SSA.L Regulatory News (SSA)

5 Oct 2006 15:00

Sistema (LSE:SSA), the largest private sector consumer servicescompany in Russia and the CIS, today announced its unauditedconsolidated US GAAP financial results for the six months ended June30, 2006. £ HIGHLIGHTS £ -- Consolidated revenues up 37% year on year to US$ 4.6 billion £ -- OIBDA1 up 16% year on year to US$ 1.7 billion £ -- Operating income up 10% year on year to US$ 1.04 billion £ -- Net income up 36% year on year to US$ 310.1 million £ -- Total consolidated assets up 49% year on year to US$ 17.3 billion £ -- Earnings per share up 31% year on year to US$ 0.64 £ Alexander Goncharuk, President and Chief Executive Officer ofSistema, commented: "The company has demonstrated impressive resultsin the first half of 2006, and we are happy to see all of our targetstrategic goals for the period being met. This relates both to thefinancial results presented today, and to the key operationalperformance indicators". £ FINANCIAL SUMMARY \* T (US$ millions) 1H 2006 1H 2005 Year-on-year FY 2005 GrowthRevenues 4,598.0 3,360.1 37% 7,593.5Operating income 1,038.6 941.3 1,957.4Margin 23% 28% 10% 26%Net Income 310.1 227.7 534.4Margin 7% 7% 36% 7%OIBDA 1,653.1 1,421.9 2,982.0Margin 36% 42% 16% 39%\* T £ OPERATING REVIEW £ Sistema's consolidated revenues increased by 37% year on year,which reflected a solid performance by the Group's Telecommunicationsbusinesses and the rapid development of the Group'snon-telecommunications operations. The non-telecommunicationsbusinesses accounted for 28% of Group consolidated revenues for thefirst half of the year, compared to 21% for the same period of 2005.The organic year on year and like for like growth was 29% and amountedto US$ 4,252.9 million in the first half of 2006, excluding businessesacquired or divested since the end of the first half of 2005. £ Group OIBDA increased by 16% year on year for the first six monthsended June 30, 2006 with the lower OIBDA margin impacted by relativemargin pressures in the wireless telecommunications business. Thenon-telecom segments showed lower margins compared to theTelecommunications segment due to their comparatively early stages ofdevelopment. £ Consolidated depreciation and amortization expense was up by 28%year on year following the increase in depreciation in the Group'stelecommunication segment. Selling,General and Administrative expensesrose by 61%, from US$ 574.4 million to US$ 924.9 million in the firsthalf of 2006, as a result of the strong growth in the existing andnewly acquired businesses. US$ 94 million, included in S,G&A expense,reflects the fair value of non-cash compensation to employees. £ Group operating income was up 10% year on year and included thenet gain of US$ 121.6 million on the disposal of interest in certainsubsidiaries, including 5% of SITRONICS stock. £ The effective tax rate increased from 30.9% to 37.2% year on yearas a result of foreign exchange gains on non-ruble denominatedlong-term debt, which are taxable under Russian statutory law. £ The marginal decrease in minority interest reflects furtherconsolidation of minority shares in the telecommunication segment, aswell as the acquisition of an additional 2.3% of the outstandingshares of MTS in December 2005, offset by the decline of the Group'sownership in Comstar UTS to 59% following its IPO. £ Net income for the first half of the year was up 36% year on yearto US$ 310.1 million, from US$ 227.7 million. £ The weighted average number of shares outstanding increased yearon year from 464,944,750 in 2005 to 481,342,813 in 2006, and the Groupreported a 31% year on year increase in basic and diluted earnings pershare from US$ 0.49 to US$ 0.64. £ Telecommunications(2) \* T(US$ millions) 1H 2006 1H 2005----------------------------------------------------------------------Revenues 3,297.4 2,680.0OIBDA 1,551.1 1,383.0Operating Income 954.0 920.5Net Income 570.9 620.8\* T £ The Telecommunications segment reported 23% year on year revenuegrowth and accounted for 72% of Group consolidated revenues for thefirst half of 2006, compared to 79% for the first half of 2005. Thegrowth was primarily organic with neither MTS or Comstar UTS havingmade any scale acquisitions since the end of the first half of 2005.MTS continued to be the main contributor and accounted for 78% of thesegment's year on year growth. £ MTS added 5.9 million subscribers during the first six months of2006, of which the majority were in the Russian and Ukrainian markets,and reported 21% year on year revenue growth for the period from US$2.3 billion to US$ 2.8 billion. MTS results for the second quarter of2006 showed an increase in ARPU to US$ 7.5 from US$ 6.6 in the firstquarter of 2006. Comstar UTS generated 28% year on year revenue growthfrom US$ 419.4 million to US$ 536.3 million, following continuedincreases in traditional fixed-line regulated revenues, as well asincreasing demand for the ADSL and pay-TV offerings.3. These broadbanddata and video services accounted for 18% of Comstar UTS's totalalternative fixed-line revenues for the period, compared to only 11% ayear ago. £ Segment OIBDA was up 12% year on year, with the lower year on yearOIBDA margin of 47% (52%) resulting from the decrease in margin in thewireless telecommunications business. MTS's OIBDA for the periodincreased by 10% year on year from US$ 1.2 billion to US$ 1.3 billion.Comstar UTS reported a 26% year on year increase in OIBDA from US$173.5 million to US$ 218.7 million. £ The year on year fall in segment net income was due to the lowercontribution from MTS of US$ 479.1 million (US$ 536.3 million), whichwas impacted by increasing service costs in the Company and, as aresult, a declining net margin. Comstar UTS meanwhile reported almostdoubling net income year on year, from US$ 49.6 million to US$ 97.4million. £ Technology \* T(US$ millions) 1H 2006 1H 2005----------------------------------------------------------------------Revenues 696.6 426.5OIBDA 80.6 115.4Operating Income 62.4 109.9Net Income 33.7 64.6\* T £ The Technology segment generated 63% year on year revenue growthfor the period and accounted for 12% of Group revenues, compared with8% for the same period of 2005. The growth was primarily driven by theTelecom Solutions business, which accounted for 51%, or US$ 352.2million (US$ 166.1 million), of segment revenues and included thenewly acquired Intracom Telecom. Improved profitability levels in thesegment were distorted in the second quarter of 2006 as a result ofthe consolidation of Intracom Telecom. Intracom Telecom was acquiredon the last day of the reporting period, with the resultingconsolidation effect that the business' revenues and expenses wereconsolidated for the entire first six months of the year, whilst theearnings for the period prior to the acquisition of the controllinginterest are reported in minority interests and are not thereforeincluded in the operating income for the period. Thus, IntracomTelecom accounted for US$ 217.0 million of the increase in Technologysegment revenues and for US$ 21.1 of the increase in its OIBDA. £ Real Estate \* T(US$ millions) 1H 2006 1H 2005----------------------------------------------------------------------Revenues 106.5 33.7OIBDA 44.4 3.9Operating Income 42.7 3.2Net Income 9.3 3.5\* T £ Sistema Hals revenues have tripled year on year in the first halfof 2006, which was primarily due to the sale of the Pokrovka 40, anoffice and hotel complex, for approximately US$ 75.0 million. OIBDAwas up more than 10 times, from US$ 3.9 to US$ 44.4 million primarilydue to the sale of the premises described above. £ The June 30, 2006, report from Cushman&WakefieldStyles&Riabokobylko valued 88 properties/projects in the portfolio,with 100% share of freehold and leasehold interest held by SistemaHals in each property, at US$ 1 865 403 000, and attributable value(excluding minority interest) at US$ 1 509 534 000. £ Insurance \* T(US$ millions) 1H 2006 1H 2005----------------------------------------------------------------------Revenues 280.8 197.9Gross Premiums Written 411.0 317.9Net Premiums Earned 255.8 183.2Net Income 17.3 7.9 Key RatiosLoss ratio (53.5) (57.1)Expense Ratio (38.9) (36.8)Combined Ratio (92.3) (93.9)\* T £ Revenues for the Rosno insurance business increased by 42% year onyear in the first half of 2006 and reflected the expansion of theclient base and the overall positive development in the Russianinsurance market. Gross premiums written increased by 29% year on yearwith voluntary medical insurance premiums up 72%, automotive insurancepremiums up 74%, and non-life insurance premiums up 59%. £ Allianz-Rosno Asset Management increased its assets undermanagement from US$ 441.4 million to US$ 467.5 year on year, whichincluded particularly strong growth in third party funds. £ The growth in premiums and investment returns resulted in a morethan doubling of net income year on year. £ Banking \* T(US$ millions) 1H 2006 1H 2005----------------------------------------------------------------------Revenues 87.8 45.8Operating Income 8.6 3.1Net Income 3.7 1.2\* T £ The Moscow Bank for Reconstruction and Development (MBRD) reportedan almost doubling of revenues year on year, following a doubling ofthe bank's loan portfolio and increasing interest income from theretail banking operations. The acquisition of Sistema's leasingcompanies in March 2006 also contributed US$ 5.1 million to the yearon year growth. The bank increased its interest income from non-groupclients following the expansion of the retail business to 12 branchesand 41 mini-offices. £ Both the operating and net income margins increased year on year. £ Retail \* T(US$ millions) 1H 2006 1H 2005----------------------------------------------------------------------Revenues 117.9 45.2OIBDA (7.4) 4.6Operating Income (8.3) 3.8Net Income (9.8) 2.3\* T £ Detsky Mir, the specialist children's goods retailer, more thandoubled its revenues year on year following the opening of seven newretail stores during the first half of the year and the opening of 28new outlets since the end of the first half of 2005. These 28 storescontributed US$ 21.4 million in new sales, or 18% of total revenues,while the wholesale company C-Toys accounted for US$ 26.9 million or23% of the Company's total revenue for the period. £ The Company's profitability was adversely affected during theperiod of rapid expansion: Detsky Mir now has 48 stores in 19 Russiancities, compared to only 20 a year ago. This additional scale willenable the company to benefit from increased purchasing and salessynergies and will allow it to secure the footprint in the primesegment of the retail market. £ Media \* T(US$ millions) 1H 2006 1H 2005----------------------------------------------------------------------Revenues 45.6 93.5OIBDA 9.9 3.9Operating Income 2.8 0.5Net Loss (0.2) (1.5)\* T £ Sistema Mass Media's results reflected the transfer of theMTU-Intel and Golden Line businesses to the Telecommunicationssegment. The two businesses contributed US$ 51.3 million of revenuesin the first half of 2005. US$ 26.1 million of the division's revenuesfor the first half of 2006 were generated by companies acquired sincethe beginning of 2005, whilst US$ 68.6 million of the first half 2005revenues were accounted for by companies that were subsequently soldor transferred to other Group reporting segments. £ The division's operating profitability however improved by US$ 2.3million year on year primarily due to the consolidation of the resultsof United Cable Network acquired in February 2006 which contributedUS$ 3.5 million to the Segment's operating income. £ FINANCIAL HIGHLIGHTS £ Sistema generated a 16% year on year increase in cash flow fromoperations from US$ 584.8 million to US$ 677.8 million for the firsthalf of the year. The increase was primarily related to organicbusiness growth and increased profitability. £ Net cash used in investing activities was US$ 2.0 billion in thefirst half of 2006 and reflected marginally increased capitalexpenditure of US$ 999.7 billion, compared to US$ 981.5 million in theprior year, as well as the purchase of businesses for a total combinedconsideration of US$ 394.9 million. £ Cash flow from financing activities amounted to US$ 2.0 billion inthe first half of 2006 and reflected US$ 977 million of net proceedsfrom the Comstar UTS initial public offering, which took place inFebruary 2006. £ The Group's net debt amounted to US$ 4.5 billion at the end of thefirst half of 2006, compared to US$ 2.5 billion as at June 30, 2005and US$ 3.9 billion as at December 31, 2005. The Group's increase inborrowings included US$ 285.0 million of debt consolidated as a resultof the acquisition of Intracom Telecom, US$ 160.0 million of proceedsfrom the MBRD bond offering in March and June 2006, and the US$ 200.0million raised by the Sitronics Finance bond offering in February2006. £ ACQUISITIONS AND DIVESTITURES £ In Technology segment, Sitronics acquired 51% of voting stake ofIntracom Telecom, a provider of telecommunications solutions andservices in the Eastern Europe and Middle East. The total cashconsideration for the deal is US$150.6 million, including US$ 43.9million payable upon due diligence completion. Additionally, Sitronicsentered into a put option agreement to acquire the remaining 49.0% ofcommon shares of Intracom Telecom. £ Comstar UTS announced an unconditional purchase offer for MGTSordinary shares in December 2005. Comstar UTS acquired 3,363,332 MGTSshares during the first two months of 2006, equivalent to 4.21% of theoutstanding ordinary shares, for a total cash consideration of RUR1,600 million (equivalent to US$ 59.1 million as at June 30, 2006).Comstar UTS purchased an additional 3.82% of MGTS common stock fromminority shareholders for US$ 71.5 million in March 2006. As a result,Comstar UTS's voting and economic interests in MGTS have increased to53.0%. £ Comstar UTS also purchased 100% of Astelit, an alternativefixed-line telecommunications company, for US$ 7.8 million in June2006. Astelit holds licences to provide integrated fixed-line servicesacross 51 Russian regions to large corporate customers, and has over200 km of its own fiber optic infrastructure in city centres. Astelithas subsequently been rebranded as M-Telecom. £ ROSNO acquired a 51% stake in Medexpress, which is a provider ofvoluntary medical insurance in the North-western region of the RussianFederation, for US$ 6.6 million in January 2006. The Group plans tofurther develop Medexpress' operations and use its distributionnetwork as an additional sales channel for ROSNO products. £ Sistema Mass Media and ECU GEST acquired 90% and 10% respectivelyof JIR Broadcast and JIR Inc., which are the owners of 100% of UnitedCable Networks ("UCN"), for a total cash consideration of US$ 145.9million in February 2006. UCN is a pay-TV and broadband serviceprovider with 724,000 subscribers in 17 metropolitan areas across theRussian Federation. Sistema Mass Media sold its ownership in GazetaMetro in June 2006 for US$ 1.9 million in cash. Sistema Mass Mediaacquired GK Sendi, which is an internet provider in Nizhny Novgorod,and Informservis, which is a cable television operator in the sameregion, for US$ 6.3 million in January 2006. The Group intends to usethese acquisitions to further develop its digital TV and broadbandnetworks in the regions. £ Detsky Mir completed the acquisition of 99% of Tireks Development,which owns a 30% stake in Group subsidiary Dom Igrushki, for a cashconsideration of US$ 2.4 million in March 2006. £ Intourist purchased a 20% equity interest in Cosmos Hotel forapproximately US$ 20.8 million in March 2006, and now controls theCompany with a 63.4% shareholding. £ Concern RTI acquired a 50% plus one share interest inUralEleketro, and a 100% stake in UralElektro-K, for a combined cashconsideration of US$ 5.4 million in March 2006. Both companiesmanufacture electronic equipment. £ RECENT EVENTS FOLLOWING THE END OF THE REPORTING PERIOD £ In October 2006, Sistema acquired a 66% controlling stake throughdirected new share issue in WaveCrest Group Enterprises Ltd.("WaveCrest"). WaveCrest is a global communications service provideroffering wholesale (operator) and retail (residential) telephonyservices, using conventional circuit-switched and Internet protocol(IP) telephony. £ MTS acquired a 75% controlling stake in Dagtelecom from GlaxenCorp. for $14.7 million in July 2006. Dagtelecom is the GSM-900 mobileservices provider in the Republic of Dagestan, in the south of Russia,with a population of 2.6 million, and has 1.7 million subscribers. £ Intourist Overseas Limited purchased a 51% stake in Tatilya TurizmSeyahat Insaat, a Turkish travel operator, for US$ 0.3 million in July2006. £ The Group acquired a 81.25% share in ZAO Sahles, the owner ofcontrolling stakes in the entities that together comprise the PermMotors Group for US$ 122 million in August 2006. Perm Motors is one ofRussia's largest manufacturers of jet aircraft engines and industrialturbines. £ In July 2006, the Group disposed of Glorely, a subsidiary holding35% interest in Sistema-Invest, the owner of the Group's energycompanies in the Republic of Bashkortostan for a total cashconsideration of $201.0 million. £ In July-September 2006, Sistema Mass Media acquired several cabletelevision operators in various Russian regions, namely 74% share inSmolensk-based "Teleradiotekhnika" for $1.2 million, 100% share inVoronezh-based "Elecom-service" for $1.0 million, 100% share in"Telesat" located in Nizhny Tagil for $0.4 million, 74% share in agroup of operators based in Ivanovo for $7.1 million, 55% share in"Electronica" in Balakovo for $0.8 million and 90% share in "Sallak"based in Krasnodar for $0.2 million. These acquisitions contibuted tothe Group's expansion in the regional cable television market. £ In August 2006, the Group sold for $20.0 million its 8% interestin MTK ("KOMKOR") together with additional 3% interest acquired from arelated party after June 30, 2006. £ OTHER INFORMATION £ Conference call information £ The company will host a conference call today at 18.00 (Moscowlocal time), 15.00 (London local time), 10.00 (New York local time).To participate in the conference call, please dial the followingnumbers: \* TUK: +44 20 7138 0837 US: +1 718 354 1172\* T £ A replay facility will also be made available and may be accessedby dialing the following numbers and entering the replay access code -5837451# \* TUK: +44 20 7806 1970 US: +1 718 354 1112\* T £ For further information, please visit www.sistema.com. £ Sistema is the largest private sector consumer services company inRussia and the CIS, with over 50 million customers. Sistema developsand manages market-leading businesses in selected service-basedindustries, including telecommunications, technology, insurance,banking, real estate, retail and media. Founded in 1993, the companyreported revenues of US$ 4.6 billion for the first half of 2006, andtotal assets of US$ 17.3 billion as at June 30, 2006. Sistema's sharesare listed under the symbol "SSA" on the London Stock Exchange, underthe symbol "AFKS" on the Russian Trading System (RTS), and under thesymbol "SIST" on the Moscow Stock Exchange (MSE). £ Some of the information in this press release may containprojections or other forward-looking statements regarding futureevents or the future financial performance of Sistema. You canidentify forward looking statements by terms such as "expect,""believe," "anticipate," "estimate," "intend," "will," "could," "may"or "might" the negative of such terms or other similar expressions. Wewish to caution you that these statements are only predictions andthat actual events or results may differ materially. We do not intendto update these statements to reflect events and circumstancesoccurring after the date hereof or to reflect the occurrence ofunanticipated events. Many factors could cause the actual results todiffer materially from those contained in our projections orforward-looking statements, including, among others, general economicconditions, our competitive environment, risks associated withoperating in Russia, rapid technological and market change in ourindustries, as well as many other risks specifically related toSistema and its operations. £ SISTEMA JSFC AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME(AMOUNTS IN THOUSANDS OF U.S. DOLLARS) \* T June 30, June 30, 2006 2005 ------------ ------------ Sales $ 4,262,297 $ 3,144,208Revenues from financial services 335,662 215,842 ------------ ------------TOTAL REVENUES 4,597,959 3,360,050 ------------ ------------ Cost of sales, exclusive of depreciation and amortization shown separately below (1,865,658) (1,217,934)Financial services related costs, exclusive of depreciation and amortization shown separately below (232,387) (166,238) ------------ ------------TOTAL COST OF SALES (2,098,045) (1,384,172) ------------ ------------ Selling, general and administrative expenses (924,914) (574,392)Depreciation and amortization (614,479) (480,590)Other operating expenses, net (87,375) (13,531)Equity in net income of investees 43,838 34,356Net gain/(loss) on disposal of interests in subsidiaries and affiliates 121,600 (452) ------------ ------------OPERATING INCOME 1,038,584 941,269 ------------ ------------ Interest income 30,381 35,712Interest expense, net of amounts capitalized (165,511) (122,491)Currency exchange and translation loss (788) (12,157) ------------ ------------Income before income tax, equity in net income of energy companies in the Republic of Bashkortostan and minority interests 902,666 842,333 ------------ ------------ Income tax expense (335,954) (260,626)Equity in net income of energy companies in the Republic of Bashkortostan, net of income tax effect of $27,618 87,461 - ------------ ------------Income before minority interests 654,173 581,707 ------------ ------------ Minority interests (344,095) (354,052) ------------ ------------NET INCOME $ 310,078 $ 227,655 ============ ============ Other comprehensive income/(loss):Unrealized gain on securities available for sale, net of income tax effect of $163 and nil, respectively 585 307Change in fair value of interest rate swaps, net of income taxeffect of $360 and $245, respectively 1,520 (776)Translation adjustment, net of minority interest of $36,157 and $4,530, respectively, and income tax effect of nil 50,576 (11,798) ------------ ------------Comprehensive income $ 362,759 $ 215,388 ------------ ------------ Weighted average number of common shares outstanding 481,342,813 464,944,750 Earnings per share, basic and diluted $ 0.64 $ 0.49\* T £ SISTEMA JSFC AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS) \* T June 30, December 2006 31, 2005 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,214,368 $ 482,647 Short-term investments 952,738 594,196 Loans to customers and banks, net 1,015,999 451,395 Insurance-related receivables 220,606 149,589 Accounts receivable, net 996,618 442,643 Other receivables and prepaid expenses, net 713,938 578,152 VAT receivable 398,830 495,191 Inventories 688,610 482,909 Deferred tax assets, current portion 162,267 123,681 ----------- ----------- Total current assets 6,363,974 3,800,403 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, NET 6,789,681 5,876,124Advance payments for non-current assets 319,885 233,761Investments in affiliates 1,047,057 914,203Other investments 150,000 150,000Goodwill 530,032 330,932Licenses, net 518,651 615,042Other intangible assets, net 954,352 886,272Loans to customers and banks, net of current portion 221,974 117,107Debt issuance costs, net 83,547 82,662Deferred tax assets, net of current portion 73,019 33,472Other non-current assets 240,559 50,872 ----------- -----------TOTAL ASSETS $17,292,731 $13,090,850 =========== ===========\* T £ SISTEMA JSFC AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(AMOUNTS IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AMOUNTS) \* T June 30, December 2006 31, 2005 ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 828,412 $ 594,816 Bank deposits and notes issued 573,425 496,829 Insurance-related liabilities 606,079 412,328 Taxes payable 186,628 125,474 Deferred tax liabilities, current portion 48,475 28,149 Subscriber prepayments, current portion 497,937 472,673 Accrued expenses and other current liabilities 1,143,844 520,671 Short-term notes payable 314,925 637,769 Current portion of long-term debt 536,091 520,310 ----------- ----------- Total current liabilities 4,735,816 3,809,019 ----------- ----------- LONG-TERM LIABILITIES: Capital lease obligations 8,384 6,682 Long-term debt 4,837,823 3,202,629 Subscriber prepayments, net of current portion 161,424 163,897 Deferred tax liabilities 298,798 237,916 Postretirement benefit obligation 13,625 16,217 ----------- ----------- Total long-term liabilities 5,320,054 3,627,341 ----------- ----------- Deferred revenue 133,691 125,700 ----------- -----------TOTAL LIABILITIES 10,189,561 7,562,060 ----------- ----------- Minority interests in equity of subsidiaries 3,160,813 2,295,147 Commitments and contingencies - - SHAREHOLDERS' EQUITY: Share capital (482,500,000 and 9,650,000 shares issued as of June 30, 2006 and December 31, 2005, respectively, with par value of 1.8 ruble and 90 rubles, respectively) 30,057 30,057 Treasury stock (2,228,200 shares with par value of 1.8 ruble as of June 30, 2006) (50,892) - Additional paid-in capital 1,886,568 1,479,743 Retained earnings 1,996,376 1,696,276 Accumulated other comprehensive income 80,248 27,567 ----------- -----------TOTAL SHAREHOLDERS' EQUITY 3,942,357 3,233,643 ----------- -----------TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $17,292,731 $13,090,850 =========== ===========\* T £ SISTEMA JSFC AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(AMOUNTS IN THOUSANDS OF U.S. DOLLARS) \* T June 30, June 30, 2006 2005 ----------- ----------- OPERATING ACTIVITIES: Net income $ 310,078 $ 227,655 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 614,479 480,590 Loss on disposal of property, plant and equipment 1,516 15 Gain on disposal of interests in subsidiaries (121,600) - Non-cash compensation to employees 90,778 - Minority interests 344,095 354,052 Equity in net income of investees (131,299) (34,356) Deferred income tax benefit (65,238) (41,873) Provision for doubtful accounts receivable 59,923 30,704 Allowance for loan losses 14,669 (444) Inventory obsolescence charge 6,361 1,752 Changes in operating assets and liabilities, net of effects from purchase of businesses: Trading securities (87,350) (353,315) Loans to banks (356,816) (89,839) Insurance-related receivables (62,295) (54,228) Accounts receivable (253,447) (106,221) VAT receivable 97,555 (37,490) Other receivables and prepaid expenses (111,106) (146,327) Inventories (69,847) (37,483) Accounts payable 110,640 132,664 Insurance-related liabilities 180,405 167,152 Subscriber prepayments 22,791 37,916 Taxes payable 50,472 53,310 Accrued expenses and other liabilities 35,638 (269) Postretirement benefit obligation (2,592) 801 ----------- ----------- Net cash provided by operations 677,810 584,766 ----------- ----------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (878,984) (836,849) Purchases of intangible assets (120,667) (136,276) Purchases of businesses, net of cash acquired (394,880) (55,405) Purchases of long-term investments (1,679) (64,304) Purchases of other non-current assets (60,878) (3,804) Purchases of short-term investments (410,336) (687,515) Proceeds from sale of short-term investments 124,910 54,909 Proceeds from sale of property, plant and equipment 2,281 2,500 Proceeds from disposal of interests in subsidiaries and affiliates 65,387 - Net increase in loans to customers (303,966) (40,094) ----------- ----------- Net cash used in investing activities (1,978,812) (1,766,838) ----------- -----------\* T £ SISTEMA JSFC AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(AMOUNTS IN THOUSANDS OF U.S. DOLLARS) \* T June 30, June 30, 2006 2005 FINANCING ACTIVITIES: Principal payments on short-term borrowings, net (451,171) (143,966) Net increase/(decrease) in deposits from customers 40,125 (16,257) Net increase in bank promissory notes issued 36,471 2,709 Proceeds from capital transactions of subsidiaries 979,343 - Purchase of treasury stock (50,892) - Proceeds from long-term borrowings, net of debt issuance costs 1,703,194 878,724 Principal payments on long-term borrowings (222,737) (236,494) Principal payments on capital lease obligations (1,610) (5,017) Proceeds from issuance of common stock - 1,284,649 ---------- ---------- Net cash provided by financing activities $2,032,723 $1,764,348 ---------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS $ 731,721 $ 582,276 CASH AND CASH EQUIVALENTS, beginning of the period 482,647 503,747 ---------- ---------- CASH AND CASH EQUIVALENTS, end of the period $1,214,368 $1,086,023 ========== ========== CASH PAID DURING THE PERIOD FOR: Interest, net of amounts capitalized $ (165,335)$ (96,286) Income taxes (317,911) (274,969) NON-CASH INVESTING AND FINANCING ACTIVITIES: Property, plant and equipment contributed free of charge $ - $ 3,322 Equipment acquired through vendor financing 2,000 2,533 Equipment acquired under capital leases 5,214 2,568\* T £ SISTEMA JSFC AND SUBSIDIARIESSEGMENT NOTE(Amounts in thousands of U.S. dollars) \* TFor the six months ended Telecommu- Tech- June 30, 2006 nications nology Insurance Banking---------------------------------------------------------------------- Net sales to external customers (a) 3,292,847 547,520 262,542 73,120Intersegment sales 4,505 149,084 18,256 14,708Income from equity investees 43,686 16 176 -Interest income 29,766 3,828 378 -Interest expense (100,807) (16,382) - -Net interest revenue (b) - - 32,286 13,181Depreciation and amortization (597,063) (18,192) (1,947) (1,130)Operating income/(loss) 954,008 62,405 34,752 8,620Income tax expense (279,658) (13,515) (9,397) (4,894)Income/(loss) before minority interests 628,216 37,064 17,555 3,726Investments in affiliates 258,019 - - 17,749Segment assets 11,742,137 1,580,357 803,432 1,904,791Indebtedness (c) (3,417,379) (519,737) (1,523) (350,938)Capital expenditures 881,182 41,266 4,670 3,354 (a) - Interest income and expenses of the Insurance and Banking segments are presented as revenues from financial services in the Group's consolidated financial statements.(b) - The Banking segment derives a majority of its revenue from interest. In addition, management primarily relies on net interest revenue,not the gross revenue and expense amounts, in managing that segment. Therefore, only the net amount is disclosed.(c) - Represents the sum of short-term and long-term debt, including vendor financing, and capital lease obligations For the six months Mass Real Corporate ended June 30, 2006 Media Estate Retail and Other Total---------------------------------------------------------------------- Net sales to external customers (a) 33,397 102,765 117,903 167,865 4,597,959Intersegment sales 12,181 3,771 19 26,631 229,155Income from equity investees - - - 87,421 131,299Interest income 97 841 771 10,119 45,800Interest expense (1,422) (2,599) (3,104) (50,538) (174,852)Net interest revenue (b) - - - - 45,467Depreciation and amortization (7,099) (1,735) (891) (7,218) (635,275)Operating income/(loss) 2,823 42,692 (8,321) 37,792 1,134,771Income tax expense (1,728) (5,294) 274 (29,391) (343,603)Income/(loss) before minority interests (239) 30,662 (9,654) 72,518 779,848Investments in affiliates 5,100 - - 766,189 1,047,057Segment assets 303,460 393,009 164,693 2,701,704 19,593,583Indebtedness (c) (30,956)(42,017)(55,089)(1,286,861)(5,704,500)Capital expenditures 20,642 42,540 8,953 4,258 1,006,865 (a) - Interest income and expenses of the Insurance and Banking segments are presented as revenues from financial services in the Group's consolidated financial statements.(b) - The Banking segment derives a majority of its revenue from interest. In addition, management primarily relies on net interest revenue,not the gross revenue and expense amounts, in managing that segment. Therefore, only the net amount is disclosed.(c) - Represents the sum of short-term and long-term debt, including vendor financing, and capital lease obligations\* T \* TFor the six months ended June Tele-commu- Tech- 30, 2005 nications nology Insurance Banking---------------------------------------------------------------------- Net sales to external customers(a) 2,652,866 265,612 182,800 33,048Intersegment sales 27,160 160,929 15,069 12,770Income from equity affiliates 31,493 - 307 -Interest income 18,339 248 - -Interest expense (81,650) (5,177) - -Net interest revenue(b) - - - 4,146Depreciation and amortization (462,515) (5,462) (1,871) (1,005)Operating income/(loss) 920,523 109,942 13,640 3,141Income tax expense (222,354)(19,211) (6,435) (1,939)Income/(loss)before minority interests, extraordinary gain and cumulative effect of a change in accounting principle 633,935 85,243 6,060 1,202Investments in affiliated companies 203,213 - - 16,518Segment assets 8,414,326 426,080 633,771 1,122,469Indebtedness (c) (2,552,221)(27,023) (517) (150,000)Capital expenditures 880,712 15,469 4,575 2,145 (a) - Interest income and expenses of the Insurance and Banking segments are presented as revenues from financial services in the Group's consolidated financial statements.(b) - The Banking segment derives a majority of its revenue from interest. In addition, management primarily relies on net interest revenue,not the gross revenue and expense amounts, in managing that segment. Therefore, only the net amount is disclosed.(c) - Represents the sum of short-term and long-term debt, including vendor financing, and capital lease obligations For the six months Mass Real Corporate ended June 30, 2005 Media Estate Retail and Other Total---------------------------------------------------------------------- Net sales to external customers(a) 71,344 32,647 45,143 76,590 3,360,050Intersegment sales 22,196 1,082 19 3,517 242,742Income from equity affiliates 384 - - 2,172 34,356Interest income 30 338 5 21,753 40,713Interest expense (740) (2,793) (507) (43,716) (134,583)Net interest revenue(b) - - - - 4,146Depreciation and amortization (3,436) (732) (819) (4,750) (480,590)Operating income/(loss) 463 3,215 3,811 (11,429) 1,043,306Income tax expense (1,442) (1,164) (892) (7,189) (260,626)Income/(loss)before minority interests, extraordinary gain and cumulative effect of a change in accounting principle (1,536) 3,452 2,169 (48,282) 682,243Investments in affiliated companies 808 103 - 44,179 264,821Segment assets 106,339 239,624 66,531 1,884,048 12,893,188Indebtedness (c) (26,596)(33,375)(183,866) (588,297)(3,561,895)Capital expenditures 5,982 16,093 703 55,869 981,548 (a) - Interest income and expenses of the Insurance and Banking segments are presented as revenues from financial services in the Group's consolidated financial statements.(b) - The Banking segment derives a majority of its revenue from interest. In addition, management primarily relies on net interest revenue,not the gross revenue and expense amounts, in managing that segment. Therefore, only the net amount is disclosed.(c) - Represents the sum of short-term and long-term debt, including vendor financing, and capital lease obligations\* T £ Attachment A £ Non-GAAP financial measures. This press release includes financialinformation prepared in accordance with accounting principlesgenerally accepted in the United States of America, or US GAAP, aswell as other financial measures referred to as non-GAAP. The non-GAAPfinancial measures should be considered in addition to, but not as asubstitute for, the information prepared in accordance with US GAAP. £ Operating Income Before Depreciation and Amortization (OIBDA) andOIBDA margin. OIBDA represents operating income before depreciationand amortization. OIBDA margin is defined as OIBDA as a percentage ofour net revenues. Our OIBDA may not be similar to OIBDA measures ofother companies; is not a measurement under accounting principlesgenerally accepted in the United States and should be considered inaddition to, but not as a substitute for, the information contained inour consolidated statement of operations. We believe that OIBDAprovides useful information to investors because it is an indicator ofthe strength and performance of our ongoing business operations,including our ability to fund discretionary spending such as capitalexpenditures, acquisitions of mobile operators and other investmentsand our ability to incur and service debt. While depreciation andamortization are considered operating costs under generally acceptedaccounting principles, these expenses primarily represent the non-cashcurrent period allocation of costs associated with long-lived assetsacquired or constructed in prior periods. Our OIBDA calculation iscommonly used as one of the bases for investors, analysts and creditrating agencies to evaluate and compare the periodic and futureoperating performance and value of companies within the wirelesstelecommunications industry. OIBDA can be reconciled to ourconsolidated statements of operations as follows: \* T June 30, June 30, 2006 2005---------------------------------------------------------------------- Operating Income Before Depreciation and Amortization 1,038.6 941.3 ---------------------------------------------------------------------- Depreciation and Amortization 614.5 480.6 ---------------------------------------------------------------------- OIBDA 1,653.1 1,421.9\* T £ (1) OIBDA is defined as operating income before depreciation andamortization. See Attachment A for this statement for the wholedefinition of OIBDA and a reconciliation of OIBDA to operating income. £ (2) Here and further, in the comparison of period to periodresults of operations, in order to analyze changes, developments andtrends in revenues by reference to individual segment revenues,revenues are presented on an aggregated basis, which is revenues afterelimination of intra-segment (between entities in the same segment)transactions, but before inter-segment (between entities in differentsegments) eliminations, unless accompanied by the word "consolidated".Amounts attributable to individual companies, where appropriate, areshown prior to both intra-segment and inter-segment eliminations. £ (3) Here and further, in the comparison of period-to-periodresults, Comstar UTS's results include the results of MGTS. Copyright Business Wire 2006