated statements of financial position. The Group’s share in the net income of unconsolidated associates is included in other income in the accompanying consolidated statements of operations and disclosed in Note 13. Results of operations of subsidiaries acquired are included in the consolidated statements of operations from the date of their acquisition. The acquisition of Comstar-UTS, an entity under common control, in the fourth quarter of 2009 (Note 3) has resulted in change in the reporting entity. The consolidated financial statements presented for the periods subsequent to the acquisition include the accounts of MTS OJSC and its subsidiaries, in which MTS OJSC exercises control through the ownership of majority voting interest. As the Group and Comstar-UTS are under the common control of Sistema, the assets and liabilities acquired were recorded at the historical carrying value and the consolidated financial statements were retroactively restated to reflect the Group as if Comstar-UTS had been owned since the beginning of the earliest period presented. The following table presents the significant effects of this restatement. As previously reported As of December 31, 2008: Total current assets Goodwill Property, plant and equipment, net Intangible assets, net Investments in shares of Svyasinvest Other non-current assets Total assets Total current liabilities Total long-term liabilities $2,368,734 377,982 5,900,129 1,392,131 — 409,358 10,448,334 3,307,141 3,062,798 $673,577 91,489 1,858,091 230,050 1,240,977 98,143 4,192,327 852,192 1,133,836 $(19,888) — — 96,843 — (437) 76,518 (36,292) 31,849 $3,022,423 469,471 7,758,220 1,719,024 1,240,977 507,064 14,717,179 4,123,041 4,228,483 Comstar-UTS Eliminations and other* As restated
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Print manager | MTS
Total liabilities Redeemable noncontrolling interest Shareholders’ equity attributable to the Group Nonredeemable noncontrolling interests Total equity
6,369,939 — 4,054,896 23,499 $4,078,395
1,986,028 — 798,517 703,891 $1,502,408
(4,443) 145,748 52,505 586,599 $639,104
8,351,524 145,748 4,905,918 1,313,989 $6,219,907
* Includes the effect of implementation of the provisions of EITF Topic D-98 (see Recently adopted accounting pronouncements).
As previously reported For the year ended December 31, 2008: Net operating revenue Net operating income Income before provision for income taxes and noncontrolling interests Net income Net income attributable to the Group EPS, basic and diluted, U.S. Dollars For the year ended December 31, 2007: Net operating revenue Net operating income Income before provision for income taxes and noncontrolling interests Net income Net income attributable to the Group EPS, basic and diluted, U.S. Dollars $8,252,378 2,733,846 2,829,088 2,090,818 2,071,504 $1.05 $10,245,293 3,203,492 2,570,684 1,940,063 1,930,419 $1.00
Comstar-UTS
Eliminations and other*
As restated
$1,765,226 441,192 355,134 242,694 109,912
$(109,585) 2,652 4,241 4,421 (40,212)
$11,900,934 3,647,336 2,930,059 2,187,178 2,000,119 $1.04
$1,562,291 451,635 245,517 131,597 35,176
$(90,763) (553) (2,767) (2,592) (19,265)
$9,723,906 3,184,928 3,071,838 2,219,823 2,087,415 $1.06
* Includes the effect of implementation of the provisions of EITF Topic D-98 (see Recently adopted accounting pronouncements).
As of December 31, 2009 and 2008, the Company had investments in the following significant legal entities: December 31, Accounting method Sibintertelecom Dagtelecom Russian Telephone Company ("RTC") Evrotel Ukrainian Mobile Communications (“UMC”) MTS Finance(1) Uzdunrobita BCTI MTS Bermuda(2) K-Telekom Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated Consolidated 2009 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 80.0% 2008 100.0% 74.9% 100.0% — 100.0% 100.0% 100.0% 100.0% 100.0% 80.0%
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Print manager | MTS
Comstar-UTS MTS Belarus TS-Retail (1) Represents beneficial ownership. (2) A wholly owned subsidiary established to repurchase the Group’s ADSs.
Consolidated Equity Equity
64.0% 49.0% 34.6%
59.4% 49.0% 33.9%
Functional currency translation methodology—As of December 31, 2009, the functional currencies of the Group entities were the following: • For entities incorporated in Russian Federation, MTS Bermuda and MTS Finance—Russian ruble (”RUB”); • For UMC—Ukrainian hryvnia; • For Turkmen branch of BCTI—Turkmenian manat; • For K-Telecom—Armenian dram; • For MTS-Belarus—Belarusian ruble; and • For Uzdunrobita and other entities—U.S. Dollar (”USD”). The Group’s reporting currency is U.S. Dollars. Remeasurement of financial statements into functional currencies where applicable and translation of financial statements into U.S. Dollars has been performed as follows: For entities whose records are not maintained in their functional currencies, monetary assets and liabilities have been remeasured at the period-end exchange rates. Non-monetary assets and liabilities have been remeasured at historical rates. Revenues, expenses and cash flows have been remeasured at average rates. Remeasurement differences resulting from the use of these rates have been accounted for as currency exchange and transaction gains and losses in the accompanying consolidated statements of operations. For entities whose records are maintained in their functional currency, which is other than the reporting currency, all year-end statement of financial position items have been translated into U.S. Dollars at the period-end exchange rate. Revenues and expenses have been translated at average exchange rate for the period. Translation differences resulting from the use of these rates are reported as a component of other comprehensive income. Management estimates—The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence, valuation of assets acquired and liabilities assumed in business combinations, income tax benefits, the recoverability of investments, goodwill, intangible assets and other long-lived assets, certain accrued liabilities and valuation of financial instruments. Cash and cash equivalents—Cash and cash equivalents represent cash on hand and in bank accounts and short-term investments, including term deposits, having original maturities of less than three months. Short-term investments and loans—Short-term investments generally represent investments in promissory notes, loans and time deposits which have original maturities in excess of three months but less than twelve months. These investments are being accounted for at amortized cost. Accounts receivable—Accounts receivable are stated net of allowance for doubtful accounts. Concentrations of credit risk with respect to trade receivables are limited due to a highly diversified customer base, which includes a large number of individuals, private businesses and state financed institutions. Provision for doubtful accounts—The Group provides an allowance for doubtful accounts based on management’s periodic review for recoverability of accounts receivable, advances given, loans and other receivables. Such allowance reflects either specific cases, collection trends or estimates based on evidence of collectibility. For changes in the provision for doubtful loans and accounts receivable see Notes 5 and 6, respectively. Prepaid expenses—Prepaid expenses primarily comprise advance payments made to vendors for inventory and services. Inventory—Inventory mainly consists of handsets and accessories held for sale, cables and spare parts to be used for equipment maintenance within the next twelve months and advertising
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Print manager | MTS
materials. Inventory is stated at the lower of cost or market value. Inventory cost is determined using the weighted average cost method. Handsets and accessories held for sale are expensed when sold. The Group periodically assesses its inventories for obsolete and slow-moving stock. Value added tax (”VAT”)—Value added tax related to sales is payable to the tax authorities on an accrual basis based upon invoices issued to the customer. VAT incurred for purchases may be reclaimed from the state, subject to certain restrictions, against VAT related to sales. Assets held for sale—In 2006, the Group management decided to discontinue use of certain telecommunication equipment (”Lucent equipment”) in accordance with the Group’s network development strategy. The Group accounts for Lucent equipment in accordance with the authoritative guidance on property, plant and equipment, and reports Lucent equipment at the lower of its carrying amount or fair value less costs to sell. The fair value of these assets held for sale was considered a Level 3 valuation as it was based on significant unobservable inputs. The equipment had a fair value less costs to sell of approximately $46.4 million and $67.4 million as of December 31, 2009 and 2008, respectively. The Group initially negotiated with a third party to sell this equipment during the year ended December 31, 2007. However, due to the wide range of geographical areas in which the equipment was located and its diversity, the Group reconsidered the time needed to sell the equipment in 2007 and, as a result, the original plan of sale was extended. The amount of Lucent equipment sold during 2008 and 2009 equaled $12.8 million and $25.2 million, respectively. The remaining part of Lucent equipment held for sale in the amount of $18.5 million is expected to be sold during 2010 and was classified as other current assets in the accompanying consolidated statement of financial position as of December 31, 2009. Due to the fact that the initial plan of sale was reconsidered, the fair value of Lucent equipment was determined using the discounted cash flows based on an updated expected timing of sale. As a result, an impairment loss on Lucent equipment in the amount of $6.8 million was recorded as other operating expenses in the Group’s consolidated statement of operations for the year ended December 31, 2007. This loss is entirely attributable to the “Russia Mobile” operating reportable segment. No impairment loss on Lucent equipment was recorded during the years ended December 31, 2008 and 2009. Long-term investments and loans—Long-term financial instruments consist primarily of long-term investments and loans and long-term debt. Since quoted market prices are not readily available for all of its long-term investments and loans, the Group estimates their fair values based on the use of estimates incorporating various unobservable market inputs. The Group does not discount promissory notes of and loans granted to related parties, interest rates on which are different from market rates. Accordingly, fair value of such notes and loans may be different from their carrying value. Property, plant and equipment—Property, plant and equipment, including improvements that extend useful lives, are stated at cost. Property, plant and equipment transferred to MGTS free of charge are capitalized at their fair value at the date of transfer, and corresponding liability is recorded and amortized to the consolidated statements of operations over the contributed asset’s useful life. Property, plant and equipment with a useful life of more than one year is capitalized at historical cost and depreciated on a straight-line basis over its expected useful life as follows: Mobile telecommunication equipment Fixed line telecommunication equipment Leasehold improvements Buildings and constructions Other fixed assets 5 - 12 years 7 - 31 years Lesser of estimated useful life and lease term (1 - 10 years) 20 - 50 years 3 - 25 years
Construction in progress and equipment held for installation is not depreciated until the constructed or installed asset is ready for its intended use. Maintenance and repair costs are expensed as incurred, while upgrades and improvements are capitalized. Interest expense incurred during the construction phase of MTS’ network is capitalized as part of property, plant and equipment until the relevant projects are completed and placed into service. Asset retirement obligations—The Group calculates asset retirement obligations and an associated asset retirement cost when the Group has a legal or constructive obligation in connection with the retirement of tangible long-lived assets. The Group’s obligations relate primarily to the cost of removing its equipment from sites. The Group recorded the present value of asset retirement obligations as other long-term liabilities in the consolidated statement of financial position. License costs—License costs are capitalized as a result of (a) the purchase price allocated to licenses acquired in business combinations and (b) licenses purchased directly from government organizations, which require license payments. The Group’s operating licenses do not provide for automatic renewal. As of December 31, 2009, all licenses covering the territories of the Russian Federation were renewed. The cost to renew the licenses was not significant. However, the Group has limited experience with the renewal of its existing licenses covering the territories of the Group’s foreign subsidiaries. Management believes that licenses required for the Group’s operations will be renewed upon expiration, though there is no assurance of such renewals and the Group has limited experience in seeking renewal of its licenses. License costs are being amortized during the initial license period without consideration of possible future renewals, subject to periodic review for impairment, on a straight-line basis over the
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Print manager | MTS
period of validity, which is from three to fifteen years. Other intangible assets and goodwill—Intangible assets represent various purchased software costs, telephone numbering capacity, acquired customer base, rights to use radio frequencies and rights to use premises. A part of the rights to use premises was contributed by shareholders to the Group’s charter capital. Telephone numbering capacity with a finite contractual life is being amortized over the contract period which varies from two to ten years. The rights to use premises are being amortized over five to fifteen years. Amortization of numbering capacity costs starts immediately upon the purchase of numbering capacity. Telephone numbering capacity with unlimited contractual life is not amortized, but is reviewed, at least annually, for impairment in accordance with the authoritative guidance on intangibles. For acquisitions before January 1, 2009 goodwill represents an excess of the consideration paid over the fair market value of net identifiable assets acquired in purchase business combination and is not amortized. For the acquisitions after January 1, 2009 goodwill is determined as the excess of the consideration transferred plus the fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. Goodwill is reviewed for impairment at least annually or whenever it is determined that one or more impairment indicators exist. The Group determines whether impairment has occurred by assigning goodwill to the reporting unit identified in accordance with the authoritative guidance on intangibles, and comparing the carrying amount of the reporting unit to the fair value of the reporting unit. If an impairment of goodwill has occurred, the Group recognizes a loss for the difference between the carrying amount and the implied fair value of goodwill (see Note 11). Software and other intangible assets are amortized over one to fifty years. Customer bases are amortized on a straight-line basis over their respective estimated average subscriber life, being from 20 to 240 months. Rights to use radio frequencies are amortized over the period of their contractual life, being from two to fifteen years. All finite-life intangible assets are amortized using the straight-line method. Impairment of long-lived assets—MTS periodically evaluates the recoverability of the carrying amount of its long-lived assets. Whenever events or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable, MTS compares undiscounted net cash flows estimated to be generated by those assets to the carrying amount of those assets. When the undiscounted cash flows are less than the carrying amounts of the assets, MTS records impairment losses to write the asset down to fair value, measured by the estimated discounted net future cash flows expected to be generated from the use of the assets. Impairment of property, plant and equipment and intangible assets amounted to $75.1 million, $1.3 million and $10.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. The impairment amounts were reported within other operating expenses in the accompanying consolidated statement of operations. The losses are entirely attributable to the “Russia Mobile” operating reportable segment. Investments impairment—Management periodically assesses the recoverability of the carrying values of investments and, if necessary, records impairment losses to write the investments down to fair value (see Note 14 and 15). Leasing arrangements—Entities of the Group lease operating facilities which include switches, other network equipment, vehicles, premises and sites to install base stations equipment and towers. Rentals payable under operating leases are charged to the statements of operation on a straight line basis over the term of the relevant lease. For capital leases, the present value of future minimum lease payments at the inception of the lease is reflected as an asset and a liability in the statement of financial position. Amounts due within one year are classified as shortterm liabilities and the remaining balance as long-term liabilities. Subscriber prepayments—MTS requires the majority of its customers to pay in advance for telecommunication services. All amounts received in advance of services provided are recorded as a subscriber prepayment liability and are not recorded as revenues until the related services have been provided to the subscriber. Treasury stock—Shares of common stock repurchased by the Group are recorded at cost as treasury stock and reduce the shareholders’ equity in the Group’s consolidated financial statements. Revenue recognition—Revenue include all revenues from the ordinary business activities of MTS. Revenues are recorded net of value added tax. They are recognized in the accounting period in which they are earned in accordance with the realization principle: Revenues derived from wireless, local telephone, long distance, data and video services are recognized when services are provided. This is based upon either usage (minutes of traffic processed, volume of data transmitted) or period of time (monthly subscription fees). Upfront fees received for connection of new subscribers, installation and activation of wireless, wireline and data transmission services (”connection fees”) are deferred and recognized over the estimated average subscriber life, as follows: Mobile subscribers Residential wireline voice phone subscribers Residential subscribers of broadband internet service Other fixed line subscribers The Group calculates an average life of mobile subscribers for each region in which it operates and amortizes regional connection fees.
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14 - 60 months 15 years 1 year 3 - 5 years
Print manager | MTS
Sales of handsets and accessories—MTS sells wireless handsets and accessories to customers who are entering into contracts for service and also as separate distinct transactions. The Group recognizes revenues from the sale of wireless handsets and accessories when the products are delivered to and accepted by the customer, as it is considered to be a separate earnings process from the sale of wireless services in accordance with the authoritative guidance on multiple element arrangements. The costs of wireless handsets and accessories, whether sold to subscribers through the distribution channel or as part of the service contract, are expensed when the associated revenue is recognized. Customer incentives—Incentives provided to customers are usually offered on signing a new contract or as part of a promotional offering. Incentives, representing the reduction of the selling price of the service (free minutes and discounts) are recorded in the period to which they relate, when the respective revenue is recognized, as a reduction to both accounts receivable and revenue. However, if the sales incentive is a free product or service delivered at the time of sale, the cost of the free product or service is classified as an expense. In particular, MTS sells handsets at prices below cost to contract subscribers. Such subsidies are recognized in the cost of handsets and accessories when the sale is recorded. Prepaid cards—MTS sells prepaid cards to subscribers, separately from the handset. Prepaid cards, used as a method of cash collection, are accounted for as customer advances. These cards allow subscribers to make a predetermined allotment of wireless phone calls and/or take advantage of other services offered by the Group, such as short messages and value added services. Revenue from the sale of prepaid cards is deferred until the service is rendered to the customer uses the airtime or the card expires. Roaming discounts—Group entered into roaming discount agreements with a number of wireless operators. According to the terms of the agreements MTS is obliged to provide and entitled to receive a discount that is generally dependant on the volume of inter operator roaming traffic. The Group accounts for rebates received from and granted to roaming partners in accordance with the authoritative guidance on customer payments and incentives. The Group uses various estimates and assumptions, based on historical data and adjusted for known changes, to determine the amount of discount to be received or granted. Such estimates are adjusted monthly to reflect newly available information. The Group accounts for discounts received as a reduction of roaming expenses and rebates granted as reduction of roaming revenue. The Group considers terms of the various roaming discount agreements in order to determine the appropriate presentation of the amounts receivable from and payable to its roaming partners in consolidated statement of financial position. Income taxes—The Group recognizes income tax positions if it is more likely than not that they will be sustained on a tax audit, including resolution of related appeals or litigation processes, if any, and measures them as the largest amount which is more than 50% likely of being realized upon ultimate settlement. Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities, and for the loss or tax credit carry forwards using enacted tax rates expected to be in effect at the time these differences are realized. Valuation allowances are recorded for deferred tax assets for which it is more likely than not that the assets will not be realized (see Note 23). Interests and penalties related to uncertain tax positions are recognized in income tax expense. Sales and marketing expenses—Sales and marketing expenses consist primarily of dealers’ commissions and advertising costs. Dealers’ commissions are linked to revenues received during the six-month period from the date a new subscriber is activated by a dealer. MTS expenses these costs as incurred. Advertising costs for the years ended December 31, 2009, 2008 and 2007, were $336.3 million, $475.6 million and $422.9 million, respectively. Borrowing costs—Borrowing costs include interest incurred on existing indebtedness and debt issuance costs. Interest costs for assets that require a period of time to get them ready for their intended use are capitalized and amortized over the estimated useful lives of the related assets. The capitalized interest costs for the years ended December 31, 2009, 2008 and 2007 were $72.3 million, $84.5 million and $104.5 million, respectively. Debt issuance costs are capitalized and amortized over the term of the respective borrowings using the effective interest method. Interest expense net of amounts capitalized and amortization of debt issuance costs, for the years ended December 31, 2009, 2008 and 2007, were $534.3 million, $211.8 million and $187.4 million, respectively. Retirement benefit and social security costs—The Group contributes to the local state pension and social funds, on behalf of all its employees. In Russia all social contributions are represented by a unified social tax (”UST”) calculated by the application of a regressive rate from 26% to 2% of the annual gross remuneration of each employee. The UST is allocated to three social funds, including the pension fund, where the rate of contributions varies from 20% to 2%, depending on the annual gross salary of employee. These contributions are expensed as incurred. The amount of UST paid by the Group in Russia amounted to $95.2 million, $122.3 million and $99.6 million in 2009, 2008 and 2007, respectively. Effective January 1, 2010, UST was abolished and replaced with direct contributions to the Pension Fund of the Russian Federation, Social Security Fund of the Russian Federation and Medical Insurance Fund of the Russian Federation. MGTS, a subsidiary of the Group, has historically offered its employees certain benefits upon and after retirement. The cost of such benefits includes current service costs and amortization of prior service costs. The expense is recognized during an employee’s years of active service with MGTS. The recognition of expense for retirement pension plans is significantly impacted by estimates made by management such as discount rates used to value certain liabilities, expected return on assets, future rates of compensation increase and other related assumptions. The Group accounts for pension plans in accordance with the requirements of the authoritative guidance on retirement benefits. In Ukraine, Uzbekistan, Turkmenistan and Armenia the subsidiaries of the Group are required to contribute a specified percentage of each employee payroll up to a fixed limit to the local pension fund, unemployment and social security funds. Payments to the pension fund in Ukraine amounted to $64.9 million, $14.9 million and $12.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. Amounts contributed to the pension funds in Uzbekistan, Turkmenistan and Armenia were not significant. The Group does not participate in any pension funds other than described above.
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Print manager | MTS
Earnings per share—Basic earnings per share (”EPS”) have been determined using the weighted average number of MTS shares outstanding during the year. Diluted EPS reflect the potential dilutive effect of stock options granted to employees. Financial instruments and hedging activities—From time to time to optimize the structure of business acquisitions and to defer payment of the purchase price the Group enters into put and call option agreements to aquire noncontrolling stake in the existing subsidiary. These put and call option agreements are classified as redeemable securities and are accounted for at redemption value which is generally the fair value of redemable noncontrolling interests as of reporting date. Fair value of redeemable noncontrolling interests is assessed based on discounted future cash flows of the acquired entity (”Level 3” significant unobservable inputs of the hierarchy established by the U.S. GAAP guidance). Changes in redemption value of redemable noncontrolling interests are accounted for in the Group’s retained earnings. Redemable noncontrolling interests are presented as temporary equity in the consolidated statement of financial position. The Group uses derivative instruments, including swap, forward and option contracts to manage foreign currency and interest rate risk exposures. The Group measures derivatives at fair value and recognizes them as either other current or other non-current assets or liabilities in the consolidated statement of financial position. The Group reviews its fair value hierarchy classifications quarterly. Changes in significant observable valuation inputs identified during these reviews may trigger reclassification of fair value hierarchy levels of financial assets and liabilities. During the years ended December 31, 2009 and 2008 no reclassifications occurred. The fair value measurement of the Group’s hedging agreements is based on the observable yield curves for similar instruments. The Group designates derivatives as either fair value hedges or cash flow hedges in case the required criteria are met. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the consolidated statement of operations together with any changes in the fair value of the hedged asset or liability that is attributed to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in accumulated other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statement of operations. For derivatives that do not meet the conditions for hedge accounting, gains and losses from changes in the fair value are included in the consolidated statement of operations (Note 21). The Group does not use financial instruments for trading or speculative purposes. Fair value of financial instruments—The fair market value of financial instruments, consisting of cash and cash equivalents, short-term investments, accounts receivable and accounts payable, which are included in current assets and liabilities, approximates the carrying value of these items due to the short term nature of these amounts. The fair value of issued notes based on MICEX and the Luxembourg stock exchange quotes as of December 31, 2009, is disclosed in Note 21. Based on current market interest rates available to the Group for long-term borrowings with similar terms and maturities, the Group believes the fair value of other fixed rate debt including capital lease obligations and the fair value of variable rate debt approximated its carrying value as of December 31, 2009. Comprehensive income—Comprehensive income is defined as net income plus all other changes in net assets from non-owner sources. Stock based compensation—The Group accounts for stock based compensation under the authoritative guidance on stock compensations. Under the provisions of this guidance companies must calculate and record the cost of equity instruments, such as stock options awarded to employees for services received, in the statements of operation. The cost of the equity instruments is to be measured based on the fair value of the instruments on the date they are granted (with certain exceptions) and recognized over the period during which the employees are required to provide services in exchange for equity instruments. The Group adopted the guidance using the modified prospective application transition method. Under this transition method, compensation cost for all share based awards granted prior to, but not yet vested as of December 31, 2006, was determined based on the grant date fair value estimated using the same assumptions and taking into account the estimated forfeitures. Recently adopted accounting pronouncements—On January 1, 2008, the Group adopted the authoritative guidance issued by the Financial Accounting Standards Board (”FASB”) on fair value measurements for financial assets and liabilities which provides a single definition of fair value, establishes a framework for measuring fair value and expands disclosure requirements of fair value measurement. On January 1, 2009, the Group adopted this guidance for all non-financial instruments accounted for at fair value on a non-recurring basis. The full adoption of this guidance did not have a material impact on the Group’s consolidated financial position, results of operations or cash flows at the date of adoption. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB on business combinations, including assets acquired and liabilities assumed arising from contingencies. This guidance significantly changes the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Upon the adoption of this guidance, the Group was required to expense certain transaction costs and related fees associated with business combinations that were previously capitalized. In addition, with the adoption of this guidance, contingent consideration is to be recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations. Contingent consideration was previously accounted for as a subsequent adjustment of purchase price. Also, changes to valuation allowances for acquired deferred income tax assets and adjustments to unrecognized tax benefits acquired generally are to be recognized as adjustments to income tax expense rather than goodwill. The impact of the adoption of the new guidance on the Group’s consolidated financial statements is largely dependent on the size and nature of the future business combinations. In 2009 the Group recognized acquisition related costs in the amount of $11.3 million in the consolidated statement of operations and recorded a liability for contingent consideration in amount of $30.8 million in its consolidated statement of financial position as of December 31, 2009.
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On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB that changes the accounting for noncontrolling interests in the consolidated financial statements. Noncontrolling interests (previously referred to as “minority interest”) are to be reported as part of consolidated net earnings, and the accumulated amount of noncontrolling interests is to be included as part of shareholders’ equity. In addition to these financial reporting changes, the guidance provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in the Group’s controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings. The adoption of the new guidance resulted in the reclassification of noncontrolling interests to equity and presentation of net income and other comprehensive income gross of amounts attributable to noncontrolling shareholders of the subsidiaries of the Group. In connection with the issuance of the guidance on noncontrolling interests, EITF Topic D-98, Classification and Measurement of Redeemable Securities, (further—”Topic D-98”) was revised to include the SEC Staff’s views regarding the interaction between Topic D-98 and the new guidance. The revised Topic D-98 indicates that the classification, measurement, and earningsper-share guidance required by Topic D-98 applies to noncontrolling interests (e.g., when the noncontrolling interest is redeemable at a fixed price or fair value by the holder or upon the occurrence of an event that is not solely within the control of the issuer). The revisions to Topic D-98 that are specific to accounting for noncontrolling interests should be applied no later than the effective date of the new guidance. The implementation of the provisions of Topic D-98 as of January 1, 2009 resulted in reduction of Group’s retained earnings by $122.2 million (there of $78.8 million related to the redeemable noncontrolling interest in K-Telecom and $43.5 million related to the redeemable noncontrolling interest in Dagtelecom). On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB relating to disclosures about derivative instruments and hedging activities which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The adoption of this guidance did not result in a significant impact of the Group’s financial position, results of operations and cash flows. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB which modifies the determination of the useful life of intangible assets from a requirement to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions to one that requires an entity consider its own historical experience in renewing similar arrangements, or a consideration of market participant assumptions in the absence of historical experience. This guidance also requires disclosure of information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and ability to renew or extend the arrangements. The adoption of this guidance did not result in a significant impact of the Group’s financial position, results of operations and cash flows for the year ended December 31, 2009. The Group expects that the new guidance will have an impact on its accounting for future acquisitions of intangible assets, but the effect is dependent upon the acquisitions that are made in the future. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB for intangible assets acquired in a business combination or asset acquisition that an entity does not intend to actively use but intends to hold as defensive intangible assets to prevent others from obtaining access to them, referred to as defensive intangible assets. Historically, these assets have been typically allocated little or no value. Under this guidance defensive intangible assets are required to be accounted for as a separate identifiable asset recognized at fair value with an assigned useful life. The adoption of this guidance did not result in a significant impact of the Group’s financial position, results of operations and cash flows for the year ended December 31, 2009. The Group expects that the new guidance will have an impact on its accounting for future acquisitions of intangible assets, but the effect is dependent upon the acquisitions that are made in the future. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB on equity method investment accounting considerations. This guidance considers the effects of the issuances of the new guidance related to business combinations and noncontrolling interests on an entity’s application of the equity method: determination of the initial carrying value of an equity method investment, impairment assessment of an underlying indefinite lived intangible asset of an equity method investment, accounting for issuance of shares by an equity investee, and accounting for a change in an investment from the equity method to the cost method. The adoption of this guidance did not result in a significant impact of the Group’s financial position, results of operations and cash flows. On January 1, 2009, the Group adopted the authoritative guidance issued by the FASB on an employer’s disclosures regarding plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosures required under this guidance are to provide users of financial statements with an understanding of (a) how investment allocation decisions are made; (b) the major categories of plan assets; (c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period; and (e) significant concentrations of risk within plan assets. The adoption of this guidance had no material impact on the Group’s financial statements. On June 15, 2009, the Group prospectively adopted the authoritative guidance issued by the FASB regarding the accounting for, and disclosure of, events that occur after the statement of financial position date but before the financial statements are issued. The adoption of this guidance had no material impact on the Group’s financial statements. On July 1, 2009, the Group adopted the FASB Accounting Standards Codification (”the Codification”) and the revised guidance on Hierarchy of Generally Accepted Accounting Principles introduced by the FASB. The Codification became the source of authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification became nonauthoritative. With the adoption of this codification the Group has accordingly updated the financial statements disclosures. On October 1, 2009, the Group adopted additional guidance on measuring the fair value of liabilities issued by the FASB in August 2009 and effective the first interim or annual reporting period beginning after August 28, 2009. The new guidance specifies that the entity determine whether a quoted price exists for an identical liability when traded as an asset (i.e. a Level 1
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fair value measurement) and if not, the entity must use a valuation technique based on the quoted price of a similar liability traded as an asset, or another valuation technique (i.e. market approach or income approach) and that the entity should not make a separate adjustment for restrictions on the transfer of a liability in estimating fair value. The adoption of this guidance had no material impact on the Group’s financial statements. New accounting pronouncements—In June 2009, the FASB updated the guidance related to consolidation accounting for variable interest entities to require an enterprise to perform an analysis to determine whether the entity’s variable interest or interests give it a controlling interest in a variable interest entity. The Group does not maintain any variable interest entities and as such, the adoption of this guidance, effective January 1, 2010, is not expected to have an impact on the Group’s consolidated financial statements. In October 2009, the FASB amended the revenue recognition for multiple deliverable arrangements guidance to require the use of the relative selling price method when allocating revenue in these types of arrangements. This method allows a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This updated guidance is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this guidance, effective January 1, 2011, is not expected to have a significant impact on the Group’s consolidated financial statements. In January 2010, the FASB issued additional guidance that requires new disclosures related to transfers into and out of Level 1 and Level 2 of fair value measurements and separate presentation of information about purchases, sales, issuances, and settlements in the roll forward for Level 3 inputs. The update also clarifies existing guidance for fair value measurements for each class of assets and liabilities as well as for disclosures about inputs and valuation techniques. The guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures related to purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which are effective for interim and annual periods beginning after December 15, 2010. The adoption of the revised guidance will impact disclosures and will not have an impact on the Group’s consolidated financial statements. In February 2010, the FASB updated the authoritative guidance on the accounting for, and disclosure of, subsequent events to remove the requirement for an entity that files or furnished financial statements with the SEC to disclose a date through which subsequent events have been evaluated in both originally issued and restated financial statements. Restated financial statements include financial statements revised as a result of correction of an error or retrospective application of US GAAP. The updated guidance removes potential conflicts with the SEC’s literature. The Group adopted the revised guidance in February 2010.
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Note 3: Business Acquisitions and Disposals
Acquisitions of certain retail chains—In 2009, in conjunction with the development of its own retail network, MTS acquired controlling interests in the number of retail chains in Russia. The acquisitions were accounted for using the purchase method of accounting. The following table summarizes the purchase price allocation of the retail chains acquired as of the acquisition date: Telefon.ru Month of acquisition Ownership interest acquired Current assets Non-current assets Brand Goodwill Current liabilities Non-current liabilities Fair value of contingent consideration Consideration paid February 100% $48,979 2,315 — 123,333 (108,701) (5,926) — $60,000 Eldorado March 100% $2,467 911 374 29,875 (12,248) (115) (3,414) $17,850 Teleforum October 100% $2,953 745 — 9,050 (3,614) — (6,934) $2,200 $54,399 3,971 374 162,258 (124,563) (6,041) (10,348) $80,050 Total
The Group’s financial statements reflect the allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. Goodwill was mainly attributable to the synergies from the Group’s ability to optimize the dealers’ compensation structure and to maintain its subscriber market share in Russia. Goodwill is not deductible for income tax purposes and was assigned to “Russia Mobile” operating segment. Brand components are amortized over the periods of 6 months.
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Under the terms of the individual purchase agreements, the Group may have to pay additional consideration as follows: • up to $25 million during the period from 12 to 18 months for Telefon.ru; • up to $5 million in 12 months for Eldorado; and • up to $8.8 million in 12 months for Teleforum. The additional consideration may be reduced by the amount of tax liability related to the activities prior to the acquisition dates. The Group may also deduct amounts of any potential losses arising from the loss of control on any of Teleforum’s outlets from the amount of contingent consideration. The financial statements reflect management’s estimate of the fair value of the contingent consideration at the acquisition date. Eurotel acquisition—In December 2009, MTS acquired a 100% stake in Eurotel OJSC (”Eurotel”), a Russian federal back bone network operator, from a third party. The consideration paid comprised $90 million. Under the terms of agreement the Group shall pay contigent consideration of up to $20 million by the end of February 2011 should Eurotel complete the construction of certain fibre optic lines and the Group retain control over the technical support agreements in relation to the optic cable lines. At the acquisition date the estimated fair value of this contingent consideration was $20 million. The acquisition was accounted for using the purchase method. The purchase price allocation for the acquisition has not been finalized as of the date of these financial statements, as the Group has not completed the valuation of individual assets of Eurotel. The preliminary purchase price allocation for the acquisition was as follows: Current assets Non-current assets Goodwill Current liabilities Non-current liabilities Fair value of contingent consideration Consideration paid $15,517 62,792 103,754 (70,960) (1,103) (20,000) $90,000
The excess of the purchase price over the value of net assets acquired and the fair value of contingent consideration was preliminary allocated to goodwill which was assigned to the “Russia Fixed” operating segment and is not deductible for income tax purposes. Goodwill is mainly attributable to the synergies from reduction of interconnect and internet traffic expenses of the Group. Comstar-UTS acquisition—In October 2009, MTS acquired a 50.91% stake in Comstar-UTS, a provider of fixed line communication services in Russia, Ukraine and Armenia, from Sistema. Consideration paid amounted to RUB 39.15 billion ($1.32 billion as of October 12, 2009) or RUB 184.02 ($6.21) per global depositary receipt (”GDR”). This acquisition has been accounted for as a common control transaction at carrying amount. The excess of consideration over the carrying value of net assets received has been recorded as a decrease in additional paid-in capital of the Group in the amount of $1.080 billion and as a decrease in retained earnings in the amount of $242.7 million (see also Note 2). Further, in December 2009, in a series of transactions, the Group acquired a 14.2% stake in the Moscow City Networks OJSC (”MGTS”) in exchange for 31,816,462 ordinary MTS shares (equal to RUB 7.17 billion based on the MICEX price on December 17, 2009, or RUB 225.4 per share, per the terms of the agreement with MGTS shareholder), representing 1.6% shares outstanding, previously held in treasury and $7.3 million in cash. The MGTS stake, represented by 2,462,687 ordinary shares and 11,135,428 preferred shares, were held by a wholly owned subsidiary of Comstar-UTS. Simultaneously, MTS received 46,232,000 shares, representing 11.06% of total shares outstanding, of Comstar-UTS from MGTS Finance S.A., a wholly owned subsidiary of MGTS. In addition, MTS paid Comstar-UTS a cash consideration of $8.3 million. The transaction was accounted for directly in equity. Kolorit acquisition—In September 2009, MTS acquired a 100% stake in Kolorit Dizayn Inc (”Kolorit”), a company providing outdoor advertising services in the territory of Uzbekistan, for $39.7 million in cash. The acquisition was accounted for using the purchase method of accounting. The summary of the purchase price allocation for the acquisition was as follows: Current assets Non-current assets Brand Goodwill
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$993 11,788 2,097 27,109
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Current liabilities Non-current liabilities Consideration paid
(2,098) (235) ($39,654)
Goodwill is mainly attributable to synergies from advertising cost optimization. Goodwill is not deductible for income tax purposes and was assigned to the “Uzbekistan Mobile” operating segment. Dagtelecom acquisition—In January 2009, Glaxen Corp. (”Glaxen”), the minority shareholder of Dagtelecom, exercised its put option over its 25.5% stake in the company. Consideration payable by the Group on the put option agreement comprised $51.3 million. Payment made by the Group was reduced by $12.5 million to offset the loan receivable from Glaxen at the date of acquisition. The transaction was accounted for directly in equity. Acquisitions of controlling interests in regional fixed line operators—In 2008, as a part of its program of regional expansion, Comstar-UTS has acquired controlling interests in certain alternative fixed-line operators in several regions of Russia. The acquisitions were accounted for using the purchase method of accounting. The following table summarizes the purchase price allocation of the fixed-line operators acquired as of the acquisition dates: Interlink Group Month of acquisition Ownership interest acquired Current assets Property, plant and equipment Goodwill Subscriber base Current liabilities Non-current liabilities Deferred tax liabilities Consideration paid (910) $8,428 June 100% $994 7,042 4,230 — (2,928) Strategia (Urals Telephone Company (“UTC”) July 100% $4,194 15,135 27,846 12,553 (6,280) (5,253) (4,710) $43,485 $5,188 22,177 32,076 12,553 (9,208) (5,253) (5,620) $51,913 Total
Recognition of goodwill in the amounts of $4.2 million and $27.8 million from the acquisition of Interlink Group and UTC, respectively, was due to the economic potential of the markets the acquired companies operate in. Goodwill was recognized in the “Russia Fixed” operating segment. The Group’s financial statements reflect the allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. Goodwill is not deductible for tax purposes. Subscriber base components are amortized over the periods ranging from 9 to 17 years, depending on the type of subscribers. Acquisition of Stream-TV—In December 2008, as part of its regional expansion, Comstar-UTS entered into an agreement with Sistema Mass Media (”SMM”), a subsidiary of Sistema, to acquire all of SMM’s interest in certain of its subsidiaries (collectively referred to as “Stream-TV”) for a total cash consideration of RUB 3,544.5 million ($117.2 million as of December 31, 2009), determined by an independent appraiser and payable in installments between December 2008 and March 2009, including RUB 980.0 million ($32.4 million as of December 31, 2009) payable to Stream-TV and RUB 2,564.5 million ($84.8 million as of December 31, 2009) payable to SMM. RUB 2,460.8 million ($81.4 million as of December 31, 2009) and RUB 103.3 million ($3.4 million as of December 31, 2009) of the consideration was paid to SMM during the years ended December 31, 2008 and 2009, respectively. In addition, in December 2008 Stream-TV paid $19.1 million in cash to SMM for the controlling interests in certain regional subsidiaries acquired by Stream-TV from SMM in 2007. In the first quarter of 2009, legal title to the business and full control of Stream-TV transferred to Comstar-UTS. This acquisition was accounted for by Comstar, and therefore the Group in a like manner, as a common control transaction. These financial statements reflect retrospective application of this acquisition in a manner similar to a pooling of interests. The transaction was accounted for directly in equity. MSS acquisition—In February 2008, MTS acquired an additional 9% stake in its Omsk subsidiary, Mobilnye Sistemy Svyazi (”MSS”), from a private investor for $16.0 million in cash. As a result of this transaction, the Group’s ownership in the subsidiary increased to 100%. The transaction was accounted for using the purchase method. The allocation of the purchase price increased the recorded license cost by $8.8 million and customer base cost by $3.2 million. License costs are amortized over the remaining contractual terms of the license of approximately 3 years and the customer base is amortized on a straight-line basis over the estimated average subscriber’s life of approximately 5 years. Acquisitions of controlling interests in regional fixed line operators—In 2007, as a part of its program of regional expansion, Comstar-UTS has acquired controlling interests in a
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number of alternative fixed-line operators in certain regions of Russia and Ukraine. The acquisitions were accounted for using the purchase method of accounting. The following table summarizes the purchase price allocation of the fixed-line operators acquired as of the acquisition dates: Sochi telecom service Month of acquisition Ownership interest acquired Current assets Property, plant and equipment Goodwill Subscriber base Trademark Current liabilities Non-current liabilities Noncontrolling interest Consideration paid August 100% $51 114 451 232 — (98) — — $750 Digital Telephone Networks— South November 100% $10,977 102,558 — 91,923 1,683 (6,873) (33,112) — $167,156 Regional Technical Centre December 88% $13,421 21,402 — 738 — (3,949) (3,377) (2,109) $26,126 Comstar Ukraine* May 25% $— — 543 — — — — 424 $967 $24,449 124,074 994 92,893 1,683 (10,920) (36,489) (1,685) $194,999 Total
* Acquisition of an additional 25% interest in the existing subsidiary, Comstar Ukraine, resulting in 100% ownership as of December 31, 2007. Goodwill is attributable to the economic potential of the markets the acquired companies operate in. Goodwill is not deductible for income tax purposes and was assigned to “Russia Fixed” operating segment. The Group’s financial statements reflect the allocation of the purchase price based on a fair value assessment of the assets acquired and liabilities assumed. Subscriber base components are amortized over the periods ranging from 13 to 24 years, depending on the type of subscribers. Bashcell acquisition—In December 2007, MTS acquired a 100% of Bashcell, the GSM-1800 mobile services provider in the Republic of Bashkortostan situated in Russia’s Volga region, for $6.7 million in cash. In connection to the purchase MTS assumed debt in the amount of $31.9 million due from Bashcell to its previous shareholder. This acquisition was accounted for using the purchase method of accounting. The purchase price allocation for the acquisition was as follows: Current assets Non-current assets Customer base cost Goodwill Current liabilities Non-current liabilities Deferred taxes Consideration paid $5,645 13,156 2,260 21,077 (7,737) (31,918) 4,209 $6,692
Goodwill is mainly attributable to the synergy expected as a result of the acquisition and was assigned to the “Russia Mobile” operating segment. The amount of goodwill is not deductible for income tax purposes. The customer base is amortized on a straight-line basis over the estimated average subscriber’s life of 5 years. K-Telecom acquisition—In September 2007, MTS acquired an 80% stake in International Cell Holding Ltd, 100% indirect owner of K-Telecom, Armenia’s wireless telecommunication operator. Along with acquisition, the Group entered into a call and put option agreement for the remaining 20% stake to be exercised not earlier than July 2010 and not later than July 2012. In accordance with put and call option agreement, the exercise price shall be fair value, as determined by an independent investment bank at the date the option is exercised subject to a cap of €200.0 million (equivalent of $286.9 million as of December 31, 2009). K-Telecom operates under the VivaCell brand in the GSM-900/1800 standard covering the entire territory of Armenia. The license is valid until the end of 2019. In accordance with sale and purchase agreement, MTS paid €260.0 million ($361.2 million as of the date of acquisition) for 80% of K-Telecom and €50.0 million ($69.0 million as of the date of acquisition) shall be paid out to the sellers in the course of three years from 2008 to 2010 provided certain agreed financial targets are met by K-Telecom. In conjunction with the
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acquisition, MTS extended a €140.0 million ($194.5 million as of date of acquisition) loan to K-Telecom for repayment of payables for equipment and other liabilities due as of the date of acquisition to PMF Telecommunications, an entity affiliated to the sellers. As a result, K-Telekom’s liabilities to the seller and its affiliates were settled. The loan is eliminated in consolidation and is not part of the purchase price. Finders and consultants fees paid in connection with the business combination and included in the purchase price were $26.7 million. This acquisition was accounted for using the purchase method of accounting. The purchase price allocation for the acquisition was as follows: Current assets Non-current assets License costs Customer base cost Trademark Goodwill Current liabilities Non-current liabilities Deferred tax liabilities Noncontrolling interest Consideration paid $31,805 198,984 217,354 76,754 2,555 120,579 (25,138) (149,841) (59,722) (10,772) $402,558
In accordance with the terms of the sale and purchase agreement, based on K-Telekom’s financial results for the year ended December 31, 2008, €20.0 million ($28.2 million as of December 31, 2008) was accounted for as the adjustment to purchase price and recognized as a liability in the accompanying consolidated statement of financial position as of December 31, 2008. And based on K-Telekom’s financial results for the year ended December 31, 2009, €5.0 million ($7.2 million as of December 31, 2009) was accounted for as the adjustment to purchase price and recognized as a liability in the accompanying consolidated statement of financial position as of December 31, 2009. Goodwill is mainly attributable to the economic potential of Armenia, given the low mobile penetration level of the market. Goodwill is not deductible for income tax purposes and was assigned to the “Armenia Mobile” operating segment. The customer base is amortized on a straight-line basis over the estimated average subscriber’s life of 46 months. Uzdunrobita acquisition—In June 2007, MTS purchased an additional 26% stake in Uzdunrobita, a mobile telecom operator in Uzbekistan, from a private investor for $250.0 million in cash. Previously MTS owned 74% of Uzdunrobita. As a result of this transaction, MTS’ ownership increased to 100%. The transaction was accounted for using the purchase method. Allocation of the purchase price increased the recorded license cost by $155.7 million, customer base cost by $6.5 million, and property plant and equipment cost by $5.4 million. Additionally, $35.0 million was recognized as goodwill. Goodwill is not deductible for income tax purposes and is mainly attributable to the economic potential of the markets where Uzdunrobita operates. Goodwill was assigned to the “Uzbekistan Mobile” operating segment. License costs are amortized over the remaining contractual terms of the licenses of approximately 9 years and the customer base is amortized over the estimated average subscriber’s life of 20 months. Acquisition of minority interest in Golden Line—In April 2007 Comstar-UTS acquired 100% shares in Golden Line from Comstar Direct, a 52% owned subsidiary of Comstar-UTS, thus increasing its effective shareholding in Golden Line to 100%. Golden Line was a provider of dedicated leased access lines in Moscow to corporate clients using its fiber optic network and MGTS’ switches. The acquisition has been accounted for as a common control transaction, at carrying amounts with excess of the book value of the net assets acquired over the purchase price, recorded as an increase in the additional paid-in capital of the Group in the amount of $2.8 million. Disposal of shares in Metrocom—In March 2007, Comstar-UTS sold its 45% stake in Metrocom, an affiliate, to a third party for a total cash consideration of $20.0 million, resulting in a gain of $3.2 million recognized as other income in the accompanying consolidated statement of operations for the year ended December 31, 2007. Reorganization of Comstar Direct—Prior to December 2008, Comstar Direct was owned 52% by Comstar-UTS and 48% by Sistema Mass Media (”SMM”), a subsidiary of Sistema. In December 2008, Comstar Direct was split into two legal entities: SMM-Finance which became a 100% subsidiary of SMM, and Comstar Direct which became a 100% subsidiary of Comstar-UTS. The effect of this transaction was the disposal of $26.8 million of net assets of Comstar Direct and the acquisition of the remaining 48% minority interest in Comstar Direct from SMM by Comstar-UTS. The transaction was accounted for at cost as a transaction between entities under common control. The excess of the net assets disposed of and the noncontrolling interest acquired was recorded in additional paid-in capital.
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Summary of the assets and liabilities disposed of by Comstar-UTS and the acquisition of the remaining 48% minority interest in Comstar Direct is as follows: Cash and short-term investments and loans Inventory and other current assets Trade and other accounts receivable Long-term investments and loans Trade accounts payable Total assets and liabilities disposed, net Noncontrolling interest acquired Excess of the net assets disposed of and minority interest acquired $5,029 6,168 22,379 7,508 (14,264) 26,820 (15,813) $11,007
Pro forma results of operations (unaudited)—The following unaudited pro forma financial data for the years ended December 31, 2009 and 2008, gives effect to the acquisitions of Eurotel, Teleforum, Kolorit, Eldorado and Telefon.ru, as though these business combinations had been completed at the beginning of 2008. 2009 Pro forma: Net revenues Net operating income Net income $9,908,584 2,547,218 980,553 $12,729,516 3,644,378 1,964,364 2008
The pro forma information is based on various assumptions and estimates. The pro forma information is not necessarily indicative of the operating results that would have occurred if the Group acquisitions had been consummated as of January 1, 2008, nor is it necessarily indicative of future operating results. The pro forma information does not give effect to any potential revenue enhancements or cost synergies or other operating efficiencies that could result from the acquisitions. The actual results of operations of these companies are included in the consolidated financial statements of the Group only from the respective dates of acquisition.
Page 40 - Note 4: Cash and Cash Equivalents (http://annualreview2009.mtsgsm.com/financial_statements/notes/4_cash_cash_equivalents/)
Note 4: Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2009 and 2008 comprised the following: December 31, 2009 Ruble current accounts Ruble deposit accounts U.S. Dollar current accounts U.S. Dollar deposit accounts Euro current accounts Euro deposit accounts Hryvna current accounts Hryvna deposit accounts Uzbek som current accounts Uzbek som deposit accounts
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2008 571,424 1,059,105 217,586 12,000 602,825 4,161 1,260 2,768 26,922 140,045 142,272 108,935 35 5,940 423,150 1,462 1,948 229,904
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662 Turkmenian manat current accounts Armenian dram current accounts Armenian dram deposit accounts Other Total cash and cash equivalents 21,020 2,683 — 415 2,522,831
57,430 1,496 — 4,162 4,890 1,121,669
Page 41 - Note 5: Short-term Investments (http://annualreview2009.mtsgsm.com/financial_statements/notes/5_shortterm_investments/)
Note 5: Short-term Investments
Short-term investments as of December 31, 2009 comprised the following: Type of investment Promissory notes Funds in trust management Deposit Loan Agreement Deposit Deposit Deposit Deposit Other Total Contractor Sberbank (Note 17) Gazprombank VTB TS-Retail (Note 25) VTB UniBank Converse Bank AreximBank Annual interest rate 6.0% 9.0% 8.8% 13.0% 8.5% 7.0%-9.0% 8.0%–8.5% 9.0% Maturity date March – June 2010 October 2010 March 2010 August 2010 March 2010 January – June 2010 January – July 2010 January 2010 Amount $143,300 20,077 16,532 12,421 9,919 7,666 1,600 1,000 4,695 $217,210
Short-term investments as of December 31, 2008 comprised the following: Type of investment Deposit Deposit Promissory notes Promissory notes Promissory notes Funds in trust management Loan agreement Funds transferred to the investment broker Loan agreement Other Total
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Contractor MBRD (Note 25) MBRD (Note 25) Alt (Note 25) Delfa (Note 25) Finexcort (Note 25) MBRD (Note 25) Sistema-Hals (Note 25) IFC Metropol Sky Link and subsidiaries (Note 25)
Annual interest rate 10.3% 7.5% 18.0% 18.0% 16.5% 16.0% 11.0% 0.0% 11.0%
Maturity Date July 2009 June 2009 January 2009 January 2009 January 2009 March 2009 December 2009 March 2009 Various
Amount $30,000 15,000 85,091 68,073 68,073 45,949 16,688 11,981 10,522 8,740 $360,117
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Beta Link—During the year ended December 31, 2008 the Group granted a short-term loan in the amount of $28.2 million to Beta Link with a maturity date of December 2, 2009 and related interest of 9.0%. The Group had 49.0% of shares of Beta Link assigned as collateral pursuant to the loan agreement. As of December 31, 2008, the Group’s management became aware of the deteriorated financial position of Beta Link. Further, in March 2009, Beta Link filed a bankruptcy petition to the Arbitration Court of Moscow. The Group’s management believes that a probable risk exists that such loan may not be recovered. Accordingly, an allowance for the entire loan amount was recorded in the provision for doubtful accounts in the accompanying statement of operations for the year ended December 31, 2008.
Page 42 - Note 6: Trade Receivables, Net (http://annualreview2009.mtsgsm.com/financial_statements/notes/6_trade_receivables_net/)
Note 6: Trade Receivables, Net
Trade receivables as of December 31, 2009 and 2008 comprised the following: December 31, 2009 Subscribers Interconnect Dealers Roaming Other Allowance for doubtful accounts Trade receivables, net 323,135 108,376 61,827 159,119 37,982 (97,337) 593,102 2008 239,782 105,430 86,821 33,958 46,247 (69,054) 443,184
The following table summarizes the changes in the allowance for doubtful accounts receivable for the years ended December 31, 2009, 2008 and 2007: 2009 Balance, beginning of the year Provision for doubtful accounts Accounts receivable written off Currency translation adjustment Balance, end of the year 69,054 104,125 (75,280) (562) 97,337 2008 69,716 97,459 (84,363) (13,758) 69,054 2007 67,708 63,966 (66,096) 4,138 69,716
Page 43 - Note 7: Inventory and Spare Parts (http://annualreview2009.mtsgsm.com/financial_statements/notes/7_inventory_spare_parts/)
Note 7: Inventory and Spare Parts
Inventory and spare parts as of December 31, 2009 and 2008, comprised the following: December 31, 2009 Spare parts for telecommunication equipment SIM cards and prepaid phone cards
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2008 $26,928 23,821 $69,008 24,026
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Equipment for resale Advertising materials Other materials Total inventory and spare parts
164,974 2,195 20,775 $238,693
36,694 2,966 8,419 $141,113
Obsolescence expense for the years ended December 31, 2009, 2008 and 2007, amounted to $4.1 million, $3.9 million and $4.9 million, respectively, and was included in general and administrative expenses in the accompanying consolidated statements of operations.
Page 44 - Note 8: Property, Plant and Equipment (http://annualreview2009.mtsgsm.com/financial_statements/notes/8_property_plant_equipment/)
Note 8: Property, Plant and Equipment
The net book value of property, plant and equipment as of December 31, 2009 and 2008, was as follows: December 31, 2009 Network, base station equipment and related leasehold improvements Office equipment, computers and other Buildings and related leasehold improvements Vehicles Property, plant and equipment, at cost Accumulated depreciation Construction in progress and equipment for installation Property, plant and equipment, net $9,391,656 1,047,753 890,913 54,105 11,384,427 (5,095,168) 1,456,072 $7,745,331 2008 $8,080,872 881,580 802,655 54,855 9,819,962 (4,038,053) 1,976,311 $7,758,220
Depreciation expenses during the years ended December 31, 2009, 2008 and 2007, amounted to $1,387.0 million, $1,537.1 million and $1,145.7 million, respectively.
Page 45 - Note 9: Capital Lease Obligations (http://annualreview2009.mtsgsm.com/financial_statements/notes/9_capital_lease_obligations/)
Note 9: Capital Lease Obligations
MGTS entered into several agreements for the lease of telecommunication equipment with InvestSvyazHolding, a subsidiary of Sistema. The agreements expire on various dates in 20082010 and provide for transfer of ownership of the equipment to the Group after the last lease payment is made. The interest rate implicit in the leases varies from 10% to 14%. Respective obligations are denominated in Euro. In addition to the agreements with InvestSvyazHolding, the Group has certain other leasing agreements with third parties; assets capitalized under these agreements and respective liabilities are not material. The following is a summary of leased assets and respective depreciation as of December 31, 2009 and 2008: 2009 Telecommunications equipment Vehicles Buildings
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2008 $68,547 9,995 171 $70,563 12,114 171
Print manager | MTS
Improvement Leased assets, at cost Accumulated depreciation Leased assets, net
1,096 $79,809 (36,380) $43,429
— $82,848 (28,377) $54,471
Depreciation of the assets recorded under capital leases is included in depreciation and amortization in the accompanying consolidated statements of operations. Interest expense accrued on capital lease obligations for the years ended December 31, 2009, 2008 and 2007 amounted to $1.5 million, $2.0 and $3.3 million, respectively. The following table presents future minimum lease payments under capital leases together with the present value of the net minimum lease payments: Payments due in the period ended December 31, 2010 2011 2012 2013 2014 After 2014 Total minimum lease payments (undiscounted) Less amount representing interest Present value of net minimum lease payments Less current portion of lease obligations Non-current portion of lease obligations $3,598 1,066 173 172 172 241 5,422 (1,328) 4,094 (3,173) $921
Page 46 - Note 10: Licenses (http://annualreview2009.mtsgsm.com/financial_statements/notes/10_licenses/)
Note 10: Licenses
In connection with providing telecommunication services, the Group has been issued various GSM operating licenses by the Russian Ministry of Information Technologies and Communications. In addition to the licenses received directly from the Russian Ministry of Information Technologies and Communications, the Group has been granted access to various telecommunication licenses through acquisitions. In foreign subsidiaries, the licenses are granted by the local communication authorities. As of December 31, 2009 and 2008, the recorded values of the Group’s telecommunication licenses were as follows: December 31, 2009 Russia Uzbekistan Armenia Ukraine Turkmenistan Licenses, at cost Accumulated amortization Licenses, net
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2008 $264,387 196,517 196,193 49,046 — 706,143 (341,421) $275,883 196,517 241,710 50,642 18,685 783,437 (295,056)
Print manager | MTS
$364,722 Amortization expense for the years ended December 31, 2009, 2008 and 2007, amounted to $78.7 million, $154.7 million and $200.5 million, respectively.
$488,381
As of December 31, 2009, operating license related to Turkmenistan was fully amortized and its respective cost and accumulated amortization was written off from the consolidated statement of financial position. Based on the cost of amortizable operating licenses existing at December 31, 2009, the estimated future amortization expenses are $70.2 million during 2010, $51.3 million during 2011, $35.2 million during 2012, $30.6 million during 2013, $29.8 million during 2014 and $147.6 million thereafter. The actual amortization expense reported in future periods could differ from these estimates as a result of new intangible assets acquisitions, changes in useful lives and other relevant factors. Operating licenses contain a number of requirements and conditions specified by legislation. The requirements generally include the targets for start date of service, territorial coverage and expiration date. Management believes that the Group is in compliance with all material terms of its licenses. Licenses that expired during the year ended December 31, 2009 and 2008 were renewed, however their carrying value in accompanying consolidated statements of financial position is immaterial due to low cost of renewal. Management does not presently assume renewals in its determination of the useful lives of its licenses as the Group has limited experience with renewal of licenses.
Page 47 - Note 11: Goodwill (http://annualreview2009.mtsgsm.com/financial_statements/notes/11_goodwill/)
Note 11: Goodwill
The change in the net carrying amount of goodwill for 2009 and 2008 by reportable segments was as follows: Russia Mobile Balance at January 1, 2008 Acquisitions (Note 3) Impairment Currency translation adjustment Balance at December 31, 2008 Acquisitions (Note 3) Finalization of purchase accounting Currency translation adjustment Balance at December 31, 2009 $134,818 16,366 — (23,873) 127,311 189,842 — (3,636) $313,517 Ukraine Mobile $8,000 — — (2,492) 5,508 — — (197) $5,311 Russia Fixed $163,099 3,550 (49,891) (25,269) 91,489 104,439 41,835 (1,397) $236,366 Other $216,632 29,222 — (691) 245,163 34,283 — (30,867) $248,579 Total $522,549 49,138 (49,891) (52,325) 469,471 328,564 41,835 (36,097) $803,773
Based on goodwill impairment testing, as of December 31, 2008 the Group recorded an impairment loss of $49.9 million included in other operating expenses in the accompanying statement of operations for the year ended December 31, 2008 and related to the acquisition of United Cable Networks by Sistema Mass Media in 2006. United Cable Networks were acquired by the Group in 2009 as part of acquisition of Stream-TV (see Note 3). The impairment loss was primarily caused by changes in management forecasts with respect to regional markets and increase in weighted average cost of capital due to the economic crisis. The fair value of the reporting units was measured using a combination of present value techniques, the Gordon model and earnings multiples. As of December 31, 2009 no impairment of goodwill allocated to “Russia Fixed” reportable segment was recognized based on the goodwill impairment test. The fair value of the reporting unit was measured using a combination of present value techniques, the Gordon model and earnings multiples involving the assumptions that are based upon what management believes a hypothetical marketplace participant would use in estimating fair value on the measurement date. The most significant of these assumptions are as follows: (i) cost of capital was estimated at 14% based on internally calculated weighted average cost of capital and cost of capital estimated for Comstar-UTS by major market analysts; (ii) growth rate into perpetuity reflects the level of economic growth from the last forecasted period into perpetuity and reflects the long-term expectations for inflation. Management estimates these rates based on observable market data;
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Print manager | MTS
(iii) operating expenses are forecasted with reference to the historic absolute and relative levels of expenses the Group has incurred in generating revenue in each reporting unit, operating strategies, specific forecasted operating expenses to be incurred and expectations on what these expenses would be like for an average market participant. Estimates of the forecasted operating expenses are developed from a number of internal and external sources, in combination with a process of on-going consultation with operational management; and (iv) forecasted capital expenditures, both recurring expenditure to replace retired assets and investments in new projects, are forecasted based on current strategies and specific forecast expenditures to be incurred, as well as expectations on what these costs would be like for an average market participant. Estimates of the forecasted capital expenditures are developed from a number of internal and external sources, in combination with a process of on-going consultation with operational management.
Page 48 - Note 12: Other Intangible Assets (http://annualreview2009.mtsgsm.com/financial_statements/notes/12_other_intangible_assets/)
Note 12: Other Intangible Assets
Intangible assets as of December 31, 2009 and 2008 comprised the following: December 31, 2009 Gross carrying value Net carrying value Gross carrying value December 31, 2008 Net carrying value
Useful lives, months Amortized intangible assets Billing and telecommunication software Acquired customer base Rights to use radio frequencies Accounting software Numbering capacity with finite contractual life Office software Other Unamortized intangible assets Numbering capacity with indefinite contractual life Total other intangible assets 13 to 240 20 to 240 24 to 180 13 to 60 24 to 120 13 to 60 36 to 600
Accumulated amortization
Accumulated amortization
$1,461,834 221,536 239,475 134,292 90,266 71,997 77,616 2,297,016
$(896,243) (74,320) (75,762) (79,480) (80,822) (41,110) (29,680) (1,277,417)
$565,591 147,216 163,713 54,812 9,444 30,887 47,936 1,019,599
$1,293,005 381,054 205,923 94,026 89,273 57,833 40,648 2,161,762
$(710,988) (63,823) (48,622) (41,140) (76,727) (20,366) (9,440) (971,106)
$582,017 317,231 157,301 52,886 12,546 37,467 31,208 1,190,656
47,737 $2,344,753
— $(1,277,417)
47,737 $1,067,336
39,987 $2,201,749
— $(971,106)
39,987 $1,230,643
As a result of the limited availability of local telephone numbering capacity in Moscow and the Moscow region, MTS has been required to enter into agreements for the use of telephone numbering capacity with several telecommunication operators in Moscow. The costs of acquired numbering capacity with a finite contractual life are amortized over a period of two to ten years in accordance with the terms of the contracts to acquire such capacity. Numbering capacity with an indefinite contractual life is not amortized. Amortization expense for the years ended December 31, 2009, 2008 and 2007 amounted to $373.9 million, $459.3 million and $328.7 million, respectively. Based on the amortizable intangible assets existing at December 31, 2009, the estimated amortization expense is $370.0 million for 2010, $248.5 million for 2011, $149.4 million for 2012, $85.0 million for 2013, $36.4 million for 2014 and $130.3 million thereafter. The actual amortization expense reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives and other relevant factors.
Page 49 - Note 13: Investments in and Advances to Associates (http://annualreview2009.mtsgsm.com/financial_statements/notes/13_investments_advances_to_associates/)
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Print manager | MTS
Note 13: Investments in and Advances to Associates
As of December 31, 2009 and 2008, the Group’s investments in and advances to associates comprised the following: December 31, 2009 MTS Belarus—equity investment MTS Belarus—loans receivable Coral/Sistema Strategic Fund—equity investment Receivables from other investee companies Total investments in and advances to associates $220,350 100 — — $220,450 2008 $237,427 2,050 10,041 369 $249,887
MTS Belarus—In April 2008 the Group entered into a credit facility agreement with MTS Belarus valid till March 15, 2009. The facility allowed MTS Belarus borrowing up to $33.0 million and bears an interest of 10.0%. In 2009 the maturity date was extended to March 15, 2010 and the total allowable amount was increased to $46.0 million. As of December 31, 2009, the balance outstanding under the facility was $0.1 million. After the statement of financial position date the agreement with MTS Belarus was prolonged till March 15, 2011. The financial position and results of operations of MTS Belarus as of and for the year ended December 31, 2009 were as follows: (unaudited) Total assets Total liabilities Net income $498,278 56,736 143,061
Coral/Sistema Strategic Fund—In the years ended December 31, 2007 and 2008, the Group purchased an equity interests in a limited partnership organized by Sistema. The purpose of the strategic fund was to invest in various projects in the telecommunications and high-technology area. The Group exercised significant influence over Coral and therefore the investment was accounted for using equity method. As of December 31, 2009 the management of the Group determined that the investment was fully impaired, consequently the carrying value of the investment was written off in the amount of $7.4 million and recorded in equity in net income/loss of associates in the accompanying consolidated statement of operations for the year then ended. As of December 31, 2009 the Group did not have any further commitment to invest in Coral according to the restructuring agreement which was signed by the partners of the fund in September 2009. TS-Retail—As discussed in Note 25, in the year ended December 31, 2007 the Group invested in TS-Retail, an equity investee, $5.6 million. As of December 31, 2007 the investment was written off to $nil. The Group’s share in the earnings or losses of associates was included in other income in the accompanying consolidated statements of operations. For the years ended December 31, 2009, 2008 and 2007, this share amounted to $60.3 million, $75.7 million and $71.1 million, respectively.
Page 50 - Note 14: Investment in Shares of Svyazinvest (http://annualreview2009.mtsgsm.com/financial_statements/notes/14_investment_shares_svyazinvest/)
Note 14: Investment in Shares of Svyazinvest
In December 2006, as a part of its program of regional expansion, Comstar-UTS acquired a 25% stake plus one share in Telecommunication Investment Joint Stock Company (”Svyazinvest”) from Mustcom Limited for a total consideration of approximately $1,390.0 million, including cash of $1,300.0 million and the fair value of the call and put option of $90.0 million. Comstar-UTS and MGTS Finance S.A., a subsidiary of MGTS, have acquired 4,879,584,306 ordinary shares of Svyazinvest, with Comstar-UTS buying 3,378,173,750 shares, which represent 17.3% of total outstanding shares of Svyazinvest, and MGTS Finance S.A. buying 1,501,410,556 shares, representing 7.7% of total outstanding shares of Svyazinvest. Svyazinvest is a holding company that holds controlling stakes in seven publicly traded fixed-line operators (”MRKs”) based in seven federal districts of Russia. Based on the analysis of all relevant factors, the management determined that the acquisition of 25% plus one share of Svyazinvest does not allow the Group to exercise significant influence over this entity due to its legal structure and certain limitations imposed by Svyazinvest charter documents. Accordingly, the Group accounts for its investment in Svyazinvest under the cost
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Print manager | MTS
method. In November 2009, the Group, Sistema and Svyazinvest (”the Parties”) signed a non-binding memorandum of understanding (”MOU”), under which the Parties agreed to enter in the series of transactions which would ultimately result in (i) disposal of the Group’s investment in Svyazinvest to a state controlled enterprise; (ii) noncash extinguishment of the Group’s indebtedness to Sberbank (see Note 17); (iii) increase in Sistema’s ownership in Sky Link Group (currently a 50% affiliate of Sistema, see also Note 25) to 100% and disposal of this investment to a state controlled enterprise; and (iv) disposal of 28% of MGTS’ common stock owned by Svyazinvest to Sistema. In addition, certain cash consideration, the amount of which is yet to be negotiated between the parties, is to be paid to Svyazinvest under the MOU. The 28% stake in MGTS is then intended to be transferred to the Group. Based on the estimated fair values of the elements of the assets to be exchanged and liabilities to be extinguished under the MOU and other relevant factors, management believes that as of December 31, 2009 there were indicators of potential impairment of the Group’s investment in Svyazinvest. Svyazinvest is a non-public entity and the Group has no access to consolidated financial information of Svyazinvest at a level of detail necessary to perform a complete fair value assessment of the Svyazinvest business directly, based on estimated future cash flows or otherwise. As a result, management has determined that the best estimate of the fair value of the Group’s investment in Svyazinvest is the amount determined based on the MOU. Based on the MOU, the estimated fair value of the investment, which included significant unobservable inputs (Level 3 measurement), is approximately RUB 26.0 billion ($859.7 million as of December 31, 2009). The following table represents carrying value of investment in Svyazinvest as of December 31, 2009 and 2008: Balance at December 31,2008 Impairment loss Currency translation adjustment Balance at December 31,2009 $1,240,977 (349,370) (31,938) $859,669
At the date of these consolidated financial statements, the Group did not have a legally binding commitment to enter into the transaction contemplated by the MOU and there is an uncertainty as to the ability of the Group to complete the transaction in a near future. Further, due to material uncertainties inherent in the valuation of Svyazinvest, the result could be materially different from the valuation performed by another party or using information which management of the Group does not have the ability to access, or from the amount the Group would be able to realize in an exchange transaction involving the investment in Svyazinvest.
Page 51 - Note 15: Other Investments (http://annualreview2009.mtsgsm.com/financial_statements/notes/15_other_investments/)
Note 15: Other Investments
As of December 31, 2009 and 2008, the Group’s other investments comprised of the following: Annual interest rate Loans receivable from TS-Retail (Note 25) Investment in Tammaron Ltd Promissory notes of Sistema Telecom (Note 25) Investments in ordinary shares (Note 25) Loan receivable from Intellect Telecom (Note 25) Promissory notes of Sistema (Note 25) Other Total other investments 11.0-15.0% — 3.0-4.4% — 7.0-11.0% 0.0% Maturity Date August 2011 on demand various in 2009 — July-August 2012 2017 December 31, 2009 30,192 — — 11,724 12,808 20,449 3,720 78,893 December 31, 2008 11,156 21,230 51,966 12,091 11,717 — 3,399 111,559
During the year ended December 31, 2008, the Group deposited in Tammaron Ltd., a company incorporated under the laws of the British Virgin Islands, an amount of $21.2 million for the a potential business acquisition. During 2009 based on the analysis of the current Russian and global financial markets situation management believes that a significant uncertainty exists with regard to the completion of such transaction and accordingly a reserve for the entire amount has been provided by the Group as an impairment of investments in the Group’s consolidated statement of operations for the year ended December 31, 2009.
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Page 52 - Note 16: Restricted Cash (http://annualreview2009.mtsgsm.com/financial_statements/notes/16_restricted_cash/)
Note 16: Restricted Cash
Restricted cash of $6.4 million and $23.6 million, as of December 31, 2009 and 2008, respectively, consists of cash deposited by Uzdunrobita in a special bank account which was created to be in compliance with the government regulation for local currency conversion into foreign currencies. The cash deposited will be converted from Uzbek Som into U.S. Dollars and used for settlements with suppliers of equipment and software.
Page 53 - Note 17: Borrowings (http://annualreview2009.mtsgsm.com/financial_statements/notes/17_borrowings/)
Note 17: Borrowings
Notes—As of December 31, 2009 and 2008, the Group’s notes consisted of the following: Currency MTS OJSC Notes due 2016 MTS OJSC Notes due 2014 MTS Finance Notes due 2012 MTS Finance Notes due 2010 MTS OJSC Notes due 2018 MTS OJSC Notes due 2015 MTS OJSC Notes due 2013 MGTS Notes due 2010 MGTS Notes due 2009 Less: unamortized discount Total notes Less: current portion Total notes, long-term RUB RUB USD USD RUB RUB RUB RUB RUB Interest rate 14.25% 16.75% 8.00% 8.38% 8.70% 14.01% 14.01% 16.00% 7.10% 2009 $495,963 495,963 400,000 400,000 323,698 248,213 247,981 402 $— (2,587) $2,609,633 (1,218,084) $1,391,549 2008 $— $— 400,000 400,000 268,544 255,272 255,272 5,202 5,233 (548) $1,588,975 (10,435) $1,578,540
The Group has an unconditional obligation to repurchase MTS OJSC Notes at par value if claimed by the noteholders subsequent to the announcement of the sequential coupon. The dates of the announcement for each particular note issue are as follows: MTS MTS MTS MTS MTS OJSC OJSC OJSC OJSC OJSC Notes Notes Notes Notes Notes due due due due due 2013 2014 2015 2016 2018 April May April June June 2010 2011 2010 2012 2010
The notes therefore can be defined as callable obligations under the FASB authoritative guidance on debt, as the holders have the unilateral right to demand repurchase of the notes at par value upon announcement of new coupons. The FASB authoritative guidance on debt requires callable obligations to be disclosed as maturing in the reporting period, when the demand for repurchase could be submitted disregarding the expectations of the Group about the intentions of the noteholders. The Group discloses the notes as maturing in 2010 (MTS OJSC Notes due
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2013, 2015, 2018), in 2011 (MTS OJSC Notes due 2015) and in 2012 (MTS OJSC Notes due 2016) in the aggregated maturities schedule as these are the reporting periods when the noteholders will first have the unilateral right to demand repurchase. The fair values of notes based on the market quotes as of December 31, 2009 at the stock exchanges where they are traded were as follows: Stock exchange MTS OJSC Notes due 2016 MTS OJSC Notes due 2014 MTS Finance Notes due 2012 MTS Finance Notes due 2010 MTS OJSC Notes due 2018 MTS OJSC Notes due 2015 MTS OJSC Notes due 2013 MGTS Notes due 2010 Total notes, long-term MICEX MICEX Luxembourg stock exchange Luxembourg stock exchange MICEX MICEX MICEX MICEX % of par 110.1 108.3 104.6 103.3 99.9 101.7 102.0 98.4 Fair value $546,055 537,127 418,400 413,200 323,375 252,432 252,941 396 $2,743,926
Subject to certain exceptions and qualifications, the indentures governing MTS Finance Notes contain covenants limiting the Group’s ability to incur debt, create liens, sell or transfer lease properties, enter into loan transactions with affiliates, merge or consolidate with another person or convey its properties and assets to another person, and sell or transfer any of its GSM licenses for the Moscow, St. Petersburg, Krasnodar and Ukraine license areas. In addition, if the Group experiences certain types of mergers, consolidations or other changes in control, noteholders will have the right to require the Group to redeem the notes at 101% of their principal amount, plus accrued interest. The notes also have cross default provisions with publicly traded debt issued by Sistema, the shareholder of the Group. The Group is also required to take all commercially reasonable steps necessary to maintain a rating of the notes from Moody’s or Standard & Poor’s. If the Group fails to meet these covenants, after certain notice and cure periods, the noteholders can accelerate the debt to be immediately due and payable. The indenture governing MTS OJSC Notes contains certain covenants which limit the Group’s ability to delist the notes from the quotation lists and delay the coupon payments. Management believes that the Group is in compliance with all restrictive note covenants as of December 31, 2009. Bank loans—As of December 31, 2009 and 2008, the Group’s loans from banks and financial institutions consisted of the following: December 31, Maturity USD-denominated: Syndicated Loan Facility granted to MTS OJSC in 2006 Syndicated Loan Facility granted to MTS OJSC in 2009 Skandinavska Enskilda Banken AB EBRD HSBC Bank plc and ING BHF Bank AG Citibank International plc and ING Bank N.V. HSBC Bank plc, ING Bank and Bayerische Landesbank Commerzbank AG, ING Bank AG and HSBC Bank plc Barclays ABN AMRO Bank N.V. Promissory note Access Telecommunications Cooperatief U.A. Other 2010–2011 2011–2012 2010–2017 2010–2014 2010–2014 2010–2013 2010–2015 2010–2014 2010–2014 2010–2013 2009 2010–2013 LIBOR+1.15% (1.58%) LIBOR+6.5% (6.93%) LIBOR+0.23%–1.8% (0.66%–2.23%) LIBOR+1.51%–3.1% (1.94%–3.53%) LIBOR+0.3% (0.73%) LIBOR+0.43% (0.86%) LIBOR+0.3% (0.73%) LIBOR+0.3% (0.73%) LIBOR+0.13%–0.15% (0.56%–0.58%) LIBOR+0.35% (0.78%) — various $323,077 360,000 279,519 150,000 90,985 84,560 76,180 66,557 59,203 25,149 — 21,694 $1,536,924 $1,168,462 — 159,047 183,333 110,727 106,358 92,789 81,348 72,360 31,436 263,552 17,938 $2,287,350 Annual interest rate (actual rate at December 31, 2008) 2009 2008
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Print manager | MTS
EUR-denominated: Syndicated Loan Facility granted to MTS OJSC in 2009 EBRD European Investment Bank Gasprombank Nordic Investment Bank ABN AMRO Bank N.V. Other RUB-denominated: Sberbank Sberbank Sberbank Gasprombank Other Debt-related parties Total bank loans Less: current portion Total bank loans, long-term 2010–2012 2012–2013 2011 2012 2010–2012 2010–2056 13.35% 11.75% Refinancing rate of the Central Bank of Russia+2.25% (11.0%) 13.0% various various various 859,669 1,554,017 396,770 213,600 25,241 $3,049,297 26,207 $26,207 $5,715,789 (780,514) $4,935,275 884,944 — — — 35,966 $920,910 94,776 $94,776 $3,767,017 (1,677,529) $2,089,488 2011–2012 2010–2016 2010–2016 2011 2010–2016 2010–2013 2010–2012 EURIBOR+6.5% (7.49%) EURIBOR+6.5%–6.9% (7.49%–7.89%) EURIBOR+6.4% (7.39%) 8.0% EURIBOR+6.5%–6.9% (7.49%–7.89%) EURIBOR+0.35% (1.34%) various 341,580 312,743 164,979 143,460 114,768 19,859 5,972 $1,103,361 — — — 423,150 — 24,406 16,425 $463,981
Interest rate of Sberbank loan maturing in 2012-2013 is set as 11.75% till March 27, 2010. For the subsequent periods (quarters) the rate is determined as a total of base rate (11.75%), rate A and rate B. Rate A and B depend on the average daily bank account balance for the period maintained by MTS OJSC and RTC with Sberbank. In case the balance maintained by MTS OJSC and RTC is below RUB 1.0 billion and RUB 0.5 billion, respectively, rates A and B are set at 0.5% each. No extra interest is charged if the average daily bank account balance maintained is equal or above RUB 1.0 billion for MTS OJSC and RUB 0.5 billion for RTC. The loans of the Group are subject to certain restrictive covenants, including, but not limited to, certain financial ratios, limitations on dispositions of assets and limitations on transactions with associates, requirements to maintain ownership in certain subsidiaries. Management believes that as of December 31, 2009 the Group is in compliance with all existing bank loan covenants. Pledges—The loan facility of RUB 26 billion (equivalent of $859.7 million as of December 31, 2009) from Sberbank granted to Comstar-UTS is secured by pledge of a 25.0% plus one share stake in Svyazinvest and two RUB-denominated promissory notes of Sberbank purchased by Comstar-UTS in the total amount of RUB 4,334 million ($143.3 million as of December 31, 2009). The loan facility of RUB 25 billion (equivalent of $826.6 million as of December 31, 2009) from Sberbank granted to MTS OJSC is sequred by the pledge of 50.18% stake in Comstar-UTS as well as equipment with a net book value of RUB 30 billion as of December 31, 2009 (equivalent of $991.9 million as of reporting date), with assigned pledge value of RUB 21 billion (equivalent of $694.3 million as of reporting date). The equipment with the fair value of approximately RUB 421.8 million ($13.9 million as of December 31, 2009) acquired by Comstar-UTS under the vendor financing agreement with Cisco Capital is pledged as collateral against the outstanding liability of RUB 408.8 million ($13.5 million as of December 31, 2009). The vendor financing agreement between K-Telecom and Intracom, a related party, with total outstanding amount as of December 31, 2009 of $23.2 million is secured by the telecommunication equipment and other assets supplied under the agreement with carrying value of $17.1 million. Available credit facilities—As of December 31, 2009, the Group’s total available credit facilities amounted to $1,666 million and related to the following credit lines: Maturity Interest rate Commitment fees Available till Available amount (USD equivalent)
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Print manager | MTS
Calyon, ING Bank N.V. and Nordea Bank AB Bank of China (BNP Paribas) Export Development Canada (EDC) Gazprombank Landesbank Baden Wuerttemberg Gazprombank Total available credit facilities
2019/2020 2016 2012 2012 2016 2012
LIBOR +1.15% EURIBOR+1.95% LIBOR +4.5% 8.0% EURIBOR+0.75% 13.0%
0.40% 0.60% 1.50% 0.75% 0.45% 0.00%
August 2011/December 2012 December 2011 December 2010 January 2012 March 2010 March 2010
$1,073,371 212,500 165,000 143,460 53,590 17,849 $1,665,770
The following table presents the aggregated scheduled maturities of the notes and bank loans principal outstanding as of December 31, 2009: Notes Payments due in the year ended December 31, 2010 2011 2012 2013 2014 Thereafter Total $1,218,084 495,963 895,586 — $— — $2,609,633 $780,514 1,872,512 1,834,103 893,030 149,222 186,408 $5,715,789 Bank loans
On February 24, 2010, subsequent to the statement of financial position date, the Group repaid the full amount due under the Syndicated Loan Facility granted to MTS OJSC in 2009 with an original maturity in 2011-2012. In the maturity schedule presented above, the principal outstanding as of December 31, 2009 under this facility and totaling $701.6 million is included in payments due in the years ended December 31, 2011 and 2012 in the amounts of $467.7 million and $233.9 million, respectively, in accordance with their original maturity.
Page 54 - Note 18: Asset Retirement Obligations (http://annualreview2009.mtsgsm.com/financial_statements/notes/18_asset_retirement_obligations/)
Note 18: Asset Retirement Obligations
As of December 31, 2009 and 2008, the estimated present value of the Group’s asset retirement obligations and change in liabilities were as follows: 2009 Balance, beginning of the year Liabilities incurred in the current period Accretion expense Revisions in estimated cash flows Currency translation adjustment Balance, end of the year Revisions in estimated cash flows are attributable to the change in the estimated future useful life of the assets. $62,053 3,923 6,518 17,693 (1,504) $88,683 2008 $59,527 3,840 6,026 3,383 (10,723) $62,053
Page 55 - Note 19: Deferred Connection Fees (http://annualreview2009.mtsgsm.com/financial_statements/notes/19_deferred_connection_fees/)
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Print manager | MTS
Note 19: Deferred Connection Fees
Deferred connection fees for the years ended December 31, 2009 and 2008, were as follows: 2009 Balance, at the beginning of the year Payments received and deferred during the year Amounts amortized and recognized as revenue during the year Currency translation adjustment Balance, end of the year Less: current portion Non-current portion $174,225 60,590 (67,057) (4,660) 163,098 (46,930) $116,168 2008 $216,511 89,195 (95,080) (36,401) 174,225 (55,012) $119,213
MTS defers initial connection fees paid by subscribers for the activation of network service as well as one time activation fees received for connection to various value added services. These fees are recognized as revenue over the estimated average subscriber life (Note 2).
Page 56 - Note 20: Property, Plant and Equipment Contributions (http://annualreview2009.mtsgsm.com/financial_statements/notes/20_property_plant_equipment/)
Note 20: Property, Plant and Equipment Contributions
MGTS receives telecommunication infrastructure which is intended to operate as an integral part of the Moscow city wire line network from the real estate constructors free of charge as provided by the regulations of the city government. Property, plant and equipment contributions received by MGTS during the years ended December 31, 2009 and 2008 were as follows: 2009 Unamortized property, plant and equipment contributions, beginning of the year Contributions received during the year Amortization for the year Currency translation effect Unamortized property, plant and equipment contributions, end of the year $93,197 3,213 (3,408) (2,653) $90,349 2008 $112,779 3,194 (4,381) (18,395) $93,197
Page 57 - Note 21: Derivative Financial Instruments (http://annualreview2009.mtsgsm.com/financial_statements/notes/21_derivative_financial_instruments/)
Note 21: Derivative Financial Instruments
Cash flow hedging In 2009, 2008 and 2007 the Group entered into variable-to-fixed interest rate swap agreements to manage the exposure of changes in variable interest rate related to its debt obligations. The instruments are qualified for cash flow hedge accounting under the U.S. GAAP requirements. Each interest rate swap matches the exact maturity dates of the underlying debt allowing for highly effective hedges. Interest rate swap contracts outstanding as of December 31, 2009 mature in 2012-2015. Further, in 2009 the Group entered into several cross currency interest rate swap agreements. These contracts hedge the risk of both interest rate and currency fluctuations and assume
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Print manager | MTS
periodical exchanges of both principal and interest payments from RUB-denominated amounts to USD- and Euro-denominated amounts to be exchanged at a specified rate. The rate was determined by the market spot rate upon issuance. These contracts also include an interest rate swap of a fixed USD- and Euro-denominated interest rate to a fixed RUB-denominated interest rate. The instruments are qualified for cash flow hedge accounting under the U.S. GAAP requirements. Each cross currency interest swap matches the interest and principal payments of the underlying debt allowing for highly effective hedges. Cross currency interest rate swap contracts outstanding as of December 31, 2009 mature in 2010-2011. The following table presents the fair value of Group’s derivative instruments designated as hedges in the consolidated statements of financial position as of December 31, 2009 and 2008. December 31, Statement of financial position location Asset derivatives Interest rate swaps Total Liability derivatives Interest rate swaps Cross currency interest rate swaps Cross currency interest rate swaps Total Other long-term liabilities Other payables Other long-term liabilities $(32,636) (9,211) (17,348) $(59,195) $(20,892) — — $(20,892) Other non-current assets $3,391 $3,391 — — 2009 2008
The following table presents the effect of Group’s derivative instruments designated as hedges on the consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007. Year ended December 31, Location of loss recognised Interest rate swaps Cross currency interest rate swaps Total Interest expense Currency exchange and transaction loss 2009 $(8,392) (24,299) $(32,691) 2008 $(2,002) — $(2,002) 2007 — — —
The ineffective portion of interest rate swap arrangements in amount of $0.9 million was included in interest expense in consolidated statement of operations for the year ended December 31, 2009. The ineffective portion of cross currency interest rate swap arrangements in amount of $4.5 million was included in currency exchange and transaction loss in consolidated statement of operations for the year ended December 31, 2009. The following table presents the effect of Group’s derivative instruments designated as hedges on accumulated other comprehensive income for the years ended December 31, 2009, 2008 and 2007. 2009 Accumulated derivatives (loss)/gain, beginning of the year Fair value adjustments on hedging derivatives, net of tax Amounts reclassified into earnings during the period, net of tax Accumulated derivatives loss, end of the year $(16,714) (28,764) 5,185 $(40,293) 2008 $(355) (18,361) 2,002 $(16,714) 2007 $759 (1,114) — $(355)
As of December 31, 2009, the outstanding hedge instruments were highly effective. Approximately $48.6 million of net loss is expected to be reclassified into net income during the next twelve months. Cash inflows and outflows related to hedge instruments were included in the cash flows from operating activities in the consolidated statement of cash flows for the years ended December 31, 2009, 2008 and 2007.
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Non-designated derivative instruments Foreign currency options—In 2009 the Group entered into foreign currency option agreements to manage the exposure to changes in currency exchange rates related to USD-denominated debt obligations. According to the agreements the Group has a combination of put and call option rights to acquire $80.0 million of USD at rates within a range specified in contracts. These contracts were not designated for hedge accounting purposes. These currency option agreements will mature in 2010-2011. Purchased call option—In the third quarter of 2008 in order to mitigate the exposure resulting from the employee phantom option program introduced in April 2008 (see Note 24), ComstarUTS acquired a phantom call option on its GDRs for $19.4 million from an investment bank. The amount of cash paid was included in the cash flows from investing activities in the consolidated statement of cash flows for the year ended December 31, 2008. The agreement entitles Comstar-UTS to receive in the second quarter of 2010 a payment equal to the difference between the average of daily volume weighted average trading prices of GDRs on the London Stock Exchange for the period between February 1 and March 31, 2010 and the phantom option exercise price of USD 10.2368, if positive, multiplied by 9,000,000. Subsequent to the acquisition of the instrument, the Group estimates the fair value of the respective asset using an option pricing model and re-measures it as of each reporting date. In April 2010 the purchased call option expired unexercised as it was out-of-money. Written call and put option—In 2006, simultaneously with the acquisition of the 25% stake plus one share in Svyazinvest (see Note 14), MGTS Finance S.A. and “2711 Centerville Cooperatief U.A.” (”2711 UA”), an affiliate of Mustcom Limited, signed a call and put option agreement, which gives 2711 UA a right to purchase 46,232,000 shares of Comstar-UTS, representing 11.06% of total issued shares, from MGTS Finance S.A and sell them back to MGTS Finance S.A. The call option acquired by 2711 UA could be exercised at a strike price of USD 6.97 per share at any time following the signing of the agreement with respect to 10.5% of Comstar UTS’ shares. The call option for the remaining 0.56% stake could be exercised at any time beginning from April 1, 2007. The call option was to expire in one year from the date of signing of the agreement. 2711 UA had a right to exercise its put option at any time within two years from the date of exercising the call option at a strike price, which will be calculated based on a weighted average price of Comstar UTS’ GDRs during the 90 trading days period preceding the exercise of the put option. Fair value of the call and put option as of December 11, 2006, the grant date, was estimated at $90.0 million and included in cost of investment in Svyazinvest. The Group was estimating the fair value of the respective liability using an option pricing model and was re-measuring it as of each reporting date. On December 7, 2007, Access Telecommunications Cooperatief U.A. (”Access”, previously known as 2711 UA) has exercised the call option for 46,232,000 shares and paid $322.2 million in cash to the Group. On August 25, 2008, Access has initiated the process of exercising the put option, and on November 26, 2008 has sold MGTS Finance S.A. 46,232,000 shares of Comstar-UTS for the total of $463.6 million, $100.0 million of which had been paid on November 26, 2008 in cash, and the remaining portion had been restructured in the form of an interest bearing promissory note repayable in four monthly installments. Cash payment in the amount of $100.0 million was included in financing activities’ section in the Group’ consolidated statement of cash flows for the year ended December 31, 2008. Currency forward—In December 2008, to mitigate foreign currency risks under the USD-denominated notes payable to Access (see Note 25) Comstar-UTS entered into forward contracts with MBRD to acquire $32.0 and $68.0 million of U.S. Dollars in January and February 2009, respectively, at a rate of RUB 27.85 per one USD. In the year ended December 31, 2009 the instrument was redeemed. Net cash proceeds from the redemption of the instrument in the amount of $20.2 million were included in the cash flows from operating activities in the consolidated statement of cash flows. The following table presents the fair value of Group’s derivative instruments not designated as hedges in the consolidated statements of financial position as of December 31, 2009 and 2008. December 31, Statement of financial position location Asset derivatives Purchased call option Currency forward Total Liability derivatives Foreign currency options Foreign currency options Total Other payables Other long-term liabilities $(2,654) (1,627) $(4,281) — — — Other non-current assets Other current assets — — — $5,830 9,734 $15,564 2009 2008
The following table presents the effect of Group’s derivative instruments not designated as hedges on the consolidated statements of operations for the years ended December 31, 2009,
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2008 and 2007. Year ended December 31, Location of gain/(loss) recognised Foreign currency options Purchased call option Currency forward Written call and put option Total Fair value of derivative instruments The following fair value hierarchy table presents information regarding Group’s assets and liabilities associated with derivative agreements measured at fair value on a recurring basis as of December 31, 2009: Quoted prices in active markets for identical assets or liabilities (Level 1) Assets: Interest rate swap agreements Liabilities: Interest rate swap agreements Cross currency interest rate swap agreements Currency option agreements — — — $(32,636) (26,559) (4,281) — — — $(32,636) (26,559) (4,281) — $3,391 — $3,391 Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) Balance as of December 31, 2009 Currency exchange and transaction loss Change in fair value of derivatives Currency exchange and transaction gain Change in fair value of derivatives 2009 $(4,280) (5,420) 12,788 — $3,088 2008 $— (13,614) 10,165 (27,940) $(31,389) 2007 $— — — (145,860) $(145,860)
Page 58 - Note 22: Accrued Liabilities (http://annualreview2009.mtsgsm.com/financial_statements/notes/22_accrued_liabilities/)
Note 22: Accrued Liabilities
December 31, 2009 Accruals for services Accrued payroll and vacation Accruals for taxes Accruals for payments to social funds Interest payable on debt Total accrued liabilities $232,897 210,329 241,838 12,396 127,953 $825,413 2008 $224,803 146,698 131,971 10,134 49,711 $563,317
Page 59 - Note 23: Income Tax (http://annualreview2009.mtsgsm.com/financial_statements/notes/23_income_tax/)
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Note 23: Income Tax
Provision for income taxes for the years ended December 31, 2009, 2008 and 2007 was as follows: December 31, 2009 Current provision for income taxes Deferred income tax benefit Total provision for income taxes $402,511 101,444 $503,955 2008 $948,983 (206,102) $742,881 2007 $937,036 (85,021) $852,015
The statutory income tax rates in jurisdictions in which the Group operates for 2009 were as follows: Russia—20.0%, Ukraine—25.0%, Uzbekistan—3.4%, Turkmenistan—20.0%, and Armenia—20.0%. The statutory income tax rate reconciled to the Group’s effective income tax rate for the years ended December 31, 2009, 2008 and 2007 was as follows: 2009 Statutory income tax rate for the year Adjustments: Expenses not deductible for tax purposes Currency exchange and transaction loss Income tax provision Settlements with tax authoroties on prior period income tax (2005 - 2008) Revaluation of UMC tax base Different tax rate of foreign subsidiaries Earnings distribution from subsidiaries Disposal of treasury stock Impairment of goodwill Change in fair value of derivative financial instruments Change in valuation allowance Comstar corporate reorganization Increase in deferred tax liability subject to registration Other Effective income tax rate 4.9 0.5 (0.2) (2.9) — (2.0) 6.8 (4.1) — (0.1) 10.3 0.4 — 0.1 33.7% 2.1 1.0 0.3 — (1.8) (1.2) — — 0.4 0.3 (0.2) — — 0.5 25.4% 2.1 0.2 0.6 — — 0.1 — — — 1.1 (0.2) — (0.3) 0.1 27.7% 20.0% 2008 24.0% 2007 24.0%
Temporary differences between the tax and accounting bases of assets and liabilities gave rise to the following deferred tax assets and liabilities as of December 31, 2009 and 2008: December 31, 2009 Assets/(liabilities) arising from tax effect of: Deferred tax assets Depreciation of property, plant and equipment Other intangible assets Deferred connection fees
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2008
$212,606 12,770 33,610
$197,879 8,967 35,873
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Subscriber prepayments Accrued expenses Provision for doubtful accounts Inventory obsolescence Loss carryforward Impairment of property, plant and equipment Valuation of investment in Svyazinvest Other Valuation allowance Total deferred tax assets Deferred tax liabilities Licenses acquired Depreciation of property, plant and equipment Customer base Other intangible assets Debt issuance cost Potential distributions from/to Group’s subsidiaries/associates Other Total deferred tax liabilities Net deferred tax asset Net deferred tax asset, current Net deferred tax asset, non-current Net deferred tax liability, long-term
16,663 130,603 3,603 3,046 111,784 19,906 78,761 23,147 (182,308) 464,191 $(59,746) (188,611) (2,695) (59,227) (22,690) (118,608) (1,025) (452,602) 11,589 $212,687 $97,355 $(298,453)
17,057 155,508 13,827 2,004 24,130 — — 13,365 (26,744) 441,866 $(104,443) (127,616) (1,773) (75,040) (7,446) — (39,662) (355,980) 85,886 $213,091 $63,507 $(190,712)
In 2009, to streamline the ownership structure within Comstar group and to enable legal merger of certain its subsidiaries, certain of Comstar’s subsidiaries were sold to Comstar-UTS. As a result, deferred tax assets on tax losses carried forward of $6.8 million were written down. The Group has the following significant balances for income tax losses carried forward as of December 31, 2009 and 2008: Jurisdiction Luxembourg (MGTS Finance S.A.) Russia (Comstar-UTS, RTC and other) USA Total not limited 2011-2019 not limited Period for carry forward 2009 $94,163 17,048 573 $111,784 2008 $12,773 4,392 6,965 $24,130
Management established a valuation allowance against tax loss carry forwards of MGTS Finance S.A. and $30.9 million of deferred tax asset on valuation of investment in Svyazinvest which is allocable to MGTS Finance S.A. because there will be no sufficient future taxable income to realize those deferred tax assets. Management also established a valuation allowance for the remaining $47.9 million of deferred tax asset on valuation of investment in Svyazinvest relating to Comstar-UTS, because such impairment loss, if realized, could be offset only against gains from disposal of Comstar UTS’ shares in subsidiaries and other investments, which, management believes, are not likely to arise in the foreseeable future. In 2009 the Group recognized deferred income tax liabilities of $70.5 million for income taxes on future dividend distributions from foreign subsidiaries (UMC and K-Telecom) which are based on $1,431.9 million cumulative undistributed earnings of those foreign subsidiaries in accordance with local statutory accounting regulations (unaudited) because such earnings are intended to be repatriated. The Group did not record any deferred tax liabilities related to undistributed earnings of these subsidiaries in prior periods as there was no intention to repatriate the earnings. No deferred tax liability was recognized on undistributed earnings of Uzdunrobita as of December 31, 2009 as the Group plans to indefinitely reinvest those. As of December 31, 2009 and
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2008 the amount of undistributed earnings of Uzdunrobita in accordance with local statutory accounting regulations amounted to $530.7 million and $401.6 million, respectively (unaudited). Potential earnings distributions from BCTI are tax free, so that no deferred tax liability arises in this regard. As of December 31, 2009, 2008 and 2007, the Group included accruals for uncertain tax positions in the amount of $10.6 million, $12.4 million and $35.8 million, respectively, as a component of income tax payable. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 2009 Balance, beginning of the year Additions based on tax position related to the current year Additions based on tax positions related to prior years Additions based on tax of acquired entities Reduction in tax positions related to prior years Settlements with tax authorities Currency translation adjustment Balance, end of the year $12,360 2,094 — 1,521 (1,778) (3,305) (258) $10,634 2008 $35,752 20,006 — — (11,692) (31,456) (250) $12,360 2007 12,183 23,828 5,933 — (2,963) (3,628) 399 35,752
Accrued penalties and interest related to unrecognized tax benefits as a component of income tax expense for the years ended December 31, 2009, 2008 and 2007 amounted to ($0.6) million, ($1.0) million and ($2.0) million, respectively, and are included in income tax expense in the accompanying consolidated statements of operations. Accrued interest and penalties were included in income tax payable in the accompanying consolidated statements of financial position and totalled to $4.3 million and $4.6 million as of December 31, 2009 and 2008, respectively. The Group does not expect the unrecognized tax benefits to change significantly over the next twelve months.
Page 60 - Note 24: Share Based Compensation (http://annualreview2009.mtsgsm.com/financial_statements/notes/24_share_based_compensation/)
Note 24: Share Based Compensation
MTS
The Stock Option Plan
In 2000, MTS established a stock bonus plan and stock option plan (”the Stock Option Plan”) for selected officers and key employees. During its initial public offering in 2000 MTS allotted 9,966,631 shares of its common stock to fund the Stock Option Plan. Since 2002, MTS has made several grants pursuant to its stock option plan to employees and directors of the Group. These options generally vest over a two year period from the date of the grant, contingent on continued employment of the grantee with MTS. The options are exercisable within two weeks after the vesting date, and, if not exercised, are forfeited. The exercise price of the options equaled the average market share price during the one hundred day period preceding the grant date. In April 2008, the Board of Directors allotted an additional 651,035 ADSs (or 3,255,175 shares) to fund a Stock Option award to MTS’ chief executive officer. The award vesting period is up to two years contingent upon employment with MTS. The award will vest only if at the end of the vesting period MTS is among the top 20 mobile operators in the world and top mobile operator in Russia and the CIS, in each case in terms of revenue, and cumulative percentage of MTS’ market capitalization growth since the grant date exceeds the predetermined threshold of 15%. A summary of the status of the Group’s Stock Option Plan is presented below: Weighted average exercise price (per share), U.S. Dollars Weighted average grant date fair value of options (per share), U.S. Dollars
Number of shares
Aggregate intrinsic value
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Print manager | MTS
Outstanding at December 31, 2006 Granted Exercised Forfeited Outstanding at December 31, 2007 Granted Exercised Forfeited Outstanding at December 31, 2008 Granted Exercised Forfeited Outstanding at December 31, 2009
1,435,001 1,778,694 (848,126) (968,313) 1,397,256 1,302,070 (1,397,256) — 1,302,070 — — — 1,302,070
$6.89 6.31 6.89 6.66 $6.31 15.93 6.31 — $15.93 — — — $15.93
$1.74 5.95 1.74 2.65 $4.05 2.44 4.05 — $2.44 — — — $2.44
$743
$5,236
$—
$—
The total intrinsic value of options exercised during the years ended December 31, 2009, 2008 and 2007 was $nil, $7.4 million and $0.4 million, respectively. Stock options outstanding as of December 31, 2009 will vest during the period ended July 1, 2010. None of the stock options outstanding as of December 31, 2009, 2008 were exercisable and therefore had a negative intrinsic value. None of the stock options outstanding as of December 31, 2007 were exercisable. Compensation cost under Stock Option Plan of $1.2 million, $3.5 million and $2.8 million was recognized in consolidated statements of operations during the years ended December 31, 2009, 2008 and 2007 respectively. Related deferred tax benefit amounted to $0.2 million, $0.7 million and $0.6 million for the years ended December 2009, 2008 and 2007, respectively. The fair value of options granted during the year ended December 31, 2007 was estimated using the lattice model based on the following assumptions: 2007 Risk free rate Expected dividend yield Expected volatility Expected life, years Fair value of options (per share), U.S. Dollar The fair value of options granted during the year ended December 31, 2008 was estimated using the Monte Carlo simulation model based on the following assumptions: 2008 Risk free rate Present value of expected dividends, U.S. Dollars Expected volatility Expected life, years Fair value of options (per share), U.S. Dollar Expected volatilities were based on historical volatility of the MTS’ ADSs. The Group is required to estimate expected forfeiture rate, as well as the probability that performance conditions that affect the vesting of the Stock Option Plan awards will be achieved and only recognize expense for those awards expected to vest. The effect of the estimated forfeitures on Group’s operations was $nil, $2.3 million and $1.7 million in 2009, 2008 and 2007, respectively. As of December 31, 2009, there was $0.6 million of total unrecognized compensation cost related to non-vested stock based compensation awards under the Stock Option Plan. This amount will be recognized over the period through July 1, 2010.
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3.1% 0.3% 40.3% 2 $5.95
2.3% $4.17 40.0% 2 $2.44
Print manager | MTS
The Phantom Stock Plan In June 2007, MTS’ Board of Directors approved the Phantom Stock Plan to provide deferred compensation to certain key employees (the “Participants”) of the Group during 2007-2011. The plan is based on units equivalent to MTS ADSs (the “Phantom ADSs”). Each Phantom ADS is the equivalent of five MTS common shares. Under the Phantom Stock Plan, the Participants are entitled to a cash payment equal to the difference between the initial grant price and the price of Phantom ADSs determined based on average market share price during the one hundred day period preceding the vesting date, multiplied by the number of Phantom ADSs granted, upon vesting of the award. The average vesting period is two years from the grant date, contingent upon the continuing employment of the Participants by the Group. Further, the award shall vest only if at the end of the vesting period the cumulative percentage of MTS market capitalization growth since the grant date exceeds the cumulative cost of equity determined by the Board of Directors for the same period. In April 2008, the Phantom Stock Plan was amended to increase the number of Phantom ADSs available under the plan from the initial 3,600,000 to 9,556,716 ADSs and to increase the number of Participants potentially eligible for the Plan to up to 420 top- and mid-level managers of the Group. Further, under the amended Plan, the Phantom ADSs granted in 2008 and thereafter will vest only if at the end of the vesting period MTS is among the top 20 mobile operators in the world and top mobile operator in Russia and the CIS, in each case in terms of revenue, and the cumulative percentage of MTS’ market capitalization growth since the grant date exceeds the predetermined threshold of 15%. At the end of the vesting period, participants are entitled to a cash payment equal to the difference between the initial grant price and the price of Phantom ADSs determined based on average market share price during the one hundred day period preceding the vesting date, multiplied by the number of Phantom ADSs granted and adjusted by the ratio that reflects actual market capitalization growth rate. During the year ended December 31, 2008, 6,676,716 ADSs were granted to the participants, 4,562,830 of which were granted on May 1, 2008 (Phantom Grant 2008 (I)) and 2,113,886 ADSs were granted on July 1, 2008 (Phantom Grant 2008 (II)).The Phantom Grant 2008 (I) was expired on July 1, 2009 and non of the Phantom Shares under the Phantom Grant 2008 (I) were exercisable as of the expiration date. Phantom Grant 2008 (II) will vest in 24 months after the grant date, contingent upon the continuing employment of the Participants. A summary of the status of the Group’s Phantom Stock Plan is presented below: Weighted average exercise price (per ADS), U.S. Dollar — 720,000 — (36,664) 683,336 6,676,716 — (1,346,442) 6,013,610 — — (3,883,144) (531,833) 1,598,633 — 56.79 — 56.79 $56.79 76.64 — 72.02 $75.41 — — 73.51 76.62 79.63 Weighted average fair value of options (per ADS), U.S. Dollar — 44.00 — 44.00 $44.0 0.68 — 0.88 $0.78 — — — 0.03 0.06 — $— $30,750
Number of ADSs Outstanding at December 31, 2006 Granted Exercised Forfeited Outstanding at December 31, 2007 Granted Exercised Forfeited Outstanding at December 31, 2008 Granted Exercised Expired Forfeited Outstanding at December 31, 2009
Aggregate intrinsic value —
None of the Phantom ADSs expired during the year ended December 31, 2009 were exercisable as of the expiration date which is July 1, 2009 for the Phantom Stock Grant 2007 and 2008 (I). All Phantom ADSs outstanding as of December 31, 2009 are non-vested and will vest during the period ended July 1, 2010. None of the Phantom Shares were exercisable as of December 31, 2009 and therefore had a negative intrinsic value. The fair value of the liability under the Phantom Stock Plan as of December 31, 2009 was estimated using the Monte Carlo simulation technique based on the following assumptions: Phantom Grant 2008 (II) Risk free rate Ranged from 0.05% to 0.2%
http://annualreview2009.mtsgsm.com/printmanager/print.jsp?sections=85§ions=87§ions=90§ions=92§ions=94§ions=96[22/07/2010 16:00:44]
Print manager | MTS
Present value of expected dividends, U.S. Dollars Expected volatility Remaining vesting period, years Fair value of phantom share award (per phantom share), U.S. Dollar
1.62 50% 0.5 0.06
The fair value of the liability under the Phantom Stock Plan as of December 31, 2008 was estimated using the Monte Carlo simulation technique based on the following assumptions: Phantom Grant 2007 Risk free rate Present value of expected dividends, U.S. Dollars Expected volatility Remaining vesting period, years Fair value of phantom share award (per phantom share), U.S. Dollar 0.2% 2.7 135% 0.5 2.00 Phantom Grant 2008 (I) 0.4% 2.7 90% 0.5 0.07 Phantom Grant 2008 (II) 0.4% 4.1 90% 1.5 1.99
The fair value of the liability under the Phantom Stock Plan as of December 31, 2007 was estimated using the Monte Carlo simulation technique based on the following assumptions: Phantom Grant 2007 Risk free rate Present value of expected dividends, U.S. Dollars Expected volatility Remaining vesting period, years Fair value of phantom share award (per share), U.S. Dollar Expected volatilities were based on historical and implied volatility of the MTS’ ADSs. For the year ended December 31, 2009 a reversal of previously recorded expense under the Phantom Stock Grant 2007, 2008 (I) and 2008 (II) in the amount of $0.5 million, $0.1 million and $0.8 million, respectively, was recognized in the consolidated statements of operations as a result of underlying stock price decrease. Related deferred tax expense amounted to $0.3 million. For the year ended December 31, 2008 a reversal of previously recorded expense in the amount of $8.9 million under the Phantom Stock Grant 2007 was recognized in the consolidated statements of operations as a result of underlying stock price decrease. Related deferred tax expense amounted to $1.8 million. The compensation cost under the Phantom Stock Grant 2008 (I) and (II) recognized in the consolidated statement of operations for the year ended December 31, 2008 amounted to $1.3 million and the related deferred tax benefit amounted to $0.3 million. The compensation cost under the Phantom Stock Plan recognized in consolidated statement of operations for the year ended December 31, 2007 amounted to $7.6 million and the related deferred tax benefit amounted to $1.8 million. As of December 31, 2009, there was $0.02 million of total unrecognized compensation cost related to non-vested Phantom ADSs. This amount is expected to be recognized over a weighted average period of 0.5 years. The Group is required to estimate expected forfeiture rate, as well as the probability that performance conditions that affect the vesting of the Phantom ADSs awards will be achieved and only recognize expense for those awards expected to vest. The Group’s estimated forfeiture rate was 5.1%. The effect of forfeitures amounted to $nil, $1.5 and $2.0 million for the years ended December 31, 2009, 2008 and 2007, respectively. Comstar-UTS The 2006 Program On September 15, 2006, the Extraordinary General Meeting of shareholders approved the stock option and stock bonus program (”the 2006 Program”) for the Board of Directors and senior management of Comstar-UTS. The 2006 Program was being implemented based on separate decisions of the Board of Directors. In November 2006, the Board of Directors of Comstar-UTS approved the grant of stock options to certain members of the Board of Directors and senior management of Comstar-UTS. The exercise price for these options is RUB 122.3 per one GDR (approximately USD 4.6 as of the grant date). These stock options were to cliff-vest in two years from the date of the grant and were exercisable over a period of 1 month after vesting. The
http://annualreview2009.mtsgsm.com/printmanager/print.jsp?sections=85§ions=87§ions=90§ions=92§ions=94§ions=96[22/07/2010 16:00:44]
3.1% $5.3 40.3% 1.5 $8.8
Print manager | MTS
2006 Program provided for the ability of Comstar-UTS to repurchase the GDRs issued under the 2006 Program from the participants, subject to separate decision of the Board of Directors. Management believed that possibility of such repurchase was remote; accordingly, the 2006 Program originally was classified as equity. In March 2008, the Board of Directors of ComstarUTS has approved the repurchase of the GDRs purchased by the participants at the exercise of the options back to Comstar-UTS at a price equal to an average price of one GDR for the 60 calendar days preceding the date of exercise weighted by trading volumes of Comstar-UTS GDRs on the London Stock Exchange. Accordingly, as of December 31, 2007 Comstar-UTS changed its estimate and re-classified the option program as liability. During the year ended December 31, 2008 certain options have been forfeited, as employment of certain members of management and the Board of Directors has been terminated. In June 2008, General shareholder meeting of Comstar-UTS has taken the decision to denominate the exercise price in USD at USD 4.60 per share. The change did not have a significant impact on compensation expense recognized by Comstar-UTS. In November 2008, the participants of the 2006 Program fully exercised their vested options, acquired 2,403,159 GDRs from Comstar-UTS for USD 4.60 per one GDR. The GDRs were then repurchased by Comstar-UTS at USD 5.34 per one GDR, and the 2006 Program was closed. Total intrinsic value of the exercised options, taking into account the repurchase feature, amounted to $1.8 million. The costs recognized in accordance with the 2006 Program for the years ended December 31, 2008 approximated ($9.2) million (a reversal). The following table summarizes information about non-vested common stock options during the year ended December 31, 2008: Quantity Non-vested options at January 1, 2008 Options granted Options vested Options forfeited Non-vested options at December 31, 2008 Phantom Option Program In March 2008, the Board of Directors of Comstar-UTS approved the employee phantom option program. Each phantom option is subject to the successful attainment of multiple market and performance conditions, such as shareholder return, market position and revenue growth. The compensation expense for these awards may be adjusted for subsequent changes in the estimated or actual outcome of the performance conditions of Comstar-UTS. The phantom options granted during 2008 vest on March 31, 2010. Upon vesting, the participants will be entitled to a cash compensation equal to the difference between weighted average price of one GDR for the 60 calendar days preceding March 31, 2010 and April 1, 2008, respectively, if positive, timed by the number of phantom options granted. The following table summarizes information about phantom options during the years ended December 31, 2009 and 2008: Quantity Outstanding at January 1, 2008 Granted Forfeited Outstanding at December 31, 2008 (all non-vested) Granted Forfeited Outstanding at December 31, 2009 (all non-vested) — 13,065,882 (940,000) 12,125,882 — (1,580,000) 10,545,882 Exercise price, U.S. Dollar — 10.2368 10.2368 10.2368 — 10.2368 10.2368 Weighted average grant- date fair value, U.S. Dollar — 2.36 2.37 2.36 — 2.37 2.35 2,403,159 — (2,403,159) — — Exercise price, U.S. Dollar n/a — 4.60 — — Weighted average grant- date fair value, U.S. Dollar 3.16 — 3.16 — —
Comstar-UTS estimates the fair value of the phantom options using stock option pricing model based on Monte Carlo simulation technique. The following assumptions were used in the option pricing model as of December 31, 2009 and 2008: 2009 Risk-free interest rate Expected residual option life (months) Expected dividends
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2008 0.1% 3 Nil 2.4% 15 Notional
Print manager | MTS
Expected volatility Fair value of options (per share) as of December 31
97% USD 0.03
82% USD 0.36
Expected volatility as of December 31, 2009 was based on historical volatility of the GDRs of Comstar-UTS in the fourth quarter of 2009. The costs recognized in accordance with phantom option plan for the years ended December 31, 2009 and 2008 amounted to negative $2.0 million and $2.3 million, respectively. Total expected future compensation cost related to non-vested awards not yet recognized as of December 31, 2009 which will be recognized on a straight-line basis over the three months ending March 31, 2010 was immaterial.
Page 61 - Note 25: Related Parties (http://annualreview2009.mtsgsm.com/financial_statements/notes/25_related_parties/)
Note 25: Related Parties
Related parties include entities under common ownership and control with the Group, affiliated companies and Svyazinvest, in which the Group owns 25% plus one share stake (see Note 14) and which owns approximately 28% voting shares in MGTS, a subsidiary of Comstar-UTS. As of December 31, 2009 and 2008, accounts receivable from and accounts payable to related parties were as follows: December 31, 2009 Accounts receivable: Sky Link and subsidiaries, an affiliate of Sistema Svyazinvest and subsidiaries TS-Retail, a subsidiary of Sistema Sitronics, a subsidiary of Sistema Intellect Telecom, a subsidiary of Sistema Sistema Mass Media, a subsidiary of Sistema Glaxen, a minority shareholder of a subsidiary of the Group Mezhregion Tranzit Telecom, an affiliate of Sistema Other related parties Total accounts receivable, related parties Accounts payable: Sitronics, a subsidiary of Sistema Maxima, a subsidiary of Sistema TS-Retail, a subsidiary of Sistema Svyazinvest and subsidiaries Mezhregion Tranzit Telecom, an affiliate of Sistema Mediaplanning, a subsidiary of Sistema Sistema Telecom, a subsidiary of Sistema Sistema Mass Media, a subsidiary of Sistema Sky Link and subsidiaries, an affiliate of Sistema Other related parties Total accounts payable, related parties $68,296 6,511 5,739 2,299 — — 861 — 488 3,209 $87,403 $162,906 15,168 — 6,387 18,257 6,118 2,697 7,675 — 7,274 $226,482 $7,467 4,446 3,278 1,933 622 204 — — 2,023 $19,973 $4,319 9,334 16,271 — 1,073 14,416 12,215 8,323 4,669 $70,620 2008
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Print manager | MTS
The Group does not have the intent and ability to offset the outstanding accounts payable and accounts receivable with related parties under the terms of existing agreements with them. Operating Transactions For the years ended December 31, 2009, 2008 and 2007, operating transactions with related parties are as follows: 2009 Revenues from related parties: Svyazinvest and subsidiaries (interconnection, commission for provision of DLD/ILD services to the Group’s subscribers and other) TS-Retail, a subsidiary of Sistema (Sales of handsets and accessories) Mezhregion Tranzit Telecom, an affiliate of Sistema (interconnection, line rental, commission for provision of DLD/ILD services to the Group’s subscribers, and other) Sky Link and subsidiaries, an affiliate of Sistema (interconnection and other) Other related parties Total revenues to related parties Operating expenses incurred on transactions with related parties: RA Maxima, a subsidiary of Sistema (advertising) Sitronics, a subsidiary of Sistema (IT consulting) Svyazinvest and subsidiaries (interconnection and other) Mediaplanning, a subsidiary of Sistema (advertising) Mezhregion Tranzit Telecom, an affiliate of Sistema (interconnection, line rental and other) TS-Retail, a subsidiary of Sistema (dealer commision) Sistema Telecom, a subsidiary of Sistema (use of the brand name) City Hals, a subsidiary of Sistema (rent, repair, maintenance and cleaning services) AB Safety, an affiliate of Sistema (security services) Other related parties Total operating expenses incurred on transactions with related parties $102,005 52,211 28,997 23,782 18,115 17,889 11,738 9,988 5,576 17,931 $138,756 39,646 41,533 82,036 191,155 4,448 14,676 13,835 — 14,296 $134,878 35,889 36,663 48,756 121,355 133 14,556 9,466 — 12,199 $43,174 20,689 11,465 9,857 7,653 $63,147 1,500 128,560 7,977 10,306 $69,094 — 93,224 9,857 6,137 2008 2007
$92,838 $211,490 $178,312
$288,232 $540,381 $413,865
In addition to above, for the years ended December 31, 2009, 2008 and 2007 the Group received dividends from Svyazinvest totaling $nil, $2.4 million and $1.9 million, respectively. In the year ended December 31, 2007 Comstar Direct, a subsidiary of Comstar-UTS, sold substantially all TV content and certain property, plant and equipment to Sistema Mass Media for $14.8 million (exclusive of VAT). Respective gains totalling $2.7 million were included in other income in the accompanying consolidated statement of operations. In the year ended December 31, 2008, respective receivables were transferred to SMM in the course of reorganization of Comstar Direct (see Note 3). Investing and financing transactions During the years ended December 31, 2009 and 2008 the Group made certain investments in and loans to related parties. Respective balances are summarized as follows: December 31, 2009 Loans to, promissory notes and investments in shares of related parties: Short-term investments (Note 5) TS-Retail, a subsidiary of Sistema MBRD, a subsidiary of Sistema Alt, a related party of Sistema
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2008
$12,421 992 —
— $90,949 85,091
Print manager | MTS
Delfa, a related party of Sistema Finexcort, a subsidiary of Sistema Sistema-Hals, an affiliate of Sistema Sky Link and subsidiaries, an affiliate of Sistema Total short-term investments to related parties Other investments (Note 15) TS-Retail, a subsidiary of Sistema Sistema Intellect Telecom, a subsidiary of Sistema Sistema Telecom, a subsidiary of Sistema Total other investments to related parties Investments in shares (Note 15) MBRD, a subsidiary of Sistema Sistema Mass Media, a subsidiary of Sistema Other Total investments in shares of related parties
— — — — $13,413
68,073 68,073 16,688 10,522 $339,396
30,192 20,449 12,808 — $63,449
11,156 — 11,717 51,966 $74,839
5,248 3,856 1,434 $10,538
5,401 3,970 1,510 $10,881
Moscow Bank of Reconstruction and Development (”MBRD”)—The Group has a number of loan agreements and also maintains certain bank and deposit accounts with MBRD, whose major shareholder is Sistema. As of December 31, 2009 and 2008, the Group cash position at MBRD amounted to $963.6 million and $242.4 million in current accounts, respectively. Deposit accounts at MBRD amounted to $1.0 million and $195.7 million as of December 31, 2009 and 2008, respectively. Deposit accounts in MBRD included deposit accounts with original maturities in excess of three months but less than twelve months totaling $1.0 million and $90.9 million as of December 31, 2009 and 2008, respectively, which are classified as short-term investments in the accompanying consolidated statements of financial position. The interest accrued on the deposits for the years ended December 31, 2009, 2008 and 2007, amounted to $25.1 million, $43.2 million and $22.8 million, respectively, and was included as a component of interest income in the accompanying consolidated statements of operations. Loans payable to MBRD amounted to $1.2 million and $8.6 million as of December 31, 2009 and 2008, respectively. Interest expense on these loans for the years ended December 31, 2009 and 2008, 2007 amounted to $0.8 million, $1.3 million and $1.0 million, respectively. Sistema—In November 2009, the Group accepted a promissory note from Sistema as repayment of a loan principle and interest accrued to date under the agreement with Sistema-Hals (see Note 5). The note has zero interest rate and is repayable in 2017. As of December 31, 2009 the amount receivable of $20.4 million was included in other investments in the accompanying consolidated statement of financial position. In the year ended December 31, 2000 following the indemnification obtained from Sistema to repay debt from Ericsson Project Finance, the Group entered into a long-term, RUBdenominated promissory notes with zero interest rate and maturities from 2049 to 2056 to reimburse payments made by Sistema. As of December 31, 2009 and 2008 the carrying values of these notes amounted to $1.8 million and $nil, respectively. Sistema Mass Media (”SMM”)—In 2008 and 2009, the Group had various loans and promissory notes payable to SMM, a subsidiary of Sistema. As of December 31, 2009 these loans and notes were fully repaid. Interest expense on these loans and notes for the years ended December 31, 2009 and 2008, 2007 amounted to $1.4 million, $8.1 million and $1.5 million, respectively. Intellect Telecom—During the years ended December 31, 2009 MGTS, a subsidiary of Comstar-UTS, and MTS itself granted loans to Intellect Telecom, a subsidiary of Sistema. Loans bear interest of 7.0% and 11.0%, respectively, and mature in 2012. Sistema Telecom—In June 2009, the Group transferred RUB-denominated promissory notes of Sistema Telecom, a subsidiary of Sistema, for the total amount of $8.7 million to SMM for partial extinguishment of the Group’s debt payable to SMM. In December 2009 the remaining portions of the notes were partly offset against the Group’s payables to Sistema Telecom and partly repaid in cash by Sistema Telecom. Investments in ordinary shares—As of December 31, 2009 and 2008 the Group had several investments in share capitals of subsidiaries and affiliates of Sistema for $10.5 million and $10.9 million, respectively, which were individually immaterial. The main investments related to two subsidiaries of Sistema: MBRD of 4.56% and Sistema Mass Media of 3.14%. Promissory notes of Alt, Delfa and Finexcort—In December 2008, the Group purchased promissory notes of Alt, Delfa, related parties of Sistema, and Finexcort, a subsidiary of Sistema. As of December 31, 2008 the total amount of $221.2 was included in short-term investments in the accompanying consolidated statements of financial position. The notes, together with
http://annualreview2009.mtsgsm.com/printmanager/print.jsp?sections=85§ions=87§ions=90§ions=92§ions=94§ions=96[22/07/2010 16:00:44]
Print manager | MTS
interest accrued, were redeemed in the first quarter of 2009. Sky Link and subsidiaries—In 2009 and 2008, Sky Link, an affiliate of Sistema, repaid the Group $14.3 million and $3.4 million, respectively, of outstanding indebtedness, which resulted in partial reversal of a provision for uncollectible loans recorded by the Group in 2007 and recognition of a gain of $4.3 million in the accompanying consolidated statement of operations for the year ended December 31, 2009. Sitronics—During the years ended December 31, 2009, 2008 and 2007, the Group acquired from Sitronics Group, a subsidiary of Sistema, telecommunications equipment, software and billing systems (FORIS) for approximately $190.1 million, $357.6 million and $222.1 million, respectively. In addition during the years ended December 31, 2009, 2008 and 2007, the Group purchased SIM cards and prepaid phone cards from Sitronics Smart Technologies, a subsidiary of Sitronics, for approximately $32.4 million, $39.6 million and $19.2 million, respectively. As of December 31, 2009 and 2008 the advances given to Sitronics and its subsidiaries amounted to $23.7 million and $1.7 million, respectively. These amounts were included into property, plant and equipment in the accompanying consolidated statements of financial position. Sistema-Hals—In October 2008, the Group entered into an agreement for the construction of an aerial system in Moscow metro with Sistema-Hals, an affiliate of Sistema. As of December 31, 2009 and 2008 the advances given to Sistema-Hals under this agreement amounted to $6.7 million and $11.7 million, respectively. These amounts were included into property, plant and equipment in the accompanying consolidated statements of financial position. MGTS, a subsidiary of Comstar-UTS, entered into a series of agreements with Sistema-Hals, a subsidiary of Sistema, on project development and reconstruction of buildings which house MGTS’ automatic telephone exchanges. As of December 31, 2009 and 2008, as a result of the work performed by Sistema-Hals under these contracts, MGTS recorded a liability of $38.3 million and $36.8 million, respectively, payable to Sistema-Hals that was recorded in the accompanying consolidated statements of financial position. TS-Retail—In November 2006, MTS established a wholly owned subsidiary, TS-Retail, with a registered capital of $1.1 million for further expansion of Group’s retail operations. In December 2007, MTS’ stake in this company decreased from 100% to 25% following an increase of share capital by TS-Retail by $14.0 million, which was paid by the Group and certain subsidiaries of Sistema. MTS deconsolidated TS-Retail in December 2007 and subsequently accounted for this investment under the equity method. During the years ended December 31, 2009 and 2008, the Group granted loans in total amount of $42.6 million at 11.0%-15.0% annual interest rates maturing in 2010-2011. InvestSvyazHolding—MTS itself and MGTS, a subsidiary of Comstar-UTS, entered into agreements with InvestSvyazHolding, a subsidiary of Sistema, for leasing of network equipment and billing system. These leases were recorded as capital leases in compliance with the authoritative guidance on leases and disclosed in Note 9. Svyazinvest—In 2008, the Group paid $3.6 million dividends to Svyazinvest.
Page 62 - Note 26: Stockholders' Equity (http://annualreview2009.mtsgsm.com/financial_statements/notes/26_stockholders_equity/)
Note 26: Stockholders' Equity
Share capital—MTS’ share capital comprises 1,916,869,262 and 1,885,052,800 of outstanding common shares, net of treasury shares, as of December 31, 2009 and 2008. The total shares in treasury stock of the Group comprised 76,456,876 and 108,273,338 as of December 31, 2009 and 2008, respectively. Each ADS initially represented 20 shares of common stock of the Company. Effective January 2005, the ratio was changed from 1 ADS per 20 ordinary shares to 1 ADS per 5 ordinary shares. The Company initially issued a total of 17,262,204 ADSs (69,048,816 ADSs recalculated using new ratio), representing 345,244,080 common shares. As of December 31, 2009 MTS repurchased 13,599,067 ADSs. Noncontrolling interest—MTS’ equity was affected by changes in subsidiaries’ ownership interests as follows: December 31, 2009 Net income attributable to the Group Transfers from the noncontrolling interest Increase in MTS equity due to acquisition of noncontrolling interest in Comstar-UTS Decrease in MTS paid-in capital due to exercise of the put option on Comstar-UTS shares Increase in MTS equity due to exercise of the call option on Comstar-UTS shares Increase in MTS equity due to acquisition of noncontrolling interest in MGTS
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2008 $2,000,119 — (9,358) — —
2007 $2,087,415 — — 71,060 —
$1,004,479 45,284 — — 269,281
Print manager | MTS
Decrease in MTS paid-in capital due to acquisition of noncontrolling interest in Dagtelecom Decrease in MTS paid-in capital due to reorganisation of Comstar Direct Increase in MTS paid-in capital due to acquisition of noncontrolling interest in Golden Line Decrease in MTS paid-in capital due to acquisition of noncontrolling interest in other subsidiaries Net transfers from the noncontrolling interest Net income attributable to the Group and transfers from the noncontrolling interest:
(7,679) — — (487) 306,399 $1,310,878
— (6,539) — — (15,897) $1,984,222
— — 1,467 — 72,527 $2,159,942
Dividends—In 2007, the Board of Directors approved a dividend policy, whereby the Group shall aim to make dividend payments to shareholders in the amount of at least 50% of annual net income under U.S. GAAP. The dividend can vary depending on a number of factors, including the outlook for earnings growth, capital expenditure requirements, cash flow from operations, potential acquisition opportunities, as well as the Group’s debt position. Annual dividend payments, if any, must be recommended by the Board of Directors and approved by the shareholders. In accordance with the Russian laws, earnings available for dividends are limited to profits determined in accordance with Russian statutory accounting regulations, denominated in rubles, after certain deductions. The net income of MTS OJSC for the years ended December 31, 2009, 2008 and 2007 that is distributable under Russian legislation totaled RUB 33,480 million ($1,055.4 million), RUB 40,554 million ($1,631.6 million) and RUB 37,696 million ($1,473.8 million), respectively. The following table summarizes the Group’s declared cash dividends in the years ended December 31, 2009, 2008 and 2007: 2009 Dividends declared (including dividends on treasury shares of $45,631, $36,529 and $5,967, respectively) Dividends, U.S. Dollars per ADS Dividends, U.S. Dollars per share As of December 31, 2009 and 2008, dividends payable were $1.1 million and $0.6 million, respectively. MGTS’ preferred stock—MGTS, a subsidiary of Comstar-UTS, had 15,965,850 preferred shares outstanding at December 31, 2009. MGTS’ preferred shares carry guaranteed noncumulative dividend rights amounting to the higher of (a) 10% of MGTS’ net profit as determined under Russian accounting regulations and (b) the dividends paid on common shares. No dividends may be declared on common shares before dividends on preferred shares are declared. If the preferred dividend is not paid in full in any year the preferred shares also obtain voting rights, which will lapse after the first payment of the dividend in full. Otherwise, preferred shares carry no voting rights except on resolutions regarding liquidation or reorganization of MGTS and changes/amendments to MGTS’ charter restricting the rights of holders of preferred shares. Such resolutions require the approval of 75% of the preferred shareholders. In the event of liquidation, dividends to preferred shareholders that have been declared but not paid have priority over ordinary shareholders. In June 2009, the general shareholders’ meeting of MGTS approved zero dividend payment for 2008. Accordingly, the preferred shares obtained voting rights which will lapse after the first payment of the dividend in full. In December 2009, the Group has acquired 11,135,428 preferred shares of MGTS (see Note 3). $1,265,544 3.2 0.647 2008 $1,257,453 3.2 0.631 2007 $747,213 1.9 0.375
Page 63 - Note 27: Retirement and Post Retirement Obligations (http://annualreview2009.mtsgsm.com/financial_statements/notes/27_retirement_and_post_retirement_obligations/)
Note 27: Retirement and Post Retirement Obligations
MGTS has historically provided certain benefits to employees upon their retirement and afterwards, which include monthly regular pension, death-in-service payments, lump-sum upon retirement payments, death while pensioner payments and 50% monthly telephone subsidy for the pensioners who served more than 30 years at MGTS. As of December 31, 2009, there were 10,010 active employees eligible to the program. The pension plan is terminally funded, i.e., upon retirement MGTS transfers all its obligations to a national pension fund “Sistema” (NPF “Sistema”), a subsidiary of Sistema, and from that moment onwards has no more obligations towards the pensioner regarding the pension plan. All other program benefits are financed on a pay-as-you-go basis. MGTS’ pension obligations are measured as of December 31. The following are the key assumptions used in determining the projected benefit obligation and net periodic pension expense:
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Discount rate Expected return on plan assets Projected salary growth Discount rate used for annuity contracts calculation Rate at which pension payment are assumed to be indexed Long-term inflation Staff turnover (for ages below 50)
9.00% p.a. 9.22% p.a. 9.72% p.a. 7.00% p.a. 0.00% p.a. 5.50% p.a. 5.00% p.a.
The change in the projected benefit obligation and the change in plan assets for the years ended December 31, 2009 and 2008 are presented in the following table: 2009 Old age pension Change in projected benefit obligation Projected benefit obligation, beginning of the year Service cost Interest cost Plan amendments losses Actuarial (gains)/losses Benefit payment Settlement and curtailment gain Termination benefits Foreign currency translation effect Projected benefit obligation, end of the year Change in fair value of plan asset Fair value of plan assets, beginning of the year Correction of asset value, beginning of year Actual return on plan assets Employer contributions Benefits paid Settlement Foreign currency translation effect Fair value of plan assets, end of the year Unfunded status of the plan, end of the year, net $471 (188) — 1,733 — (1,245) 1 $772 $(10,997) $— — — 3,044 (3,044) — — $— $(14,540) $471 (188) — 4,777 (3,044) (1,245) 1 $772 $(25,537) $2,473 — 187 604 — (2,689) (104) $471 $(11,453) $— — — 5,701 (5,701) — — $— $(17,797) $2,473 — 187 6,305 (5,701) (2,689) (104) $471 $(29,250) $11,924 491 914 — 17 — (1,245) — (332) $11,769 $17,797 737 1,371 — (1,686) (3,043) — — (636) $14,540 $29,721 1,228 2,285 — (1,669) (3,043) (1,245) — (968) $26,309 $17,381 807 1,102 66 (2,355) — (2,689) — (2,388) $11,924 $20,909 794 1,083 1,844 265 (5,701) — 2,102 (3,499) $17,797 $38,290 1,601 2,185 1,910 (2,090) (5,701) (2,689) 2,102 (5,887) $29,721 Other benefits Total Old age pension 2008 Other benefits Total
Reconciliations of the unfunded status of the plan for the years ended December 31, 2009 and 2008 are as follows: 2009 Old age pension Unfunded status of the plan, beginning of the year Net periodic benefit cost Contributions made (Credit)/charge to other comprehensive income/(loss), net $11,453 2,115 (1,733) (505) Other benefits $17,797 2,726 (3,044) (2,303) Total $29,250 4,841 (4,777) (2,808) Old age pension $14,908 2,570 (604) (3,137) 2008 Other benefits $20,909 4,576 (5,701) 1,512 Total $35,817 7,146 (6,305) (1,625)
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Foreign currency translation effect Unfunded status of the plan, end of the year
(333) $10,997
(636) $14,540
(969) $25,537
(2,284) $11,453
(3,499) $17,797
(5,783) $29,250
The components of the net periodic pension expense for the years ended December 31, 2009 and 2008 are as follows: 2009 Old age pension Service cost Interest cost Return on assets Termination benefits in connection with established staff reduction program Net actuarial loss recognized in a year Amortization of prior service cost Correction of asset value, beginning of year Net periodic pension expense $491 914 — — 582 (60) 188 $2,115 Other benefits $737 1,371 — — 438 180 — $2,726 Total $1,228 2,285 — — 1,020 120 188 $4,841 Old age pension $807 1,102 (187) — 933 (85) — $2,570 2008 Other benefits $794 1,083 — 2,102 597 — — $4,576 Total $1,601 2,185 (187) 2,102 1,530 (85) — $7,146
Amounts recognized in other comprehensive income for the years ended December 31, 2009 and 2008 are as follows: 2009 Old age pension Unrecognized gains Unrecognized prior service cost/(credit) Total recognized in other comprehensive income $(565) 60 $(505) Other benefits $(2,123) (180) $(2,303) Total $(2,688) (120) $(2,808) Old age pension $(3,289) 152 $(3,137) 2008 Other benefits $(331) 1,843 $1,512 Total $(3,620) 1,995 $(1,625)
The estimated net loss and prior service credit for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the year ending December 31, 2010 are $0.5 million and $0.1 million, respectively. The Group’s management expects contributions to the plan during the year ended December 31, 2010 to amount to $3.0 million. The future benefit payments to retirees under the defined benefit plan are expected to be as follows: 2010—$1.8 million; 2011—$2.0 million, 2012—$2.3 million, 2013—$3.2 million, 2014— $3.5 million and an aggregate of $20.6 million in 2015 to 2019. NPF “Sistema” does not allocate any separately identifiable assets to its clients such as MGTS. Instead, it operates a pool of investments where it invests the funds from the pension solidarity and individual accounts. The pool of investments includes primarily investments in Russian corporate bonds, Russian governmental bonds and shares of Russian issuers.
Page 64 - Note 28: General and Administrative Expenses (http://annualreview2009.mtsgsm.com/financial_statements/notes/28_general_administrative_expenses/)
Note 28: General and Administrative Expenses
General and administrative expenses for the years ended December 31, 2009, 2008 and 2007, comprised the following: 2009 Salaries and social contributions Rent 991,568 278,536 2008 1,094,148 243,837 2007 922,652 190,690
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General and administrative Taxes other than income Repair and maintenance Billing and data processing Consulting expenses Business acquisitions related costs Insurance Provision for obsolescence Total
213,255 180,775 157,932 64,169 58,931 11,353 7,561 4,113 1,968,193
256,731 215,570 221,192 62,203 50,774 — 11,452 3,870 2,159,777
239,250 172,684 218,824 45,097 40,157 — 19,339 4,931 1,853,624
Page 65 - Note 29: Segment Information (http://annualreview2009.mtsgsm.com/financial_statements/notes/29_segment_information/)
Note 29: Segment Information
Historically, the Group has reflected its reportable segments on a geographical basis. Management has taken this approach as this was effectively how the business was managed. In 2009, since the acquisition of Comstar-UTS the Group’s management determined a new operating segment and identified three reportable segments: Russia Mobile, Russia Fixed and Ukraine Mobile. These segments have been determined based on different geographical areas of business activities and the nature of their operations: mobile includes activities for the providing of wireless telecommunication services to the Group’s subscribers and distribution of mobile handsets and accessories; fixed line includes all activities for providing wireline telecommunication services, broadband and consumer Internet. Information about other business activities and operating segments that are not reportable due to non materiality of business activity was combined and disclosed in the “Other” category separately from other reconciling items. Also, historically, the Group included corporate headquarters expenses to “Russia” reportable segment as the chief operating decision maker assessed the performance of the segments on such basis. In 2009, since the acquisition of Comstar-UTS, the chief operating decision maker has changed the approach to the allocation of corporate headquarters expenses and such changes have been reflected in the financial information the chief operating decision maker now reviews. According to the new approach corporate headquarters expenses which are not directly attributable to the reportable segments are included into “Other” category. The accompanying consolidated financial statements reflect these changes for all periods presented. Intercompany eliminations presented below consist primarily of sales transactions between segments conducted under the normal course of operations. Financial information by reportable segment is presented below: December 31, 2009 Revenue: Russia Mobile Russia Fixed Ukraine Mobile Other Intercompany eliminations Total revenue Depreciation and amortization: Russia Mobile Russia Fixed Ukraine Mobile $1,107,593 193,357 352,037 $1,312,406 214,288 437,988 $1,076,586 185,337 324,976 $6,636,568 1,485,590 1,048,751 787,543 (134,910) $9,823,542 $7,840,225 1,765,226 1,661,951 779,520 (145,988) $11,900,934 $6,181,023 1,562,291 1,608,021 483,499 (110,928) $9,723,906 2008 2007
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Other Total depreciation and amortization Operating income: Russia Mobile Russia Fixed Ukraine Mobile Other Intercompany eliminations Net operating income Net operating income Currency exchange and transaction loss (gain) Interest income Interest expense Change in fair value of derivatives Impairment of investments Equity in net income of associates Other expense, net Income before provision for income taxes and minority interest
186,581 $1,839,568
186,443 $2,151,125
87,986 $1,674,885
$1,941,174 406,995 120,248 82,257 (3,107) $2,547,567 $2,547,567 252,945 (108,543) 571,719 5,420 368,355 (60,313) 23,254 $1,494,730
$2,836,660 440,441 321,328 45,503 3,404 $3,647,336 $3,647,336 565,663 (70,860) 233,863 41,554 — (75,688) 22,745 $2,930,059
$2,251,259 450,907 456,778 25,808 176 $3,184,928 $3,184,928 (161,856) (53,507) 192,237 145,860 22,691 (71,116) 38,781 $3,071,838
2009 Additions to long-lived assets: Russia Mobile Russia Fixed Ukraine Mobile Other Total additions to long-lived assets Long-lived assets: Russia Mobile Russia Fixed Ukraine Mobile Other Total long-lived assets Total assets: Russia Mobile Russia Fixed Ukraine Mobile Other Total assets $8,662,850 3,881,353 1,567,563 1,668,979 $15,780,745 $4,821,658 2,268,116 1,365,686 1,525,702 $9,981,162 $1,247,307 120,036 259,388 463,624 $2,090,355
2008 $1,595,643 353,975 405,127 313,002 $2,667,747
$4,840,847 2,276,474 1,484,317 1,345,077 $9,946,715
$6,971,541 4,282,381 1,669,996 1,793,261 $14,717,179
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Page 66 - Note 30: Commitments and Contingencies (http://annualreview2009.mtsgsm.com/financial_statements/notes/30_commitments_contingencies/)
Note 30: Commitments and Contingencies
Recent volatility in global and Russian financial markets—During 2009, a number of major economies around the world continued to experience volatile capital and credit markets. A number of major global financial institutions have been placed into bankruptcy, taken over by other financial institutions and/or supported by government funding. As at the date these consolidated financial statements are authorized for issue as a consequence of the market turmoil in capital and credit markets both globally and in Russia, notwithstanding any potential economic stabilization measures that may be put into place by the Russian Government, there exists economic uncertainties surrounding the continual availability, and cost, of credit facilities, the potential for economic uncertainties to continue in the foreseeable future. The crisis may also damage purchasing power of the Group’s customers mainly in business sector and thus lead to decline in revenue streams and cash generation. While management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group’s results and financial position in a manner not currently determinable. Operating environment—The economies in Russia and the CIS countries, while deemed to be market economies, continue to display certain traits consistent with that of an emerging market. These characteristics have in the past included higher than normal inflation, insufficient liquidity of the capital markets, and the existence of currency controls. The further development of the Russian and CIS countries’ economies will be subject to their government’s continued actions with regard to supervisory, legal and economic reforms. Capital commitments—As of December 31, 2009, the Group had executed purchase agreements of approximately $200.2 million to acquire property, plant and equipment, and intangible assets and costs related thereto. Agreement with Apple—In August 2008, the Group entered into an unconditional purchase agreement with Apple Sales International to buy 1.5 million iPhone handsets at list prices at the dates of respective purchases over the three year period. Pursuant to the agreement the Group shall also incur certain iPhone promotion costs. In 2009 and 2008, the Group made 0.4% and 7.2% of its total purchase installment contemplated by the agreement, respectively. Total amount paid for handsets purchased under the agreement for the years ended December 31, 2009 and 2008 amounted to $3.4 million and $65.4 million, respectively. MGTS long-term investment program—In December 2003, MGTS announced its long-term investment program for the period from 2004 to 2012, providing for extensive capital expenditures, including expansion and full digitalization of the Moscow telephone network. The program was approved by the resolution of the Moscow City Government on December 16, 2003. At the inception of the investment program, capital expenditures were estimated to be approximately $1,600.0 million and included reconstruction of 350 local telephone stations and installation of 4.3 million of new phone lines. As a result of implementation of the investment program, new digital equipment is being installed in the buildings housing the telephone nodes, and a substantial amount of floor space will become available after the replacement of analogue switching equipment. The additional free floor space after reconstruction is expected to be sold to third parties or rented out. There are 113 automatic telephone station buildings which are to be reconstructed or rebuilt in the course of the investment program. Currently, the management had not made a decision whether to sell the free floor space created in the course of the investment program or to rent it out. In November 2006, MGTS signed an agreement with the Moscow City Government, under which MGTS’ investment program was approved. Under the agreement, the Moscow City Government is entitled to receive not less than 30% of the market value of additional floor space constructed during the course of the investment program. The obligation arises at the time the reconstruction of specified properties is completed. In December 2005, MGTS made a prepayment to the Moscow City Government under this program which will be offset against the future liability arising as a result of the investment program. In the course of implementation of the investment program, MGTS entered into a series of agreements with Sistema-Hals, a subsidiary of Sistema, related to project development and reconstruction of buildings housing the telephone stations. The main part of the work under these contracts was to be performed between 2006 and 2012. Under the agreements, SistemaHals was to prepare the project documentation and perform construction works on behalf of MGTS, and MGTS was to reimburse all the expenses incurred in relation to the construction process with a margin of 4.75% on such expenses and to pay a fixed fee of $0.04 million per one building. During 2009 and 2008, project development and site preparation works were performed by Sistema-Hals on 96 sites, which resulted in $2.8 million and $11.0 million addition to construction in-progress in 2009 and 2008, respectively, and recognition of payable to Sistema-Hals (see Note 25). No construction or other works were performed in relation to the other sites in 2009, as the business plans are still under development. In February 2009, the Board of Directors of MGTS approved the cancellation of agreements with Sistema-Hals with respect to 26 sites, which also extinguishes the respective portion of MGTS’ liability to Sistema-Hals, and signing of 26 new agreements with investor companies. Under the new agreements, the investor companies would perform all necessary reconstruction work and obtain the property rights for the reconstructed buildings except for the premises locating the digitalized nodes which would remain MGTS property. In addition, within 12 months after transfer of the building into the investment project, MGTS is to receive cash payment equal to MGTS’ share in the value of the building before reconstruction as appraised by an independent valuation firm in 2008, plus interest at 20% per annum accrued for the period from transfer of the building into the project and the date of payment. As of December 31, 2009, cancellation of 2 out of aforementioned 26 agreements was signed by Sistema-Hals.
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Operating leases—The Group has entered into non-cancellable agreements to lease the space for telecommunication equipment, offices and transmission channels, which expire in various years up to 2058. Rental expenses under the operating leases of $278.5 million, $243.8 million and $190.7 million for the years ended December 31, 2009, 2008 and 2007, respectively, are included in operating expenses in the accompanying consolidated statements of operations. Rental expenses under the operating leases of $168.7 million, $175.8 million and $129.1 million for the years ended December 31, 2009, 2008 and 2007, respectively, are included in cost of services in the accompanying consolidated statements of operations. Future minimum lease payments due under these leases at December 31, 2009 are as follows: Payments due in the years ended December 31, 2010 2011 2012 2013 2014 Thereafter Total $196,858 33,741 25,768 11,707 8,313 93,609 $369,996
Taxation—Russia and the CIS countries currently have a number of laws related to various taxes imposed by both federal and regional governmental authorities. Applicable taxes include VAT, corporate income tax (profits tax), a number of turnover based taxes, and payroll (social) taxes. Laws related to these taxes have not been in force for significant periods, in contrast to more developed market economies; therefore, the government’s implementation of these regulations is often inconsistent or nonexistent. Accordingly, few precedents with regard to tax rulings have been established. Tax declarations, together with other legal compliance areas (for example, customs and currency control matters), are subject to review and investigation by a number of authorities, which are enabled by law to impose extremely severe fines, penalties and interest charges. These facts create tax risks in Russia and the CIS countries that are more significant than typically found in countries with more developed tax systems. Generally, according to Russian tax legislation, tax declarations remain open and subject to inspection for a period of three years following the tax year. As of December 31, 2009, tax declarations of MTS OJSC and other subsidiaries in Russia for the preceding three fiscal years were open for further review. In October 2009, the Russian tax authorities completed the tax audit of Sibintertelecom for the years ended December 31, 2006, 2007 and 2008. Based on the results of this audit, the Russian tax authorities assessed that RUB 174.5 million ($5.8 million as of December 31, 2009) of additional taxes, penalties and fines were payable by the Group. The resolution has not come into force yet as the Group has prepared and filed an appeal with the Federal Tax Service to recognize the tax authorities’ resolution to be invalid. As of December 31, 2009, no provision was recorded in the consolidated financial statements in respect of this matter, as the management believes the decision to be favorable. The Group purchases supplemental software from foreign suppliers of telecommunication equipment in the ordinary course of business. The Group’s management believes that custom duties are calculated in compliance with the applicable legislation. However there is a risk that the customs authorities may take a different view and impose additional custom duties. As of December 31, 2009 and 2008, no provision was recorded in the consolidated financial statements in respect of such additional duties. Pricing of revenue and expenses between each of the Group’s subsidiaries and various discounts and bonuses to Group’s subscribers in the course of performing its marketing activities might be a subject to transfer pricing rules. The Group’s management believes that taxes payable are calculated in compliance with the applicable tax regulations relating to transfer pricing. However there is a risk that the tax authorities may take a different view and impose additional tax liabilities. As of December 31, 2009 and 2008, no provision was recorded in the consolidated financial statements in respect of such additional claims. Management believes that it has adequately provided for tax and customs liabilities in the accompanying consolidated financial statements. As of December 31, 2009 and 2008, the provision accrued amounted to $68.2 million and $27.6 million, respectively. In addition, the accrual for unrecognized income tax benefits, potential penalties and interest recorded in accordance with the authoritative guidance on income taxes totaled $4.2 million and $8.0 million as of December 31, 2009 and 2008, respectively. However, the risk remains that the relevant authorities could take differing positions with regard to interpretive issues and the effect could be significant. 3G license—In May 2007, the Federal Service for Supervision in the Area of Communications and Mass Media awarded MTS a license to provide 3G services in the Russian Federation. The 3G license was granted subject to certain capital and other commitments. The major conditions are that MTS will have to build a certain number of base stations that support 3G standards and will have to start providing services in the Russian Federation by certain date, and also will have to build a certain number of base stations by the end of the third, fourth and fifth years from the date of granting the license. Management believes that as of December 31, 2009 MTS is in compliance with these conditions. Issued guarantees—In 2006, MGTS became a guarantor under a credit facility provided to InvestSvyazHolding, a subsidiary of Sistema, by Komercni banka, a.s., Prague. The credit line for the total amount of €10.4 million matures in April 2011. MGTS’ guarantee amounted to $6.7 million as of December 31, 2009. In 2006, MGTS became a guarantor under a credit facility provided to MBRD, a subsidiary of Sistema, by Bankgesellschaft Berlin AG, Berlin. The credit line for the total amount of €2.1 million matures in June 2011. MGTS’ guarantee amounted to $0.9 million as of December 31, 2009.
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Under these guarantees the Group could be potentially liable for a maximum amount of $7.6 million in case of borrowers’ default under the obligations. As of December 31, 2009, no event of default has occurred under any of the guarantees issued by the Group. The Group does not recognize a liability at inception for the fair value of the guarantor’s obligation, as provisions of the authoritative guidance on guarantees do not apply to the guarantees issued between corporations under common control. Bitel—In December 2005, MTS Finance acquired a 51.0% stake in Tarino Limited (”Tarino”), from Nomihold Securities Inc. (”Nomihold”), for $150.0 million in cash based on the belief that Tarino was at that time the indirect owner, through its wholly owned subsidiaries, of Bitel LLC (”Bitel”), a Kyrgyz company holding a GSM 900/1800 license for the entire territory of Kyrgyzstan. Following the purchase of the 51.0% stake, MTS Finance entered into a put and call option agreement with Nomihold for “Option Shares,” representing the remaining 49.0% interest in Tarino shares and a proportional interest in Bitel shares. The call option was exercisable by MTS Finance from November 22, 2005 to November 17, 2006, and the put option was exercisable by Nomihold from November 18, 2006 to December 8, 2006. The call and put option price was $170.0 million. Following a decision of the Kyrgyz Supreme Court on December 15, 2005, Bitel’s corporate offices were seized by a third party. As the Group did not regain operational control over Bitel’s operations in 2005, it accounted for its 51.0% investment in Bitel at cost as at December 31, 2005. The Group appealed the decision of the Kyrgyz Supreme Court in 2006, but the court did not act within the time period permitted for appeal. The Group subsequently sought the review of this dispute over the ownership of Bitel by the Prosecutor General of Kyrgyzstan to determine whether further investigation could be undertaken by the Kyrgyz authorities. In January 2007, the Prosecutor General informed the Group that there were no grounds for involvement by the Prosecutor General’s office in the dispute and that no legal basis existed for the Group to appeal the decision of the Kyrgyz Supreme Court. Consequently, the Group decided to write off the costs relating to the purchase of the 51.0% stake in Bitel, which was reflected in its audited annual consolidated financial statements for the year ended December 31, 2006. Furthermore, with the impairment of the underlying asset, a liability of $170.0 million was recorded with an associated charge to non-operating expenses. In November 2006, MTS Finance received a letter from Nomihold purporting to exercise the put option and sell the Option Shares for $170.0 million to MTS Finance. In January 2007, Nomihold commenced an arbitration proceeding against MTS Finance in the London Court of International Arbitration in order to compel MTS Finance to purchase the Option Shares. Nomihold seeks specific performance of the put option, unspecified monetary damages, interest, and costs. The matter is currently pending. MTS Finance is vigorously contesting this action and has asked the arbitration tribunal to dismiss Nomihold’s claim. In connection with the above mentioned put option exercise and the uncertainty as to the resolution of the dispute with Nomihold, the Group recognized a liability in the amount of $170.0 million in its audited annual consolidated financial statements with a corresponding charge to other non-operating expenses as of December 31, 2006 and for the year then ended. In addition, three Isle of Man companies affiliated with the Group (the “KFG Companies”), have been named defendants in lawsuits filed by Bitel in the Isle of Man seeking the return of dividends received by these three companies in the first quarter of 2005 from Bitel in the amount of approximately $25.2 million plus compensatory damages, and to recover approximately $3.7 million in losses and accrued interest. In the event that the defendants do not prevail in these lawsuits, the Group may be liable to Bitel for such claims. The KFG Companies have also asserted counterclaims against Bitel, and claims against other defendants including Altimo LLC (”Altimo”), and Altimo Holdings & Investments Limited (”Altimo Holding”), for the wrongful appropriation and control of Bitel. On November 30, 2007 the High Court of Justice of the Isle of Man set aside orders it had previously issued granting leave to serve the non-Manx defendants out of the jurisdiction as to the KFG Companies’ counterclaims on the basis of a lack of jurisdiction. The KFG Companies appealed that ruling to the Isle of Man Staff of Government and the appeal hearing took place in July 2008. On November 28, 2008, the Staff of Government reversed the High Court and ruled that the case should proceed in the Isle of Man. The defendants have sought leave to appeal from the Judicial Committee of the Privy Council of the House of Lords of the United Kingdom. It is not possible at this time to predict the ultimate outcome or resolution of these claims. In a separate arbitration proceeding initiated against the KFG Companies by Kyrgyzstan Mobitel Investment Company Limited (”KMIC”), under the rules of the London Court of International Arbitration, the arbitration tribunal in its award found that the KFG Companies breached a transfer agreement dated May 31, 2003 (the “Transfer Agreement”), concerning the shares of Bitel. The Transfer Agreement was made between the KFG Companies and IPOC International Growth Fund Limited (”IPOC”), although IPOC subsequently assigned its interest to KMIC, and KMIC was the claimant in the arbitration. The tribunal ruled that the KFG Companies breached the Transfer Agreement when they failed to establish a date on which the equity interests in Bitel were to be transferred to KMIC and by failing to take other steps to transfer the Bitel interests. This breach occurred prior to MTS Finance’s acquisition of the KFG Companies. The arbitration tribunal ruled that KMIC is entitled only to damages in an amount to be determined in future proceedings. At the request of the parties, the tribunal agreed to stay the damages phase of the proceedings pending the resolution of the appeals process now before the second instance court in the Isle of Man, as described above. The Group is not able to predict the outcome of these proceedings or the amount of damages to be paid, if any. Beta Link—On August 12, 2009, Beta Link CJSC (”Beta Link”) filed a claim against MTS, seeking (i) payment of RUB 238.5 million ($7.9 million as of December 31, 2009) in dealer commission, (ii) payment of $10.0 million in penalties for breach of dealers’ agreement and (iii) payment of $2.7 million of unrealized potential benefits. On December 11, 2009, Moscow Arbitration Court ruled against MTS enacting to pay an amount of RUB 118.6 million ($3.9 million as of December 31, 2009) and $10 million in penalties. MTS prepared and filed an appeal in response of Moscow Arbitration Court ruling, which resulted in a judgment in favor of the Group on March 23, 2010. Beta Link, in return, prepared the further appeal against MTS. Group’s management is unable to predict the outcome of this claim at this time. As of December 31, 2009, the provision for the entire amount totaled to $13.9 million was recorded in the consolidated financial statements in respect of this claim.
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Other litigations—In the ordinary course of business, the Group may be party to various legal, tax and customs proceedings, and subject to claims, certain of which relate to the developing markets and evolving fiscal and regulatory environments in which MTS operates. Management believes that the Group’s liability, if any, in all such pending litigation, other legal proceeding or other matters will not have a material effect upon its financial condition, results of operations or liquidity of the Group.
Page 67 - Note 31: Subsequent Events (http://annualreview2009.mtsgsm.com/financial_statements/notes/31_subsequent_events/)
Note 31: Subsequent Events
For the purpose of the accompanying consolidated financial statements, subsequent events have been evaluated through April 29, 2010, which is the date these financial statements were available to be issued. Increase in MGTS Tariffs—In January 2010, the Federal Tariff Service approved new tariffs for MGTS residential and corporate subscribers effective February 1, 2010. The tariffs for subscribers increased at an average rate of 10.3% in RUB. Non-controlling interest in EuroTel—In February 2010, the Group completed the cash acquisitions of the outstanding 20% minority stake in Yekaterinburg based cable-TV and communications operator EuroTel LLC and a 25% minority stake in Management and Leasing LLC, which owns communication infrastructure in Yekaterinburg. The Group now owns 100% of the issued share capital in both companies. The total cash consideration for the two related acquisitions is RUB 100 million ($3.3 million at the date of acquisition). Acquisition of Tenzor Telecom—In February 2010, the Group acquired 100% in Tenzor Telecom, an alternative telecommunications operator based in Yaroslavl in Central Russia, for RUB 220 million ($7.3 million as of the date of acquisition). The acquisition was made in frame of regional expansion program of the Group. Decrease in interest rates Gazprombank—In February 2010 MTS reached an agreement with Gazprombank to reduce the interest rates on the outstanding loans. The interest rate on the EURO 100.0 million credit facility with original maturity in September 2012 was reduced from an annual rate of 8% to 7%. The interest rate on the facility of RUB 6.46 billion with maturity in September 2012 was reduced from an annual rate of 13% to 10.95%. MTS also reduced the interest rate on the revolving credit line in the amount of €100.0 million with maturity in September 2012 from 8% to 7%. Raising of financing from Credit Agricole Corporate and Investment Bank and BNP Paribas—On February 18, 2010 the Group entered into a credit facility agreement in amount of up to $97.0 million with Credit Agricole Corporate and Investment Bank and BNP Paribas backed by Hermes. $55.1 million of the facility is available till April 15, 2010, the rest $41.9 million till March 30, 2011. The funds are to be used for purchase of telecommunication software and equipment from Alcatel Lucent Deutschland. The facility matures in 2017 and bears an interest of EURIBOR + 1.65%. The related commitment fee is set at 0.825% on undrawn balance of the facility. Legal proceedings by anti-monopoly authorities—In March 2010, the Federal Anti-Monopoly Service of Russia (”FAS”) started legal proceedings against MTS, VimpelCom OJSC and Megafon OJSC about their alleged violation of antimonopoly legislation by charging artificially high prices for roaming services. The Group does not possess information related to the date that this case will be considered by the FAS. In case roaming tariffs of the Group are found to be in violation of applicable legislation, the Group may face certain fines of up to 15% of the revenue from the services provided in violation of the legislation. Management believes that there was no violation of the anti-monopoly legislation and no amounts have been accrued in the accompanying consolidated financial statements in relation to this claim. Amendment to Sberbank Credit Line Facility—In March 2010, Comstar-UTS agreed to amend the repayment schedule of Sberbank credit line facility (see Note 17). Under the new schedule, the loan principal is repayable in eight quarterly installments of RUB 3,250.0 million ($107.5 million as of December 31, 2009) each starting from September 2010. In addition, nominal interest rate was decreased to 10.5% per annum for the period from March 1, 2010 till September 27, 2010 and to 11.75% per annum thereafter. Approval of new credit facility from Sberbank—In March 2010 Sberbank approved a new RUB 5.8 billion ($191.8 million as of December 31, 2009) credit facility for Comstar. This facility can be utilized by the end of 2010, has an interest rate of 10.5% and the repayments of the amounts borrowed under the facility start in 2012. MGTS dividend—In March 2010, the extraordinary general shareholders’ meeting of MGTS approved dividend on preferred shares of MGTS for the total amount of RUB 321.9 million (approximately $10.7 million). The dividends are due to be paid until the end of May 2010. Upon dividend payment, preferred shares of MGTS will become non-voting. Voluntary partial repayment of RUB 12 billion Sberbank facility—On April 5, 2010 the Group voluntarily repaid RUB 6 billion (equivalent of $205.3 million as of the date of repayment) of its 12 billion Sberbank facility. Raising of financing from the Bank of Moscow—On April 6, 2010 the Group signed a credit agreement with the Bank of Moscow in amount of RUB 22 billion. The terms of the agreement stipulate a three-year maturity with one-year extension option and an annual interest of up to 10.25%. The credit line can be drawn down until October 1, 2010. The facility carries no commitment fees or any other upfront fees payable at signing. However, the Group is to pay fee of 0.2% from each amount drawn under the agreement.
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Decrease in interest rates Sberbank—On April 13, 2010, the Group lowered interest rates on MTS’ Sberbank facilities. The interest rate for RUB 47 billion facility closed in September 2009 was set at 10.65%, the interest rate for RUB 12 billion facility closed in August 2009 (partially repaid in April 2010) was set at 9.75%. Repurchase of MTS OJSC Notes due 2013—In April 2010 the Group set a new 7.0% coupon rate for the coupon payments to be made on MTS OJSC Notes due 2013 until maturity. On April 26, 2010, upon demand of certain noteholders, the Group repurchased 7.1 million of MTS OJSC Notes due 2013 at nominal value of RUB 7.1 billion ($242.5 million as of the date of the transaction). Repurchase of MTS OJSC Notes due 2015—In April 2010 the Group set a new 7.75% coupon rate for the coupon payments to be made on MTS OJSC Notes due 2015 until maturity. On April 29, 2010, upon demand of certain noteholders, the Group repurchased 6.3 million of MTS OJSC Notes due 2015 at nominal value of RUB 6.3 billion ($214.5 million as of the date of the transaction). Change of ADS ratio—Effective May 3, 2010, the ratio of Company’s ADSs changed from 1 ADS per 5 common shares to 1 ADS per 2 common shares. Agreement to sell Svyazinvest stake to Rostelecom—On May 20, 2010, Comstar-UTS, MGTS Finance S.A., a company controlled by Comstar-UTS, and Rostelecom entered into agreements involving the sale of a 25% + 1 share of Svyazinvest to Rostelecom for RUB 26 billion. The closing of the transactions is subject to a number of conditions including, inter alia, obtaining the necessary corporate approvals by the parties involved, regulatory clearances, including those from the FAS, and the entry by Sistema and Svyazinvest into an exchange transaction, upon completion of which, Svyazinvest will control 100% of the share capital in Sky Link and Sistema will acquire the 23.33% stake in MGTS controlled by Svyazinvest. The precise terms and consummation of this and certain additional related transactions remain subject to the negotiation and execution of definitive binding documentation by these and other parties. The agreements signed on May 20, 2010 are in line with the previously announced non-binding memorandum of understanding (”MOU”) concluded by Comstar-UTS with Sistema and Svyazinvest in November 2009 (see Note 14). Repayment of EBRD, Nordic Investment Bank and European Investment Bank loans—On May 26, 2010 the Group repaid loans from EBRD, Nordic Investment Bank and European Investment Bank totalling EUR 413.0 million and accrued interest totalling EUR 13.9 million. Notes issue—On June 22, 2010, the Group issued U.S. Dollar denominated loan participation notes in the amount of $750.0 million with an annual interest rate of 8.625% and a maturity in June 2020. The notes were issued by MTS International Funding Limited, a private company organized and existing as a private limited company under the laws of Ireland, and are listed on the Irish Stock Exchange. Dividends—On June 24, 2010, the annual general meeting of the Company’s shareholders approved dividends of RUB 15.40 per ordinary share for the fiscal year ended December 31, 2009 amounting to a total of RUB 30.70 billion ($991.3 million at the exchange rate as of June 24, 2010). Repurchase of MTS OJSC Notes due 2018—In June 2010 the Group set a new 8.0% coupon rate for the coupon payments to be made on MTS OJSC Notes due 2018 until maturity. On June 24, 2010, upon demand of certain noteholders, the Group repurchased the Notes in the amount of 179.5 million rubles ($5.8 million as of the date of the transaction). Proposed merger of MTS and Comstar-UTS—On June 25, 2010, MTS announced that the MTS and Comstar-UTS Boards of Directors approved the merger (”prisoedinenie” under Russian law) of MTS and Comstar-UTS. The merger is conditional on the approval of 75% of the shareholders present at each company’s Extraordinary Shareholders Meeting (EGM), the receipt of regulatory clearance and other closing conditions. MTS and Comstar-UTS expect to convene EGMs on December 23, 2010, at which MTS’ and Comstar UTS’s respective shareholders will vote on the merger. If approved, the companies expect to complete the merger transaction in the second quarter of 2011. MTS and Comstar-UTS shareholders who vote against or do not vote on the merger will have the right to sell their shares back to MTS or Comstar-UTS, respectively, for cash at a price set by the respective companies’ Boards of Directors, subject to the statutory limit of 10% of each company’s Net Asset Value under Russian Accounting Standards. MTS also announced contemporaneously with the merger its intent to launch a voluntary tender offer for up to 9.0% of Comstar UTS’s issued share capital at RUR 220.0 per Comstar-UTS ordinary share. The tender offer has been submitted to the Federal Commission on the Securities Market for review and will be delivered to Comstar-UTS shareholders following this review.
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Financial Downloads
Financial Statements
Download balance sheet (103KB)
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Contacts
INVESTOR CONTACTS
If you have any questions or require further information on MTS, please contact the Investor Relations Department: Joshua Tulgan, Director, Investor Relations Danny Khoussainov, Deputy Director, Investor Relations Telephone: +7 (495) 223-20-25 Fax: +7 (495) 911-65-67 E-mail: [email protected] Address: Investor Relations Department, Mobile TeleSystems, Ul. Vorontsovskaya 5, Bldg. 2, 109147 Moscow, Russia.
MEDIA CONTACTS
For any media or events questions, please contact: Arseny Tseytlin Telephone: +7 (495) 223-20-25 E-mail: [email protected]
BUSINESS CONTACTS
For information on marketing, advertising, new technologies and value-added services, please contact: Telephone: +7 (495) 911-65-56 Fax: +7 (495) 911-65-25
CUSTOMER CONTACTS
For information on network operation, tariffs and services, payment and billing, please contact our MTS’ Contact Center: Telephone: +7 (495) 766-01-66
MTS SPEAKER REQUEST FORM
To request a speaker for an event, please complete our MTS Speaker Request Form here: http://www.mtsgsm.com/news/contact/prform/. Page 70 - Glossary (http://annualreview2009.mtsgsm.com/other_information/glossary/)
Glossary
Active Line (fixed line services)
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A line is considered “active” if the subscriber has used the service within the last 30 days.
ADS (ADR)
Listed shares of common stock, represented by American Depositary Receipts (also called American Depositary Shares), or ADR, on the New York Stock Exchange under the symbol “MBT.” Each ADR represents five underlying shares of the Company’s common stock. Prior to January 1, 2005, each ADR represented 20 shares.
ARPU
Average monthly service revenue per subscriber is calculated by dividing the Company’s service revenue for a given period, including guest roaming and interconnect fees, by the average number of subscribers during that period and dividing by the number of months in that period. As of June 30, 2006, the methodology for reporting average revenue per user for our Russian subscribers was changed to include interconnect revenue in the calculation.
CAPEX
Or capital expenditures, includes the Company’s purchases of property, plant and equipment and intangible assets.
CDMA450
A third generation digital cellular telephony technology that is used by the Company in Ukraine for the provision of wireless services in a 450 MHz frequency range. The technology allows speeds of up to 1.8 MBit/s of uplink and up to 3.1 MBit/s of downlink connection.
Churn
Defined as the total number of subscribers who cease to be a subscriber (as defined above) during the period (whether involuntarily due to non-payment or voluntarily, at such subscriber’s request), expressed as a percentage of the average number of our subscribers during that period.
GSM
Or Global System for Mobile communications, is a second-generation digital cellular telephony technology that can be used for the provision of wireless services.
IMT-2000/3G/UMTS
A third generation digital cellular telephony technology that can be used for the provision of wireless services and allows subscribers to achieve faster data download speeds with top download capacity using HSPA (High Speed Packet Access) technology of up to 3.6 MBit/s.
Last mile
The last portion of the telephone access line that is installed between a local telephone company switching facility and the customer’s premises.
MOU
Average monthly minutes of usage per subscriber is calculated by dividing the total number of minutes of usage during a given period by the average number of subscribers during the period and dividing by the number of months in that period.
Net debt
Represents total debt less cash and cash equivalents and short-term investments.
OIBDA
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Represents operating income before depreciation and amortization. The Company’s OIBDA may not be similar to OIBDA measures of other companies; is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that OIBDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions of mobile operators and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our OIBDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the wireless telecommunications industry.
ROIC
Or Return on Invested Capital, is measured as net income plus interest expense plus depreciation expense divided by closing equity plus minority interest plus long-term financial obligations.
SAC
Subscriber acquisition costs are calculated as total sales and marketing expenses and handset subsidies for a given period divided by the total number of gross subscribers added during that period.
Subscriber
Defined as an individual or organization whose account shows chargeable activity within sixty one days in the case of post-paid tariffs, or one hundred and eighty three days in the case of our pre-paid tariffs, or whose account does not have a negative balance for more than this period.
Total debt
Comprised of the current portion of debt, current capital lease obligations, long-term debt and long-term capital lease obligations.
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Using This Site
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Disclaimer
Some of the information in this document may contain projections or other forward-looking statements regarding future events or the future financial performance of MTS, as defined in the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify forward looking statements by terms such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “will,” “could,” “may” or “might,” and the negative of such terms or other similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not undertake or intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. We refer you to the documents MTS files from time to time with the U.S. Securities and Exchange Commission, specifically the Company’s most recent Form 20-F. These documents contain and identify important factors, including those contained in the section captioned “Risk Factors” that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, the severity and duration of current economic and financial conditions, including volatility in interest and exchange rates, commodity and equity prices and the value of financial assets; the impact of Russian, U.S. and other foreign government programs to restore liquidity and stimulate national and global economies, our ability to maintain our current credit rating and the impact on our funding costs and competitive position if we do not do so, strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses, including Comstar-UTS, potential fluctuations in quarterly results, our competitive environment, dependence on new service development and tariff structures, rapid technological and market change, acquisition strategy, risks associated with telecommunications infrastructure, governmental regulation of the telecommunications industries and other risks associated with operating in Russia and the CIS, volatility of stock price, financial risk management and future growth subject to risks.
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