Financial Results for the Fourth Quarter 2002 and the Year Ended 31 st December 2002

20 May 2003

Moscow, Russian Federation — May 20, 2003 — Mobile TeleSystems OJSC (“MTS” — NYSE: MBT), the largest mobile phone operator in Russia and Central and Eastern Europe1, today announced its financial results for the fourth quarter and the year ended December 31, 2002.

  • MTS reports record revenues of $1.36 billion for full year 2002, up 52.5% year on year.
  • EBITDA increase of 47.4% to $674.1 million; EBITDA margin was 49.5%.
  • Net income rose by 34.6% to $277.1 million.
  • Subscriber numbers increased by approximately four million users in 2002 to 6.64 million at December 31, 2002.
  • As of May 19, 2003, MTS’ consolidated subscriber base was over 10.42 million customers.

Revenues for the year ended December 31, 2002 were $1.36 billion, a year-on-year increase of 52.5%. Fourth quarter revenues were $409.3 million, a 58.3% increase on the same quarter in 2001, and a 5.4% increase on the previous quarter.

In 2002, EBITDA (see Attachments B and C) was up 47.4% compared to the previous year to $674.1 million, giving an EBITDA margin of 49.5%. Fourth quarter EBITDA was $182.7 million, a 45.6% increase on the same quarter in 2001, and an 11.3% drop on the previous quarter. EBITDA margin in the fourth quarter was 44.6%.

Net income for the full year 2002 was $277.1 million, up 34.6% on the previous year. Fourth quarter net income was $85.2 million, a 39.2% increase on the same quarter in 2001, and up 1.1% compared to the previous quarter.

Financial Highlights (Unaudited)

US$ million Q4
Change Full-year ended
Dec 31, 2002
Full-year ended
Dec 31, 2001
Net revenues $409.3 $258.5 58.3% $1 361.8 $893.2 52.5%
Operating income $123.7 $85.7 44.3% $464.4 $324.1 43.3%
Net income $85.2 $61.2 39.2% $277.1 $205.8 34.6%
EBITDA $182.7 $125.5 45.6% $674.1 $457.4 47.4%
EBITDA margin 44.6% 48.5%  —  49.5% 51.2%  — 

Note: See Attachment B and C for definitions of EBITDA and EBITDA margin and a reconciliation of both financial measures.

As of December 31, 2002, MTS together with its subsidiaries serviced 6.64 million subscribers. During 2002, the Company’s subscriber base increased by approximately four million subscribers, of which 3.35 million were added through the organic growth of the Company’s business, and 640,000 were added via acquisitions of local mobile operators in Russia’s regions. In addition, MTS’ unconsolidated subsidiary in Belarus, Mobile TeleSystems LLC, serviced approximately 43,000 users as of December 31, 2002.

As of May 19, 2003, MTS’ consolidated subscriber base comprised of 10.42 million customers, of which 8.54 million were in Russia and 1.88 million in Ukraine2. In addition, Mobile TeleSystems LLC serviced 125,000 subscribers in Belarus as of May 19, 2003.

Commenting on the results, Mikhail Smirnov, President of MTS, said: “During the past year our Company continued to demonstrate strong performance both in terms of subscribers and earnings growth. We attribute MTS’ achievements to the successful implementation of the Company’s strategy — expansion into new regions while strengthening our positions in our existing markets. At the same time, cost control and a balanced capital investment policy remained a prime focus of the management.”

Operational Highlights

  Q1 2002 Q2 2002 Q3 2002 Q4 2002 FY 2002 FY 2001
Total subscribers, end of period (mln) 3.53 4.37 5.43 6.64 6.64 2.65
ARPU (US$) $26.7 $25.0 $25.2 $21.2 $22.9 $36.0
MOU (minutes) 142 167 175 175 159 157
Churn rate (%) 9.8 7.7 6.5 10.1 33.9 26.8
SAC per gross additional sub (US$) $36 $39 $32 $34 $35 $55

Note: See Attachment A for definitions of ARPU, MOU, Churn and SAC.

The Company s stable financial position and strong balance sheet allow the Board of Directors to recommend that the Annual General Meeting of Shareholders, which will take place June 30, approve a dividend for the year 2002 of RUR 1.70 per share or approximately $1.10 per ADS. The record date for the dividend payment was May 19, 2003.

The Company’s average monthly revenue per user (ARPU) was $21.2 in the fourth quarter, and $22.9 for the full year 2002. The decline in ARPU is largely attributable to the rapid expansion of the Company’s subscriber base and hence a dilution of our subscriber mix by the mass-market subscribers. In particular, during the last quarter of 2002, MTS experienced an accelerated subscriber growth with 1.22 million new customers added on a net basis. However, as the bulk of new subscriber additions took place towards the end of the quarter the subscriber growth during the quarter did not significantly affect revenues.

Average monthly minutes of usage per subscriber (MOU) continued to increase during 2002 to 159 minutes for the year. Management believes that the trend of growing usage is largely attributed to the increased traffic between our own customers. An incoming call originated by a MTS customer is typically free of charge, while an outgoing call from one MTS customer to another is typically charged with a discount. Therefore, an increase in MOU does not necessarily translate into increased ARPU.

Churn rate in the fourth quarter of 2002 was at 10.1% and at 33.9% for the full year. Management believes that the increase in the Company’s churn rate in 2002 is consistent with the general market trend. Nevertheless, the Company continues to implement programs to encourage customer loyalty.

The Company’s subscriber acquisition cost (SAC) per gross subscriber addition continued to decline in 2002 reflecting the lower cost of attracting mass-market subscribers and increase economies of scale. An increase in SAC per gross subscriber addition in Q4 2002 compared to the previous quarter is largely attributed to the promotion of MTS new brand Jeans.

MTS’ capital expenditures on property, plant and equipment during 2002 amounted to $502.1 million, in line with the management guidelines for the past year. Of the above amount $150.2 million was spent in the fourth quarter of the year. In addition, MTS spent $72.2 million on purchases of intangible assets during 2002.

MTS’ regional expansion in Russia has continued in line with the Company’s stated aims. This expansion is carried out both through the launch of MTS’ own operations and the acquisition of existing operators. The Company spent (net of cash acquired) $143.4 million on acquisitions of local mobile operators in the regions of Russia during 2002.

In addition, during 2002 MTS commenced operations in thirteen regions of Russia for which the Company held GSM licences.

MTS also took important steps in its expansion strategy outside of the Russian Federation during 2002, starting with the announcement in June 2002 of the launch of a network in Belarus operated by Mobile TeleSystems LLC, a joint venture between MTS and the Belarus government. Additionally, in November 2002, MTS entered into agreements to purchase a majority stake in Ukrainian mobile operator Ukrainian Mobile Communications (UMC) and subsequently acquired a 57.7% stake in UMC in March 2003.

The past year was also marked by the Company’s new marketing initiatives. In November 2002, MTS launched a new brand, Jeans, aimed at the mass market. The unique feature of this new brand is the absence of a monthly subscription fee and it is likely to attract new, lower usage, subscribers that account for the bulk of new additions on the Russian cellular market. As of December’31, 2002, MTS had 215,000 Jeans subscribers or approximately 3% of the total subscriber base in Russia. As of May’19, 2003, MTS serviced 949,000 Jeans subscribers, which represented around 11.1% of MTS’ total subscriber base in Russia.

Unlike the Jeans brand, the MTS brand will continue to be geared towards higher usage and business subscribers. This is a further step in segmenting the Russian market with the objective of maximising value. Amongst MTS other recent marketing initiatives was the introduction of a unified set of tariff plans across its Russian network in February of 2003. Today, in addition to the Jeans brand’s pre-paid tariffs, MTS subscribers across Russia can sign up for various tariff plans grouped into one of four categories targeted at different subscriber groups: “MTS.VIP”, “MTS.Business”, “MTS.Optima”, and “MTS.Corporation”.

 In terms of numbers of subscribers.
 MTS owns a 57.7% stake in UMC, a leading mobile phone operator in Ukraine. MTS consolidates UMC effective March 2003.

Attachments to The Fourth Quarter and Full-Year 2002 Earnings Press Release

Attachment A


Subscriber. We define a “subscriber” as an individual or organization whose account does not have a negative balance for more than sixty-one days, or one hundred and eighty two days in the case of our Jeans brand tariff launched in November 2002.

Average monthly service revenue per subscriber (ARPU). We calculate our average monthly service revenue per subscriber by dividing our service revenues for a given period, including guest roaming fees, by the average number of our subscribers during that period and dividing by the number of months in that period.

Average monthly minutes of usage per subscriber (MOU). MOU is calculated by dividing the total number of minutes of usage during a given period by the average number of our subscribers during the period and dividing by the number of months.

Churn. We define our “churn” as the total number of subscribers who cease to be a “subscriber” as defined above during the period (whether involuntarily due to non-payment or voluntarily, at such subscriber’s request), expressed as a percentage of the average number of our subscribers during that period.

Subscriber acquisition cost (SAC). We define SAC as total sales and marketing expenses for a given period. Sales and marketing expenses are comprised of advertising expenses, commissions to dealers, and handset subsidies. SAC per gross additional subscriber is calculated by dividing SAC during a given period by the total number of gross subscribers added by us during the period.

Attachment B

EBITDA should not be considered in isolation as an alternative to net income, operating income, net cash provided by operating activity or any other measure of performance under U. S. GAAP. We believe that EBITDA is viewed as a relevant supplemental measure of performance in the wireless telecommunications industry and we define EBITDA as operating income excluding depreciation and amortization. EBITDA margin is defined as EBITDA as a percentage of our net revenues. We believe EBITDA and EBITDA margin to be relevant and useful information as these are important measurements used by our management to measure the operating profits or losses of our business. EBITDA is also one of many factors used by the credit rating agencies to determine our credit ratings. EBITDA and EBITDA margin should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with accounting principles generally accepted in the United States of America. EBITDA and EBITDA margin, as we have defined them, may not be comparable to similarly titled measures reported by other companies.

The following table provides a reconciliation of EBITDA to operating income:

Financial Highlights (Unaudited)

US$ million Q4
Full-year ended
Dec 31, 2002
Full-year ended
Dec 31, 2001
EBITDA $182.7 $125.5 $674.1 $457.4
Less: depreciation and amortisation ($58.9) ($39.8) ($209.7) ($133.3)
Operating income $123.7 $85.7 $464.4 $324.1

Attachment C

EBITDA margin is defined as EBITDA as a percentage of net revenues.

The following table provides a reconciliation of EBITDA margin to operating income as a percentage of net revenues:

US$ million Q4
Full-year ended
Dec 31, 2002
Full-year ended
Dec 31, 2001
EBITDA margin 44.6% 48.5% 49.5% 51.2%
Less: depreciation and amortisation as’a’% of’net revenues (14.4%) (15.4%) (15.4%) (14.9%)
Operating income as a % of net revenues 30.2% 33.2% 34.1% 36.3%

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

Amounts in thousands of U.S. dollars, except share amounts
  December 31
December 31
Cash and cash equivalents $219,629 $34,661
Short-term investments 85,304 30,000
Trade receivables, net 24,258 40,501
Accounts receivable, related parties 2,377 3,569
Inventory, net 26,184 41,386
Prepaid expenses 22,712 26,537
Deferred tax asset 5,802 12,223
VAT receivable 82,216 154,061
Other current assets 8,374 15,392
Total current assets 476,856 358,330
PROPERTY, PLANT AND EQUIPMENT, net 856,056 1,344,633
LICENSES, net 299,360 386,919
OTHER INTANGIBLE ASSETS, net 84,245 138,090
DEBT ISSUANCE COSTS, net 3,997 2,957
Total assets $1,727,492 $2,283,296

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

Amounts in thousands of U.S. dollars, except share amounts
  December 31
December 31
Accounts payable, related parties $6,142 $4,968
Trade accounts payable 106,068 117,623
Deferred connection fees 21,419 22,210
Subscriber prepayments and deposits 63,741 110,950
Debt, current portion 18,825 67,098
Capital lease obligation, current portion 14,401 21,232
Income tax payable 23,078 3,987
Accrued liabilities 51,626 73,919
Other payables 3,357 2,226
Total current liabilities 308,657 424,213
Notes payable 248,976 300,638
Debt, net of current portion 35,942 58,276
Capital lease obligation, net of current portion 7,696 7,241
Deferred connection fees, net of current portion 25,993 19,694
Deferred taxes 67,505 105,818
Total long-term liabilities 386,112 491,667
Total liabilities 694,769 915,880
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 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 555,794 558,102
Unearned compensation  —  (212)
Shareholder receivable (38,958) (34,412)
Retained earnings 461,091 738,213
Total shareholders’ equity 1,018,279 1,302,043
Total liabilities and shareholders’ equity $1,727,492 $2,283,296

Mobile TeleSystems unaudited consolidated statements of operations for the years and three months ended december 31, 2001 and 2002

Amounts in thousands of U.S. dollars, except share amounts
  For the year ended Three months ended
  December 31 December 31
  2001 2002 2001 2002
Service revenues $830,308 $1,274,287 $238,284 $383,101
Connection fees 21,066 24,854 6,040 6,134
Equipment sales 41,873 62,615 14,167 20,071
  893,247 1,361,756 258,491 409,306
Interconnection and line rental 75,278 113,052 17,908 21,374
Roaming expenses 68,387 83,393 17,821 30,847
Cost of equipment 39,828 90,227 13,514 29,781
  183,493 286,672 49,243 82,002
OPERATING EXPENSES 134,598 229,056 46,610 82,088
SALES AND MARKETING EXPENSES 107,729 171,977 27,149 62,553
DEPRECIATION AND AMORTIZATION 133,318 209,680 39,771 58,930
IMPAIRMENT OF INVESTMENT 10,000  —  10,000  — 
Net operating income 324,109 464,371 85,718 123,733
Interest income (11,829) (8,289) (1,363) (1,500)
Interest expense, net of amounts capitalized 6,944 44,389 985 13,067
Other expense (income) 108 (2,454) (3,130) (5,188)
Total other expenses (income), net (4,777) 33,646 (3,508) 6,379
Income before provision for income taxes and minority interest 326,622 427,251 88,143 116,327
PROVISION FOR INCOME TAXES 97,461 110,417 22,842 16,317
MINORITY INTEREST 7,536 39,711 6,207 14,831
before cumulative effect
221,625 277,123 59,094 85,179
Cumulative effect of a change in accounting principle (17,909)  —   —   — 
Extraordinary gain on debt repayment, net of income tax 2,113  —  2,113  — 
before cumulative effect of a change in accounting principles
205,829 277,123 61,207 85,179
Weighted average number of common shares outstanding 1,983,359,507 1,983,359,507 1,983,359,507 1,983,359,507
Per common share — basic and diluted: 0.104 0.140 0.0309 0.0429

Mobile telesystems unaudited consolidated statements of cash flows for the years ended december 31, 2001 and 2002

Amounts in thousands of U.S. dollars, except share amounts
  2001 2002
Net income: $205,829 $277,123
Adjustments to reconcile net income to net cash provided by operating activities:    
Minority interest 7,536 39,475
Depreciation and amortization 133,318 209,680
Amortization of deferred connection fees (20,027) 24,768
Deferred subscriber acquisition cost  —   — 
Amortization of deferred subscriber acquisition costs  —   — 
Cumulative effect of a change in accounting principle 17,909  — 
Gain on debt extinguishments (2,113)  — 
Provision for obsolete inventory 2,543 5,614
Provision for doubtful accounts 3,219 7,047
Interest accrued 5,845 44,388
Interest paid (4,068) (43,438)
Deferred taxes (49,302) (18,989)
Non-cash expenses associated with stock bonus plan and stock option plan  —  23
Impairment of investment 10,000  — 
Changes in operating assets and liabilities:  —   — 
Decrease/(Increase) in trade receivables (7,181) (18,945)
Decrease/(Increase) in accounts receivable, related parties (3,091) (1,360)
Increase in inventory (4,129) (18,186)
Increase in prepaid expenses (8,552) (2,634)
Increase in VAT receivable (59,618) (64,154)
(Increase)/Decrease in other current assets 1,613 (7,422)
Increase/(Decrease) in accounts payable, related parties 1,049 81
(Decrease)/Increase in trade accounts payable 20,470 (16,058)
Increase in subscriber prepayments and deposits 49,980 (3,558)
Increase/(Decrease) in income tax payable 19,424 (19,778)
Increase in accrued liabilities and other payables 17,547 19,095
Net cash provided by operating activities 338,201 412,772
Acquisitions of subsidiaries, net of cash acquired (75,858) (143,396)
Purchase of property, plant and equipment (396,667) (502,054)
Purchase of intangible assets (44,533) (72,218)
Purchases of short term investments (110,000)  — 
Proceeds from sale of short term investments 195,602 55,304
Investments in and advances to affiliates (10,067) (35,557)
Net cash used in investing activities (441,523) (697,921)
Proceeds from issuance of capital stock, net of direct expenses  —   — 
Proceeds from issuance of notes 248,135 50,808
Notes issuance cost (3,856) (649)
Capital lease obligation principal paid (7,947) (1,804)
Dividends paid (2,959)  — 
Proceeds from loans 13,577 52,851
Loan principal paid (13,683) (7,008)
Payments from Sistema 14,325 6,619
Net cash provided by financing activities 247,592 100,817
Effect of exchange rate changes on cash and cash equivalents (469) (636)
CASH AND CASH EQUIVALENTS, at beginning of year 75,828 219,629
CASH AND CASH EQUIVALENTS, at end of year $219,629 $34,661
Income taxes paid $129,418 $147,346

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