Contents - MegaFon

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Contents - MegaFon
Contents
Contents
2
Address of the Chief Executive Officer to the Shareholders
6
MegaFon’s Network Coverage Area
8
The Company’s Key Performance Indicators in 2007
and Its Position within the Industry
12
12
14
15
16
18
About the Company
22
Report by the Board of OJSC “MegaFon”
on the Results of the Company’s
Development in its Priority Directions
22
23
23
24
25
Corporate Finance Management
HR Management
Administration and Quality Management
Meetings of the Board of Directors of OJSC “MegaFon”
Report on Payment of Declared (Accrued) Dividends
under Shares of OJSC “MegaFon”
28
28
29
30
32
34
35
Operations
35
Information on Compliance
with the Corporate Code by OJSC “MegaFon”
36
Annual Accounting Statements
of OJSC “MegaFon” for 2007
42
Consolidated Financial Statements for 2007
Shareholders Equity of OJSC “MegaFon”
Governance of the Company
Board of Directors of OJSC “MegaFon”
Sole and Collegiate Executive Bodies of OJSC “MegaFon”
Basic Risk Factors Related to Operations of OJSC “MegaFon”
Marketing
Sales and Customer Care
Value-Аdded Services
Technology Development
Special Programs
International Projects
73 Annexes
73 Annex 1. Corporate Events
74 Annex 2. Basic Provisions of the Corporate Code
Reflected in the Company’s Internal Documents
0–1
Address of the Chief Executive Officer to the Shareholders
Sergey Soldatenkov
Chief Executive Officer
Address of the Chief Executive Officer
to the Shareholders
Dear Ladies and Gentlemen,
I am pleased to present to you the Annual Report of OJSC “MegaFon” (referred to
hereinafter also as “Company” or “MegaFon”), which summarizes the outstanding
results of the Company in 20071.
Last year we received the revenue of 5.72 BUSD, a 53% increase over 2006. Our 2007 EBITDA
of 2.9 BUSD is 58% better than the prior year. EBITDA margin in 2007 was 51%. Net income in
2007 of 1.4 BUSD was 70% higher than last year. Net cash flow in 2007 amounted to 885 MUSD,
which is 3.5 times increase over last year2.
The subscriber base grew by 6 mln and approached 35.7 mln customers at the end of 2007,
thus, we increased the Russian market share from 19.5% to 20.5%.
More significantly, in 2007 MegaFon overtook “The Big Three” competitors in terms of the growth rate
of Russian revenue both in absolute terms (1.8 BUSD) and in relative terms (49%). We increased our
share in aggregate revenue of the Big Three mobile operators in Russia from 29% to 31%. We raised
our Russian EBITDA share among the three largest operators from 28% to 31%.
In 2007, MegaFon completed the coverage of the licensed territory. Construction of the network
in the republics of Altai and Tyva enabled MegaFon to become the only mobile operator in Russia
with network that operates in all RF subjects.
1. Hereinafter in this Report the date refers to the Company , its 100%-owned subsidiaries, and CJSC “TTmobile”.
2. Until December 31, 2006, the Company used US Dollars as the currency used in preparation of US GAAP financial statements. Starting from January 01,
2007, the Company changed its reporting currency from US Dollars to Rubles due to the fact that the Ruble is the basic currency for the Company’s operations.
For the sake of comparisons to prior periods the information in this report is presented in US Dollars.
Financial information for 2007 presented in this Report in USD was obtained as a result of the convenience translation methodology under which 2007
financial data was recalculated in USD at the official exchange rate of the RF Central Bank as of the end of the reporting period.
In spring 2007, MegaFon demonstrated the best tender results – 560 points – and became
the holter of №1 UMTS license. Just 6 months later we summarized our theoretical
investigations and practical experience from UMTS network operating in Tajikistan
and developed the first commercial product for 3G users in Russia. The first UMTS network
in Russia started to work in Saint-Petersburg and Leningrad oblast on October 24, 2007.
In 2007, we continued to improve the international corporate credit ratings of MegaFon.
The rating agencies, Moody’s и S&P, upgraded the Company’s rating on the basis of their
review of operating and financial performance of the Company during the reporting year.
We expect that in 2008 the Russian economy will continue to grow, income of Russian
consumers will grow as well, which will ensure good prospects for higher profitability
of mobile communications. Given this solid economic background, we believe that the
Russian mobile market will remain in relative terms one of the most dynamic and fastestgrowing emerging markets in the world. Our intention is to provide for priority growth
in the Russian Federation with the purpose of further enhancement of our competitive
position and improvement of our financials.
We hope you are pleased with our operating and financial performance in 2007, and with
your continuing support, we intend to pursue our consistent strategy to grow successfully
and profitably, further increasing the value of the Company.
2–3
–5
6
8
MegaFon’s Network Coverage Area
The Company’s Key Performance
Indicators in 2007 and Its Position
within the Industry
MegaFon’s Network Coverage Area
MegaFon’s Network Coverage Area
Total number of subcribers 35 655 937 mln
6–7
The Company’s Key Performance Indicators in 2007
Subscriber Base Distribution among the Regions:
The Company’s Key Performance Indicators in 2007
and Its Position within the Industry
In 2007, the subscriber base of MegaFon grew by 20%: from 29.7M as of January 1, 2007 to
35.7M as of December 31, 2007.
North-West
During the same period MegaFon’s market share grew from 19.5 % to 20.5 %.
The Company’s share in the revenue of the Big Three for 2007 is 31 % of total revenue of the
three major Russian operators.
The MegaFon’s share in the revenue of the Big Three in Russia in 2006 and 2007:
Volga
Center
Urals
The MegaFon’s share in the revenue
of the Big Three in Russia in 2006
The MegaFon’s share in the revenue
of the Big Three in Russia in 2007
29.1
31.0
34.4%
36.5%
Moscow
Siberia
North Caucasus
Far East
Tajikistan
34.7%
34.3%
MegaFon is still growing faster than other Big Three operators. The Company’s growth
rates of subscriber base and that of revenue are above the growth rates of subscriber
base in the entire market (14% for 2007) and are higher than the revenue growth rates
in the industry.
It became possible to achieve such results due to centralization of commercial activity
of the regional subsidiaries and the NW Branch of OJSC “MegaFon”, in particular,
through shifting focus in the structure of our marketing offers to stimulating the growth
of on-net traffic. As a result the clients got attractive prices for on-net calls, and we got
an opportunity to increase our business efficiency by decreasing the share of outgoing
calls to networks of other operators – in 2007 the share of on-net traffic increased
on average from 5% to 15%. The Company’s marketing policy in 2007 was focused
on stimulating usage of services. Our offers became more popular, convenient, and
interesting.
8–9
–11
12
22
About the Company
Report by the Board
of OJSC “MegaFon”
on the Results of the
Company’s Development
in its Priority Directions
About the Company
Shareholders Equity of OJSC “MegaFon”
About the Company
OJSC “MegaFon” started its operations on June 17, 1993, after incorporation
of CJSC “North West GSM”, on the basis of which OJSC “MegaFon”
was established in 2002. In 1994 MegaFon began to provide cellular
telecommunication services in the North-West region of the Russian
Federation.
2. Sonera Holding B.V. – legal entity under the law of the Kingdom of the Netherlands;
legal address: Rodezand 34k, 3011 AN, Rotterdam, the Netherlands; owner of 1,612,001
common registered shares of the Company that is 26.0 % of voting shares and charter
capital of the Company;
3. Open Joint Stock Company “CТ-Mobile” – legal entity under the law of the Russian
Federation; legal address: Kuzovatkina street, 14, Nignevartovsk 628611 Khanti-MansiiskiUGRA Autonomous Region, Russia; owner of 1,556,194 common registered shares of the
Company that is 25.1 % of voting shares and charter capital of the Company;
In August 2001, OJSC “Telecominvest”, Telia Group (Sweeden), Sonera Holding B.V.
(the Netherlands), LLC “CT-Mobile”, and IPOC International Growth Fund Limited signed
the agreement on merging CJSC “North West GSM”, CJSC “Sonic Duo” and eight regional
mobile operators for the purposes of establishing a nationwide mobile operator under
the single brand of “MegaFon”.
4. IPOC International Growth Fund Limited – legal entity under the law of the Bermudas;
location: Richmond House,12 Par-La-Ville Road, 5th Floor, Hamilton, HM08, Bermuda;
owner of 496,003 common registered shares of the Company that is 8.0 % of voting shares
and charter capital of the Company;
Early in 2007, Company completed the reorganization of its 100% subsidiaries,
CJSC “Volzhsky GSM” and “CJSC “Mobicom-Kirov”, in the form of merger into
OJSC “MCS-Povolzhie” (09.01.2007) and CJSC “Ural GSM” (01.01.2007) respectively,
100% subsidiaries of the Company.
5. Telia International AB – legal entity under the law of Sweden; legal address:
Marbackagatan 11, 12386 Farsta, Stockholm, Sweden; owner of 394,953 common
registered shares of the Company that is 6.37 % of voting shares and charter capital
of the Company;
The license portfolio of the Company and its 100%-owned subsidiaries covers the entire
territory of the Russian Federation with a population over 145 million. As of December
31, 2007, OJSC “MegaFon” had commercial operations in 85* subjects of the Russian
Federation. Subjects of Federation are combined into eight “enlarged regions”, called
macro regions.
6. Telia International Management AB – legal entity under the law of Sweden; legal address,
Marbackagatan 11, SE-12386 Farsta, Sweden; owner of 107,247 common registered shares
of the Company that is 1.73 % of voting shares and charter capital of the Company;
* Since March 1, 2008 the Russian Federation consists of 83 subjects.
Shareholders Equity of OJSC “MegaFon”
The shareholders equity of OJSC “MegaFon” as of December 31, 2007,
was 62,000,020 (Sixty Two Million and Twenty) rubles divided into
6,200,002 (Six Million Two Hundred Thousand and Two) common registered
shares each with face value of 10 (Ten) rubles.
The first issue of the Company’s shares took place in 1995 when 10,000 (Ten Thousand)
shares were issued with face value of 100 (One Hundred) rubles. In 1997, the Company
placed its second and third issues. In 2002, 3,100,001 (Three Million One Hundred
Thousand and One) shares were placed during the forth issue.
In 2003, by the order of the Federal Commission for the Securities Market all issues
of common registered uncertified shares of the Company were combined, and the single
state number 1-02-00822-J was assigned hereto.
Currently, the shareholders of OJSC “MegaFon” are leading Russian and foreign companies
operating in the field of telecommunications:
1. Open Joint Stock Company “Telecominvest” – legal entity under the law of the Russian
Federation; legal address: 54 Nevski av., St Petersburg 191011 Russia; owner of 1,940,601
common registered shares of the Company that is 31.3 % of voting shares and charter
capital of the Company;
7. Limited Liability Company “Contact-С” – legal entity under the law of the Russian
Federation; legal address: Kalinina street 9, Priozersk, 188760, Leningrad region, Russia;
owner of 93,003 common registered shares of the Company that is 1.5 % of voting shares
and charter capital of the Company.
12–13
Governance of the Company
Board of Directors of OJSC “MegaFon”
Governance of the Company
Board of Directors of OJSC “MegaFon”
In its decision-making and corporate governance the Company complies
with the Civil Code of the Russian Federation, the Law “On Joint Stock
Companies”; the Law “On Securities Market”; the Corporate Governance
Code (recommended by Federal Commission on Securities Market in 2002).
In 2007, the following persons served on the Board of Directors
of OJSC “MegaFon”:
OJSC “MegaFon” is the parent company of the MegaFon Group consisting of subsidiaries
in the Russian Federation and abroad. OJSC “MegaFon” is in charge for the budgeting,
strategic planning, procurement, finances, and investor relations. All business operations
and processes of the Company are centralized. MegaFon has the following decision-making
bodies:
• General Shareholders Meeting;
• Board of Directors;
• Management Board;
• Chief Executive Officer (CEO).
Each 100%-owned operating subsidiary of OJSC “MegaFon” has the following governance
bodies:
1. Aimo Eloholma has been the Board member of OJSC “MegaFon” since June 2003; during
2006 and 2007 he acted as the Chairman. Since 2003 he had been Deputy CEO and
managing director of Sonera Corporation and President of TeliaSonera International.
At present he is the head of international operations in TeliaSonera International. He was
the Executive Vice-President for fixed communications in Sonera Corporation in 1999-2001.
Mr Eloholma graduated from Helsinki Technological University with MS degree in electrical
engineering.
2. Gorokhov Maxim Yurievich had been the Board member of OJSC “MegaFon” since
June 30, 2004 till January 19, 2005 and was re-elected as member of the Board of OJSC
“MegaFon” on November 18, 2005. Mr. Gorohov has been CEO of OJSC “Telecominvest”
since 2002. Mr.Gorohov graduated from Leningrad Polytechnic Institute named after Kalinin
in 1988 with a degree in mechanics and management processes.
• General Shareholders Meeting, or the Sole Shareholder (OJSC “MegaFon”);
• Board of Directors;
• General Director.
3. Kastritsa Maria Leonidovna has been the Board member of OJSC “MegaFon”
since November 27, 2006. Ms. Kastritsa is the Head of representative offices
of “J.P.Galmond & Co” in Moscow and St.Petersburg. Ms. Kastritsa graduated from Russian
State University named after Gertsen (St.Petersburg), and St. Petersburg University
of Foreign Economic Affairs, Economics and Law.
On December 20, 2007, in most of MegaFon’s subsidiaries a decision was made to dismiss
the Board of Directors and terminate early the authorities of the Board members for the
purpose of implementing the direct governance system. New Charters were approved under
which the functions and authority of the Boards of the subsidiaries were delegated to their
Sole Shareholder.
4. Mohamed Amersi had been the Board member of OJSC “MegaFon” since January 19,
2005 to November 18, 2005, was re-elected to the Board of Directors of OJSC “MegaFon”
on June 29, 2006, at the same time he was the Board member in Gramercy Communications
Partners and acted as CEO of Emergent Telecom Ventures. Mr. Amersi graduated from
Sheffield University and Cambridge University with a bachelor’s degree in law.
CJSC “TTmobile”, in which MegaFon owns 75% of the charter capital, has the following
governance bodies:
5. Alexander E. Okun has been the Board member of OJSC “MegaFon” since June 30, 2004.
Since 2003 he has been the Managing Director of “Kaskol UK Ltd.” From 1999 to 2003
he was the Managing Director of Eagle International, advisor to CIBC Oppenheimer World
Equity Fund. Mr. Okun graduated from the Leningrad State Electrical Engineering University
with a degree in electrical engineering.
• General Shareholders meeting;
• Board of Directors;
• General Director.
The Company’s management provides corporate governance over CJSC “TTmobile”
via representation in the Board of Directors (the Board of Directors of CJSC “TTmobile”
includes the representatives of the Management Board of OJSC “MegaFon”).
The parent company and the subsidiaries are separate legal entities. The legal support,
accounting, and taxation of each subsidiary are executed in compliance with the laws and
regulations existing in each respective region according to the decisions of governance
bodies in the subsidiaries.
6. Per Olof Sjostedt was elected member of the Board of OJSC “MegaFon” on June 29, 2005;
at the same time Mr Sjostedt acts as Senior Vice-President for TeliaSonera AB.
From 1998 to 2001 he had been CEO of Ericsson Russia, from 2003 to 2004 he had been
the Regional Manager in Emerson Network Power. Mr. Sjostedt graduated from Royal
Institute of Technology.
7. Rytkonen Esko Juhani has been the Board member of OJSC “MegaFon” since June 29,
2005, at the same time he has been the Senior Vice-President for TeliaSonera Finland Oyj.
From 1998 to 2003 Mr Rytkonen had acted as Director for Finance for Sonera Oyj.
Mr Rytkonen graduated from Helsinki School of Economics with a degree in international
business administration.
During 2007 no members of the Board of OJSC “MegaFon” owned any shares
of OJSC “MegaFon”.
14–15
Sole and Collegiate Executive Bodies of OJSC “MegaFon”
Sole and Collegiate Executive Bodies of OJSC “MegaFon”
The collegiate executive body of OJSC “MegaFon” is the Management Board. It is elected
by the General Shareholders Meeting following the recommendations of the Chief Executive
Officer. The meetings of the Management Board take place whenever required.
The Management Board members are responsible for current management and
administration of OJSC “MegaFon”. The Chairman of the Management Board represents
OJSC “MegaFon” and acts as the sole executive body of OJSC “MegaFon” (Chief Executive
Officer).
Names, qualifications and other information concerning each Management Board member acting
in 2007 are listed below:
1. Sergey Soldatenkov has been the Chief Executive Officer of OJSC “MegaFon” since April
2003 and Chairman of the Management Board of OJSC “MegaFon”. Since 1997,
Mr. Soldatenkov has been Board member of OJSC “Telecominvest”. From 2000 to 2002
Mr. Soldatenkov had been the Chairman of the Management Board and Board member
of OJSC “North-West Telecom”. He was also the Board member in OJSC “Lensvyaz”,
CJSC “Delta Telecom” (from 1995) and CJSC “Telecombank” (from 1998). In 2000
Mr. Soldatenkov was elected member of the Board of OJSC “St Petersburg Telegraph”.
From 2000 to 2001 he had been the Board member of “St Petersburg Bank of
Reconstruction and Development”. In 2004 Mr. Soldatenkov was elected the chairman
of the Board of CJSC “Sonic Duo”, CJSC “Mobikom-Center”, CJSC “Mobikom-Kavkaz”,
CJSC “Ural GSM”, CJSC “Mobikom-Kirov”, CJSC “Mobikom-Novosibirsk”, CJSC “MobikomKhabarovsk”, CJSC “Volzhsky GSM”, OJSC “MSS-Povolzhie”. Mr. Soldatenkov graduated
from Leningrad University of Aviation Instruments with a degree in Radio engineering.
2. Victor Kvitsinsky has been a member of the Management Board member and Deputy
CEO for technology and development since March 14, 2005. From 2000 to 2004 he was
Head of department of electric communications of Ministry for Telecommunications and
Informatization of the Russian Federation, from 1999 to 2000 he was Technical director
of CJSC “Peterstar”. Mr. Kvitsinsky graduated from Leningrad Institute of
Telecommunications named after V.Ulianov (Lenin).
3. Andis Locmelis has been a member of the Management Board since June 2007.
In November 2006 he was appointed Chief Financial Officer of OJSC “MegaFon”.
From 2004 to 2006 Mr. Locmelis was Financial Director and Management Board member
of “Lattelecom Group” (Riga, Latvia). From 1999 to 2004 he was Director for Finance and
Information Technologies, Management Board member of “ALDARIS” (Riga, Latvia).
In 2001 Mr. Locmelis got an MBA degree.
4. Igor Nikodimov has been a member of the Management Board and Deputy CEO for
Foreign Economic Affairs and Administration of OJSC “MegaFon” since July 2002. He was
CEO and member of “North-West GSM” Board from September 1998, Deputy CEO of “NorthWest GSM” from 1997 to 1998 and Director for Administration of “North-West GSM” from
1994 to 1998. He graduated from the Institute of Textile and Light Industry named after
S.Kirov in St. Petersburg, and St. Petersburg State Telecommunications University with
a degree in Communication Lines and Switching Systems, he is the candidate of technical
sciences.
5. Alexey Nichiporenko has been a member of the Management Board since November
2002. In October 2004 he was appointed Chief Operating Officer after two years
of being Deputy CEO for technology and development of OJSC “MegaFon”. From 2001
to 2002 he was CEO of CJSC “Sonic Duo” and from 2000 to 2001 – Director for corporate
development of Telecominvest. Mr. Nichiporenko graduated from Admiral Makarov State
Maritime Academy of St. Petersburg with a degree in Radio Engineering and St. Petersburg
International Management University.
6. Edward Ostrovsky has been a member of the Management Board member and Deputy
CEO for Implementation of Special Programs and Cooperation with State Bodies
in OJSC “MegaFon”. From 1993 to 2002 he was Deputy Minister for communications
and informatization in the Ministry of Communications of the Russian Federation.
Mr. Ostrovsky graduated from Military Academy of Communications with a degree in
communications technology. At present he is Vice-president of International Academy
of Telecommunications. He was awarded the title of the Hero of Russia.
7. Lubov Rudnitskaya has been a member of the Management Board member and Chief
Accountant of OJSC “MegaFon” since August 20, 2002. From 2000 to 2002 she was Senior
Adviser to Chairman of Managing Board of CJSC “Russian Industrial Bank”. Since 2002 she
was the Chairwoman of Managing Board of CJSC “Russian Industrial Bank”.
Ms Rudnitskaya graduated from St Petersburg State University holding a degree in political
economy.
8. Larisa Tkachuk has been a member of the Management Board and Chief Commercial
Officer of OJSC “MegaFon” since March 14, 2005. From 2002 to 2004 she was Head of
Sales and Marketing Department of OJSC “MegaFon”, she used to work as the Director
for Marketing in Representation Office of International Communications Services Corp.
Ms Tkachuk graduated from the National Technical University with a degree in Industrial
marketing.
During 2007, members of the Management Board did not own any shares of OJSC
“MegaFon”. In 2007, the total amount of remuneration to the person who is the Sole
Executive Body of OJSC “MegaFon”, members of the Collegiate Executive Body of OJSC
“MegaFon” and members of the Board of OJSC “MegaFon” was 144,756,553.57 rubles.
There are no options or other similar programs for executives in the Company.
16–17
Basic Risk Factors Related to Operations of OJSC “MegaFon”
Basic Risk Factors Related to Operations of OJSC “MegaFon”
Influence of Possible Aggravation of Situation in the Company’s Sector
on its Performance.
In the last few years, the cellular communication sector has been one of the most fastdeveloping Russian industries. The situation in this sector is unlikely to aggravate in the
near future.
In 2007, the total amount of subscribers in Russia grew by 21 mln, getting to 173 million
at the end of 2007. According to the estimates of the analytical company ACM-Consulting,
the level of mobile penetration in Russia reached 119% as of the end of 2007.
At the same time, the relative growth rate of the subscriber base continued to decrease
by 69%, 21% and 13% in 2005-2007, respectively, which should lead to a more severe
struggle to attract new subscribers and retain old ones. This is the main factor that may
potentially lead to the aggravation of the situation in the sector.
It should be noted that the influence of this factor on the Company is mitigated by the
fact that the Company is one of the three largest cellular communications operators
in the Russian market and is constantly increasing its market share. Together with its
subsidiaries, the Company holds licenses for providing communications services
in the GSM standard throughout Russia.
Expected actions of the Company in the event the competition becomes more severe
include: increasing the subscriber base through timely expansion of its networks,
developing telecommunications infrastructure, implementing new types of services.
Special attention is also paid to the retaining of old subscribers, loyalty program was
developed, which is valid for the subscribers of the Company and its subsidiaries,
working under MegaFon brand.
Constructing the Company’s telecommunications network is fraught with risks and
uncertainty which may postpone provision of services within certain territories and increase
the cost of constructing the necessary infrastructure. In addition to the Company’s ability
to provide for equipment supplies on commercially attractive terms, such risks include
regulations for use of telecommunications equipment in public communications networks
and commissioning new facilities. In particular, all types of equipment are subject
to mandatory state certification.
Probable steps of the Company towards eliminating these risks: further development
of the logistics system, more severe control over compliance with all the rules, norms,
and standards regulating the use of telecommunications equipment in public
communications networks and commissioning new facilities.
Impact of Stronger Competition in the Company’s Sector
The Company’s main competitors are two national mobile communications operators
– OJSC MTS and OJSC VimpelCom. They have established relations with each other
and a number of other key operators, and continue to develop these relations, which may
provide them with a significant competitive advantage. AFK Systema, a Russian holding
company that has invested into several telecoms companies, informed that it owns 52.8%
of the voting stock of MTS. Telenor, a leading Norwegian communication operator, said that
it owns 26.6% voting shares of VimpelCom, while Alpha-Group, a Russian holding company
with operations in the power and telecommunications sectors of the Russian economy,
informed that it holds 35.8% voting shares of VimpelCom. New competitors or alliances
of competitors may quickly take over a significant market share.
Moreover, both competitors of the Company have registered their shares in the form
of American depository receipts at the New York Stock Exchange. The competitors have
access to foreign capital markets, meaning that in future they might have better financing
opportunities than the Company has.
Risks Related to Sector’s Technological Development
Technologies develop fast in the mobile telephony sector, and the standards evolve
constantly. The Company’s success is partially dependent on the ability to quickly single
out and use the most promising new technologies, as well as on the ability to abandon
obsolete technologies. In this respect, one of the most important problems the Company
encounters is the necessity to:
• effectively integrate new and advanced technologies;
• continue to develop the technical experience;
• respond to other technological changes.
Four of the main competing wireless communication standards licensed and operating
in Russia at the present are as follows: GSM-900/1800, which is used by the Company,
MTS, VimpelCom, and several regional operators; Digital Advanced Mobile Phone System,
which operates in the 800 MHz range (DAMPS); NMT-450 which operates in the 450 MHz
range (Scandinavian mobile phone); and CDMA (Multiple access with code division).
GSM networks operate in the majority of Russian regions. Rossvyaznadzor may provide
additional licenses for any wireless communication standards, including GSM, in the
regions where the Company operates. Issuing additional licenses for building networks
in already existing wireless communication standards or implementing new wireless
communication technologies in any region where the Company operates may increase
the competition considerably.
In 2007, the Company received a license to provide cellular communication services
of the third generation (3G). In 2007, 3G network was commercially launched by NorthWest Branch of the Company.
Besides, the technologies currently used by the Company may become obsolete or suffer
competition from new technologies. In particular, third-generation communication based
on the UMTS standards considerably surpasses the existing second-generation standards
such as GSM. Correspondingly, the Company’s success in the future may partially depend
upon the governmental policy and regulation of the third-generation communication
standards. The Company may also meet with competition from the direction of other
communication technologies. Suppliers of traditional wire telephone communications
services may become competitors as their services become more advanced. In the future
the Company may also encounter competition from IP-telephony-based voice transmission
communication, especially when combines with the appearing wireless communication
technologies such as WiMax.
Impact of Changes in Conditions of Interacting with Other Communications Operators
In order to provide communication services in 2007 the Company concluded agreements
of network interconnection (internetworking) with owners of the existing networks.
These agreements allow the Company to switch local, long-distance, and international calls
that originate in the Company’s networks and terminate in the networks of other operators
and vice versa.
Significant increase of the Company’s expenses on network interconnection or the
limitation of the Company’s access to internetworking may adversely affect the Company’s
ability to provide services. Moreover, the Company’s counterparties under each
internetworking agreement currently have the right to repudiate these agreements
and may use it.
18 –19
Basic Risk Factors Related to Operations of OJSC “MegaFon”
Influence of the Risk of Uncertainty Regarding the Telecom Market Regulation
On January 1, 2004, a new Law “On Communications” came into force in Russia.
Even though a number of regulatory documents necessary for the new Law’s
implementation have not yet been adopted, on January 1, 2006 the new rules for
connecting telecommunication networks and their interaction approved by Resolution No
161 of the Government of Russia dated March 28, 2005, became effective.
These rules govern relations between communication operators and make one of the
principal regulatory documents in the domain of telecommunications regulation.
The Company received and implemented the License to provide the local and intrazonal
telephone communications services within the territory of its operation. In this connection,
the risk of possible negative impact on the Company activities related to the direct
numbering capacity as a result of changes in the Rules is low.
On July 1, 2006, changes made to Article 54 of the Federal Law on Communications became
effective. As per these changes, a subscriber shall not pay for telephone connection
established as a result of another subscriber’s call. Rates for the inter-zone telephone
connection between users of the local and cellular telephone connection were approved
by the Federal Tariffs Service upon introduction of this principle. The principle “calling
party pays” is widely used all over the world and is fair for the most subscribers. Rates
for the inter-zone telephone connection between users of the local and cellular telephone
connection have been approved by the Federal Tariffs Service upon introduction of this
principle. In this connection, the Company signed the supplement agreements on price
change with all main counterparties. The risk that the price change will adversely affect the
Company activities was mitigated by the competent marketing policy of the Company.
Risks Related to Possible Change of Prices for Raw Materials, Services Used by the
Company in its Business (Separately in Domestic and External Markets), Their Impact upon
the Company’s Performance
The Company acquires special expensive equipment for the purposes of network expansion
and telecommunications infrastructure development. Possible increase in prices on
equipment and services used by the Company in its activities may adversely affect the
Company’s financial indicators, since it would lead to a cost rise and, consequently –
to profit reduction.
Risks Related to Changes in the Global Economy
The Russian economy is sensitive to market declines and deceleration of the global
economy. Since Russia is one of the leading world natural gas and oil producers and
exporters, its economy is especially sensitive to natural gas and oil prices in the world
markets. If the continuing US crisis in the market of unsecured liabilities under immovable
assets mortgages and general instability in financial markets and loan markets result in
decelerated growth or recession in US economy, this may reduce the demand and prices
for natural gas and oil, which in its turn may decelerate the growth of the Russian economy
or cause its collapse. These events may significantly limit the Company’s access to capital
and have an adverse effect on the financial state of the Company’s subsidiaries and,
consequently, its business.
Financial Risks
The inflation affects the ruble rate against foreign currencies and may result in an increase
in a number of the Company expenses expressed in foreign currency. Such costs include
lease payments, cost of equipment and intangible assets (including the software and
licenses for use of the software) acquired from foreign providers, costs relating to servicing
of credits and loans in foreign currency and also consulting services nominated in foreign
currency. The Company will not be able to raise its tariffs to the level ensuring current
operation margin because of tough competition. Accordingly, high inflation in Russia may
increase expenditures of the Company and reduce operating profit.
Risks Related to Changes of Interest Rates
In order to continue its development, the Company needs to perform considerable capital
investments, build and develop its telecommunication networks. Maintenance of the
Company’s positions in the telecom market shall require large additional investment
spending. The Company needs to attract additional financing to satisfy its financial needs.
Growth of interest rates on the market may force the Company to attract more expensive
funds to finance its investment program and day-to-day operations.
If the Company is unable to receive sufficient funds on commercially viable terms, it may
need to considerably cut the expenses on developing its telecommunication networks,
which may adversely affect its market share and operating performance.
At the same time, a rise of interest rates shall reduce the cost of servicing the already
existing loans with fixed rates (e.g. bonded loans).
Hence, the influence of interest rates upon the Company’s activities is very significant.
In the event of this factor’s (upsurge of interest rates on national-currency obligations)
negative influence the Company intends to make borrowings in foreign currency, as the
interest rate on such credits is more stable (there are agreements to this effect with credit
organizations).
20–21
Report by the Board of OJSC “MegaFon”
Corporate Finance Management
HR Management
Administration and Quality Management
Report by the Board of OJSC “MegaFon” on the Results of the
Company’s Development in its Priority Directions
HR Management
MegaFon’s success in 2007 is the result of performance of its 17,000 employees
and well-balanced policy of HR management.
In 2007, the priority activities of OJSC “MegaFon” were as follows:
Personnel Number Growth in MegaFon Group
• Stronger financial position, growth of earnings and revenues;
• Retaining ARPU, improving margins
• Increasing market share, improving customer loyalty;
• Corporate culture development.
Corporate Finance Management
2007 marks another exciting year for our Finance function. We continued to improve our
international corporate credit rating. All the major international credit rating agencies,
both Moody’s and S&P, upgraded us a full notch after they conducted their regular annual
operational and financial reviews during the last year.
We are pleased that our 2007 operating cash flow exceeded $900 million which is $645
million higher than in 2006. Our operating cash surplus allowed us to further reduce
approximately $180 million of our debt and also to invest about $600 million in short term
investments, which earned us significant interest income.
Our banking relationships continue to improve in spite of the recent turmoil in the global
financial and credit markets. Terms and conditions on our existing credit facilities continue
to improve. In recognition of our strong operational and financial performance, our bankers
allowed us to amend and restate all our existing loan agreements, which released all
upstream guarantees and significantly improved major terms and conditions.
Over the course of the year, MegaFon closed $185million of credit facilities from various
international sources. Specifically, in April 2007, we amended our credit facility with Nordic
Investment Bank, converting the facility into a revolving loan facility, and adding other banks
to the lending group. In October 2007, the Company entered into a 7-year credit facility
agreement with China Development Bank and Bayerische Landesbank (“China Development
Bank II Credit”) for $85 million with interest at LIBOR plus 1.1%. Our goal for 2007 is to
continue to actively manage and refine our liability profile. We also aim to maintain prudent
and conservative financial policies and leverage levels, moving us further closer
to investment grade ratings.
3500
5582
8652
11690
15890
16795
2002
2003
2004
2005
2006
2007
20000
15000
10000
5000
0
One of the priority areas of Company’s activities in the field of HR management
is development of corporate culture, which provides framework for implementation
of a project “Branded Customer Service”. In the course of this project over 3 500 employees
took part in sessions “The Future Begins Today” aimed at corporate culture development.
The project will continue in 2008 and cover all MegaFon employees.
Research conducted in 2007 by Boston Consulting Group revealed that MegaFon’s
corporate culture allowed reaching high results due to total participation of employees
and realization of personal responsibility for the result.
In 2007, about 11 MUSD were invested into training and development. The highest priority
was the programs aimed at development and realization of leadership potential and deeper
cooperation of the Company’s management.
The Company began to pay more attention to non-material stimulation through recognition
of achievements of its employees.
In 2007, employees salaries were brought in line with the corporate grade system and
uniform policy of compensation management in OJSC “MegaFon”; this allowed to increase
significantly salary fund management efficiency and to take measures to increase
competitiveness of the compensation to employees as compared to average market level
in different regions of Russia.
Administration and Quality Management
In 2007, OJSC ”MegaFon” successfully passed two audits by Lloyd Register Quality
Assurance, international independent certification company, and thus proved its
compliance with ISO 9001:2000 international standards.
22–23
Meetings of the Board of Directors
Report on Payment of Declared (Accrued) Dividends under Shares of OJSC “MegaFon”
The Board of Directors
№73(137) as of 26.10.2007.
Meetings of the Board of Directors of OJSC “MegaFon”
Storage agreement № 3200140096
between OJSC “MegaFon” and CJSC “Ural
GSM” (monthly payment at amount of RUR
75 520, including VAT).
30.11.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
D.Malyshev
Supplemental agreement № 1 to lease
agreement № 35 between OJSC “MegaFon”
and CJSC “Mobicom-Khabarovsk” as of
01.01.2007.
29.10.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
А.A.Locmelis,
Y.Zhuravel
Supplemental agreement № 2 to lease
agreement № 30 between OJSC “MegaFon”
and CJSC “Mobicom-Kavkaz” as of
01.01.2007.
29.10.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Krainik
Supplemental agreement № 1 to lease
agreement № 29 between OJSC “MegaFon”
and CJSC “Sonic Duo” as of 01.01.2007.
29.10.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
I.Parfenov
Loan Agreement № 145/Б between
OJSC “MegaFon” and CJSC “MobicomNovosibirsk” at total amount of USD
40 000 000, including VAT.
07.02.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Gorshkov
Loan Agreement № 146/Б between
OJSC “MegaFon” and CJSC “MobicomKhabarovsk” at total amount of USD
14 000 000, including VAT.
07.02.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
Y.Zhuravel
The Board of Directors
№69(133) as of 27.06.2007.
Granting guarantee by OJSC “MegaFon” to
OJSC АКB “Svyaz-Bank”, CJSC “ТTmobile”
as beneficiary at total amount of RUR
128 750 000, including VAT.
04.09.2007
S.Soldatenkov,
I. Nikodimov, ,
A.Nichiporenko,
L.Tkachuk,
G. Kaumov
The Board of Directors
№71(135) as of 29.08.2007.
Supplemental agreement № 1 to lease
agreement № 32 between OJSC “MegaFon”
и CJSC “Ural GSM” as of 01.01.2007,
including VAT.
01.09.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
D.Malyshev
Supplemental agreement № 3 to lease
agreement № 30 between OJSC “MegaFon”
and CJSC “Mobicom-Kavkaz” as of
01.01.2007.
01.11.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
A.Krainik
During 2007, the Board of Directors of OJSC “MegaFon” had 16 meetings:
11 meetings in joint presence, and 5 absentee meetings.
In 2007, OJSC “MegaFon” did not close any major transactions. The Charter of the Company
does not provide for any other transactions to which the procedures for major transactions
approval would apply.
List of transactions with vested interest closed by OJSC “MegaFon” in the reporting year, with
specification of an interested party (parties), material conditions for each transaction
and Company’s management body that made the decision on its approval:
Management body
that made decision
on transaction approval
Material conditions of the agreement
Extraordinary General
Shareholders Meeting
as of 12.03.2007.
Loan Agreement between OJSC “MegaFon”
and CJSC “Mobicom-Center” at total
amount of USD 77 000 000, including VAT.
Loan Agreement between OJSC “MegaFon”
и CJSC “Sonic Duo” at total amount of USD
200 000 000, including VAT.
Extraordinary General
Shareholders Meeting
as of 30.11.2007.
Effective date
15.03.2007
15.03.2007
Interested parties
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Eremkin
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
I.Parfenov
Loan Agreement between OJSC “MegaFon”
and CJSC “Mobicom-Kavkaz” at total
amount of USD 300 000 000, including
VAT.
15.03.2007
Loan Agreement ДОГ№144-Б between
OJSC “MegaFon” and OJSC “MCS Povolzhie” at total amount of USD
140 000 000, including VAT.
15.03.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
V.Ermakov
Supplemental agreement № 1 to loan
agreements №141/Б and 133/Б between
OJSC “MegaFon” and CJSC “Sonic Duo”.
29.12.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
V.Ermakov
Supplemental agreement № 3 to lease
agreement № 31 between OJSC “MegaFon”
and OJSC “MCS-Povolzhie” as of
01.01.2007.
01.11.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
V.Ermakov
Supplemental agreement № 2 to lease
agreement № 32 between OJSC “MegaFon”
and CJSC “Ural GSM” as of 01.01.2007.
01.11.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Krainik
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
D.Malyshev
Annual General Shareholders
Meeting as of 28.06.2007.
Supplemental agreement № 2 to lease
agreement № 31 between OJSC “MegaFon”
and OJSC “MCS - Povolzhie”
as of 01.01.2007.
02.10.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
V.Ermakov
The Board of Directors
№73(137) as of 26.10.2007.
Purchase agreement of office furniture
№ А7-УСЛ-31 between OJSC “MegaFon”
and CJSC “Sonic Duo” at total amount of
RUR 6 934 942, including VAT.
31.10.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
I.Parfenov
The Board of Directors
№ 62(126) as of 31.0101.02.2007.
Storage agreement №3200128636
between OJSC “MegaFon” and CJSC
“Mobicom-Novosibirsk” (valid till
15.10.2009, monthly payment of RUR
40 828, including VAT)
15.10.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
A.Gorshkov
Storage agreement №3200129985
between OJSC “MegaFon” and CJSC
“Mobicom-Khabarovsk” (valid till
01.11.2009, monthly payment of RUR
23 600 ).
01.11.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
Y.Zhuravel
Supply agreement № 08-1 for
telecommunications equipment between
OJSC “MegaFon” and CJSC “Sonic Duo”
at total amount of RUR 1 605 000 000,
including VAT.
09.01.2007
S.Soldatenkov,
A.Nichiporenko,
L.Tkachuk,
A.Locmelis,
I.Parfenov
Report on Payment of Declared (Accrued) Dividends under Shares of OJSC “MegaFon”
Dividends upon 2007 operating results of OJSC “MegaFon” were not declared and were not paid.
24–25
–27
28
35
36
Operations
Information on
Compliance with the
Corporate Code
by OJSC “MegaFon”
Annual Accounting
Statements of OJSC
“MegaFon” for 2007
Operations
Marketing
Sales and Customer Care
Operations
Sales and Customer Care
Marketing
In 2007, MegaFon continued to implement initiatives aimed at increasing the quality of
services and subscriber base loyalty:
In 2007, MegaFon continued unification of marketing proposals on the whole territory of
service taking into account competitive advantage and subscribers needs, as a result the
following federal proposal were prepared and launched in the market:
• in addition to the existing 199 offices, 45 new sales and customer care offices were
opened, total amount of processed customer requests is over 26 mln;
• operational CRM, allowing to process customer requests better and analyze the quality
of rendered services; self-service channels became popular (IVR, WEB, USSD), due to which
the number of requests (excluding requests for the balance) exceeded 2 bln;
• Tariff plan “Student”
• Tariff plan “MegaFon-Modem”
• Tariff plan “Home”
• Tariff option “Communications Geography”
• Bundles of minutes and SMS
• Tariff plan for small business “Firmenny (Corporate) Tariff”
• Tariff plan “Business Trip”
• Tariff plan “Territory”
• Tariff option “Call Geography”
• First federal promotion to attract corporate clients “Let Them Talk”
• Quality committees, which consolidate the needs of subscribers and monitor their
satisfaction under new projects of the Company, were created in subsidiaries
and the NW Branch of OJSC “MegaFon”.
With “Home” tariff plan the Company finished creation of a logical line of base tariff plans
and in the conditions of high market saturation started to develop and launch special
niche proposals, where first of all “Student” and “MegaFon-Modem” tariff plans should be
mentioned.
• motivation program for employees participating in customer care is operating in all
the subsidiaries and the NW Branch of OJSC “MegaFon”.
The Company started to pay a lot of attention to promotion of value-added services, which
is reflected in the launch of “MMS, GPRS-WAP and GPRS-Internet Test Package” that allows
subscribers to learn new services.
In 2007, tariff options “Geography of Communications” and “Geography of Calls”, as well
as bundles of minutes and SMS became a natural development of MegaFon innovative tariff
policy under which for yet another year the Company’s subscribers can create their own tariff
according to their preferences.
Development of the business market became one of the priorities in 2007. The idea used at
the mass market – creation of special niche proposals – was also implemented in products
for business clients. Tariff plans “Business Trip” and “Territory” meet the demands of
corporations with branches in different subjects of the Russian Federation. “Firmenny Tariff”
allowed attracting small businesses, earlier uncovered segment of the corporate market.
Tariff option “Business Trip” became one of the innovative proposals for MegaFon business
clients – now tariffs can be tuned not only in home region, but also in roaming.
In 2007, the Company conducted the first federal campaign to attract corporate clients
(“Let Them Talk”), which allowed positioning the Company as an operator “for business”,
offering flexible and innovative solutions for all segments of the corporate market.
• information centers (in addition to their service function) started to sell products and
services of MegaFon’s network, the total number of requests throughout 2007 exceeded
112 mln;
During 2007, the Company continued to implement commercial projects aimed at increasing
the efficiency of its distribution channels:
• starting from the end of 2007, the Company launched the internet-shop www.shop.
megafon.ru, allowing subscribers’ selecting the telephone number according to their
preferences. One of the convenient additional options – delivering SIM-cards to the address
of the customer. Due to this project MegaFon’s subscriber base increased by tens of
thousands of new clients;
• federal merchandising project was launched that allowed improving significantly the work
of retail and interaction with partners;
• at the beginning of 2007 the brand-book was created for MegaFon’s branded shops;
• together with partners 85 new branded shops were opened, their total number is 410;
• during 2007, multiple joint campaigns with partners were conducted, as well as a set
of measures on increasing dealer network loyalty, which allowed MegaFon to become
the leader of the Russian market in terms of net subscriber adds.
28–29
Value-Added Services
2007 VAS Revenue Structure – Regions
Value-Added Services
2007 became a landmark for the Company. The first Russian 3G network was
commercially launched in the NW Branch, which means that the services on
the basis of data technologies – one of main strategic priorities of MegaFon
– were upgraded to a new level of quality.
Moscow
North Caucasus
North-West
Volga
During 2007, new multimedia services were implemented and customary services were
improved, both types of services are aimed at meeting the customer demands.
Urals
Siberia
Center
Far East
• Since the beginning of the year each new subscriber of MegaFon can use
data services and MMS services via Try & Buy system.
• The pilot federal project, MP3-shop, selling full-tracks, with new billing mechanisms
was launched in Moscow region.
Services that generated most of VAS revenue in 2007 included SMS peer to peer – 57%,
and data transmission (GPRS, CSD) – 21%.
• Multi-user online (MMORPG) JAVA-games are being developed.
• WEB-portal MegaFonRPO received a new advanced design.
• By the end of 2007, RBT service was being provided to over 3 million users.
• In 2007, a new promising move was initiated – mobile advertising.
• “Mobile TV” service was launched for commercial use on the whole territory
of network coverage.
• At the end of 2007 a joint project with Nokia was started – MegaSync
(synchronization of handset e-mail, contacts and calendar).
• As a result of 2007, MegaFon is leading among the Big Three operators in terms
of VAS ARPU, which was $ 1.9.
In 2007, the best results of VAS revenue were demonstrated by CJSC “Sonic Duo”
(MegaFon- Moscow), NW branch OJSC “MegaFon” (MegaFon-North West), CJSC “MobicomKavkaz” (MegaFon-North Caucasus) and OJSC “MCS-Povolzhie” (MegaFon-Povolzhie).
Data transmission services was the fastest growing sector. During the year GPRS traffic
grew three-fold and was over 400 GB.
The Company also spent some of its effort on implementation in some regions of a number
of new services such as “Live Balance”, “Mobile TV”, dynamic voice mail, federal package
of IN services for corporate customers.
30 –31
Technology Development
Technology Development
The main results of the Company’s technical development in 2007 include continuing
significant level of investment into the construction of the network infrastructure over
the entire coverage area of MegaFon network.
In 2008, it is planned to launch into commercial use the fragments of 3G network that
are currently on the final stage of construction on the territory of 17 RF subjects in the
North-West and 14 RF subjects in some other Federal Districts, while in the North West
Federal District alone there will be over 1000 BS integrated into use.
Based on License №38950 “Intra-Zonal Communication Services”, in 2006 a network
for rendering intra-zonal communications services was constructed and launched for
commercial use in Saint Petersburg.
Growth of equipment quantities during the period:
Equipment
Growth for
2005, %
Growth for
2006, %
Growth for
2007, %
HLR, quantity
11,5
17,2
5,9
HLR, capacity (kSubs)
60,9
34,9
9,1
MSC, quantity
32,4
10,2
10,2
MSC, capacity (kSubs)
60,4
32,5
25,2
BSC, quantity
52,3
25,2
23,0
BSC, capacity
127,1
26,6
30,8
BS sites
54,6
36,4
26,7
BS racks
61,1
41,8
28,8
Sectors
70,5
41,2
26,1
TXR
88.1
46.5
31.5
In compliance with License №49431 “Communication Services for Cable Broadcasting”,
installation of the relevant equipment was completed for the purposes of rendering
a wide range of services on the territory of the North-West Federal District, including
mobile TV services, and work is being conducted on launching it into commercial use.
Based on License №53194 “Communication Services for Providing Communication
Channels” that was received pursuant to prolongation of License №22964 dated
01.08.2002, we continued leasing communications channels on the territory of
Archangelsk, Vologda, Leningrad and Murmansk regions, Republic of Karelia and
St. Petersburg.
In order to implement its License №44514 “ILD and DLD Communication Services”
we took effort to launch commercial use of ILD and DLD networks on the territory
of the Russian Federation.
Base station sites construction dynamics
Region
2005
yearend
2005
yearend
2005
yearend
2007
growth, %
Moscow
1510
2000
2400
20,0
North-West
2213
2622
2986
13,9
Center
1058
1643
2346
42,8
North Caucasus
1589
1995
2254
13,0
Povolzhie
1828
2584
3448
33,4
Ural
1027
1416
1782
25,8
Siberia
577
862
1148
33,2
Far East
417
816
1290
58,1
Total in MegaFon network
10219
13938
17654
26,7
As of December 31, 2007, the Company’s mobile network included 17 654 base station
sites. 19 switches, 502 base station controllers were in use. The growth in base station
sites for 2007 was 26.7%.
In 2007, the efficiency of network technological equipment increased simultaneously
with improvement of the service quality.
In 2007, MegaFon won the first place at tender for 3G license. At the end of October
2007, in terms of realization of License №50788 “Mobile Communication Services”
(IMT2000/UMTS standard), MegaFon became the first among the Russian GSMoperators to start rendering 3G services, providing unique advantages of 3G
communications to its subscribers on the territory of St. Petersburg and Leningrad
region.
Based on Licenses №44199 “Data Transmission Communications Services for Rendering
Voice Information” and №44200 “Data Transmission Communication Services, Except
for Data Transmission Communication Services for Rendering Voice Information”, on the
territory of North-West Federal District we constructed a scaled high efficiency IP-MPLS
data transmission network that uses 10 Gigabit Ethernet communication channels and
allows to transmit different types of traffic, while providing the required QoS level and
high level of failure-resistance.
The main activities of OJSC “MegaFon” and its subsidiaries in 2007 were provided by
additional numbering resource in terms of license for ILD and DLD services, as well as
extending the list of services provided to subscribers: 15 codes of OKS№7 signalization
points, 10 000 numbers in DEF=8 (800) codes. For implementation of license for local
and zone communications there are over 125 000 numbers in АВС codes, 255 codes
of OKS№7 signalization points. In order to provide future development of its GSM
mobile communication networks, MegaFon received additional numbering resource
of one million numbers in DEF code.
32–33
Special Programs
International Projects
Information on Compliance with Corporate Code by OJSC “MegaFon”
In 2007, MegaFon expanded its GSM roaming geography
up to 200 countries, as well as GPRS and CAMEL roaming – up to 100 countries.
GSM
GPRS
CAMEL
3G (incoming)
confidential and open wireless communications, including services to Administration
of the President of the Russian Federation, Ministry of Defense of Russia, etc.
The number of consumers of special services significantly increased among commercial
structures, including “Norilsk Nickel”, Mosvodokanal, security agencies of FSUE
“Security”, “Satro-Paladin”, Jablotron, “Security complex”, “Golf stream”,
“Cesar Sattelite”, “Bayard”, AnvantTech, etc., banks and other commercial structures.
Agreements
(operators/
countries)
Commercial
partners
(operators/
countries,
incl. satellite
service)
Agreements
(operators/
countries)
Commercial
partners
(operators/
countries)
Commercial
partners
(operators/
countries)
Commercial
partners
(operators/
countries)
2006
year end
500/186
427/190/198
359/162
130/89
129/80
–
International Projects
200
year end
533/191
464/196/203
409/170
169/104
167/105
429/173
By the end of 2007, the mobile operator CJSC “TT mobile”, a subsidiary
of OJSC “MegaFon” operating on the territory of Tajikistan, was rendering services
to approximately 140 000 commercial subscribers (about 14% of Tadjik telecom
market).
In 2007, MegaFon was the first among Russian operators to provide GPRS roaming for
its subscribers in all European countries, GSM/GPRS/CAMEL roaming in home network
in all RF subjects, and began to provide incoming 3G roaming services to subscribers
of its Russian and foreign partners.
In 2007, the roaming management system that allows optimizing costs for outgoing
international roaming of MegaFon network was launched into use.
In 2007, the annual growth of aggregate roaming services (intranet and internet) was
8%. The aggregate turnover of intranet roaming services increased by 17% during 2007.
Major contribution to this indicator was made by international outgoing roaming, which
increased by 37% as compared to 2006. Due to the development of MegaFon network
in the regions, in 2007 there remained the trend to replace the national roaming with
the intra-net one.
The volumes of incoming roaming came close to stabilization – the growth was 6%.
Annual growth of GPRS services in roaming in 2007 was 260% (up to US$ 2.7 M)
for outgoing international roaming, and 220% (up to $ 2.1 M) for incoming international
roaming.
Special Programs
In 2007, the number of subscribers of Special Federal Subsystem of Confidential Mobile
Communications and Special Network of Data Transmission more than doubled.
We were successful in rendering confidential and common mobile services during
important national events (Summit “Russia – EU”, elections to RF State Duma of the
fifth convocation, joint military exercise of “2007 Peace Mission” member states of
the Shanghai Cooperation Organization, antiterrorist exercises in Moscow, Leningrad
Region etc.).
In 2007, MegaFon provided Special Federal Subsystem of Confidential Mobile
Communications and Special Network of Data Transmission services to the benefit of
Administration of the President of the Russian Federation, Federal Protective Service
of Russia, Federal Security Service of Russia, Ministry of Internal Affairs of Russia, STSI
of Russia, Ministry for Emergency Situations of Russia, State Inspectorate for Minor
Courts of Ministry for Emergency Situations of Russia, State Fire Inspectors of Ministry
for Emergency Situations of Russia, Main Directorate of Administrating Punishment,
Rosatom and other agencies. The Company won 7 tenders for rendering services of
CJSC “TT mobile” provides mobile services in GSM 900/1800 and 3G-UMTS standards,
and holds licenses for telematic and data transmission services (including IPtelephony). Distinctive advantages of the CJSC “TT mobile” include: high communication
quality standard, wide range of value-added services, professionalism, as well as high
level of responsibility and care for each customer and their interests.
By the end of 2007 the network of CJSC “TT mobile”, consisting of 295 BS, covered
approximately 15% of the country territory with about 73% Tajik population.
Information on Compliance with Corporate Code
by OJSC “MegaFon”
In order to protect the rights and guarantee the interests of its shareholders and
potential investors, OJSC “MegaFon” complies with the key provisions of the Corporate
Code recommended by the FCSM on April 04, 2002, by its Directive №421/p;
it also pursues the best world corporate governance practices. Key provisions of the
Corporate Code reflected in the Company’s internal documentation are disclosed in
Annex 2.
34–35
Annual Accounting Statements
Annual Accounting Statements of OJSC “MegaFon” for 2007
Independed auditor’s reporton financial statements of OJSC “MegaFon”
to the shareholders and Board of Directors of OJSC “MegaFon”
Details of the auditing firm
Name: ERNST & YOUNG LLC
Address: Russia 115035, Moscow, Sadovnicheskaya naberezhnaya, 77, building 1
Certificate of an entry made to the Uniform State Register of Legal Entities Concerning
a Legal Entity Registered Before July 1, 2002; date of the entry – December 5, 2002,
series 77 No. 007367150, registered by the Moscow Registration Chamber State Institution
at No. 108.877 on June 20, 2002, Main State Registration Number 1027739707203.
Audit License No. Е002138, approved by Order No. 223 of the Russian Ministry of Finance
dated September 30, 2002, for a term of five years, prolonged till 30 September, 2012 by
Order No. 573 of the Russian Ministry of Finance dated September 30, 2007.
Membership of an accredited professional auditors’ association – ERNST & YOUNG LLC
is a member of Non-profit Partnership “The Institute of Professional Accountants of Russia”
(“IPAR”).
the amounts and disclosures in the financial statements concerning the financial and
business operations of the audited entity; assessing the compliance with accounting
principles and rules used in the preparation of financial statements, and significant
estimates made by management of the audited entity; as well as the evaluation of the overall
financial statement presentation. We believe that our audit provides a reasonable basis
for our opinion on the fairness, in all material respects, of these financial statements and
on compliance of accounting procedures insofar as they relate to the preparation of financial
statements in accordance with the legislation of the Russian Federation.
In our opinion, the accounting procedures at OJSC “MegaFon”, insofar as they relate
to the preparation of financial statements in 2007, complied with the requirements
of Federal Law on Accounting No. 129-FZ of 21 November, 1996, in all material respects,
and the aforementioned financial statements referred to above have been prepared in
accordance with the aforementioned Law and present fairly, in all material respects,
the financial position of OJSC “MegaFon” as of 31 December, 2007 and the results of its
operations for the period from 1 January through 31 December, 2007 in accordance with
regulations of the Russian Federation insofar as they relate to the preparation of financial
statements.
The accompanying financial statements are not intended to present the financial position
and results of operations in accordance with accounting principles and practices generally
accepted in countries and jurisdictions other than the Russian Federation. Accordingly,
the accompanying financial statements are not designed for those who are not informed
about accounting principles, procedures and practices in the Russian Federation.
March 26, 2008
Details of the audited entity
Name: OJSC “MegaFon”
Address: 115035, Moscow, Kadashevskaya naberezhnaya, 30
Information about the State Register of Legal Entities Concerning a Legal Entity:
No. АОЛ-5192 on June 17,1993
We have audited the accompanying financial statements of OJSC “MegaFon” for the period
from 1 January through 31 December, 2007, which are comprised of the balance sheet,
the statements of income, changes in the shareholders’ equity, cash flows, and the related
appendix to the balance sheet and the explanatory notes to the financial statements,
inclusive of sections 4-29. The management of OJSC “MegaFon” is responsible for the
compliance of accounting procedures, preparation and presentation of these financial
statements. Our responsibility is to express an opinion on the fairness, in all material
respects, of these statements and on compliance of accounting procedures insofar as they
relate to the preparation of financial statements in accordance with the legislation of the
Russian Federation based on our audit.
We conducted our audit in accordance with the Federal Law on Auditing Activity, the Federal
Rules (Standards) on Auditing, the Rules (Standards) for Auditing Activities, as approved
by the Committee on Auditing Activity under the President of the Russian Federation,
and International Standards on Auditing.
The audit was planned and performed to obtain reasonable assurance about whether
the financial statements are free of material misstatements. The audit was performed
on a selective basis and included an examination, on a test basis, of evidence supporting
Mikhail Kapitanov
Partner
Dmitry Lobachev
Auditor’s qualification certificate
No. K002839 (general audit), not limited in tim
36–37
Balance sheet
Balance sheet
as of December, 31, 2007
Codes
Capital and Liabilities
Line code
At beginning
of reporting year
At end
of reporting year
1
2
3
4
Charter capital
410
62 000
62 000
411
–
–
Form No.1
under OKUD code
0710001
Date (yy/mm/dd)
2007
Company OJSC “MegaFon”
under OKPO code
31090505
Treasury shares
Taxpayer Identification Number
TIN
7812014560
Additional capital
420
2 351 126
2 246 430
Reserve capital
430
3 100
3 100
including: reserves established
in accordance with legislation
431
3 100
3 100
III. Equity and Reserves
12
31
Type of activity
under OKVED code
64.20
Legal/ownership form OJSC
under OKOPF/OKFS codes
47
Monetary unit: RR thds
under OKEI code
384
reserves established in accordance
with charter documents
432
–
–
Date
of approval
Retained earnings (loss)
470
24 106 154
29 071 810
TOTAL for Section III
490
26 522 380
31 383 340
Loans and borrowings
510
41 512 312
57 304 206
Deferred tax liabilities
515
271 471
328 654
Other long-term liabilities
520
0
–
TOTAL for Section IV
590
41 783 783
57 632 860
Loans and borrowings
610
10 327 075
11 371 736
Accounts payable
620
3 858 539
5 245 363
Locations (address) 115035 Moscow, Kadashevskaya, 30
34
Date of
sending
(receipt)
Assets
1
IV. Long-Term Liabilities
Line code
At beginning
of reporting year
At end
of reporting year
2
3
4
I. Non-current assets
Intangible assets
110
166 022
112 939
Fixed assets
120
13 638 487
15 956 003
Construction in progress
130
3 321 993
4 543 234
Income-bearing investments in tangible assets
135
30 112 629
34 862 772
Long-term financial investments
140
17 093 957
18 609 284
Deferred tax assets
145
170 236
333 804
Other non-current assets
150
2 809 700
2 499 512
TOTAL for Section I
190
67 313 024
76 917 548
II. Current assets
Inventory
210
206 296
196 376
V. Short-Term Liabilities
including: trade accounts payable
621
1 395 846
2 482 445
accrued payroll
622
52 438
61 581
рayable to state non-budgetary funds
623
15 314
14 145
taxes and levies payable
624
315 984
368 235
other payables
625
296 229
540 909
advances received
626
1 782 728
1 778 048
Dividends payable
630
–
–
Deferred income
640
53 743
38 770
Reserves for future expenses
650
–
–
Other short-term liabilities
660
–
–
including: raw materials,
consumables and other similar assets
211
75 058
63 767
TOTAL for Section V
690
14 239 357
16 655 869
livestock
212
–
–
Balance
700
82 545 520
105 672 069
work in progress
213
–
–
Statement of off-balance-sheet items
inished goods and goods for resale
214
–
–
Leased fixed assets
910
321 660
329 270
dispatched goods
215
–
–
including capital leases
911
–
–
Inventory items accepted into custody
920
–
19 071
Goods accepted on commission
930
–
–
Bad debts written-off to losses
940
464 422
754 079
Assets received as collateral for liabilities
and payments
950
150 479 024
67 792 243
960
8 100 349
8 191 936
prepaid expenses
216
131 238
132 609
other inventory and costs
217
–
–
Value added tax on purchased assets
220
322 730
538 797
Accounts receivable (where settlement is expected
in over 12 months after the reporting date)
230
1 615 178
1 833 794
including trade receivables
231
–
–
Assets pledged as collateral for liabilities
and payments
other
232
1 615 178
1 833 794
Depreciation of housing assets
970
–
–
6 182 560
Depreciation of land improvement
and other similar assets
980
–
–
Intangible assets obtained for use
990
–
–
Accounts receivable (where settlement is expected
within 12 months after the reporting date)
240
5 621 456
ncluding trade receivables
241
2 285 261
2 166 441
other
242
3 336 195
4 016 119
Short-term financial investments
250
5 851 805
18 724 080
Cash
260
1 615 031
1 278 914
Other current assets
270
–
–
TOTAL for Section II
290
15 232 496
28 754 521
CEO
S.V. Soldatenkov
(signature)
BALANCE
300
82 545 520
(full name)
Chief
Accountant
L. B. Rudnitskaya
(signature)
(full name)
105 672 069
“26” March 2008
“26” March 2008
38–39
–41
42
73
Consolidated
Financial Statements
for 2007
Annexes
Consolidated Financial Statements
Years ended December 31, 2007 and 2006
with Report of Independent Auditors
Report of Independent Auditors
The Board of Directors and Shareholders
OJSC MegaFon
Consolidated Financial Statements
Years ended December 31, 2007 and 2006
Contents
1 Report of Independent Auditors
43
Consolidated Financial Statements
2
3
4
5
6
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity
Notes to Consolidated Financial Statements
44
45
46
47
48
We have audited the accompanying consolidated balance sheets of OJSC MegaFon and subsidiaries (“the
Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s
internal control over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of OJSC MegaFon and subsidiaries at December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States.
Ernst & Yong LLC
Moscow, Russia
April 17, 2008
42...
43...
Consolidated Balance Sheets
Consolidated Statements of Income
(in millions of Rubles, except share amounts)
(in millions of Rubles)
(Note 2)
(Note 2)
December 31
Note
2006
December 31
2007
2007
Convenience
translation,
thousands US $
Assets
Current assets:
Cash and cash equivalents
3
Short-term investments
6,965
4,259
$
173,510
569
21,710
884,455
2006
2007
16, 21
101,115
140,393
17,442
26,304
Cost of services, excluding depreciation and amortization (including
related party amounts of 1,435 in 2007 and 2,475 in 2006)
17, 21
2007
Convenience
translation,
thousands US $
$
5,719,541
1,071,612
Accounts receivable, net of allowance for doubtful
accounts of 222 in 2007 and 143 in 2006
4
4,740
5,443
221,745
Gross margin
83,673
114,089
4,647,929
Accounts receivable, related parties
21
418
104
4,237
Sales and marketing expenses
18
11,066
13,647
555,972
Inventories
457
468
19,066
VAT receivable
3,322
2,372
96,634
Operating expenses (including related party amounts
of 680 in 2007 and 841 in 2006)
19, 21
22,507
28,854
1,175,498
739
1,111
45,262
Depreciation and amortization
6, 7
18,393
24,187
985,366
31,707
47,401
1,931,093
2,866
2,476
100,871
Change in fair value of derivative financial instruments (C-loans)
777
–
–
Other income, net
(273)
(1,164)
(47,421)
Deferred tax assets
20
Prepayments and other current assets
5
Total current assets
2,469
3,704
150,898
Operating income
19,679
39,171
1,595,807
Other income and expenses:
Interest expense
Property, plant and equipment, net
6
87,600
102,817
4,188,714
Intangible assets, net
7
13,740
12,745
519,225
Other non-current assets
8
1,680
1,764
71,864
122,699
156,497
Total assets
$
6,375,610
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
221,460
(2,358)
(490)
(20,003)
Total other expenses, net
13
1,012
822
33,447
Income before income taxes and minority interest
30,695
46,579
1,897,646
4,553
5,436
2,387
3,061
124,704
Provision for income taxes
8,684
12,633
514,662
21
586
519
21,144
Minority interest in earnings/(loss) of a subsidiary
22
(20)
(815)
Subscribers’ prepayments
5,515
5,794
236,045
Net income
21,989
33,966
Deferred revenue, current portion
1,238
499
20,329
Accounts payable, related parties
$
Net foreign exchange gain
9
Accounts payable and accruals to equipment suppliers
Accrued liabilities
10
2,663
3,790
154,403
Loans from shareholders, current portion
12
–
433
17,640
Debt, current portion
11
7,496
10,130
412,691
Other current liabilities
143
260
10,592
Total current liabilities
24,581
29,922
1,219,008
Debt, net of current portion
11
31,893
26,003
1,059,349
Loans from shareholders
12
3,241
2,877
117,208
Other non-current liabilities
14
1,945
2,632
107,226
Deferred tax liabilities
20
50,028
1,449
1,228
63,109
62,662
2, 552,819
–
–
–
55
35
1,426
Common stock (par value of 10 Rubles, 6,200,002 shares
authorized, issued and outstanding)
581
581
23,670
Reserve fund
17
17
693
Additional paid-in capital
13,875
13,875
565,261
45,309
79,591
3,242,496
(247)
(264)
(10,755)
Total shareholders’ equity
59,535
93,800
3,821,365
Total liabilities and shareholders’ equity
122,699
156,497
Total liabilities
Commitments and contingencies
23
Minority interest
Shareholders’ equity:
Accumulated other comprehensive loss
The accompanying notes are an integral part of
these consolidated financial statements.
20
$
1,383,799
15
Retained earnings
44...
Revenues (including related party amounts of 1,605 in 2007
and 1,826 in 2006)
Note
2
$
6,375,610
Consolidated Financial Statements
The accompanying notes are an integral part of
these consolidated financial statements.
45...
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity
(in millions of Rubles)
(in millions of Rubles, except share amounts)
(Note 2)
(Note 2)
Years ended December 31,
2006
2007
21,989
33,966
18,393
24,187
985,366
Net foreign exchange gain
(2,358)
(490)
(20,003)
Minority interest in net earnings/(loss) of a subsidiary
22
(20)
(815)
Provision for deferred income taxes
(856)
(593)
(24,158)
Change in fair value of derivative financial instruments (C-loans)
777
–
Amortization of deferred finance charges and other non-cash items
1,257
1,182
Accounts receivable
(2,221)
(590)
(24,036)
Accounts receivable, related parties
(326)
122
4,970
Inventories
120
(43)
(1,752)
VAT receivable
738
951
38,743
Prepayments and other current assets
(654)
(1,172)
(47,747)
Balances as of December 31, 2005 6,200,002
$
1,383,799
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Shares
Convenience
translation,
thousands US $
Cash flows from operating activities:
Net income
Common stock
2007
Amount
Reserve
fund
Additional
paid-in
capital
Retained earnings
Accumulated
other comprehensive loss
Comprehensive income
(loss)
Total
581
17
13,875
23,320
–
–
37,793
Comprehensive income
Net income
–
–
–
–
21,989
–
21,989
21,989
Foreign currency translation
adjustment
–
–
–
–
–
(224)
(224)
(224)
Total comprehensive income
21,765
–
–
–
–
–
–
–
–
Effect of adoption of SFAS No.158,
(net of tax effect of zero)
–
–
–
–
–
(23)
(23)
48,154
Balances as of December 31, 2006 6,200,002
581
17
13,875
45,309
(247)
59,535
Decrease/(increase) in:
Increase/(decrease) in:
Accounts payable
1,874
668
27,214
Accounts payable, related parties
145
172
7,007
Deferred revenue
739
(734)
(29,903)
Subscribers’ prepayments
742
279
11,366
Accrued liabilities
299
1,125
45,834
Net cash provided by operating activities
40,680
59,010
2,404,039
Purchases of property, plant and equipment and intangible assets
(33,203)
(35,894)
(1,462,303)
Proceeds from sale of property, plant and equipment
–
218
8,881
Increase in short-term investments
(569)
(21,172)
(862,537)
Other non-current assets
475
(47)
(1,915)
Net cash used in investing activities
(33,297)
(56,895)
(2,317,874)
Proceeds from long-term debt
7,238
6,305
256,863
Repayments of long-term debt and C-loans
(15,076)
(10,812)
(440,476)
Deferred finance charges paid
(154)
(176)
(7,170)
Capital lease principal repayments
(106)
(10)
(407)
Net cash used in financing activities
(8,098)
(4,693)
(191,190)
Effect of exchange rate changes on cash and cash equivalents
(192)
(128)
(5,216)
Net decrease in cash and cash equivalents
(907)
(2,706)
(110,241)
Cash and cash equivalents at the beginning of the year
7,872
6,965
Cash and cash equivalents at the end of the year
6,965
4,259
$
173,510
Cash paid during the year for income taxes
9,885
14,013
$
570,883
Cash paid during the year for interest, net of amounts capitalized
2,512
2,532
103,152
954
1,835
74,757
Comprehensive income
Net income
–
–
–
–
33,966
–
33,966
33,966
Pensions costs (net of tax effect
of zero)
–
–
–
–
–
(17)
(17)
(17)
Total comprehensive income
–
–
–
–
–
–
33,949
–
Effect of adoption of FIN No.48
–
Balances as of December 31, 2007 6,200,002
–
–
–
316
–
316
581
17
13,875
79,591
(264)
93,800
Cash flows from investing activities:
Cash flows from financing activities:
283,751
Supplemental cash flow information:
Non-cash financing and investing activities:
Equipment purchased under credit (See Note 11)
46...
The accompanying notes are an integral part of
these consolidated financial statements.
Consolidated Financial Statements
The accompanying notes are an integral part of
these consolidated financial statements.
47...
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
(continued)
December 31, 2007 and 2006
(in millions of Rubles, unless otherwise indicated)
2. Summary of Significant Accounting Policies
The principal accounting policies adopted for the preparation of the accompanying consolidated financial
statements are set out below.
Basis of Presentation
1. Description of Business
Open joint stock company (or “OJSC”) MegaFon (the “Company” or “MegaFon”) is a provider of a broad range
of wireless telecommunications services to businesses, other telecommunications service providers and retail
subscribers.
The Company and its subsidiaries have operating licenses for all Federal Districts of the Russian Federation,
covering 100% of its population. MegaFon has built and is expanding a nationwide mobile communications
network that operates on the dual band GSM-900/1800 standard. The Company is also operating an IMT-2000
UMTS network in St. Petersburg.
In April 2007, the results of the tender for the 3G licenses were announced. MegaFon was one of three companies that were granted a federal license allowing them to provide 3G services in Russia. In accordance with the
conditions of the license, the Company must start commercial exploitation of the 3G technology in 86 regions
at various dates over the period from May 2008 through May 2010.
The statutory accounting records of the Company and its subsidiaries, except for TT-Mobile, are maintained
in Rubles and are prepared in accordance with the accounting requirements provided for under Russian law
and accounting practices. The accounting records of TT-Mobile are maintained in the local currency and in
accordance with the accounting practices of the Republic of Tajikistan. These financial statements have been
prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”). The accompanying financial statements differ from statutory financial statements used in Russia and
the Republic of Tajikistan because they reflect certain adjustments, recorded in the entities’ accounts, which
are necessary to present the financial position, results of operations and cash flows in accordance with US
GAAP. The principal adjustments are related to revenue recognition, deferred taxation, consolidation, accounting for derivatives, and valuation and depreciation of property, plant and equipment and intangible assets.
As further discussed in “Foreign Currency Translation Methodology” below, effective January 1, 2007, the
Company’s reporting currency changed from the US dollar to the Ruble.
As at December 31, 2007, MegaFon included the following operating entities:
Company
Ownership interest
Region / License area
Date operations
started
MegaFon:
(NW GSM branch)
N/A
St. Petersburg and St. Petersburg region
December 1994
Sonic Duo 100%
100%
Moscow and Moscow Region
November 2001
MCS Povolzhie
100%
Volzhsky Federal District
August 1999
Mobicom Center
100%
Central Federal District
December 2002
Ural GSM
100%
Urals Federal District
June 2002
Mobicom Caucasus
100%
Southern Federal District
January 2001
Mobicom Novosibirsk
100%
Siberian Federal District
December 2003
Mobicom Khabarovsk
100%
Far East Federal District
March 2004
TT-Mobile
75%
Republic of Tajikistan
October 2001
Subsidiaries:
Basis of Consolidation
The Company consolidates all entities for which it has voting or effective control. All significant intra-group
balances and transactions are eliminated in consolidation.
Management Estimates
During January 2007, Volzhsky GSM and Mobicom Kirov were merged with and into MCS Povolzhie and Ural
GSM, respectively.
The preparation of financial statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results may differ from those estimates. The
most significant estimates with regard to the accompanying consolidated financial statements relate to the
useful lives of tangible and intangible assets, deferred revenue, asset retirement obligation, fair value of derivative financial instruments, income tax provision and recoverability of deferred taxes.
Foreign Currency Translation Methodology
The Company’s functional currency is the Ruble as the largest portion of its revenues, capital expenditures and
operating costs are denominated in Rubles. The Company changed its functional currency from the US dollar
to the Ruble effective January 1, 2006.
Until December 31, 2006, the Company continued to use the US dollar as its reporting currency. Effective
January 1, 2007, the Company changed its reporting currency from the US dollar to the Ruble, since this is
the currency of the prime economic environment in which substantially all operations of the Company are
conducted.
Prior period comparative financial statements have been recast to the Ruble using a methodology consistent
with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”. All assets
and liabilities were translated using the December 31, 2006 exchange rate. Shareholders’ equity was translated at the applicable historical rates. Income and expenses were translated using the quarterly average exchange rates. The objective of this procedure is to present comparative financial statements as if the Company
had always used the Ruble as its reporting currency.
48...
The US dollar amounts disclosed in the accompanying consolidated financial statements are presented solely
for the convenience of the reader and have been translated at the exchange rate of 24.5462 Rubles per US dollar as of December 31, 2007, the exchange rate determined by the Central Bank of the Russian Federation as of
such date. This translation should not be construed as representing that the Ruble amounts actually represent
or have been, or could be, converted into US dollars at that exchange rate or at any other rate of exchange.
49...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
2. Summary of Significant Accounting Policies (continued)
2. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
Cash represents cash on hand and in the Company’s bank accounts. Cash equivalents represent short-term
cash deposits held at banks with an original maturity of three months or less. Cash equivalents are carried at
cost, which approximates fair value.
Short-Term Investments
Short-term investments represent investments in notes receivable and time deposits, which have original
maturities in excess of three months but less than twelve months. These investments are accounted for at
cost, which approximates fair value. The carrying amount of short-term investments is reduced to recognize
any decline in value which is other than temporary.
Intangible Assets
Intangible assets represent numbering capacity, capitalized licenses and other intangible assets.
The Company and its subsidiaries have numerous operating licenses granted by the Ministry of Telecommunications and Information of the Russian Federation. License costs represent either an allocation of the purchase
price to licenses acquired in business combinations or payments made to government organizations to receive
the licenses. License costs are capitalized and amortized on a straight-line basis over their expected useful
lives of ten to twelve years from the date operations commenced in the license area. Management believes
that all existing operating licenses will be renewed in the future without substantial cost. The licenses expire
between 2008 and 2013.
Numbering capacity represents payments made to acquire access to telephone numbers and the use of telephone lines. Numbering capacity costs are amortized over periods up to six years using the straight-line
method.
Accounts Receivable
Accounts receivable are stated net of an allowance for accounts identified as doubtful. The Company provides
an allowance for doubtful accounts based on management’s periodic review of accounts receivable, including
an assessment of the delinquency of these account balances.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined using the first in – first out
(“FIFO”) method. Inventories are mainly comprised of SIM-cards and prepaid phone cards.
Value-Added Tax
Value-added taxes (“VAT”) related to revenues are generally payable to the tax authorities on an accrual basis
when invoices are issued to customers and dealers. VAT incurred for purchases may be reclaimed or offset,
subject to certain restrictions, against VAT related to revenues. VAT related to purchases which are not currently reclaimable as of the balance sheet dates are recognized in the balance sheets on a gross basis as VAT
receivable.
All intangible assets are subject to periodic review for indications of impairment.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, less accumulated depreciation. Cost includes all costs directly attributable to bringing the asset to working condition for its intended use. Interest expense incurred
during the construction phase of a project is capitalized as part of property, plant and equipment until the project is completed and the asset is placed into service. Depreciation is recorded on a straight-line basis so as to
amortize the cost of the assets over their expected useful lives. The expected useful lives are as follows:
Buildings and structures
Switching equipment, including billing systems
Base stations, including software
Other network equipment
Vehicles and office equipment
7 to 20 years
3 to 7 years
7 years
5 to 7 years
3 to 5 years
VAT receivable in turn may be recoverable from the tax authorities via an offset against future VAT payable to
the tax authorities on MegaFon’s revenue or via direct cash receipts from the tax authorities.
Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the
assets. The lease term includes renewals when such renewals are reasonably assured.
Management reviews the recoverability of the balance of VAT receivable and believes that the amounts reflected in the financial statements are fully recoverable within one year with the exception of 57 and 44 which
are therefore classified as noncurrent assets at December 31, 2007 and December 31, 2006, respectively (see
Note 8).
The cost of maintenance, repairs, and replacement of minor items of property, plant and equipment are expensed. Betterments of property are capitalized. Upon sale or retirement of property, plant and equipment,
the cost and related accumulated depreciation are removed from the accounts. Any resulting gains or losses
are included in the determination of operating results.
Deferred Finance Charges
Commissions, arrangement and commitment fees and related legal fees paid to secure a firm commitment
from lenders, premiums paid to secure vendor financing, and other direct debt issuance costs incurred in
connection with new borrowings are deferred and amortized over the terms of the related loans, using the
effective-interest method. Costs capitalized in connection with revolving credit facilities are amortized on a
straight-line basis over the period the revolving line of credit is active.
50...
Other intangible assets are amortized on a straight-line basis over their estimated useful lives, generally from
two to ten years.
In 2007 and 2006, the Company revised its estimates of useful lives and residual values of certain equipment.
These revisions were reflected through an additional charge to depreciation, which resulted in a decrease of
net income for 2007 and 2006 by approximately 1,139 and 421, respectively. These revisions represent the
outcome of a comprehensive management analysis of the estimated future usage, residual values and timing
of disposal of these assets.
51...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
2. Summary of Significant Accounting Policies (continued)
2. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment (continued)
The Company accounts for asset retirement obligations in accordance with SFAS No. 143, “Accounting for
Asset Retirement Obligations.” SFAS No. 143 requires entities to record the fair value of a legal liability for
an asset retirement obligation in the period it is incurred. This cost is initially capitalized and amortized over
the remaining useful life of the asset. Once the obligation is ultimately settled, any difference between the
final cost and the recorded liability is recognized as a gain or loss on disposition. The Company has certain
legal obligations related to rented sites for base stations and masts, which fall within the scope of SFAS No.
143. These legal obligations include requirements to restore the real estate upon which the base stations and
masts are located.
The Company annually evaluates whether there are any indicators which suggest that the estimated cash
flows underlying the liability have changed materially. If such indicators exist the Company re-estimates the
timing and amount of the cash flows and accounts for the effect of such changes in accordance with the provisions of SFAS No. 143.
Impairment of Long-Lived Assets
The Company periodically evaluates the recoverability of the carrying amount of its longlived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Whenever events
or changes in circumstances indicate that the carrying amounts of those assets may not be recoverable, the
Company compares the undiscounted net cash flows estimated to be generated by those assets to the carrying
amount of those assets.
When these undiscounted cash flows are less than the carrying amounts of the assets, the Company will record impairment losses to write-down the asset to fair value, measured by the discounted estimated net future
cash flows expected to be generated from the assets. During the years ended December 31, 2007 and 2006,
no such impairments have occurred.
Subscribers’ Prepayments
Amounts received from subscribers in advance of services being provided are deferred and recognized as
revenues when the services are provided.
Revenue Recognition (continued)
Subscription Fees
The Company recognizes monthly subscription fees as revenue in the month when the service is provided.
Usage Charges and Value Added Services Fees
Usage charges consist of fees based on airtime or data services used by the subscriber. The Company recognizes
revenues related to usage charges and value-added services in the period when the services are rendered.
For prepaid subscribers, the Company recognizes revenues for services provided to subscribers with negative
(i.e., debit) account balances only upon subsequent collection of the cash from such subscribers.
The Company presents revenue from some value-added services (e.g., content services) on a gross basis when
the Company is responsible for providing the content and on a net basis when the content service provider is
responsible for providing the content.
Prepaid Phone Cards
Prepaid phone cards allow subscribers to make a predetermined monetary amount of wireless phone calls
and/or take advantage of other services, such as short messages and sending or receiving of faxes. At the
time that the prepaid phone card is purchased, the receipt of cash is recorded as a subscriber prepayment.
Revenues are recognized in the period when services are actually rendered. Unused value relating to phone
cards is recognized as revenue when the prepaid phone card expires.
Roaming Fees
The Company charges roaming fees (generally on a per-minute basis) to other wireless operators for “guest”
roamers utilizing MegaFon’s network. The Company recognizes revenues from roaming fees in the period
when the services are rendered.
Interconnection fees
The Company rents telecommunication channels to the other telecommunications operators in Russia. Also,
the Company charges other operators for terminating traffic on the Company’s network (see Note 17). The
Company records these charges as interconnection revenue. The Company recognizes revenue from rent and
for termination of traffic in the month when the services are provided.
Connection Fees
Connection fees consist of non-refundable charges received from subscribers at the time of service initiation.
The Company defers revenue from initial connection fees and recognizes them as revenue over the estimated
average subscriber lives. These estimated average subscriber lives differ by region and by type of tariff plans
and range from six to twenty months.
Interest Free Loans from Shareholders
The Company accounts for interest free loans from non-controlling shareholders in accordance with Accounting Principles Board Opinion No. 21 “Interest on Receivables and Payables”. Accordingly, these loans are
recorded at their estimated present values based on the Company’s incremental borrowing rate. The related
imputed interest is recorded as additional paid-in capital in the statements of shareholders’ equity. The accretion of imputed interest is included as interest expense in the accompanying statements of income.
Other
The Company provides technical support to the other telecommunication operators in Russia. The Company
recognizes revenue from technical support in the month when the services are rendered. Also, the Company
sells a relatively small quantity of handsets and accessories. The Company recognizes revenues from the sale
of handsets and accessories upon the transfer of handsets and accessories to a customer.
Revenues are categorized as follows:
Arrangements with Multiple Deliverables
Certain of the Company’s commercial arrangements constitute a contractual arrangement with multiple deliverables. In accordance with the Emerging Issues Task Force Consensus No. 00-21, “Revenue Arrangements
with Multiple Deliverables”, the Company allocates the consideration received from a subscriber to the separate units of accounting inherent in the contract based on their relative fair values.
• Revenue from subscribers, including subscription fees, usage charges, fees for value-added services and
the fees charged to subscribers for roaming outside MegaFon’s network;
• Roaming fees charged to other wireless operators for guest roamers utilizing MegaFon’s network;
• Revenue from interconnection charges;
• Connection fees; and
• Other: technical support, sales of handsets and accessories.
Discounts and Commissions to Dealers
Dealers purchase service contracts and prepaid phone cards from the Company at a discount and resell them
to subscribers at prices set by the Company. Also, dealers collect payments for services from subscribers
and remit them to the Company. In turn, the Company pays dealers a commission which is determined as a
percentage of amounts collected. The respective discounts and commissions are recorded as a part of sales
and marketing expenses.
Revenue Recognition
Revenues are stated net of VAT charged to customers.
52...
53...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
2. Summary of Significant Accounting Policies (continued)
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
Also, the Company pays dealers a commission for each subscriber connected, depending on region, class
or type of subscriber connected and other factors, including average revenue per subscriber for certain time
periods. The Company recognizes the entire estimated commission payable when the subscriber is connected
by the dealer.
Advertising Costs
Income Taxes (continued)
On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with SFAS No. 109. FIN No. 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN No. 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In addition, FIN No. 48 states that income taxes
should not be accounted for under the provisions of SFAS No. 5, “Accounting for Contingencies”.
Advertising costs are expensed as incurred (see Note 18).
Retirement Benefit Obligations
The adoption of FIN No. 48 resulted in a cumulative effect adjustment increasing the opening balance of retained
earnings as of January 1, 2007 by approximately 316. As of December 31, 2007, an asset in the amount of 497
was recorded, of which 182 and 315 are included in other current and non-current assets, respectively.
Both the Company and its subsidiaries are legally obliged to make defined contributions to the National Pension Fund, managed by the Russian Federation Social Security (a defined contribution plan). The Company has
no legal or constructive obligation to pay future benefits under this plan. Its only obligation is to pay contributions as they fall due. The Company’s contributions relating to defined contribution plans are calculated as a
percentage of employees’ compensation and expensed in the year to which they relate. Contributions to the
National Pension Fund for the years ended December 31, 2007 and 2006 were 959 and 740, respectively.
Although the Company believes it is more likely than not that all recognized income tax benefits would be
sustained upon examination, the Company has recognized certain income tax benefits that have a reasonable
possibility of being successfully challenged by the tax authorities (also see Note 23). If these income tax positions are successfully challenged by the tax authorities, this could result in a reduction in total unrecognized
tax benefits of up to 160. However, the Company does not believe that it is reasonably possible that this will
occur.
Additionally, the Company has a noncontributory defined benefit pension plan that covers approximately
half of the employees at one of its locations. The net pension benefit obligation and the related periodic net
pension cost are based on, among other things, assumptions of the discount rate, estimated return on plan
assets, salary increases and the mortality of participants. Before December 31, 2006, actuarial gains and
losses were deferred and amortized over future periods. As of December 31, 2006 the Company adopted the
provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)”. SFAS No. 158 requires the Company
to recognize the funded status of a defined benefit plan as an asset or liability in the statement of financial
position and to recognize changes in that funded status in the year in which the changes occur through other
comprehensive income. The adoption of SFAS No. 158 at December 31, 2006 resulted in an adjustment to accumulated other comprehensive income of 23.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income taxes.
As of December 31, 2007, the tax years ended December 31, 2005, 2006 and 2007 remained subject to examination by the tax authorities.
Income Taxes
Provision is made in the financial statements for taxation of profits in accordance with Russian legislation currently in force. The Company accounts for income taxes under the liability method in accordance with SFAS No.
109, “Accounting for Income Taxes”. Under the liability method, deferred income taxes reflect the future tax
consequences of temporary differences between the tax and financial statement basis of assets and liabilities
and are measured using enacted tax rates applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in the tax rates is recognized in income in the period that includes the enactment date. A valuation allowance
is provided when it is more likely than not that some or all of the deferred tax assets will not be realized in the
future. These evaluations are based on the reversals of the various taxable temporary differences, tax-planning strategies and expectations of future taxable income.
As of January 1, 2007 and December 31, 2007, the Company did not have unrecognized income tax benefits
which are more than inconsequential.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily
of cash, cash equivalents, short-term investments and accounts receivable. The Company deposits available
cash with various banks, including Svyazbank, a related party (see Notes 3 and 21). Deposit insurance is
either not offered or only offered in de minimis amounts in respect of bank deposits within Russia. To manage the credit risk, MegaFon allocates its available cash to a limited number of Russian banks and domestic
branches of international banks. Some of these Russian banks are state owned. Management periodically
reviews the credit worthiness of the banks in which it deposits cash.
The Company extends credit to certain counterparties, principally international and national telecom operators, for roaming services, and to certain dealers, and establishes an allowance for doubtful accounts for specific accounts that it believes represent a potentially significant credit risk. The Company generally requires its
subscribers to prepay for services, except for corporate subscribers that it deems reliable.
Starting in 2005, a significant portion of the Company’s collection of cash from subscribers is handled by a
single “master” dealer who, for a commission, produces and sells payment cards to sub-dealers, and collects
and remits to the Company the funds received from the subdealers. Payments are due to the Company not
later than 16 days after the payment cards are shipped to the sub-dealers. Because of the additional credit risk
which this arrangement presents, management regularly monitors the status of receivables from this “master”
dealer to ensure that settlements are made when they become due (see Note 4).
A significant portion of Company’s sales and purchases of roaming and interconnection services is performed
with related parties. Respective payables and receivables are not significant (see Note 21).
The Company does not provide for deferred taxes on the undistributed earnings of its subsidiaries, as such
earnings are not anticipated to be distributed in a taxable manner.
54...
55...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
2. Summary of Significant Accounting Policies (continued)
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income (Loss)
New Accounting Pronouncements (continued)
SFAS No. 130, “Reporting Comprehensive Income”, requires the reporting of comprehensive income in addition to net income. Comprehensive income is defined as net income plus all other changes in net assets from
non-owner sources.
The components of accumulated other comprehensive loss, net of tax, are as follows:
Balance as of December 31, 2005
Foreign currency
translation
adjustment
Defined benefit
pension plan
Accumulated
other comprehensive loss
–
–
–
Change for the period
224
23
247
Balance as of December 31, 2006
224
23
247
Change for the period
–
17
17
Balance as of December 31, 2007
224
40
264
Derivative Instruments and Hedging Activities
The Company follows the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities”, as amended. SFAS No. 133, as amended, requires that all derivative instruments be recorded
on the balance sheet at their respective fair values. On the date a derivative contract is executed, and depending on the specific facts and circumstances, this derivative may be designated as a fair value hedge, cash flow
hedge or foreign currency hedge of net investment in a foreign operation. For derivative instruments
that are not designated as hedges or do not qualify as hedged transactions, the changes in the fair value are
reported in the statement of income. The Company does not hold or issue derivatives for trading purposes.
Comparative Information
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”), which will change the accounting and reporting for
minority interests, which will be recharacterized as noncontrolling interests and classified as a component of
equity within the consolidated balance sheets. The requirements of SFAS No. 160 will be effective for the year
beginning January 1, 2009. The Company is currently evaluating the impact of adopting SFAS No. 160 on its
financial statements.
3. Cash and Cash Equivalents
Cash and cash equivalents are comprised of:
December 31, 2006
December 31, 2007
Bank deposits and cash on hand
2,767
2,723
Time deposits
4,198
1,536
Total cash and cash equivalents
6, 965
4,259
Time deposits as of December 31, 2007 and 2006 have an interest yield from 2.2% to 9.5% and from 2% to
7.25%, respectively, and have original maturities of 90 days or less. These deposits can be withdrawn before
their maturity dates without penalties.
As of December 31, 2007 and 2006, 678 and 535 of cash and cash equivalents were on deposit with Svyazbank, a related party (see Notes 2 and 21).
4. Accounts Receivable
Accounts receivable are comprised of:
December 31, 2006
December 31, 2007
Subscribers
326
691
Roaming (other wireless operators)
456
449
The “master” dealer (see Note 2)
1,249
730
Other dealers
1,359
1,539
Interconnection
1,379
2,166
Other
114
90
Less allowance for doubtful accounts
(143)
(222)
Total accounts receivable, net
4,740
5,443
Certain prior year amounts and disclosures have been reclassified to conform to the 2007 presentation.
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which clarifies the definition
of fair value, establishes guidelines for measuring fair value, and expands disclosures regarding fair value
measurements. SFAS No. 157 does not require any new fair value measurements and eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for the year
beginning January 1, 2008. The Company is currently evaluating the impact of adopting SFAS No. 157 on its
financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment to SFAS No. 115”. SFAS No. 159 permits companies to elect to measure
many financial instruments and certain other items at fair value. SFAS No. 159 does not affect any existing
accounting standards that require certain assets and liabilities to be carried at fair value. SFAS No. 159 is
effective for the year beginning January 1, 2008. The Company is currently evaluating the impact of adopting
SFAS No. 159 on its financial statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS No. 141R”), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The requirements
of SFAS No. 141R will be effective for the year beginning January 1, 2009. The Company is currently evaluating
the impact of adopting SFAS No. 141R on its financial statements.
56...
57...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
5. Prepayments and Other Current Assets
6. Property, Plant and Equipment (continued)
Prepayments and other current assets are comprised of:
In 2007, the Company decided to replace certain telecommunications equipment. Most of this equipment
remained in use as of December 31, 2007 and is expected to be de-installed during 2008. As part of the arrangement to replace the equipment, certain of this equipment will be sold. In connection with the decision
to replace the equipment, the Company re-evaluated the remaining useful lives of such equipment, resulting
in the useful lives being re-set to periods ranging from 18 to 24 months as of April 1, 2007. Subsequently,
in October 2007, the Company revised its estimates of the remaining useful lives of such equipment, resulting in useful lives being re-set to periods ranging from 9 to 21 months. In connection with these revisions
the Company recorded additional depreciation expense of 809 for the year ended December 31, 2007. After
taking into account this additional depreciation, the net book value of the assets to be sold as of December
31, 2007 was approximately 173. Equipment which will be replaced, but which was still in use as of December
31, 2007, was classified as property, plant and equipment. The acceleration of depreciation expense had the
effect of decreasing net income by 615 for the year ended December 31, 2007, net of income tax.
December 31, 2006
December 31, 2007
Prepaid taxes
1,142
1,997
Advances for advertising
132
129
Advances for other services
620
753
Other current assets
575
825
Total prepayments and other current assets
2,469
3,704
Advances for other services mainly relate to interconnection, network maintenance, rent prepayments for sales
offices and base station facilities, office maintenance and advances to dealers. Prepaid taxes mainly relate to
prepaid income taxes, which amounted to 1,827 and 1,085 as of December 31, 2007 and 2006, respectively.
Asset Retirement Obligations
The following table describes the changes to the Company’s asset retirement obligations liability:
6. Property, Plant and Equipment
Property, plant and equipment are comprised of:
Buildings,
structures
and leasehold
improvements
Telecommunications
network
Vehicles,
computers,
office and other
equipment
Construction
in-progress
Total
Cost:
At December 31, 2006
9,225
93,394
6,777
12,999
122,395
Additions
Transfers
–
–
–
37,296
37,296
6,175
26,660
2,629
(35,464)
–
Disposals
(75)
(3,328)
(219)
(174)
(3,796)
At December 31, 2007
15,325
116,726
9,187
14,657
155,895
At December 31, 2006
1,366
30,643
2,786
–
34,795
Charges
1,049
18,208
2,410
–
21,667
Accumulated depreciation:
2006
2007
Asset retirement obligations at the beginning of the year
599
1,740
Liability recognized during the year
364
637
Revision in estimated cash flows
691
(335)
Accretion expense
86
214
Liability settled in the current period
–
(21)
Asset retirement obligations at the end of the year
1,740
2,235
7. Intangible Assets
Intangible assets are comprised of:
Amortization expense for the year ended December 31, 2006 was 2,493.
Operating
licenses
Numbering
capacity
Other
intangible
assets
Total
2,135
3,240
24,291
Disposals
(28)
(3,202)
(154)
–
(3,384)
Cost:
At December 31, 2007
2,387
45,649
5,042
–
53,078
At December 31, 2006
18,916
Net book value
at December 31, 2007
Additions
4
14
1,507
1,525
12,938
71,077
4,145
14,657
102,817
Disposals
–
(11)
(176)
(187)
Net book value
at December 31, 2006
7,859
62,751
3,991
12,999
87,600
At December 31, 2007
18,920
2,138
4,571
25,629
Accumulated amortization:
Depreciation expense for the year ended December 31, 2006 was 15,900.
Included in construction in-progress are advances to suppliers of network equipment of 1,943 and 1,226 as of
December 31, 2007 and 2006, respectively.
Software and licenses for base stations and billing systems are included in the balances of telecommunications
network assets. The net book value is 4,494 and 4,437 as of December 31, 2007 and 2006, respectively.
Interest capitalized was 804 (out of the total interest expense of 3,280) and 808 (out of the total interest expense of 3,674) for the years ended December 31, 2007 and 2006, respectively.
At December 31, 2006
7,640
1,799
1,112
10,551
Charges
1,624
233
663
2,520
Disposals
–
(11)
(176)
(187)
At December 31, 2007
9,264
2,021
1,599
12,884
Net book value
at December 31, 2007
9,656
117
2,972
12,745
Net book value
at December 31, 2006
11,276
336
2,128
13,740
Amortization expense for the next five years is expected to be as follows: 2008 – 2,429; 2009 – 2,128;
2010 – 1,984; 2011 – 1,811 and 2012 – 1,722.
58...
59...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
8. Other Non-Current Assets
11. Long-Term Loans
Long-term loans are comprised of:
Other non-current assets are comprised of:
December 31, 2006
December 31, 2007
December 31, 2006
December 31, 2007
Nordea and Bayerische Hypo- und Vereinsbank AG loan (1)
817
416
VAT receivable
44
57
Ruble Bonds (2)
4,500
3,000
Deferred finance charges (see Note 11)
1,479
1,086
Eurobonds (3)
9,874
8,296
Other
157
621
Sberbank loans (4)
2,522
1,508
Total other non-current assets
1,680
1,764
Citibank International Plc., ING BHF-Bank Aktiengesellschaft,
and ING Bank N.V. loans (5)
4,144
2,732
Bayerische Landesbank, Bayerische Landesbank Filiale Di
Milano, Commerzbank Aktiengesellschaft, Citibank N.A.
London branch, and ING Bank N.V. loans (6)
11,449
11,507
Citibank N.A. London branch and ING Bank N.V. loan (7)
2,902
6,500
9. Accounts Payable
Accounts payable are comprised of:
December 31, 2006
December 31, 2007
Roaming
369
374
China Development Bank, Citibank International Plc.,
and Citibank N.A. London branch loan (8)
1,343
–
Interconnection
2,052
2,130
China Development Bank and Bayerische Landesbank (9)
–
126
Dealers
689
1,118
Other accounts payable
1,443
1,814
Japan Bank for International Cooperation, Citibank N.A.
Tokyo branch and Calyon Tokyo branch loan (10)
1,013
1,105
Total accounts payable
4,553
5,436
Nordic Investment Bank loan (11)
395
368
Other loans (12)
430
575
Total long-term loans
39,389
36,133
Less current portion
7,496
10,130
Non-current portion
31,893
26,003
10. Accrued Liabilities
Accrued liabilities are comprised of:
December 31, 2006
December 31, 2007
Accrued taxes
1,222
1,801
Salary and social contributions
701
1,415
Accrued interest
328
195
Other accrued liabilities
412
379
Total accrued liabilities
2,663
3,790
Loan repayments over the four-year period beginning on January 1, 2008 are as follows:
Total
2008
2009
2010
2011
Total
10,130
14,336
4,527
7,140
36,133
Lenders whose loans mature after 2011 (see Notes 11(6), (9), (10), (11)) may be entitled to require the early
prepayment of the outstanding amount of these loans if the Company elects to repay certain specific loans
from shareholders maturing in 2011 (see Note 12). The maturity table above assumes such prepayment of
these loans.
At December 31, 2007, the Company’s debt was denominated in the following currencies:
Borrowing currency
Millions of Rubles
Rubles
4,508
4,508
US dollars (in millions)
660
16,208
Euros (in millions)
429
15,417
Total long-term loans
36,133
(1) Nordea and Bayerische Hypo- und Vereinsbank AG (Nordea/HVB)
In November 2004, the Company entered into a loan agreement with Nordea/HVB for approximately $51 million (1,434 at the exchange rate as of November 30, 2004). The loan is guaranteed by EKN, a Swedish export
credit agency. This loan bears interest at LIBOR plus 0.8% and is repayable over the period from 2005 to 2008.
The loan also requires the Company to meet various financial and non-financial covenants. Deferred financing
costs of 41 were capitalized in connection with this loan.
60...
61...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
11. Long-Term Loans (continued)
11. Long-Term Loans (continued)
(2) Ruble Bonds
In April 2004, the Company issued 1.5 billion of Ruble bonds. The bonds were issued at face value bearing
interest at an annual rate of 9.28% payable semi-annually. The Company redeemed these bonds at their maturity in April 2007.
(7) Citibank N.A. London branch and ING Bank N.V. and Nokia Corporation (“Finnvera III Credit”)
In June 2006, the Company entered into the Finnvera III Credit for 218 million Euros (7,407 at the exchange
rate as of June 30, 2006) with interest at approximately 4.3%. This loan is guaranteed by Finnvera, a Finnish
export credit agency. A payment of 6.5 million Euros (225 at the exchange rate as of date of payment) of insurance premium was required to obtain this guarantee and is capitalized as deferred finance charges as each
payment is made. The Finnvera III Credit can only be used for purchases of Nokia Corporation equipment. The
amounts drawn under the Finnvera III Credit are repayable semi-annually from 2007 through 2011.
In April 2005, the Company issued 3 billion of Ruble bonds. The bonds were issued at face value bearing interest at an annual rate of 9.25% payable semiannually. The Company redeemed these bonds at their maturity
in April 2008.
(3) Eurobonds
In December 2004, MegaFon S.A. issued $375 million (10,406 at the exchange rate as of December 31, 2004)
of loan participation notes (the Eurobonds) at face value with interest at 8% payable semi-annually. The Eurobonds mature in December 2009. The proceeds from the Eurobonds were used to finance a loan from MegaFon
S.A. to the Company on substantially the same terms and conditions as the Eurobonds. Deferred financing
costs of 178 were capitalized in connection with this loan.
In July and August 2007, the Company purchased a total $37 million face value of its Eurobonds (950 at the exchange rates as of the transaction dates) for approximately 990. In connection with this Eurobonds repurchase,
the Company recognized a loss in the amount of approximately 30 for the year ending December 31, 2007.
(4) Sberbank
The Company has entered into several credit line agreements with Sberbank. As of December 31, 2006, the interest on outstanding Sberbank loans ranged from 8.5% to 9%. In August 2007, the interest rate was reduced
to 7.5% under all credit line agreements with Sberbank. The loans are repayable at various dates from 2006 to
2010. As of December 31, 2007, 1,608 remained undrawn under the Sberbank credit line agreements.
(5) Citibank International Plc. and ING BHF-Bank Aktiengesellschaft and Siemens AG (“Hermes Credit”);
Citibank International plc. and ING Bank N.V. and Ericsson AB (“EKN Credit”); Citibank International plc. and
ING Bank N.V. and Nokia Corporation (“Finnvera Credit”)
In October 2003, the Company entered into the Hermes Credit for 75.4 million Euros (2,629 at the exchange rate
as of October 31, 2003) with interest at approximately 4%. This credit line can only be used for purchases of
Siemens AG equipment. The loan is guaranteed by Hermes, a German export credit agency. A payment of 4.8 million Euros (167 at the exchange rate as of date of payment) was required to obtain this guarantee and has been
capitalized as deferred finance charges. The Hermes Credit is repayable semiannually from 2004 through 2011.
In May 2004, the Company entered into the EKN Credit and the Finnvera Credit for approximately $54 million
and $135 million (1,549 and 3,913 at the exchange rate as of May 31, 2004), respectively, with interest at approximately 4%. The EKN and Finnvera credit lines can only be used for purchases of Ericsson and Nokia equipment, respectively. The loans are guaranteed by EKN, a Swedish export credit agency, and Finnvera, a Finnish
export credit agency, respectively. A payment of $14 million (406 at the exchange rate as of date of payment)
was made to obtain these guarantees, which has been capitalized as deferred finance charges. These credits
are repayable semiannually from 2004 through 2009.
(6) Bayerische Landesbank and Commerzbank Aktiengesellschaft and Siemens AG (“Hermes II Credit”);
Bayerische Landesbank, Commerzbank Aktiengesellschaft and Bayerische Landesbank Filiale Di Milano
and Siemens Mobile Communications Spa (“SACE Credit”); Citibank, N.A. London branch, ING Bank N.V. and
several other financial institutions and Nokia Corporation (“Finnvera II Credit”)
In June 2005, the Company entered into (1) the Hermes II Credit for 185 million Euros (6,387 at the exchange
rate as of June 30, 2005) with interest at Euribor plus 0.35%, (2) the SACE Credit for 74.5 million Euros (2,572
at the exchange rate as of June 30, 2005) with interest at approximately 4% and (3) the Finnvera II Credit for
$321.5 million (9,217 at the exchange rate as of June 30, 2005) with interest at approximately 4%.
These loans are guaranteed by Hermes, a German export credit agency, SACE, an Italian export credit agency
and Finnvera, a Finnish export credit agency, respectively. A payment of $45.2 million (1,288 at the exchange
rate as of date of payment) in the aggregate was made to obtain these guarantees, which has been capitalized
as deferred finance charges.
62...
The Hermes II, SACE and Finnvera II Credits can only be used for purchases of Siemens AG, Siemens Mobile
Communications Spa and Nokia Corporation equipment, respectively. The amounts drawn under the Hermes
II and the SACE Credits are repayable semi-annually from 2006 through 2015. The amounts drawn under the
Finnvera II Credit are repayable semi-annually from 2005 through 2010.
(8) China Development Bank, Citibank International Plc. and Citibank N.A. London branch (“China Development Bank Credit”)
In December 2005, the Company entered into a credit facility agreement with China Development Bank, Citibank International Plc. and Citibank N.A. London branch (“China Development Bank Credit”) for $51 million
(1,468 at the exchange rate as of December 31, 2005) with interest at LIBOR plus 2.5%. The proceeds under
the credit facility can only be used for purchases of Huawei equipment. The amounts drawn under the China
Development Bank Credit were repayable semi-annually from 2007 through 2011. In December 2007, the
Company early repaid the total amount outstanding under the credit facility.
(9) China Development Bank and Bayerische Landesbank (“China Development Bank II Credit”)
In October 2007, the Company entered into a credit facility agreement with China Development Bank and
Bayerische Landesbank (“China Development Bank II Credit”) for $85 million (2,102 at the exchange rate as
of October 31, 2007) with interest at LIBOR plus 1.1%. The proceeds under the credit facility can only be used
for purchases of Huawei equipment. Amounts drawn under this credit facility are repayable from 2009 through
2014 in semi-annual installments.
As of December 31, 2007, the Company has an amount due to Huawei of 126. As the Company intends to repay
this amount using the proceeds from the China Development Bank II Credit, the Company has classified the
amount due to Huawei as long-term debt in the accompanying balance sheet as of December 31, 2007.
(10) Japan Bank for International Cooperation, Citibank N.A. Tokyo branch and Calyon Tokyo branch
In January 2006, the Company entered into a credit facility agreement with Japan Bank for International Cooperation, Citibank N.A. Tokyo branch and Calyon Tokyo branch (“JBIC Credit”) for $50 million (1,406 at the
exchange rate as of January 31, 2006) with interest at 6.87% for Tranche A in the amount of $30 million and
LIBOR plus 0.45% for Tranche B in the amount of $20 million. The proceeds under JBIC Credit can only be used
for purchases of NEC Corporation equipment or limited local content. The amounts drawn under the JBIC Credit
are repayable semi-annually from 2008 through 2012.
(11) Nordic Investment Bank
In October 2004, the Company entered into a credit agreement with Nordic Investment Bank for $30 million
(863 at the exchange rate as of October 31, 2004). In June 2006, the Company amended this credit agreement,
increasing the amount of the facility from $30 million to $50 million (1,354 at the exchange rate as of June 30,
2006). The amounts drawn under the Nordic Investment Bank Credit are repayable semi-annually from 2007
through 2012 and bear interest at LIBOR plus 0.85-2.20% depending on the Fitch, S&P and Moody’s international corporate ratings received by the Company.
In April 2007, the Company amended its credit agreement with Nordic Investment Bank, increasing the amount
of the facility from $50 million to $100 million (2,569 at the exchange rate as of April 30, 2007), converting the
credit facility into a revolving loan facility (“Revolving Loan Facility”), and adding other banks to the lending
group.
As of December 31, 2007, $85 million (2,086 at the exchange rate as of December 31, 2007) remained undrawn under the Nordic Investment Bank credit line agreements.
(12) Other
The Company has entered into other credit agreements as follows – Svyazbank, a related party, for two loans
under which an aggregate of 391 is outstanding, and which bear interest at 11% and 12%; Transcontinental
Mobile Investment Ltd. (see Note 21), for $2 million (63 at the exchange rate as of August 31, 2002) with
interest at 6%; and Huawei Technologies for $5.5 million (134 at the exchange rate as of December 31, 2007)
without interest. These loans have varying maturities ranging from 2006 to 2012.
63...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
11. Long-Term Loans (continued)
12. Loans from Shareholders (continued)
Covenant Requirements
The Nordea/HVB, Eurobonds, Hermes, EKN, Finnvera, Hermes II, Finnvera II, SACE, Finnvera III, China Development Bank, JBIC, and Nordic Investment Bank credit agreements (see Notes 11(1), (3), (5), (6), (7), (8), (9), (10)
and (11) above) place various restrictions on the Company related to incurrence of debt, negative pledges,
mergers and acquisitions, and changes in the business without prior consent from the lenders. The agreements also require the Company to meet various financial and non-financial covenants.
Undrawn Credit Facilities
In August 2006, the Company entered into a revolving credit facility with UniCredit Bank (former International
Moscow Bank) for 4 billion Rubles with an interest rate which depends on the tenor of the loan selected on
each drawdown. However, the interest rate cannot exceed 8.25% (“UniCredit Bank Revolving Credit”). The
amounts drawn under the UniCredit Bank Revolving Credit are to be repaid no later than two years from the
date the amounts are drawn. The final maturity is in August 2011. As of December 31, 2007, the UniCredit
Bank Revolving Credit remains undrawn.
12. Loans from Shareholders
Long-term loans from shareholders are comprised of:
December 31, 2006
December 31, 2007
955
947
TeliaSonera (2)
1,395
1,402
IPOC (3)
534
527
CT Mobile (4)
357
434
Total long-term loans
3,241
3,310
Less current portion
–
433
Non-current portion
3,241
2,877
Telecominvest (1)
Shareholder loan repayments over the five-year period beginning on January 1, 2008 are as follows:
Year
2008
527
2009-2010
–
2011
2,876
2012
–
After 2012
97
Total repayments
3,500
Less unamortized discount
(190)
Total long-term loans
3,310
(1) Telecominvest
In 2001-2003, the Company entered into several loan agreements with Telecominvest aggregating $28.2 million (691 at the exchange rate as of December 31, 2007) and bearing interest at 6-10%. The original maturities
of the loans were in 2004-2009. These loans were extended and amended in November 2004 as discussed
above.
(2) TeliaSonera
In 2001-2003, the Company received several loans from TeliaSonera affiliated entities aggregating $45 million (1,105 at the exchange rate as of December 31, 2007) with interest at 0-10%. The original maturities of the
loans were in 2004-2009. The loans were extended and amended in November 2004 as discussed above.
(3) IPOC
In 2003, the Company received loans from IPOC aggregating $16 million (394 at the exchange rate as of December 31, 2007) with interest at 6% that had an original maturity of July 2004. The loans were extended and
amended in November 2004 as discussed above.
(4) CT Mobile
In 2001, Sonic Duo received three Ruble denominated interest-free loans from CT Mobile aggregating 624. The
loans have no stated maturity. The first two loans with an aggregate principal of 527 are callable by CT Mobile not
earlier than December 31, 2008 and the third loan is callable by CT Mobile not earlier than December 31, 2030.
Effective September 2004, the interest rate on these loans was changed to the 6-month LIBOR rate plus 4%.
Interest accruing after September 2004 will not be capitalized but will be payable together with principal at
maturity.
13. Derivative Financial Instruments
1) C-loans
Under the C-loan agreements, each of the European Bank for Reconstruction and Development and International Finance Corporation advanced $12 million (371 at the exchange rate as of February 28, 2002) in the aggregate to Sonic Duo. In connection with the acquisition of Sonic Duo in February 2002, the Company assumed
the liability under these C-loan agreements.
The C-loan agreements provided that the repayment amount of the loans would be equal in the aggregate to
3.5528% of the fair value of MegaFon at the applicable repayment date (or 1.7764% of MegaFon’s fair value
for each lender).
Under the agreements, the loans were to have been repaid no later than December 31, 2009. Repayment of the
loans was also required upon the occurrence of certain events.
The Company accounted for the C-loans in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended. In 2002, a liability equal to the excess of the fair value of the Cloans over $12 million (371 at the exchange rate as of February 28, 2002) was included in the purchase price
allocation. Subsequent changes in the fair value of the C-loans were recorded in the consolidated statement of
income. During 2006, the fair value of the C-loans increased by 185.
In July 2006, the Company fully prepaid the C-loans in the amount of $188 million (5,052 at the exchange rate
as of July 31, 2006).
In November 2004, the Company signed an amendment to existing loan agreements with Telecominvest, TeliaSonera and IPOC which capitalized (i.e., included in the underlying loans) the accrued but unpaid interest
on certain loans and extended the maturity of all of these loans to the earlier of September 30, 2011 or a
date ninety days after the payment in full of the Hermes, EKN and Finnvera Credits (see Note 11(5)). Also, the
repayment of these shareholder loans is subordinated to the Nordea/HVB, Hermes, EKN, Finnvera, Hermes II,
Finnvera II, SACE, Finnvera III, China Development Bank, JBIC, and Nordic Investment Bank credit agreements
(see Notes 11(1), (5), (6), (7), (8), (9), (10), (11)) and also to the Eurobonds (see Note 11(3)).
64...
65...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
13. Derivative Financial Instruments (continue)
16. Revenues (continued)
2) Foreign Currency Swap Agreements
During July – September 2006 and May – June 2007, the Company entered into several long-term fixed-tofixed cross-currency swaps. These derivative financial instruments are used to limit exposure to changes in
foreign currency exchange rates on certain long-term indebtedness denominated in foreign currencies.
On March 4, 2006, amendments to the Telecommunications Law were approved which introduced the Calling
Party Pays rules (“CPP Rules”) which became effective as of July 1, 2006. Under the CPP Rules, all incoming
calls on fixed and mobile lines in Russia became free of charge, and only the fixed-line or mobile operators
originating the call may charge the subscriber for the call. To compensate for this loss of revenue from subscribers, beginning from July 1, 2006 the Company began charging other operators for terminating traffic on
the Company’s network, and these charges are included in revenues from interconnection charges.
The swaps effectively converted, using the then-effective foreign currency exchange rates, some of the Company’s outstanding fixed-rate long-term US dollar and Euro denominated loans (specifically the EKN, Finnvera,
Finnvera II and Finnvera III credit agreements) into synthetically equivalent Ruble long-term loans with fixed
rates ranging from 3.95% to 6.65%. The carrying amount of such long-term loans as of December 31, 2007
was approximately $217 million and 117 million Euro (9,512 at the exchange rate as of December 31, 2007).
For accounting purposes, the Company has chosen not to designate these swaps as hedging instruments and,
therefore reports all gains and losses from the change in fair value of these derivative financial instruments
directly in the consolidated statement of income as part of net foreign exchange gain.
17. Cost of Services
Cost of services for the years ended December 31 are comprised of:
2006
2007
14,670
23,472
Cost of SIM-cards
1,189
877
Roaming expenses
1,583
1,955
Total cost of services
17,442
26,304
Interconnection charges
These derivative financial instruments were recorded at fair value as of December 31, 2007 and included in
other non-current assets in the amount of 191, other current liabilities in the amount of 260, and in other noncurrent liabilities in the amount of 176.
Included in interconnection charges for 2006 and 2007, are charges from other mobile and fixed-line operators for terminating traffic which originated on the Company’s network under the CPP Rules introduced beginning from July 1, 2006.
14. Other Non-current Liabilities
Other non-current liabilities are comprised of:
December 31, 2006
December 31, 2007
Asset retirement obligations (see Note 6)
1,740
2,235
Obligation under defined benefit pension plan
138
191
Other non-current liabilities
67
206
Total other non-current liabilities
1,945
2,632
15. Shareholders’ Equity
The reserve fund, an element of Russian corporate law, represents a portion of the Company’s earnings designated to create a reserve to cover future losses. The balance of the reserve fund is not available for dividends.
In accordance with Russian legislation, dividends may only be declared to the shareholders of the Company
from accumulated undistributed and unreserved earnings as shown in the Company’s Russian statutory financial statements. OJSC MegaFon had 29,072 of undistributed and unreserved earnings as at December 31,
2007. In addition, the Company’s share in the undistributed and unreserved earnings of MegaFon’s subsidiaries was 69,594 as at December 31, 2007.
16. Revenues
Revenues for the years ended December 31 are comprised of:
66...
18. Sales and Marketing Expenses
Sales and marketing expenses for the years ended December 31 are comprised of:
2006
2007
Advertising
4,389
5,971
Commissions to dealers for connection of new subscribers
4,453
4,946
Commissions to dealers for distribution of prepaid
cards and cash collection from subscribers
2,224
2,730
Total sales and marketing expenses
11,066
13,647
19. Operating Expenses
Operating expenses for the years ended December 31 are comprised of:
2006
2007
Salaries and social charges
6,745
8,797
Rent
3,780
5,522
Network repair and maintenance
2,741
3,186
Operating taxes
2,777
3,818
1,024
381
2006
2007
Materials and supplies
Revenues from local subscribers
90,669
119,331
Office maintenance
858
1,222
Roaming charges to other wireless operators
2,564
2,342
Professional services
590
766
Revenues from interconnection charges
7,239
17,885
Radio frequency fees
916
1,695
Connection fees
332
370
Insurance
275
291
2,801
3,176
22,507
28,854
Other revenues
311
465
Other expenses, net
Total revenues
101,115
140,393
Total operating expenses
Rent represents expenses related to the operating lease of premises for offices, base stations and switches.
67...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
20. Income Taxes
20. Income Taxes (continued)
Provision for income taxes for the years ended December 31 are comprised of:
Management believes that no valuation allowance against the deferred tax asset in respect of the loss carryforwards is required based on the Company’s plans to carry out the legal merger of all of the Company’s
subsidiaries with the Company that would allow the Company to use the loss carry-forwards of loss-making
subsidiaries against taxable profits of profit-making subsidiaries.
2006
2007
Current income taxes
9,540
13,226
Less deferred income tax benefit
856
593
Total income taxes
8,684
12,633
Income taxes represent the Company’s provision for profit tax. Profit tax is calculated at 24% of taxable profit
in 2007 and 2006, in accordance with the laws of the Russian Federation.
The reconciliation between the provision for income taxes reported in the consolidated financial statements
versus the provision for income taxes computed by applying the Russian enacted statutory tax rate to the
income before income taxes and minority interest is as follows:
The Company has entered into certain transactions with its shareholders and their affiliates. The outstanding
receivable/(payable) balances and the annual revenues and expenses as of and for the years ended December
31, 2007 and 2006 are comprised of the following:
December 31, 2006
December 31, 2007
Accounts receivable, related parties
TeliaSonera (1)
19
35
Skylink (7))
162
–
Mezhregion Transit Telecom (8)
183
–
Other
54
69
Total accounts receivable, related parties
418
104
299
461
2006
2007
Provision for income taxes computed on income before
income taxes and minority interest at statutory rate
7,367
11,179
Change in the fair value of C-loans (Note 13)
185
–
Non-deductible expenses
1,059
1,151
Accounts payable, related parties
Foreign exchange gain
(56)
3
Peterservice (6)
Other differences
129
300
Mezhregion Transit Telecom (8)
214
–
Other
73
58
Total accounts payable, related parties
586
519
2006
2007
Provision for income taxes reported in the consolidated
financial statements
8,684
12,633
The deferred tax balances were calculated by applying the presently enacted statutory tax rate of 24% applicable
to the periods in which the temporary differences between the tax basis of assets and liabilities and the amounts
reported in the accompanying consolidated financial statements are expected to reverse. Deferred taxes in the
accompanying consolidated financial statements as of December 31 are comprised of the following:
Revenues
TeliaSonera (1)
217
182
Turkcell Iletisim (3)
69
64
Mezhregion Transit Telecom (8)
1,001
706
Skylink (7)
397
391
Other
142
262
Total revenues, related parties
1,826
1,605
2006
2007
Revenue recognition
467
366
Fixed assets and other intangible assets
699
938
Cost of services
Loss carry-forwards
974
831
TeliaSonera (1)
56
48
Turkcell Iletisim (3)
68
87
Globus Telecom (8)
57
–
Petersburg Transit Telecom (4)
257
–
Mezhregion Transit Telecom (8)
1,846
1,000
Skylink (7)
80
83
Deferred tax assets:
Other
558
778
Total deferred tax assets
2,698
2,913
Deferred tax liabilities:
Deferred finance charges
204
95
Licenses
2,668
2,288
Other
111
217
Other
536
647
Total cost of services, related parties
2,475
1,435
Total deferred tax liabilities
3,408
3,030
Operating expenses
Net deferred tax liabilities
710
117
Telecominvest (2)
159
129
Add current deferred tax assets
739
1,111
J.P. Galmond & Co (5)
17
13
Total long-term net deferred tax liabilities
1,449
1,228
Peterservice (6)
289
222
Mezon Invest (9)
102
34
For Russian income tax purposes, certain subsidiaries of the Company have accumulated tax losses incurred
in 2001 – 2007 which may be carried forward for ten years to use against their future income. Their use is not
restricted in 2008 or in future years. As of December 31, 2007, these subsidiaries had tax losses available for
carry-forward aggregating approximately 3,463 with a related tax benefit of 831 which expire as follows: 2012
– 28, 2013 – 35, 2014 – 161 and 2015 – 437, 2016 – 111 and 2017 - 59.
68...
21. Related Party Transactions
Absolut (9)
78
91
Kelly Services (10)
146
159
Other
50
32
Total operating expenses, related parties
841
680
69...
Notes to Consolidated Financial Statements
(continued)
Notes to Consolidated Financial Statements
(continued)
(1) TeliaSonera - primarily settlements on roaming services.
23. Commitments and Contingencies
(2) Telecominvest - payments for delivery of invoices to customers.
Operating Environment
While there have been improvements in the Russian economy over the past few years, such as an increasing
gross domestic product and a reducing rate of inflation, Russia remains in a continuing process of economic
reform and development of its legal, tax and regulatory frameworks, all of which are required in order for it to
develop a stable market economy.
(3) Turkcell Iletisim - primarily settlements on roaming services. Turkcell Ilitisim is an affiliate of TeliaSonera.
(4) Petersburg Transit Telecom - primarily fees for interconnection and rent of digital channels (included in cost
of services). Petersburg Transit Telecom was a wholly-owned subsidiary of Telecominvest. In January 2007,
Telecominvest sold its entire interest in Petersburg Transit Telecom to a third party.
(5) J. P. Galmond & Co - payments for legal services. The legal firm is affiliated (through its principal) with
Telecominvest and IPOC.
(6) Peterservice - primarily installation and maintenance of information and billing systems (purchase of billing
systems from Peterservice in the amount of 1,202 and 845 in 2007 and 2006, respectively). Peterservice is an
affiliate of Telecominvest.
(7) Skylink - settlements on roaming and telecommunications services. Skylink is an affiliate of IPOC.
In August 2007, entities affiliated with IPOC sold its entire interest in Skylink to a third party.
(8) Globus Telecom, Mezhregion Transit Telecom - payments for telecommunications services. These companies are affiliates of Telecominvest and IPOC. In 2005 - 2006, their interests in Globus Telecom were sold to
a third party. In June 2007, entities affiliated with IPOC sold its entire interest in Mezhregion Transit Telecom
to a third party.
(9) Mezon Invest and Absolut - payments for rent. Mezon Invest and Absolut are affiliates of Telecominvest and
IPOC. In May 2007, entities affiliated with IPOC sold its entire interest in Mezon Invest to a third party.
(10) Kelly Services - payments for outsourcing of personnel. This company is an affiliate of one of the members
of the Board of Directors.
Telecominvest and IPOC are also affiliated with the ultimate parent of one of the shareholders of Svyazbank
(see Notes 2, 3 and 11), where the Company regularly maintains deposit accounts.
As described in Note 12, the Company has loans from the following shareholders: Telecominvest, TeliaSonera,
IPOC and CT Mobile. The Company also has a loan from Transcontinental Mobile Investment Ltd., which was an
affiliate of CT Mobile at the time that the loan was incurred, but which CT Mobile asserts was not an affiliate
in 2007 and 2006.
In connection with loans from shareholders, the Company recognized interest expense of 271 and 283 during
the years ended December 31, 2007 and 2006, respectively.
22. Guarantees
The Company issued guarantees to several banks for loans to certain employees through January 2013. As
of December 31, 2007, the amount outstanding under these loans is 69. The Company would be required to
perform under the applicable guarantee if any of the employees does not repay the principal, interest, or make
any other payment specified in his or her loan agreement. Management believes that the fair value of these
guarantees and its related potential liability are de minimis.
Further growth and the positive development of the Russian economy are largely dependent on these reforms
and developments being implemented and the effectiveness of economic, financial and monetary measures
undertaken by the Russian government.
Taxation
Russian tax, currency and customs legislation are subject to varying interpretations and changes which can
occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity
of the Company may be challenged by the relevant regional and federal authorities. Recent events within the
Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of the legislation and assessments and as a result, it is possible that transactions and
activities that have not been challenged in the past may now be challenged. Therefore, significant additional
taxes, penalties and interest may be assessed. It is not practical to determine the amount of claims that may
be asserted, if any, or the likelihood of any unfavorable outcome. Fiscal periods remain open to review by the
authorities in respect of taxes for the three calendar years preceding the current year. Under certain circumstances reviews may cover longer periods.
Based on tax examinations of other telecommunications companies operating in Russia, tax authorities are
currently focusing on a number of specific areas, which include, but are not limited to revenues from interconnection charges. As a result of such examinations, tax authorities are claiming additional taxes which are currently being disputed in the courts by these Russian telecommunications companies.
In November 2007, the Company received a final assessment from the tax inspectorate in connection with the
examination of tax returns of OJSC MegaFon for 2004 through 2006. The assessment claims additional taxes
amounting to 315 mainly in respect of income tax and VAT, including fines and penalties, for interconnection
settlements. In November 2007, the Company paid this amount to the respective federal and local budgets.
Nonetheless in January 2008, the Company appealed this decision in the Moscow Arbitration Court. In the
opinion of the Company’s management, it is more likely than not that the Company will sustain its position as
a result of the court proceedings.
Moreover, certain of the Company’s subsidiaries are currently undergoing tax audits by the tax authorities.
It is possible that as a result of such audits material tax claims similar to those issued to OJSC MegaFon may
arise.
Management believes that the Company and its subsidiaries are in compliance with the tax laws affecting its
operations; however, the risk remains that governmental authorities could take differing positions with regard
to interpretative issues.
Litigation
The Company is not a party to any material litigation, although some of its subsidiaries have been sued as a
result of disputes arising in the ordinary course of their business and operations.
Management believes that the ultimate resolution of the matters mentioned above will not have a material
effect on the Company’s financial statements.
Minimum Lease Payment under Operating Leases
Future minimum lease payments under non-cancelable operating leases with terms of one year or more, as of
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Notes to Consolidated Financial Statements
(continued)
Annex 1.
Corporate Events
December 31, 2007, are as follows: 2008 – 100, 2009 – 49, 2010 – 31, 2011 - 31, 2012 - 8.
Date
Summary
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value:
January 2007
Cash, Cash Equivalents and Short-Term Investments
The carrying amount approximates their fair value because of the short maturity of those items.
The Company completed the reorganization of its 100% subsidiaries, CJSC “Volzhsky GSM”
and “CJSC “Mobicom-Kirov”, in the form of merger into OJSC “MCS - Povolzhie” and CJSC
“Ural GSM”, respectively, 100% subsidiaries of the Company
January 2007
The Board of Directors approved the Charters of the Board’s Audit Committee and the
Remuneration Committee
April 2007
The Regulations on the Corporate Secretary were approved. The position of the Corporate
Secretary was introduced in the Company, and the Office of the Corporate Secretary was
formed; Ms. Anna Goriainova was elected Corporate Secretary of the Company
April 2007
Cable Broadcasting license was obtained. Based on this license, the Company has the right
to legally render Mobile TV services and charge its subscribers for it separately
May 2007
Under the tender for 3G license, the Company won the Lot №1 and obtained the license for
rendering UMTS services (third generation)
June 2007
The Company entered the Russian Union of Industrialists and Entrepreneurs; the Company
takes part in the work and meetings of the Union on a regular basis
June 2007
he Annual General Shareholders Meeting of OJSC “MegaFon” took place. The shareholders
approved the Annual Report and Annual Accounting Statements of the Company; they also
re-elected the Board of Director, the Revision Commission and the Management Board,
and elected the Auditor of the Company. At the Annual General Shareholders Meeting the
shareholders also approved eight amendments to the Charter of OJSC “MegaFon” reflecting
the most recent changes in the law on joint-stock companies
June 2007
The Company entered the pan-world non-commercial organization
“The TeleManagement Forum”
July 2007
After official commercial launch of its mobile network in Altai the Company became the first
Russian mobile operator to cover the entire 100% of its licensed territory
SeptemberNovember 2007
The consultants of Mercuri Urval conducted assessment of operations of the Board as
compared to the previous year – the consultant’s evaluation was quite favorable
October 2007
The Company entered the market of fixed-lime communications, started construction of the
LD/LDI network, initiated the project “Home Zone”
NovemberDecember 2007
The rating agencies Standard&Poors and Moody’s upgraded the Company’s ratings to BB+
and Ba2, respectively.
July, December 2007
All guarantees under the Company’s facility agreements were eliminated
October-December 2007
Launch of the project “The Future Begins Today” targeted at development, communication
and promotions of MegaFon brand’s values
November 2007
The Company launched into commercial use the first Russian 3G network in Saint-Petersburg
December 2007
All companies of MegaFon Group completed transition to SAP/R3, thus improving the
formation of the financial statements
December 2007
New uniform charters were developed and introduced in all the subsidiaries of the Company
24. Fair Value of Financial Instruments and Risk Management
Long-Term Debt
The fair value of long-term debt is estimated based on market interest rates for the same or similar issues, or
based on the current rates offered to the Company for debt of the same remaining maturities.
Derivative Financial Instruments
The fair values of the derivative financial instruments are determined using estimated discounted cash flows.
The estimated fair values of the Company’s financial instruments at December 31 are as follows:
2006
2007
Carrying
amount
Fair value
Carrying
amount
Fair value
Cash and cash equivalents
6,965
6,965
4,259
4,259
Short-term investments
569
569
21,710
21,710
Long-term debt
42,630
42,979
39,443
39,579
Derivative financial instruments
(foreign currency swaps)
99
99
245
245
The Company, using available market information and appropriate valuation methodologies, where they exist,
has determined the estimated fair values of financial instruments. However, judgment is necessarily required
to interpret market data to determine the estimated fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a current market exchange. While management has used available market information in estimating the fair value of financial instruments, the market information may not be fully reflective of the value that could be realized in the current circumstances.
The Company, in connection with its current activities, is exposed to various financial risks, such as foreign
currency risks, interest rate risks and credit risks. The Company manages these risks and monitors their exposure on a regular basis.
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Annex 2.
Basic Corporate Code Provisions Reflected
in the Company’s Internal Documents
General Shareholders Meeting
Company’s Board of Directors
1.
2.
3.
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Shareholders shall have a possibility to
study the list of persons who have the right
to participate in General Shareholders
Meeting starting from the date of the Notice
on holding general shareholders meeting till
closing the general shareholders meeting
that is held in joint presence, or till the
deadline for submitting voting ballots if the
general shareholders meeting is held in the
form of absentee voting
In effect
Shareholders shall have a possibility to
study the information (materials) that
must be provided during preparation for
general shareholders meeting via electronic
communication means, including Internet
In effect
Article 11.13 of the Charter:
“Upon the demand of a person included on
the list of persons authorized to participate
in the General Shareholders Meeting and
vested with not less than one percent of
votes, the Company shall be obligated to
provide such list for review. ”
6.
Authority of the board of directors for annual
approval of business-plan of a joint-stock
company must be set forth in the charter of
the joint-stock company
In effect
Article 12.2. of the Charter
includes approval of budget and businessplan as well as significant changes and/or
additions to them into the competence of the
Board of Directors.
7.
The charter should contain the right of the
board of directors in a joint-stock company to
establish requirements to qualification and
level of remuneration for general director,
members of management board, heads
of main structural units of the joint-stock
company
In effect
Article 12.2. of the Charter
includes into the competence of the board
of directors establishment of the amounts of
remuneration and compensation to be paid
to the General Director of the Company and
members of the Management Board, as well
as recommendations relating to the amount of
remuneration and compensation to be paid to
the members of the Auditing Commission of the
Company and for the services of an auditor.
Before general shareholders meeting
materials to it are sent via e-mail to each
shareholder participating in such meeting
Shareholders shall have a possibility to
include an issue on the agenda of the
general shareholders meeting or demand
convocation of general shareholders meeting
without submitting an extract from the
Shareholders Register, if its rights for the
shares are recorded in the shareholders
register system, and if shareholder’s rights
for the shares are recorded in a depository
account, a statement from such depository
account shall be sufficient for execution of
the above rights
In effect
Article 11.19 of the Charter:
“The proposal on inclusion of an issue
on the agenda of the General Meeting of
Shareholders and the proposal of candidates
shall be submitted in writing with indication
of the name (company name) of the
proposing Shareholder(s), the amount and
category (type) of shares owned by him and
shall be signed by such Shareholder(s).”
4.
Charter or other internal corporate
documents of a joint-stock company must
have a requirement on mandatory presence
of the chief executive officer, members of
management board, members of board of
directors, members of revision commission
and auditor of the joint-stock company at
general shareholders meeting
Not in effect
The specified persons are generally present
at general shareholder meetings of the
Company, however there are no provisions
in the Charter or other internal corporate
documents that provide for their mandatory
presence at general shareholder meetings.
5.
Procedure for registration of participants
in general shareholder meeting must be
included in internal corporate documents of
a joint-stock company
In effect
Article 7.4. of Regulations on General
Shareholder Meeting:
“The Chairman of the General Meeting of
Shareholders shall register the shareholders
according to the list of persons having the
right to participate in the General Meeting
of Shareholders. Registration must be
completed within one hour. After the
completion of the registration the Chairman
of the General Meeting of Shareholders shall
announce the presence or absence of the
quorum. In the event the General Meeting of
Shareholders has a quorum, the Chairman
opens the General Meeting of Shareholders
and runs it according to the approved
Agenda”
Article 5.1.
of the Regulations on Corporate Secretary
sets forth that the Corporate Secretary shall
ensure registration of participants in the
general shareholder meeting.
According to Article 13.7.11. of the Charter
compensation payable to the personnel for
its work in the Company shall be within the
expenditure limits established for this purpose
in the business plans and/or budgets of the
Company as approved by the Board of Directors
8.
There must be minimum 3 independent
directors in the board of a joint-stock
company as defined by the Corporate Code
Not in effect
9.
Board of directors of a joint-stock company
must not include persons who were found
guilty of committing crimes in the sphere of
business or crimes against the state, interests
of government and local authorities or who
were subjected to administrative punishment
for offences in the sphere of business or in
the field of finance, taxes and charges or stock
market
In effect
10.
Board of directors of a joint-stock company
must not include persons who are
participants, general director (manager),
member of governance body or employee of
a legal entity that is in competition with the
joint-stock company
In effect
11.
Charter of a joint-stock company must have a
requirement regarding election of the board
of directors by cumulative voting
In effect
The Company’s Board of Directors has 2
independent directors as defined by the
Corporate Code.
Article 11.41. of the Charter:
“Election of the Board of Directors shall be
made by General Shareholders Meeting with
cumulative voting.”
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12.
13.
14.
15.
76...
Internal documents of a joint-stock company
must include the duty of the board of
directors to abstain from actions that will or
may result in conflict between their interests
and the interests of the joint-stock company,
and if such conflict arises, the duty to
disclose information about such conflict
Internal documents of a joint-stock company
must include the duty of the Board members
to notify the Board in writing about any
intention to make transactions with
securities of the joint-stock company where
they are Board members or its subsidiaries
(affiliates), as well as the duty to disclose
information about the transactions with such
securities that have been closed by them
Internal documents of a joint-stock company
must have the requirement to hold meetings
of the Board of directors minimum once
every six weeks
Board meetings of a joint-stock company
must be held minimum once in six weeks
during the year, for which the annual report
is prepared
In effect
Not in effect
In effect
In effect
Article 5.2.
of the Regulations on the Board of Directors
sets forth that the Board members must “be
loyal to the Company, that is to abstain from
using his position in the Company in the
interests of other persons; act reasonably
and in good faith regardipany’s business;
inform the Company in proper time about
his affiliation and changes in it; inform
the Board of Directors about prospective
transactions in which he may be considered
as an interested party.
Board members of the Company do not
own any securities of the Company or its
subsidiaries, and securities of the Company
or its subsidiaries are not traded in the stock
market.
Article. 7.2.
of the Regulations on the Board of Directors
states that “Meetings of the Board of
Directors shall be held periodically in
accordance with the operation plan approved
at the meeting of the Board of Directors ”.
The operation plan provides for minimum 5
meetings in the form of joint presence during
6 months.
18.
There must be a committee of the Board
(Audit Committee) that recommends an
auditor of a joint-stock company to the board
of directors and interacts with the auditor
and the revision commission of the jointstock company
In effect
Audit Committee duties include
recommending independent auditors to the
Board of Directors before they are appointed,
as well as interacting with them and the
Company’s Revision Commission.
19.
Establishing a committee of the Board
(Personnel & Remuneration Committee) that
shall identify criteria for selecting candidates
to the board of directors and prepare the
remuneration policy of the joint-stock
company
In effect
The Company has active Remuneration
Committee
The Company has active Remuneration Committee
20.
A joint-stock company must have a collegiate
executive body (management board)
In effect
Article 13.1.
of the Charter states that the Management
Board of the Company is a collective
executive body
21.
Charter or internal documents of a jointstock company must include the provision
that sets forth the requirement for the
management board to approve transactions
with real property and loans received by the
joint-stock company, if such transactions
are not major transactions and they are not
included into day-to-day business activities
of the joint-stock company
In effect
Article 13.1.
of the Charter provides that the Management
Board shall take a decision on receiving
and/or providing loans by the Company.
22.
Executive bodies must not include persons,
who are participants, general director
(manager), member of governance body
or employee of a legal entity that is in
competition with the joint-stock company
In effect
23.
Executive bodies of a joint-stock company
must not include persons who were found
guilty of committing crimes in the sphere
of business or crimes against the state,
interests of government and local authorities
or who were subjected to administrative
punishment for offences in the sphere of
business or in the field of finance, taxes and
charges or stock market. If the executive
functions are performed by a management
company or by an administrator, the
general director and members of executive
board of the management company or
the administrator must comply with the
requirements that are made to the general
director and members of executive board of
the joint-stock company
In effect
There were 16 meetings of the Board during
2007.
16.
Internal documents of a joint-stock company
must contain the procedures of holding the
board meetings
In effect
Article 9
of the Regulations on the Board of Directors
includes information about procedures of
holding the Board meetings.
17.
Internal documents of a joint-stock company
must include the rights of the board
members to receive information required
for performance of their functions from
the executive bodies and heads of main
structural units of the joint-stock company,
and include responsibility for not providing
such information
In effect
Article 5.1
of the Regulations on the Board of Directors
provides for Board member’s right to request
any information about the Company’s
operations from its officers.
Article 5.4.
of the above Regulations sets forth the
Company’s duty to provide for access to
requested information and documents for
the Board member within five days since the
date of respective request.
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Secretary of the Company
24.
A joint-stock company must have a special
officer (secretary of the company) who
provides that governance bodies and officers
of the joint-stock company comply with
mandatory procedures securing execution of
rights and legal interests of the company’s
shareholders
In effect
The Corporate Secretary acts on the
basis of the Regulations on the Corporate
Secretary that was approved by the Board on
05.04.2007.
25.
Charter or internal documents of a joint-stock
company must include the procedures for
appointing (electing) the secretary of the
company and the duties of the company’s
secretary
In effect
Procedures for appointing the Company’s
Corporate Secretary are set forth in Article
3 of the Regulations on the Corporate
Secretary. Duties of the Corporate Secretary
are specified in Articles 5-10 of the
Regulations on the Corporate Secretary.
26.
Charter of a joint-stock company must have
the requirements for a candidate secretary of
the company
Not in effect
Requirements to a candidate corporate
secretary are specified in Article 4 of the
Regulations on the Corporate Secretary.
In effect
Information about joint-stock companies and
all significant events is disclosed at: www.
megafon.ru
Disclosure of Information
27.
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A joint-stock company must have a web-site
in Internet and information about the jointstock company must be disclosed in this
web-site on a regular basis