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The History of Unification
As part of the reorganization of Svyazinvest Holding Company its seven regional communications companies in the Far East have formed Dalsvyaz Company as branches in the Primorye, Kamchatka, Magadan, Sakhalin, Amur, Khabarovsk and Jewish Autonomous regions.
The reorganization process lasted two years from 2001 to 2002.
Shares that belonged to holders of the merged companies were converted into shares of Dalsvyaz. The issuance was registered by the Federal Securities Commission of Russia on July 30 of 2002.
On December 24 of 2002 an extraordinary meeting of Dalsvyaz’ shareholders elected Igor V. Zabolotny as General Director, adopted a new Charter and approved of new directors for the Board and new members of the Auditing Commission.
The Board of Directors endorsed members of the Executive Commission, which is the managing body, on January 31 of 2003.
Description of the Region
The Far Eastern region is the largest in Russia measuring 6,215,900 square kilometers and taking up 36.4 percent of the country’s territory. The Far Eastern region includes the following smaller regions that account for the following percentage of the entire Far East:
There are 70 major cities in the Far East.
The number of residents totals more than 6 million, including 4.743 million in cities.
Description of the Region
•The region borders Japan, the United States, China and North Korea.
•Seaports handle export flows of Russian cargo to international markets and deliveries of import goods from Asian Pacific countries to Russia. There are 32 seaports, including 22 commercial ports and 10 fishing ports, on the coast of the Far East.
•The main railway lines traverse the central and southern areas of the Far East. These rail lines are eastern portions of the Trans-Siberian and Baikal-Amur railroads. The Trans-Siberian Railroad is the larger one. The Trans-Siberian and Baikal-Amur railroads terminate at the region’s seaports while a number of rail links cross over into northeastern China.
•The region has considerable deposits of mineral resources, non-ferrous and precious metals, iron ore, coal (20 billion metric tons), oil (9.6 billion metric tons), natural gas (14 trillion cubic meters) as well as timber and hydro energy resources. Estimates show that Far Eastern shelf has up to 30 billion metric tons of hydrocarbons. More that 60 percent of Russia’s fish and sea products is produced here.
•Far East has areas offering beneficial conditions for economic development. They are the Magadan, Sakhalin, Primorye and Khabarovsk regions that offer favorable terms for payment of taxes and customs duties.
Share of the Merged Companies in the Chartered Capital
The chartered capital is $ 40,508, 252
It includes• Regular shares - 95,581,421 pieces• Preferred shares - 31,168,901 pieces• With a face value of $ 0.32
The chartered capital
Svyazinvest38.10%
Cable&Wireless Public Ltd
5.07%
Goldtron Limited3.90%
Most Invest 3.90%
Other shareholders
24.73%
Брансвик Branswick U. B.
S. (nominal holder)5.20%
ZAO DKK (nominal holder)
13.00%ЗZAO ING Bank
(Eurasia) (nominal holder)6.10%
Distribution of the Chartered Capital
Distribution of Voting Shares
Svyazinvest"50.60%Other shareholders
16.50%
Most Invest5.10%
Cable&Wireless Public Ltd.
5.90%
ZAO DKK (nominal holder)9.80%
ZAO ING Bank (Eurasia) (nominal
holder)4.70%
Брансвик Ю Би Branswick U. B. S.
(nominal holder) 2.30%
Goldtron Limited5.10%
Description of Shareholders
Non-residents; 20.81%
Individuals; 14.20%
Other; 26.89%Svyazinvest;
38.10%
36%
9%13%
6%
15%
2%
19%
Elektrosvyaz of the PrimoryeRegion
Amursvyaz
Kamchatsvyazinform
Magadansvyazinform
Sakhalinsvyaz
TTK of the Jewish AR
Elektrosvyaz of theKhabarovsk Region
Share of the Merged Companies as per Cost of Net Assets
The total worth of net assets as of September 30, 2002 was $ 120 495 238.
Shares of the Merged Companies from 1999-2002
36%
9%13%6%
15%
2%
19%
Elektrosvyaz of the Primorye Region
Amursvyaz
Kamchatsvyazinform
Magadansvyazinform
Sakhalinsvyaz
Telefonno-Telegrafnaya Kompania ofthe Jewish Autonomous Region
Elektrosvyaz of the KhabarovskRegion
Preliminary Financial and Economic Indices for 2002
Type of Indices 2002
Receipts from sales of goods and services 170 391 thousands of USD
Profits from communications services 166 768 thousands of USD
Amount of communications services sold to the public 101 577 thousands of USD
Spending on regular types of activity 138126 thousands of USD
Profits from sales 32 265 thousands of USD
Pre-tax profit 12793 thousands of USD
Net profit 6 298 thousands of USD
Profitability rate
in profit from salesin pre-tax profitin net profit
23.4 % 9.3 %4.6 %
0 25000 50000 75000 100000 125000 150000 175000 200000
Sakhalin branch
Magadan branch
Kamchatka branch
Amur branch
Jewish Region branch
Khabarovsk branch
Primorye branch
Receipts (in thousands of USD) EBITDA (in thousands of USD)
Profit from sales (in thousands of USD) Net profit from sales (in thousands of USD)
Forecast of the principal financial and economic indices for 2003
JSC Dalsvyaz Thousands of USD
Receipts 198624
EBITDA 55333
Profit from sales 47253
Net profit from sales
15856
Average value
Structure of profits from 2001-2005
0
5000
10000
15000
20000
25000
2001 2002 2003 (forecast) 2004 (forecast) 2005 (forecast)
Profits from new services (in thousands of USD)
Wireless communications (in thousands of USD)
Profits from cellular operators
Receipts of Dalsvyaz
0
20000
40000
60000
80000
100000
120000
140000
2001 2002 2003 (forecast) 2004 (forecast) 2005 (forecast)
Local telephone communications (in thousands of USD)
Long distance telephone communications (in thousands of USD)
thousands of USD
Year 2001 2002 2003 (plan) 2004(forecast) 2005 (forecast)
Receipts
(in thousands of USD)
143 937 170 391 198 624 233 591 280 727
thousands of USD
Structure of spending for 2001-2005
0
2000
4000
6000
8000
10000
12000
2001 2002 2003 (forecast) 2004 (forecast) 2005 (forecast)
Depreciation (in thousands of USD)
0
10000
20000
30000
40000
50000
60000
70000
2001 2002 2003 (прогноз) 2004 (прогноз) 2005 (прогноз)
Salaries (excluding social insurance)
0
5000
10000
15000
20000
25000
2001 2002 2003 (forecast) 2004 (forecast) 2005 (forecast)
Payments to Rostelecom (in thousands of USD)
Thousands of USD
Thousands of USD
Thousands of USD
Tariff policy
0
1
2
3
4
5
6
7
8
9
Prim
orye
bra
nch
Kha
baro
vsk
bran
ch
Jew
ish
AR
bra
nch
Am
ur b
ranc
h
Kam
chat
ka b
ranc
h
Mag
adan
bra
nch
Sak
halin
bra
nch
Population Budget Self-financing
Ph
on
e m
on
thly
fe
e
The main goals for 2003:
Transition to a unified level of tariffs for individuals and organizations in the coverage area of the companyRaise the tariff for individuals to 140-170 rubles per monthRaise the tariff for organizations to 200-260 rubles per month
$
Development of the telephone network
0 100 200 300
2002
2003
56000 58000 60000 62000
2002
2003
1150000 1200000 1250000 1300000
2002
2003
89,45% 89,50% 89,55% 89,60% 89,65%
2002
2003
Growth of long distance telephone channels (in thousands of kilometers)
Growth of the number of main telephone sets
Capacity of local automatic telephone stations, subscribers
Ration between usage and capacity of the telephone stations (percentage)
Capacity of the telephone network from 2001-2004
0
200000
400000
600000
800000
1000000
1200000
1400000
2001 2002 2003 (plan) 2004(forecast)
Existing capacity of local network (subscribers)Used capacity of local network (subscribers)
Number of subscribers
Density of telephone network from 2001-2003
0
5
10
15
20
25
30
35
Prim oryebranch
Khabarovskbranch
Jewish ARbranch
Am ur branch Kam chatkabranch
Magadanbranch
Sakhalinbranch
2000 2001 2002 plan
Ra
tio o
f te
lep
ho
ne
se
ts p
er
10
0 p
eo
ple
Amur branch; 39602
Primorye branch; 150 523
Kamchatka branch; 47979
Sakhalin branch; 58858Magadan branch;
23489
Jewish AR branch; 8342
Khabarovsk branch; 78314
Khabarovsk branch; 3940
Sakhalin branch; 3557
Magadan branch; 1697
Kamchatka branch; 3842
Jewish AR branch; 563
Amur branch; 1505
Primorye branch; 11 022
Long distance traffic in 2002 (in thousands of minutes)
International traffic in 2002(in thousands of minutes)
Dalsvyaz’ total long distance traffic within Russia was 430,261 thousands of minutes.
Dalsvyaz’ international traffic was 27,289 thousands of minutes.
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
2001 2002 2003(forecast)
2004(forecast)
Primorye branch Khabarovsk branch Jewish AR branch Amur branch
Kamchatka branch Magadan branch Sakhalin branch
International traffic from 2001-2004 (in thousands of minutes)
0
5000
10000
15000
20000
25000
30000
35000
2001 2002 2003(forecast)
2004(forecast)
JSC Dalsvyaz
0
50 000
100 000
150 000
200 000
250 000
2001 2002 2003(forecast)
2004(forecast)
Primorye branch Khabarovsk branch Jewish AR branch Amur branch
Kamchatka branch Magadan branch Sakhalin branch
0
100000
200000
300000
400000
500000
600000
2001 2002 2003(forecast)
2004(forecast)
JSC Dalsvyaz
Long distance traffic within Russia from 2001-2004 (in thousands of minutes)
Amount of capital investment from 2001-2003
0
10000
20000
30000
40000
50000
60000
2001 2002 2003(forecast)
Amount of capitalinvestment
Thousands of USD
Type of Indices 2001 2002 2003Ratio between 2003 and 2002
Amount of capital investment
14467 thousands of USD
23144 thousands of USD
51 808 thousands of USD
223,8 %
Amount of capital investment (in thousands of dollars) per branch from 2001-2003
Thousands of USD
0
5000
10000
15000
20000
25000
2001 2002 2003 (plan)
Primorye branch
Khabarovsk branch
Jewish AR branch
Amur branch
Kamchatka branch
Magadan branch
Sakhalin branch
Investments (structure) from 2001-2003
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
2001
2002
2003 (plan)
Depreciation Profit Borrowing Leasing Loans Other
New capacity from 2001-2003
53,04
110
224,413
0
50
100
150
200
250
300
350
2001 2002 2003 (plan)
Total new capacity
Including replacements
Number of subscribers
Type of work 2001 2002 2003 (plan)Ratio between 2003 and 2002
Total new capacity (in thousands of subscribers)
53,04 110 224,413 203,6%
Including replacements (in thousands of subscribers)
10,28 34,8 93,892 269,8 %
Core Assets Put into Operation from 2001-2003
0
10000
20000
30000
40000
50000
60000
2001 2002 2003 (plan)
Core Assets Put intoOperation
Thousands of USD
Type of Indices 2001 2002 2003 (plan)Ratio between 2003 and 2002
Core Assets Put into Operation
16 749thousands of dollars
21 187
thousands of dollars
51 890thousands of
dollars245 %
Amount of Capital Investment from 2001-2005 (in thousands of dollars)
0
10000
20000
30000
40000
50000
60000
70000
80000
2001 2002 2003(plan)
2004(forecast)
2005(forecast)
Thousands of USD
Program for Issuance of American Depositary Receipts
• Dalsvyaz is implementing a program for issuing American Depository Receipts of the First Level.
• JP Morgan serves as a depository bank (Dalsvyaz’ ADR ticker is FEEOY).• Shareholders have the opportunity to sell their shares on international markets through
the depository bank.• American Depository Receipts may be issued for 70 percent of regular shares.
Principal Goals for Raising Investment Attractiveness
• Have the shares listed by Russia’s leading stock exchanges• Adopt a code of corporate behavior• Receive a rating of corporate management• Raise the liquidity of shares by several times• Raise the company capitalization to US$120 million in 2003, and to US$190 million
before 2005.• Continue work on the ADR program• Continue work on IR
Marketing Strategy
The Main Targets for Marketing Strategy for 2002-2005:1. The main geographical segments are coastal cities with a high population density
2. The main consumer groups are general public and small and medium-sized businesses
3. The goal is to retain the market share of 75 percent
4. Improve customer service by introduction of corporate culture and progressive quality control systems, particularly ISO 9000.
Technical Policy
The main targets for development in 2003:•Digitalization of intra zonal and access lines Introduction of intellectual network services.•Development of multi-service network throughout the region.•Development of broadband Internet access.•Development of intellectual services, IP and computer-based telephony.•Development of information services.•Development of documental communications (X.400).•Development of videoconferencing services.•Development of mobile communications.•Development of additional services based on digital telephone stations.•Providing the service of building corporate networks.
Technical Policy
1. Digitalization of intra zonal and access lines based on construction of fiber optic
cable lines and space communications systems. The main method of digitalization
will be construction of transport networks of synchronized digital hierarchy (SDH).
2. Digitalization of the telephone network will be implemented through putting online
new telephone stations and phasing out the old ones. This will enable growth of the
amount of additional services using the digital stations.
3. Introduction of intellectual network services will take place in the Primorye,
Khabarovsk, Magadan and Sakhalin regional branches. These branches will also
expand the nodes for providing STK services using computer-aided telephony.
4. Construction of multi-service telecommunications network throughout the entire
Far East enabling broadband access to the data transfer network. Development of the
project will allow the company to increase sales of information services, corporate
network building services and documental communications services.
5. Development of mobile communications services.
The main goals:
• Conduct a unified tariff policy throughout the Far East and shift to a unified level of tariffs for individuals and organizations in the coverage area of the company.
• Reduce the need to subsidize low profitability services from revenues of the high profitability services and raise tariffs to the level of economically reasonable costs (including an investment component). It is planned that tariffs for the services of local telephone communications will grow by 30 percent in 2003. Raise the tariff for individuals to 140- 170 rubles per month and to 200-260 rubles per month for organizations.
• Shift to the by-the-minute system of billing the local telephone communications. The by-the-minute system works in Yuzhno-Sakhalinsk in the Sakhalin Region. In 2003 the new billing system will be introduced in Vladivostok and Ussuriisk in the Primorye Region and in Khabarovsk in the Khabarovsk Region.
Tariff Policy
Personnel policy from 2002-2005
• Optimization of personnel quantity in accordance with the business plan (5-7 percent annually)
• The company intends to spend 2 percent of the salary fund on personnel training programs. By 2005 50 percent of the personnel will have been trained.
• With the purpose of raising work efficiency contemporary labor motivation techniques will be applied to up to 40 percent of employees.
• Employee testing and evaluation programs will be applied to create a team with a high potential.
Corporate Reorganization
The main goals:
• transition to a unified accounting policy and divided accountancy of outlays;• developing and introduction of procedures for budgeting and investment planning;• creation of a mechanism of cost management;• developing and introduction of a flexible marketing strategy through management of
services;• tariff regulation through pricing based on maximum costs;• introduction of a personnel management program.
Dynamics of trade in Dalsvyaz shares in the RTS from 2001-2003 (first quarter)
0
0.2
0.4
0.6
0.8
1
1.2
1.4
2001 2002 20030
0.20.40.60.8
11.21.41.61.8
2
2001 2002 2003
0
10
20
30
40
50
60
70
2001 2002 2003
Total amount of trade in millions of US dollars Total amount of trade in millions of shares
Number of transactions
Regular sharesPricing dynamics from 2002-2003 (first quarter)
7550 8000
42000
6300
10500
2950
12000
54951
28125
24300
6000
30350
6674
43500
90312
29700
39550
30870
26440
7393
334053439936590
8215 7300
121331
14700
51235
36060
7100
14200
72000
79552
68132
116230
14500
21920
1608
108900
130500
49705994
12800
600065107500
0.75 0.76
0.80
0.70
0.65
0.63
0.53
0.590.60
0.610.63
0.610.60 0.60
0.610.60
0.62
0.64
0.67
0.74
0.79
0.77
0.74 0.730.74 0.74
0.73 0.73 0.730.74 0.74 0.73 0.73
0.720.71 0.71 0.71
0.72 0.73 0.73 0.73 0.73 0.73 0.73 0.73 0.72
0
20000
40000
60000
80000
100000
120000
140000
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Amount of trade in USD The medium balanced price in USD
Dynamics of Trade from 2002-2003
YearRegular shares,amount in USD
Regular shares,number
Regular shares,number of transactions
2001 327941 482328 9
2002 573680 856250 52
2003 (January to February)
955436 1313149 38
Preference shares Pricing dynamics from 2002-2003 (first quarter)
11840
7200 7400 8000 9000
35993
6000 5723
11685
5202
20751
9300
5520
14186
4900
29150
23500
30550
7990 8018
11445
14850
22845
87000
0.40
0.360.37
0.40
0.450.46
0.60
0.48 0.480.46 0.47 0.47 0.46
0.470.49 0.49
0.47 0.47 0.47 0.480.50 0.50
0.51
0.54
0.00
10000.00
20000.00
30000.00
40000.00
50000.00
60000.00
70000.00
80000.00
90000.00
18.0
1.200
2
12.0
2.200
2
04.0
3.200
2
01.1
1.200
2
19.1
1.200
2
28.1
1.200
2
03.1
2.200
2
20.1
2.200
2
04.0
1.200
3
08.0
1.200
3
13.0
1.200
3
14.0
1.200
3
15.0
1.200
3
16.0
1.200
3
20.0
1.200
3
22.0
1.200
3
31.0
1.200
3
03.0
2.200
3
04.0
2.200
3
05.0
2.200
3
14.0
2.200
3
18.0
2.200
3
19.0
2.200
3
20.0
2.200
3
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Amount of trade in USD The medium balanced price in USD
volu
me
of
tra
de
in U
S d
olla
rsT
he
me
diu
m b
ala
nce
d p
rice in
US
d
olla
rs
Dynamics of Trade from 2002-2003
YearPreference shares,
amount in USDPreference shares,
numberPreference shares,
number of transactions
2001 0 0 0
2002 91156 209023 9
2003 (January to February)
306892 619557 23
56
12 9
46 42
85
120
150
190
-
20
40
60
80
100
120
140
160
180
200
Millions of USD
Capitalization of Dalsvyaz (in millions of USD)
Capitalization of Some Companies in the Far East in millions of USD on 03/01/2003
143
85
79
77
74
37
39
19
0 40 80 120 160
Sakhalinmorneftegaz
Dalsvyaz
Khabarovskenergo
Sakhaneftegaz
FESCO
Dalenergo
Primorsk Shipping Corporation
Zeyskaya Power Station