-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HqU87p3uMyDne2LKsnqrxJWRl8QOvg4p2b63MboolRso/R9lJR+T/dnymuGU/tVw kmrEI5NeP5uKuOhuMS9fpQ== 0000893220-99-001027.txt : 19990831 0000893220-99-001027.hdr.sgml : 19990831 ACCESSION NUMBER: 0000893220-99-001027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PLD CAPITAL ASSET US INC CENTRAL INDEX KEY: 0001094037 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133996647 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-05396-06 FILM NUMBER: 99702926 BUSINESS ADDRESS: STREET 1: 505 PARK AVENUE 21ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2125273800 MAIL ADDRESS: STREET 1: 505 PARK AVENUE 21ST FLOOR CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 FORM 10-Q PLD TELEKOM INC. PERIOD ENDING 3/31/1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 333-5396-06 ------------------------ PLD CAPITAL ASSET (U.S.) INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3996647 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OF ORGANIZATION) IDENTIFICATION NO.)
505 PARK AVENUE, 21ST FLOOR, NEW YORK, NEW YORK 10022 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) (212) 527-3800 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ------------------------ (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, $.01 PAR VALUE -- 1,000 SHARES (AUGUST 9, 1999) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PLD CAPITAL ASSET (U.S.) INC. INDEX
PAGE ---- Recent Developments......................................... 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements PLD Capital Asset (U.S.) Inc. Condensed Balance Sheets as of March 31, 1999 (Unaudited) and December 31, 1998................... 6 Condensed Statements of Operations (Unaudited) for the three months ended March 31, 1999 and 1998...... 7 Condensed Statements of Cash Flows (Unaudited) for the three months ended March 31, 1999 and 1998...... 8 Notes to Condensed Financial Statements (Unaudited) for the three months ended March 31, 1999........... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11 PART II OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds......... 15 Item 6. Exhibits and Reports on Form 8-K.................. 15
1 3 PLD Capital Asset (U.S.) Inc. (the "Company") is a wholly owned subsidiary of PLD Telekom Inc. ("PLD"). The Company was formed to purchase and resell or lease telecommunications equipment to other subsidiaries of PLD. The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), solely because of the guarantees it has issued in respect of PLD's outstanding 14% Senior Discount Notes due 2004 (the "Senior Notes") and 9% Convertible Subordinated Notes due 2006 (the "Convertible Notes"). Upon the completion of PLD's merger with Metromedia International Group, Inc. described below under "Recent Developments", the Company's guarantees will be terminated and it will cease to be subject to the periodic reporting requirements of the Exchange Act. RECENT DEVELOPMENTS Merger with Metromedia International Group, Inc. On May 18, 1999 PLD entered into an agreement (the "Merger Agreement") with Metromedia International Group, Inc. ("MMG") pursuant to which PLD would merge with Moscow Communications, Inc., a newly formed, wholly owned subsidiary of MMG. MMG is a global communications company engaged in the development and operation of a variety of communications businesses, including cellular telecommunications, fixed telephony, international and long distance telephony, cable television, paging and radio broadcasting, in Eastern Europe, the former Soviet Union, China and other selected emerging markets. Its common stock is listed on the American and Pacific Stock Exchanges, under the symbol MMG. Upon consummation of the merger (the "Merger"), PLD will become a wholly owned subsidiary of MMG, and the holders of shares of common stock (the "Common Stock") of PLD will receive shares of MMG on the basis of an exchange ratio determined in the manner set forth below: (a) if the Average MMG Stock Price (as defined below) is less than $6.25 and equal to or greater than $5.25, the exchange ratio will be equal to $3.50 divided by the Average MMG Stock Price; (b) if the Average MMG Stock Price is equal to or greater than $6.25 and less than or equal to $8.00, the exchange ratio will be 0.56; (c) if the Average MMG Stock Price is greater than $8.00, the exchange ratio will be equal to $4.48 divided by the Average MMG Stock Price; and (d) if the Average MMG Stock Price is less than $5.25, then the exchange ratio will be 0.6667. However, PLD has the right to terminate the Merger Agreement if the Average MMG Stock Price is less than $5.25 if MMG does not agree to increase (or "top up") the exchange ratio to an amount equal to $3.50 divided by the Average MMG Stock Price, and the further right to terminate the Merger Agreement in all events (without MMG having any "top up" right) if the Average MMG Stock Price is less than $4.00. The "Average MMG Stock Price" is to be determined by taking the average of the daily closing prices of the common stock of MMG on the American Stock Exchange Composite Transactions Tape for the twenty consecutive trading days ending on the third business day immediately prior to the meeting of the shareholders of PLD which will be called to approve the Merger. PLD's Series II and Series III Preferred Shares will be redeemed for cash for a redemption price of Cdn. $1.00 per share. Outstanding options and warrants to acquire PLD's Common Stock will be converted into options and warrants of MMG on the basis of the exchange ratio, and any of the Convertible Notes which are not exchanged under the terms of the exchange offer described below and are still outstanding, will be assumed by MMG and may be convertible into common stock of MMG also on the basis of the exchange ratio. 2 4 Salomon Smith Barney Inc., who have acted as financial advisors to PLD, have opined to the Board of Directors of PLD that the exchange ratio is fair from a financial point of view to PLD, and Donaldson, Lufkin & Jenrette Securities Corporation, who have acted as financial advisors to MMG, have opined to the Board of Directors of MMG that the exchange ratio is fair from a financial point of view to MMG. In connection with the Merger Agreement, News America Incorporated ("News America") which, through an affiliate, owns approximately 38% of PLD's Common Stock, has entered into an agreement (the "Voting Agreement") with MMG pursuant to which News America has agreed to vote its Common Stock in favor of the Merger Agreement and not to vote for, solicit, discuss or support any other transaction involving PLD which could have the effect of interfering with, preventing or materially delaying the Merger. In addition, MMG has entered into a bridge loan agreement with PLD pursuant to which MMG has agreed to lend PLD up to $7.0 million, secured by an approximately 58% interest in PLD's subsidiary Technocom Limited ("Technocom"), at an annual interest rate of 10% to fund its ongoing operations during the period from the execution of the Merger Agreement to the date that the Merger is consummated (or the Merger Agreement is terminated). As of July 31, 1999, PLD had borrowed $4.0 million under such bridge loan agreement. The consummation of the Merger Agreement is subject to a number of conditions, including the approval of the Merger by the shareholders of PLD and of MMG, the receipt of various governmental clearances and consents, the absence of any material adverse change in PLD's or MMG's respective businesses and operations and other customary closing conditions. In addition, it is subject to a number of other conditions, as follows: (a) Exchange Offer. At least 95% in aggregate principal amount of each of the Senior Notes and of the Convertible Notes (and, together with the Senior Notes, the "Outstanding PLD Notes") shall have agreed to the amendment of the indentures governing the Outstanding PLD Notes (the "Existing Indentures") and exchanged such Notes for new 10 1/2% Senior Notes due 2007 of MMG (the "New MMG Notes"). In this connection substantially all of the holders of the Outstanding PLD Notes have entered into an agreement with MMG, subject to the consummation of the Merger and certain other conditions, to: (i) defer to the date the Merger is consummated all interest payable on the Outstanding PLD Notes during the period from the execution of the Merger Agreement to the date the Merger is consummated; (ii) amend the Existing Indentures, and (iii) tender all Outstanding PLD Notes held by them for New MMG Notes. (b) Modification of Travelers Revolving Credit Agreement. The Travelers Insurance Company and The Travelers Indemnity Company (collectively, the "Travelers Parties") shall have consummated the transactions contemplated by a note and warrant modification agreement (the "Travelers Note Modification Agreement") entered into simultaneous with the execution of the Merger Agreement. Under the Travelers Note Modification Agreement the Travelers Parties have agreed not to exercise any warrants held by them, or certain other rights which they have under the Revolving Credit and Warrant Agreement dated November 26, 1997 with PLD, as amended (the "Travelers Revolving Credit Agreement"), until the Merger is consummated (or the Merger Agreement is terminated). In addition, MMG and the Travelers Parties have agreed that, in the event that the Merger is consummated: (i) the guarantees given by News America with respect to $3.1 million of the amounts due to the Travelers Parties will be released; (ii) the amount due to the Travelers Parties will be paid, as to $8.5 million on the date the Merger is consummated, and as to the remaining $4.92 million in August 2000, together with interest at an annual rate of 10.5%; (iii) in lieu of their rights under the Travelers Revolving Credit Agreement to receive warrants to purchase Common Stock of PLD, the Travelers Parties will receive at closing 100,000 shares of PLD's Common Stock (which will be converted at closing into shares of MMG at the applicable exchange ratio) and 10-year warrants to purchase 700,000 shares of common stock of MMG at a price based upon 125% of the average closing price of such common stock during December 2000, but not to be less than $10 per share or more than $15 per share; and (iv) the Travelers Revolving Credit Agreement will be 3 5 amended and restated to reflect the foregoing matters and to provide certain additional guarantees of the amounts due to the Travelers Parties. (c) News Letter Agreement. News America and MMG shall have consummated the arrangements contemplated by a letter agreement (the "News Letter Agreement") entered into between them simultaneous with the execution of the Merger Agreement. Under the News Letter Agreement News America has agreed not to exercise any rights under its Revolving Credit Agreement dated as of September 30, 1998 with PLD, as amended (the "News Revolving Credit Agreement") until the Merger is consummated (or the Merger Agreement is terminated), and MMG has agreed that, on the date that the Merger is consummated, it will cause: (i) the amount advanced by News America under the News Revolving Credit Agreement, namely, $6.45 million, to be repaid in full, together with interest at an annual rate of 10% (in lieu of the 20% rate specified in the News Revolving Credit Agreement); and (ii) the guarantees given by News America to the Travelers Parties to be cancelled. (d) Technocom Put/Call Agreement. PLD shall have completed the purchase of the shares of Technocom from Plicom Limited ("Plicom") and Elite International Limited ("Elite") in accordance with option modification agreements with each of them (the "Option Modification Agreements") entered into simultaneously with the execution of the Merger Agreement. Under the Option Modification Agreements, Plicom and Elite have agreed not to exercise their rights under their current put and call agreements with PLD to require PLD to purchase their interests in Technocom (currently exercisable after June 30, 1999) until the Merger is consummated (or the Merger Agreement is terminated), and PLD has agreed that, on the date that the Merger is consummated, it will purchase Plicom's remaining 14.57% interest in Technocom for $8.75 million, and Elite's remaining 5.03% interest in Technocom for $3.85 million, such sums representing 50% of the amounts to which such parties would have otherwise been entitled had they exercised their rights under their current put and call agreements. In addition, PLD has agreed to pay various other amounts due to Plicom and to cause its release from any guarantees of obligations undertaken at the request of PLD, and various other agreements with Plicom and Elite will be terminated. The Merger Agreement and the Merger have been unanimously approved by the Boards of Directors of both MMG and PLD, and each Board is recommending their approval by their respective stockholders. The Merger Agreement may be terminated in its entirety by either MMG or PLD in the event that the other is in material breach of the Merger Agreement, or in the event that the stockholders of both companies do not approve the Merger or that the Merger is not otherwise consummated by October 31, 1999. MMG also has the right to terminate the Merger Agreement in the event that the Board of Directors of PLD withdraws or modifies its approval of the Merger or recommends (or fails to recommend against) a different transaction to the stockholders of PLD. In the event that MMG terminates the Merger Agreement as a result of PLD's Board of Directors withdrawing or modifying its approval of the Merger or recommending (or failing to recommend against) another transaction, or as a result of a material breach by PLD of the Merger Agreement, or as a result of the stockholders of PLD not approving the Merger at a time when a different transaction had been announced, PLD will pay MMG a termination fee of $6.25 million plus its expenses (up to a maximum of $1.0 million). Russian Economic and Political Turmoil During 1998 there was considerable turmoil and uncertainty in the Russian financial markets, prompted in large part by a drop in commodity prices and economic problems in Russia, together with the crisis in the Asian financial markets which began in late 1997. These developments were accompanied by a substantial decline in the Russian stock market. These developments led the Russian government to raise interest rates significantly and to seek special assistance from the International Monetary Fund. In August 1998, the Russian government announced a substantial widening of the trading band in which the Russian Rouble would be permitted to float, together with a moratorium on certain foreign debt payments. Thereafter the Rouble 4 6 dropped substantially in value and traded outside of the high end of the band, and the Russian government did not intervene to stop this trading, thereby effectively acquiescing to a major devaluation of the Rouble. The latter part of 1998 and the first half of 1999 saw further declines in the value of the Rouble and this process is expected to continue. Also in August 1998 the Russian government announced a 90-day moratorium on debt repayments. This moratorium caused considerable difficulties for Russian banks and businesses with hard currency obligations, as well as significantly impairing the ability of such banks and businesses, as well as the Russian government itself, to access the Western capital markets. The difficulties experienced by the Russian banks in turn caused difficulties for their customers, as bank transfers and deposits were frozen in many cases. The Russian government itself has effectively defaulted on substantial amounts of its debt, and is engaged in negotiations with Western banks and institutions (which reach back several months) to restructure this indebtedness. Continuation of these conditions for any significant period of time could have serious long-term effects on the Russian economy. At the present time, it is impossible to predict whether or when any resolution of these problems is likely. In August 1998, the Russian government experienced a significant upheaval, with the dismissal of the reformist government led by Sergei Kiriyenko and its replacement by one led by Yevgeny Primakov. The Primakov government did not propose a plan to address Russia's economic and financial difficulties, one result of which was to cause the International Monetary Fund to delay further assistance to the Russian government. In 1999, further political upheavals occurred, as President Boris Yeltsin first dismissed the Primakov government in May 1999 and selected Sergei Stepashin as the new Prime Minister, and then in turn replaced him with Vladimir Putin in August 1999. It is too soon to predict what policies will be adopted by the new Putin government. These frequent governmental reshufflings create increased uncertainty about the future political situation in Russia, which in turn creates additional concern about the ability of the government to deal with the many problems currently afflicting the Russian economic system. At the present time, it is not possible to predict the complete effect of the continuing economic, financial and political difficulties in Russia, although they have made for a difficult business environment in Russia. The Company is not yet able to predict the effects of the ongoing difficulties on its results for 1999, but the continuing economic difficulties in Russia may have an adverse effect on the Company in current and future reporting periods, and there can be no assurance that such adverse effects will not be material. 5 7 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PLD CAPITAL ASSET (U.S.) INC. CONDENSED BALANCE SHEETS MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998 (THOUSANDS OF U.S. DOLLARS)
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ Assets: Current: Cash and cash equivalents.............................. $ 10 $ 10 Other receivables and prepaids......................... 228 228 Assets held for resale................................. 3,949 3,949 Due from related parties -- installment sales contracts............................................. 4,875 6,408 ------- ------- Total current assets................................. 9,062 10,595 Escrow funds.............................................. 1,872 528 Due from related parties -- installment sales contracts... 3,948 3,806 ------- ------- Total assets......................................... $14,882 $14,929 ======= ======= Liabilities and Shareholder's Equity: Current liabilities: Accounts payable and accrued liabilities............... 1,831 1,977 Due to related parties................................. 4,989 5,035 ------- ------- Total current liabilities............................ 6,820 7,012 Shareholder's equity: Capital stock: Additional paid-in capital................................ 6,641 6,641 Retained earnings......................................... 1,421 1,276 ------- ------- Total shareholder's equity........................... 8,062 7,917 ------- ------- Total liabilities and shareholder's equity........... $14,882 $14,929 ======= =======
See accompanying notes to condensed financial statements. 6 8 PLD CAPITAL ASSET (U.S.) INC. CONDENSED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED) (THOUSANDS OF U.S. DOLLARS)
1999 1998 ---- ---- Revenues: Interest income........................................... $223 $210 Operating expenses: General and administrative................................ -- -- ---- ---- Income before taxes......................................... 223 210 Income taxes................................................ 78 9 ---- ---- Net income.................................................. $145 $201 ==== ====
See accompanying notes to condensed financial statements. 7 9 PLD CAPITAL ASSET (U.S.) INC. CONDENSED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (THOUSANDS OF U.S. DOLLARS)
1999 1998 ------- ----- Cash flows from operating activities: Net income............................................. $ 145 $ 201 Adjustments to reconcile net income to net cash provided by operating activities: Changes in operating assets and liabilities: Change in due from or due to related parties, net.............................................. 1,345 (209) (Decrease)/increase in accounts payable and accrued liabilities.............................. (146) 8 ------- ----- Net cash provided by operating activities....... 1,344 -- Cash flows from investing activities: Escrow............................................ (1,344) -- ------- ----- Net cash used in investing activities........... (1,344) -- ------- ----- Increase/(decrease) in cash and cash equivalents............ -- -- Cash and cash equivalents, beginning of period.............. 10 10 ------- ----- Cash and cash equivalents, end of period.................... $ 10 $ 10 ======= =====
See accompanying notes to condensed financial statements. 8 10 PLD CAPITAL ASSET (U.S.) INC. NOTES TO CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 (1) BASIS OF PRESENTATION The accompanying condensed financial statements are unaudited and have been prepared by PLD Capital Asset (U.S.) Inc. ("PLDCA" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). In the opinion of management, the condensed financial statements include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation. Certain information and footnote disclosures generally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. Results for interim periods are not necessarily indicative of the results for a full year. These condensed financial statements should be read in conjunction with the financial statements and notes thereto for the fiscal year ended December 31, 1998. (2) BUSINESS, OPERATIONS AND FUTURE ACTIVITIES PLDCA was incorporated on March 24, 1998 under the laws of the State of Delaware and is a wholly-owned subsidiary of PLD Telekom Inc. ("PLD" or the "Parent"). The Company was formed as a special purpose subsidiary to enter into installment sales agreements in respect of certain telecommunications equipment required by PLD's operating subsidiaries located in Russia and Kazakhstan. On June 30, 1998, PLDCA assumed the assets, liabilities and business of PLD Asset Leasing Limited ("PLDAL"). PLDCA recorded such assets and liabilities at the historical cost of PLDAL, since the entities were under common control. Amounts presented for the three months ended March 31, 1998 reflect the results of operations and cash flows of PLDAL. PLDAL is a Cypriot company wholly owned by the Parent, which existed to enter into lease agreements with related companies. PLDAL is presently inactive and PLD is in the process of liquidating PLDAL. Ultimate recoverability of the Company's investments is dependent upon each of PLD's subsidiaries and affiliates, with which it has entered into installment sales contracts, achieving and maintaining profitability, which is dependent to a certain extent on a stabilization of the economies of the former Soviet Union, the ability of these companies to maintain their telecommunications licenses and their ability to obtain adequate financing to meet capital commitments. (3) COMMITMENTS AND CONTINGENCIES (a) Guarantees In June 1996, PLD issued senior discount notes (the "Senior Notes") and convertible subordinated notes (the "Convertible Notes") with an aggregate principal amount of $149.5 million (together, the "Notes"). The Company is a guarantor of this debt under the terms of the related indentures. As noted in its annual report on Form 10-K, PLD does not presently have sufficient funds on hand to meet its current debt obligations. PLD's failure to make payment in full of its current debt obligations could result in a cross-default under and acceleration of the Senior Notes and Convertible Notes. In addition, any failure by PLD to make interest payments on the Senior Notes and Convertible Notes could result in a default under and acceleration of those Notes. Any such events could result in a claim being made against the Company under its guarantee, which would have a material adverse effect on the Company and raise substantial doubt about the Company's ability to continue as a going concern. On May 18, 1999, PLD entered into a Merger Agreement with Metromedia International Group, Inc. ("MMG") pursuant to which PLD will become a wholly owned subsidiary of MMG, upon the terms and conditions set forth therein (the "Merger"). In connection with the Merger Agreement and the transactions contemplated thereunder, substantially all of the holders of the Senior Notes and Convertible Notes have agreed, subject to completion of the Merger and the other transactions contemplated by the Merger 9 11 PLD CAPITAL ASSET (U.S.) INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED) Agreement, to defer to the date the Merger is consummated all of the interest payable on the Notes during the period from the execution of the Merger Agreement to the date of consummation of the Merger and to exchange their outstanding Notes for new notes issued by MMG which will not be guaranteed by the Company. While agreements have been reached with substantially all of the holders of the Senior Notes and Convertible Notes and with other parties involving PLD's obligations to such parties, those agreements are conditioned upon the closing of the Merger. If the Merger did not close, PLD would remain obligated to pay interest on the Senior Notes and Convertible Notes and there can be no assurance that the other parties would not demand payment in full of PLD's current debt obligations to them. (b) Purchase Commitments As of March 31, 1999, the Company had entered into purchase commitments with unaffiliated companies relating to telecommunications equipment amounting to $2,051,000. (4) RESTRICTED CASH Pursuant to the terms of PLD's $149.5 million private placement completed on June 12, 1996, $1.9 million was in the Company's escrow account on March 31, 1999. These funds may only be used for certain specified purposes, principally for the purchase of telecommunications equipment and the payment of interest on PLD's Senior Notes. (5) COMPREHENSIVE INCOME For the three months ended March 31, 1999 and 1998, comprehensive income was equal to net income reported on the condensed statement of operations. (6) ACCOUNTING PRONOUNCEMENTS The American Institute of Certified Public Accountants issued Statement of Position No. 98-1 (SOP 98-1) "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and Statement of Position No. 98-5 (SOP 98-5) "Reporting on the Costs of Start-Up Activities" in 1998. SOP 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. The Company was required to adopt both new statements in the first quarter of 1999. The adoption of these statements did not have a material effect on the Company's condensed financial statements for the three months ended March 31, 1999. (7) SUBSEQUENT EVENT Pursuant to an amendment to a supply contract with Siemens, which was originally entered into in August 1997, the Company has restructured the amount outstanding as of June 30, 1999 of $1.1 million, whereby $0.7 million has been deferred for payment during the period June 30, 2000 to December 31, 2003. 10 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document contains certain forward-looking statements that are subject to risks and uncertainties. Forward-looking statements include certain information relating to political, social and economic conditions in the countries of the former Soviet Union and the Commonwealth of Independent States, the operations of the Company and its affiliates, the impact of Year 2000 issues on the Company's operations and interpretations and actions of certain regulatory authorities, including in Russia, as well as information contained elsewhere in this report where statements are preceded by, followed by, or include the words "believes," "expects," "anticipates," and similar expressions. For such statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including without limitation, those discussed elsewhere in the Report. Furthermore, this document constitutes a Year 2000 Readiness Statement, and the statements herein are subject to the Year 2000 Information and Readiness Disclosure Act, and the Company hereby claims the protection of such Act for this document and all information contained herein. BASIS OF PRESENTATION EBITDA is used as a measure of operating performance and is defined as earnings (or loss) from continuing operations before income taxes and minority interest plus net interest (interest expense less interest and other income) plus depreciation and amortization. It is presented as supplemental disclosure because it assists in understanding the Company's operating results. EBITDA, however, may not be comparable to similarly titled measures of other companies and should not be considered in isolation or as a substitute for net income, cash flow provided by operating activities or other income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS ENDED MARCH 31, 1998 Overview. The definition of EBITDA is given in the previous section. It is commonly used as an indicator of the ability of a business to generate cash flows from its operating activities. Management therefore considers it to be a relevant and useful measure for investors. The Company reported EBITDA of $0.22 million and net income of $0.15 million on revenues of $0.22 million for the three months ended March 31, 1999, compared to EBITDA of $0.21 million and net income of $0.20 million on revenues of $0.21 million reported in the first quarter of 1998. In the quarter ended March 31, 1999, cash generated from operations totaled $1.34 million and cash used in investing activities totaled $1.34 million, compared to the first quarter of 1998 when no funds were generated from operations or used in investing activities. Revenues. Revenues increased marginally from $0.21 million in the first quarter of 1998 to $0.22 million in the first quarter of 1999. General and administrative expenses. No general and administrative expenses were incurred in the first quarters of 1999 and 1998. Income taxes. The income tax charge for the three months ended March 31, 1999 was $0.08 million compared with $0.01 million in 1998. The provision for income taxes in 1999 represents U.S. federal, state and local taxes. In the quarter ended March 31, 1998 the provision for income taxes represented Cypriot income taxes payable by PLDAL. LIQUIDITY AND CAPITAL RESOURCES For the three months ended March 31, 1999, a total of $1.34 million in cash was generated from operations (1998 - nil) and $1.34 million was used in net investing activities (1998 - nil). 11 13 Cash generated from operations related primarily to payments received from PeterStar pursuant to five outstanding installment sales contracts. In turn, these receipts were deposited into the Company's escrow account at March 31, 1999 which increased to $1.87 million from $0.53 million at the end of 1998. As of March 31, 1999, the Company reported working capital of $2.24 million compared to working capital of $3.58 million at the end of 1998. At March 31, 1999, the Company had total assets of $14.88 million ($14.93 million as of December 31, 1998) consisting of current assets of $9.06 million, escrow funds of $1.87 million and long-term installment sales contracts due from related parties of $3.95 million. Shareholder's equity of $8.06 million as of March 31, 1999 compared with $7.92 million as of December 31, 1998, and consisted of $6.64 million in common stock and additional paid-in capital plus retained earnings of $1.42 million. The Company has financed all of its equipment purchases by drawing the funds required from the PLD escrow account established pursuant to the Indentures. Inasmuch as it is not permitted to obtain funds from elsewhere, its business as a provider of equipment to the PLD operating subsidiaries is entirely governed by the availability and amount of funds in the PLD escrow account and the Company's escrow account which was also established pursuant to the Indentures. The Company does not commit to any equipment purchase unless there are sufficient funds in the escrow accounts to pay for such purchase (including costs of delivery to the PLD operating subsidiary which would use the equipment, and customs duties, VAT and other costs of importation). In the event that there were insufficient funds in the escrow accounts, the Company would not make the purchase, and the equipment would have to be financed by PLD or the applicable operating subsidiary by other means, or the purchase would have to be postponed. As of December 31, 1998 there was approximately $14.4 million in the PLD escrow account and a further $0.5 million in the Company's escrow account. The escrow accounts are replenished from time to time by payments made by the PLD operating subsidiaries under leases and installment sales contracts entered into with the Company, as well as interest earned on the funds in escrow. They may also be replenished by the proceeds of certain asset sales as well as returns on certain limited investments which may be made using escrow funds. The escrow funds are available, if required, to provide funds to PLD to pay interest on the Senior Notes. The Company's operating costs are minimal and are funded as required by advances from PLD. The Company is not permitted under the terms of Indentures to incur, and has not in fact incurred, any other indebtedness or obligations other than payments to equipment manufacturers which are funded out of the escrow account. Accordingly, the Company's operations are essentially self-sufficient. As it has disclosed in its Annual Report on Form 10-K, PLD has significant debt service requirements, including the payment of interest on the Senior Notes and the Convertible Notes and amounts owing to the Travelers Parties, and PLD does not presently have sufficient funds on hand to meet its current debt obligations. The Company is a guarantor of the Senior Notes and the Convertible Notes under the terms of the related indentures. While agreements have been reached with substantially all of the holders of the Senior Notes and the Convertible Notes and with the Travelers Parties on a restructuring of PLD's indebtedness to such parties, those agreements are conditioned upon the closing of the Merger. If the Merger did not close, PLD would remain obligated to pay interest on the Senior Notes and Convertible Notes and there can be no assurance that the Travelers Parties would not demand payment in full of PLD's obligations to them. PLD's failure to make payment in full to the Travelers Parties could result in a cross-default under and acceleration of the Senior Notes and Convertible Notes. In addition, any failure by PLD to make interest payments on the Senior Notes and Convertible Notes could result in a default under and acceleration of those Notes. Any such events could result in a claim being made against the Company under its guarantee, which would have a material adverse effect on the Company and raise substantial doubt about the Company's ability to continue as a going concern. In connection with the Merger Agreement with MMG and the transactions contemplated thereunder, the holders of the Senior and Convertible Notes have agreed, subject to completion of the merger and other 12 14 transactions contemplated by the Merger Agreement, to exchange their outstanding notes for new notes issued by MMG which will not be guaranteed by the Company. EFFECTS OF NEWLY-ISSUED ACCOUNTING PRONOUNCEMENTS In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", was issued. SFAS 133 established accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS 133 cannot be applied retroactively to financial statements of prior periods. At the current time the Company has not evaluated the impact SFAS 133 will have, if any. YEAR 2000 ISSUE The Year 2000 issue exists because many computer systems and applications, particularly older systems and applications, use a two-digit, rather than a four-digit, date field to designate a particular year. As a result of the century change, date-sensitive systems may recognize dates in the twenty-first century (i.e., after 2000) as dates in the twentieth century (i.e., the corresponding year commencing with the prefix 19--). Equally, such systems may not recognize dates in the twenty-first century at all. All of this could lead to system failures or miscalculations which could lead to disruption of operations such as data being lost, an inability to process transactions, incorrect data being generated and critical deadlines being overlooked. The impact of these disruptions could be significant. PLD has conducted, and has caused each of its operating subsidiaries to conduct a survey of the equipment and software used by them. The PLD operating businesses supply telecommunications services. To the very limited extent that they maintain actual inventory for sale (e.g., cellular telephone equipment sold to subscribers for its cellular telephony services), they do not manufacture such inventory themselves but resell goods supplied by recognized manufacturers of such goods. PLD's survey has involved testing of equipment as well as contacting the manufacturers of equipment and producers of software (or review of materials published by such parties, including websites) to assess such parties' Year 2000 readiness. Such survey has indicated that, except in a few instances, the equipment and software which the operating subsidiaries use are Year 2000 compliant. PLD is taking steps to upgrade or replace those items which are not compliant. In many cases the items required to be upgraded or replaced were due to be upgraded or replaced in any event, so that PLD's exposure has been the acceleration of already planned expenditures, rather than new or unanticipated expenditures. PLD expects that essentially all of its upgrading and replacement work, and any remaining testing required, will be complete by the end of the third quarter of 1999. As of June 30, 1999 PLD has expended approximately $1.9 million for remediation efforts and expects that its total remediation costs, including scheduled upgrades and replacements of approximately $3.1 million, will be approximately $4.0 million. Starting in January 1998, all operating businesses were required to use their best efforts to obtain specific warranties of Year 2000 compliance from parties with which they contract for products or services thereafter. While almost all new contracts for products or services entered into since that date have contained some form of warranty, these have generally been limited to recovering of direct losses, and not indirect or consequential losses, such as loss of revenues or profits. In consequence, the actual efficacy of such warranties may be somewhat limited. Additionally, all operating businesses have been required to review the terms under which they have heretofore supplied products and/or services to third parties. No case has been identified in which any operating business has specifically guaranteed Year 2000 compliance, and PLD has instituted a policy regarding the giving of such guarantees in the future in order to control and limit possible exposure thereunder. Further, since none of 13 15 the operating businesses manufacture equipment or produce proprietary software for customers other than in exceptional cases, virtually all such transactions involve the re-sale or assignment of products and services supplied by others. Accordingly, PLD believes that, to the extent that such products and services are either warranted or shown to be Year 2000 compliant, its own exposure is commensurately reduced. While there can be no assurances that equipment failures will not occur, the effect of such failures may be ameliorated by the fact that such equipment is usually part of a network of facilities and equipment maintained by PLD's operating businesses. This means that a failure in an individual component will not necessarily cause a substantial disruption to the network as a whole, because no individual item is critical to the operation of the network as a whole, and the network also provides opportunities to by-pass the failure. The foregoing indicates that, to the extent that its business depends upon equipment, software, facilities and networks under its control, PLD believes that, by the year 2000, it will have taken all steps reasonably required to ensure that those items are Year 2000 compliant, and that it has reasonable contingency arrangements to deal with failures. PLD's operating businesses' principal Year 2000 risks arise from the fact that they are dependent for the completion of their calls upon a variety of other traffic carriers who provide interconnection and termination services. Since in many cases there are a variety of routes over which traffic can be carried, it is simply not possible for the operating businesses to verify that each entity which could be involved in providing telecommunications services to them will be Year 2000 compliant. To a large extent, the operating businesses are reliant in these circumstances on the actions of the other telecommunications operators and service providers to ensure that their counterparts are Year 2000 compliant. While the operating businesses believe that the parties providing these services which are based in the United States and other Western countries are expected to be substantially Year 2000 compliant, the Year 2000 compliance and readiness of the Russian and other C.I.S. parties with which the operating businesses interact appears to be substantially behind that of Western parties. PLD has been unable to determine with any degree of certainty the extent to which its interconnect partners in the C.I.S. are non-compliant because those parties have generally been reluctant to share this information. Nevertheless the Company believes, based on such reluctance and anecdotal and other evidence, that many of those partners, particularly in those in the less developed regions of the Russian Federation or the C.I.S., are substantially non-compliant. Furthermore, the likelihood that those parties will be able to become Year 2000 compliant seems problematical, given the limited amount of time left for this, the severe funding constraints faced by those parties, principally as a result of poor economic conditions in their home countries, and the possible lack of governmental pressure on those parties. Accordingly, there is a significant risk that the operating businesses may experience disruptions in their operations as a result of their C.I.S. interconnect partners not being able to complete calls or pass traffic to them. While the operating businesses are unable to predict the extent or duration of such disruptions, the possibility exists that they could be extensive, and also take considerable time, perhaps even months, to correct. An additional risk is the likelihood that the billing systems of those interconnect partners may also be disrupted, resulting in those partners being unable to collect from their customers or to make timely settlements with the operating businesses. Accordingly, the operating businesses believe that there is a considerable risk that they will experience disruptions in providing telecommunications services to and from the countries of the C.I.S. which they serve, and that those disruptions may be substantial. Given their inability to obtain an accurate assessment of the extent to which their C.I.S. partners may be non-compliant, it is impossible for the Company to predict either the extent or the magnitude of those disruptions. Nevertheless, they have the potential to adversely impact the operations of its operating subsidiaries, and such adverse impact may be material. PLD has investigated the possibility of obtaining insurance against liability arising out of claims that products or services supplied are not Year 2000 compliant, but has determined that such insurance is not obtainable upon terms which are sufficiently comprehensive and/or is only obtainable upon terms which are uneconomical given the level of perceived risk, and accordingly has elected not to pursue such insurance. 14 16 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 15 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PLD CAPITAL ASSET (U.S.) INC. Date: August 30, 1999 By: /s/ CLAYTON A. WAITE -------------------------------------- Clayton A. Waite Director and Principal Accounting Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PLD CAPITAL ASSET (U.S.) INC.'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q AND THE FINANCIAL STATEMENTS FOR PLD CAPITAL ASSET (U.S.) INC. AT AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 CONTAINED THEREIN. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 JAN-01-1999 MAR-31-1999 1 10 0 228 0 0 9,062 0 0 14,882 6,820 0 0 0 0 8,208 14,882 0 223 0 0 0 0 0 223 78 145 0 0 0 145 145 145
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