Mobile TeleSystems (MTS) announces financial results for the third quarter and nine months ended September 30th 2002 and restated financial results for previously reported periods

16 December 2002

MTS announces continued growth in revenues, EBITDA and net income. The number of subscribers has increased significantly, and for the first time the regional subscriber base exceeds that of Moscow. Moscow, Russian Federation — December 16, 2002 — Mobile TeleSystems OJSC (“MTS”; NYSE: MBT), the largest mobile cellular operator in Russia and Central and Eastern Europe*, today announces its results for the third quarter and nine months ended September 30, 2002.

Financial highlights**

US$ million Q3
2002
Q3
2001
Change Q2
2002
as restated***
Change Nine months
ended Sep 30,
2002
Nine months
ended Sep 30,
2001
Change
Net revenues 388.5 262.6 48% 316.3 23% 952.5 634.8 50%
Net income 84.3 78.4 8% 64.8 30% 191.9 144.6 33%
EBITDA 205.9 142.0 45% 162.0 27% 491.4 304.3 61%
EBITDA margin 53% 54% N/a 51% N/a 52% 48% N/a

Note: MTS’ net income for Q3 2001 was increased by $22 million as the Company recognised a correspondent deferred tax benefit due to the reduction in the statutory income tax from 35% to 24% that became effective from January 1, 2002. Net revenues in the third quarter 2002 were $388.5 million, an increase of 48% from $262.6 million reported for the same period last year and an increase of 23% from $316.3 million reported for the second quarter of 2002. * Measured in terms of number of subscribers. ** Earnings before provision for income tax, interest, depreciation and amortisation (EBITDA) should not be considered in isolation as an alternative to net income, operating income or any other measure of performance under U.S. GAAP. We believe that EBITDA is a relevant measurement utilized by the cellular industry to assess performance that attempts to eliminate variances caused by the effects of differences in taxation, the amount and types of capital employed and depreciation and amortization policies. *** See Appendix 2 Net income for the third quarter 2002 was $84.3 million an increase of 8% from the $78.4 million reported for the third quarter 2001 and an increase of 30% from the $64.8 million reported for the second quarter of 2002. EBITDA in the third quarter 2002 was $205.9 million, an increase of 45% from the $142.0 million reported for the same period last year and an increase of 27% from the $162.0 million in the second quarter of 2002. EBITDA margin, or EBITDA divided by net revenues, for the third quarter 2002 was 53% compared to 54% for the third quarter 2001 and 51% for the second quarter of 2002. Commenting on the result, Mikhail Smirnov, President of MTS said: “The third quarter results of 2002 have once again highlighted MTS’ record of delivering growth in financial performance. We have continued to increase our net revenues while maintaining EBITDA margins. Our expansion into the regions continues and for the first time we have more subscribers in the regions than in the Moscow metropolitan area.”

Operational highlights

  Q3 2002 Q2 2002 Q1 2002
Total subscribers, end of period (mln) 5.44 4.37 3.53
Subscribers in Moscow area, end of period (mln) 2.69 2.35 2.08
Subscribers in Regions, end of period (mln) 2.75 2.02 1.44
ARPU (US$) 25.2 25.0 26.7
MOU (minutes) 175 167 142
Churn rate (%) 7.5 7.7 9.8
SAC per gross addition (US$) 32 39 36

MTS’ subscriber base reached approximately 5.44 million active subscribers at the end of the third quarter of 2002, of which approximately 2.75 million live in the regions outside the Moscow license area. MTS had a 37.6% market share of the Russian mobile market at the end of September 30 according to AC&M-Consulting. MTS’ market share in Moscow was 43.3%, with approximately 2.69 million subscribers at September 30, 2002. As of today, MTS services approximately 6.22 million subscribers of which 3.30 million live in the regions outside of the Moscow licence area. The Company’s subscriber base in the city of St. Petersburg and the Leningrad region exceeded half a million during the third quarter to reach 720,000, a significant achievement considering the fact that MTS launched operations in the region in December 2001. The Company’s market share in the North West licence area (which includes the city of St. Petersburg) was at 26% at the end of the third quarter of 2002 according to AC&M-Consulting. MTS’ monthly average revenue per user (ARPU) increased from $25.0 in the second quarter to $25.2 in the third quarter of 2002. The main driver for ARPU was an increase in average monthly minutes of usage per user (MOU) from 167 minutes in Q2 2002 to 175 minutes in Q3 2002. MTS’ subscriber churn rate in the third quarter 2002 was 7.5%, down from 7.7% in the second quarter of the year. MTS’ capital expenditure during the nine months to September 30, 2002 amounted to $351.9 million, of which $117.8 million was invested during the third quarter of 2002. The Company’s capital expenditure in the Moscow licence area amounted to $165.7 million and $27.7 million, respectively.

New Marketing Initiatives

In line with MTS’ strategy for further growth, the Company announced a new brand and tariff plan targeted at the mass-market during November 2002. The “Jeans” brand with a pre-paid tariff plan was launched by MTS in Moscow and thirty-seven Russian regions. While “Jeans” is the brand used to target the mass market, MTS plans to retain the “MTS” brand for marketing to middle heavy users as well as corporate clients. MTS has also decided to introduce a different disconnection policy for its “Jeans” subscribers. A “Jeans” subscriber remains as a registered subscriber and is treated by the Company as an active subscriber if this individual or organisation has had a positive balance on its account at MTS at least once within the last 183 days. MTS’ management believes that the new disconnection policy for subscribers will help to increase customer loyalty and minimize the negative impact of a traditional seasonal outflow of customers after the summer period. At the same time, MTS is retaining its standard disconnection policy for subscribers to MTS’ tariff plans. An active MTS customer is a registered customer who has had a positive balance on his account at MTS at least once within the last 61 days.

Expansion Strategy

During the second half of 2002, MTS continued its expansion into regional markets in Russia and other countries of the former Soviet Union. The Company has started new operations in five regions of Russia with a total population of 9.6 million and acquired 100% ownership in three local GSM operators, Dontelecom (the Rostov region) Mobicom Barnaul CJSC (the Altai region) and Bit LLC (the Republic of Tyva, Sakhalin, Chukotka, and Republic of Kalmykia. These new acquisitions extended the Company’s footprint by 8.3 million people to 103.1 million, or approximately 72% of the country’s population. As part of its strategy to consolidate ownership in its subsidiary mobile phone operators, the Company has consolidated a 100% ownership in Telecom 900 CJSC, a holding company for equity stakes in three large regional mobile phone operators, Siberia Cellular Systems 900 CJSC (SCS 900), Uraltel CJSC, and Far East Cellular Systems 900 CJSC (FECS 900). MTS has also increased its ownership in Kuban GSM CJSC, the largest regional GSM company in Russia in terms of subscribers, from 51% to 60% through the purchase of a new share issue of the local operator. Kuban GSM currently services approximately 791,300 subscribers. Overall, in the second half of 2002 MTS spent approximately $63.6 million on acquisitions and consolidation of ownership in its subsidiaries. The second half of 2002 was also marked by the expansion of MTS into neighbouring countries. The Company’s joint venture in Belarus has commenced operations and today provides services to over 29,170 subscribers. In line with the Company’s strategy to exploit growth opportunities beyond Russia’s borders, MTS signed agreements in early December 2002 to purchase a majority ownership in UMC, a leading mobile phone operator in Ukraine that currently provides services to approximately 1.62 million people. Completion of the transaction is subject to a number of conditions, including approval by appropriate governmental authorities in Ukraine and the Russian Federation, as well as MTS corporate approvals.

Restatement of Financial Statements for Previously Reported Periods

MTS has restated its financial statements for the year and three months ended December 31, 2001 and for the first and second quarters of 2002 as a result of a review of its financial statements conducted by MTS management. The restatement relates to the allocation of the purchase price for MTS’ acquisitions of equity stakes in a number of local mobile phone operators in 2001 and in the first half of 2002. As a result of this review, MTS has restated approximately $72 million previously allocated to licenses to property, plant and equipment and other intangible assets. This reallocation has resulted in restatements of property, plant and equipment, licenses, depreciation and amortization expense and certain related items of our balance sheet and statement of operations as of and for the year ended December 31, 2001 and the six-month period ended June 30, 2002. Please see Appendix 1 and Appendix 2 for further detail regarding the effect of the restatement on our 2001 and first half of 2002 financial results. In addition, effective January 1, 2002 the Company adopted FAS 141, Business Combinations and FAS 142, Goodwill and Other Intangible Assets. As a result, MTS has reclassified $22 million of goodwill relating to its acquisition of Rosico CJSC in August 1998 as licenses. This reclassification resulted in a restatement of amortization expenses and deferred taxes for the six-month period ended June 30, 2002. The combined effect of the above changes is a decrease in the MTS’ reported net income of $1.5 million for the year ended December 31, 2001 and a decrease in reported net income of $3.0 million for the six months ended June 30, 2002. MTS’ financial results for the years ended December 31, 2000 and 2001 have been audited by its new independent auditor, Deloitte & Touche. The firm was appointed as MTS’ new auditors after MTS dismissed ZAO Arthur Andersen. MTS’ financial statements for the three months ended March 31, 2002 and the three and six months ended June 30, 2002 have been reviewed by Deloitte & Touche. Today, MTS will file with the Securities and Exchange Commission (US SEC) amended financial statements for the year and three months ended December 31, 2001 and the first and second quarters of 2002 on Forms 20-F/A, 6-K/A and 6-K.

Mobile TeleSystems consolidated balance sheets at December 31, 2001 and September 30, 2002

Amounts in thousands of U.S. dollars, except share amounts
  December 31
2001
September 30
2002
CURRENT ASSETS: (as restated1) (unaudited)
Cash and cash equivalents $219,629 $107,625
Short-term investments 85,304
Trade receivables, net 24,258 46,697
Accounts receivable, related parties 2,377 7,858
Inventory, net 26,184 43,240
Prepaid expenses 22,712 30,706
VAT receivable 82,216 149,369
Deferred tax asset 12,040 16,306
Other current assets 8,374 10,347
Total current assets 483,094 412,148
PROPERTY, PLANT AND EQUIPMENT 856,056 1,241,530
OTHER INTANGIBLE ASSETS 84,245 107,056
LICENSES 276,949 390,494
GOODWILL 22,411 533
DEBT ISSUANCE COSTS 3,997 3,338
INVESTMENTS IN AND ADVANCES TO AFFILIATES 740 22,212
TOTAL ASSETS $1,727,492 $2,177,311
1 See Appendix I

Mobile TeleSystems consolidated balance sheets at December 31, 2001 and September 30, 2002

Amounts in thousands of U.S. dollars, except share amounts
  December 31
2001
September 30
2002
CURRENT LIABILITIES: (as restated2) (unaudited)
Accounts payable, related parties $6,142 $8,027
Trade accounts payable 106,068 105,147
Deferred connection fees. 21,419 22,082
Subscriber prepayments and deposits 63,741 100,889
Debt, current portion 18,245 32,801
Promissory notes payable, current portion 580
Capital lease obligation, current portion 14,401 16,073
Income tax payable 23,078 21,250
Accrued liabilities 51,626 75,570
Other payables 3,357 6,492
Total current liabilities 308,657 388,331
LONG-TERM LIABILITIES:
Notes payable, net of discount 248,976 308,584
Debt, net of current portion 30,150 71,276
Capital lease obligation, net of current portion 7,696 9,487
Prom`issory notes payable, net of current portion 5,792
Deferred connection fees, net of current portion 25,993 21,753
Deferred taxes 67,505 100,358
Total long-term liabilities 386,112 511,458
Total liabilities 694,769 899,789
MINORITY INTEREST 14,444 62,517
SHAREHOLDERS’ EQUITY:
Common stock: (2,096,975,792 shares with a par value of 0.1 rubles authorized and 1,993,326,138 shares issued as of December 31, 2001 and September 30, 2002 345,244,080 of which are in the form of ADS) 50,558 50,558
Treasury stock (9 966 631 common shares at cost) (10,206) (10,206)
Additional paid-in capital 555,794 557,205
Shareholder receivable (38,958) (35,587)
Retained earnings 461,091 653,035
Total shareholders’ equity 1,018,279 1,215,005
Total liabilities and shareholders’ equity $1,727,492 2,177,311
2 See Appendix II

Mobile TeleSystems consolidated statements of operations for the three months ended September 30, 2001 and 2002, and for the nine months ended September 30, 2001 and 2002

Amounts in thousands of U.S. dollars, except share amounts
  Three months ended
September 30
Nine months ended
September 30
  2001 2002 2001 2002
NET REVENUES:
Service revenues $246,055 $368,800 $592,024 891,186
Connection fees 5,911 6,492 15,026 18,720
Equipment sales 10,597 13,256 27,706 42,544
  262,563 388,548 634,756 952,450
COST OF SERVICES AND PRODUCTS
Interconnection and line rental 25,506 36,597 57,370 91,678
Roaming expenses 23,453 23,833 50,566 52,546
Cost of equipment 9,221 22,327 26,314 60,446
  58,180 82,757 134,250 204,670
OPERATING EXPENSES 30,984 55,296 85,423 146,968
SALES AND MARKETING EXPENSES 29,559 44,629 80,580 109,424
PROVISION FOR DOUBTFUL ACCOUNTS 1,884 2,565
DEPRECIATION AND AMORTIZATION 34,982 60,072 93,547 150,750
Net operating income 106,974 145,794 238,391 340,638
CURRENCY EXCHANGE AND TRANSLATION LOSSES 586 1,757 1,181 2,447
OTHER EXPENSES (INCOME)
Interest income (2,906) (1,292) (10,466) (6,789)
Interest expenses, net of amounts capitalized 3,569 10,635 5,959 31,322
Other expenses (income) 1,101 13 3,238 2,734
Total other (income)/expenses, net 1,764 9,356 (1,269) 27,267
Income before provision for income taxes and minority interest 104,624 134,681 238,479 310,924
PROVISION FOR INCOME TAXES 24,529 40,146 74,619 94,100
MINORITY INTEREST 1,726 10,192 1,329 24,880
NET INCOME before cumulative effect of accounting principle 78,369 84,343 162,531 191,944
Cumulative effect of a change in accounting principle (17,909)
NET INCOME $78,369 84,343 $144,622 $191,944
Weighted average number of shares outstanding 1,993,326,138 1,983,399,507 1,993,326,138 1,983,399,507
Earnings per share (basic and diluted):
NET INCOME before cumulative effect of a change in accounting principle 0.039 0.043 0.082 0.097
Cumulative effect of a change in accounting principle (0.009)
Net income 0.039 0.043 0.073 0.097

APPENDIX I

The restatement of MTS’ financial statements for the year ended December 31, 2001 relates primarily to a change in the allocation of the purchase price for the Company’s acquisitions of: an additional 4% stake in ReCom CJSC in April 2001; a 100% stake in Telecom XXI OJSC in May 2001; and an 81% stake in Telecom 900 CJSC in August 2001. As a result of a review of its financial statements by MTS management, MTS has restated approximately $21 million previously allocated to licenses to property, plant and equipment and other intangible assets. This reallocation has resulted in restatements of property, plant and equipment, licenses, depreciation and amortization expense and certain related items of our balance sheet and statement of operations as of and for the year ended December 31, 2001. Additionally, the Company has reclassified an impairment charge related to its investment in a joint venture with the government of Belarus from other expenses to impairment of investment, which is deducted in determining our net operating income in order to conform to the US GAAP presentation requirements. The effects of this restatement on our financial statements for the year ended December 31, 2001 were as follows (in thousands except per share amounts):

Year ended December 31, 2001 As previously reported Restatement As restated
Property plant and equipment, net 841,308 14,748 856,056
Licenses, net 297,490 (20,541) 276,949
Other intangible assets, net 83,507 738 84,245
Deferred connection fees 47,688 (276) 47,412
Deferred tax liability 72,192 (4,687) 67,505
Minority interest 12,999 1,445 14,444
Depreciation and Amortization 133,143 175 133,318
Currency Exchange and Translation Losses 1,871 393 2,264
Provision for Income taxes 97,414 47 97,461
Minority Interest 6,614 922 7,536
Net income 207,366 (1,537) 205,829
Earnings per share 0.105 (0.001) 0.104

APPENDIX 2

In addition to the restatement of the Company’s financial statement for the year and three months ended December 31, 2002, MTS’ has restated its financial statements for the six months ended June 30, 2002. The restatement results primarily from a change in the purchase price allocation for the Company’s acquisitions of: an additional a 51% stake in Kuban GSM CJSC in March 2002; and a 100% stake in BM Telecom CJSC in May 2002. As a result of a review of its financial statements by MTS management, MTS has restated approximately $76 million previously allocated to licenses to property, plant and equipment and other intangible assets. This reallocation has resulted in restatements of property, plant and equipment, licenses, depreciation and amortization expense and certain related items of our balance sheet and statement of operations as of and for the six-month period ended June 30, 2002. In addition, effective January 1, 2002 the Company adopted FAS 141, Business Combination and FAS 142, Goodwill and Other Intangible Assets. As a result MTS has reclassified $22 million of goodwill relating to the Company’s acquisition of Rosico CJSC in August 1998 as licenses. s beginning January 1, 2002 goodwill was no longer amortized into income, this reclassification resulted in a restatement of amortization expenses for the six-month period ended June 30, 2002. The reclassification also resulted in restatement of the related deferred taxes balances for the period ended June 30, 2002. The effects of this restatement on financial statements for six months ended June 30, 2002 were as follows (in thousands except per share amounts):

Six months ended June 30, 2002: As previously reported Adjustment As restated
Property plant and equipment, net 1,069,743 72,456 1,142,199
Licenses, net 465,326 (75,669) 389,657
Goodwill, net 22,411 (21,878) 533
Other intangible assets, net 81,344 9,340 90,684
Total assets 2,031,430 (15,751) 2,015,679
Deferred connection fees 47,339 (329) 47,010
Deferred tax liability 116,290 (16,785) 99,505
Total long-term liabilities 521,637 (17,114) 504,523
Minority interest 43,015 5,919 48,034
Retained earnings 572,944 (4,556) 568,388
Total liabilities and shareholders equity 2,031,430 (15,751) 2,015,679
Depreciation and Amortization 92,784 (2,106) 90,678
Net operating income 192,738 2,106 194,844
Provision for Income taxes 53,826 128 53,954
Minority Interest 9,691 4,997 14,668
Net income 110,620 (3,019) 107,601
 

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