Mobile TeleSystems Finance S.A.: 2010 Half Year Financial Report

MOSCOW--(BUSINESS WIRE)--Regulatory News:

MOBILE TELESYSTEMS FINANCE S.A.

(A beneficially wholly owned subsidiary of
Mobile TeleSystems OJSC)

2010 half year financial report

1. STATEMENTS OF RESPONSIBLE PERSONS.

2. UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR as of June 30, 2010 and December 31, 2009 and for the Six months ended June 30, 2010 and 2009.

3. MANAGEMENT REPORT DECEMBER concerning the accounts for the six months ended June 30, 2010.

MOBILE TELESYSTEMS FINANCE S.A.
3, avenue Pasteur
L-2311Luxembourg, Grand-Duchy of Luxembourg
R.C.S. Luxembourg B 84 895

STATEMENTS OF RESPONSIBLE PERSONS

Olga NIKONOVA, Director, residing 109147, Russia, Moscow, Vorontsovskaya, bld. 5–2;
and
Ella BOGOSLAVSKAYA, Director, residing 109147, Russia, Moscow, Vorontsovskaya, bld. 8–4a; and
Sergey MOLODTSOV, Director, residing 109147, Russia, Moscow, Vorontsovskaya, bld. 5–2,

state that to the best of their knowledge, the unaudited condensed financial statements of MOBILE TELESYSTEMS FINANCE S.A. for the six months ended June 30, 2010, prepared in accordance with the applicable set of accounting rules give a true and fair view of the assets, the liabilities, the financial position and the profits and losses of MOBILE TELESYSTEMS FINANCE S.A. and that the management report includes a fair review of the development and performance of the business and the position of MOBILE TELESYSTEMS FINANCE S.A. together with a description of the principal risks and uncertainties with which it is confronted.

Signed by

Ella BOGOSLAVSKAYA, Director
Olga NIKONOVA, Director
Sergey MOLODTSOV, Director

MOBILE TELESYSTEMS FINANCE S.A.

(A beneficially wholly owned subsidiary of Mobile TeleSystems OJSC)

Unaudited Condensed Financial Statements
As of June 30, 2010 and December 31, 2009
and for the Six months ended June 30, 2010 and 2009

MOBILE TELESYSTEMS FINANCE S.A.
(A beneficially wholly owned subsidiary of Mobile TeleSystems OJSC)
UNAUDITED CONDENSED BALANCE SHEET
AT JUNE 30, 2010 and DECEMBER 31, 2009
(Amounts in U.S. dollars, except share and per share amounts)
	June 30,		December 31,
	2010		2009
CURRENT ASSETS:
Cash and cash equivalents	$	842,261	$	685,182
Other current assets (Note 4)		22,835,814		6,723,624
Total current assets		23,678,075		7,408,806
DEBT ISSUANCE COSTS (Note 3)		706,973		1,110,969
RECEIVABLES FROM RELATED PARTIES (Note 5)		800,000,000		800,000,000
TOTAL ASSETS	$	824,385,048	$	808,519,775
CURRENT LIABILITIES:
Accounts payable (Note 6)		170,624,342		170,229,019
Accrued liabilities (Note 7)		20,083,516		4,295,733
Deferred income, current portion (Note 8)		497,706		995,412
Current portion of debt (Note 9)		174,793,501		174,793,501
Total current liabilities		365,999,065		350,313,665
NOTES PAYABLE, net of current portion (Note 9)		806,483,591		805,787,589
DEFERRED INCOME, net of current portion (Note 8)		455,632		437,513
SHAREHOLDERS’ EQUITY:
Common stock (1,000 shares with a par value of $125 authorized, issued and outstanding)(Note 10)		125,000		125,000
Legal reserve (Note 10)		12,500		12,500
Retained earnings		(348,156,491)		(343,799,385)
Results for the period		(534,249)		(4,357,107)
Total shareholders’ equity		(348,553,240)		(348,018,992)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	824,385,048	$	808,519,775
The accompanying notes to the financial statements are an integral part of these statements.

MOBILE TELESYSTEMS FINANCE S.A.
(A beneficially wholly owned subsidiary of Mobile TeleSystems OJSC)
UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Amounts in U.S. dollars)
	6 months ended		6 months ended
	June 30,2010		June 30,2009
OPERATING EXPENSES (Note 14)	$	(179,772)	$	(1,409,903)
Operating loss		(179,772)		(1,409,903)
Interest income (Note 11)		33,528,892		33,749,328
Interest expense (Note 12)		(33,883,369)		(33,890,103)
Income before provision for income taxes		(534,249)		(1,550,678)
PROVISION FOR INCOME TAXES		-		-
NET LOSS	$	(534,249)	$	(1,550,678)
The accompanying notes to the financial statements are an integral part of these statements.

MOBILE TELESYSTEMS FINANCE S.A.
(A beneficially wholly owned subsidiary of Mobile TeleSystems OJSC)

NOTES TO FINANCIAL STATEMENTS
(Amounts in U.S. dollars, except if otherwise stated)

1. DESCRIPTION OF BUSINESS

Mobile TeleSystems Finance S.A. (the “Company”) is a company incorporated under the laws of Luxembourg on December 10, 2001 under the legal form of a “Société Anonyme.” The registered office of the Company is 3 Avenue Pasteur, L-2311 Luxembourg. The Company’s operations include holding of participations directlyand indirectly, in any form whatsoever, in Luxembourg and foreign companies, the acquisition by purchase, or in any other manner as well as the transfer by sale, exchange or otherwise of stock, bonds, debentures, notes and other securities of any kind, and the ownership, administration, development and management of its portfolio. The Company may also hold interest in partnerships.

The Company may borrow in any form and proceed to the issue of bonds and debentures. It may lend funds including the proceeds of such borrowings and issues to its subsidiaries, affiliated companies or any other companies. In a general fashion it may grant assistance to affiliated companies, take any controlling and supervisory measures and carry out any operation which may deem useful in accomplishment and development of its purposes.

Since the Company’s incorporation, its main activity has been issuing of notes and loaning the gross proceeds of the notes to Mobile TeleSystems OJSC (“MTS OJSC”), the Company’s 100% beneficial shareholder that is incorporated under the laws of the Russian Federation.

2. SUMMARY OF SIGNIFICANT ACCOUTING POLICIES

Accounting Principles

The Company maintains its accounting books and records in U.S. dollars based on Luxembourg accounting regulations. The accompanying financial statements have been prepared in order to present the Company’s financial position and its results of operations in accordance with accounting principles generally accepted in Luxembourg.

Cash and cash equivalents

Cash and cash equivalents represent cash on hand, in bank accounts and in short term investments having original maturity of less than three months.

Receivable from related parties

Loans receivable from related parties are recorded at nominal value. Based on management assessment of the recoverability of the amounts, no specific bad debt provision was created at June 30, 2010 and December 31, 2009.

Debt issuance costs

Legal and other direct costs incurred in connection with the issuance of debt are deferred and amortized through interest expense using the effective interest rate method over the life of the underlying debt.

Notes payable

Notes payable are initially recorded at par value less any issue discount (or plus any premium). The discount or premium between issue and redemption value is amortized over the life of the underlying debt through interest expense using the effective interest rate method.

Deferred income

Fees reimbursed by MTS OJSC in connection with notes issuance costs and discounts on the issuance of debt are deferred and recognized as income over the life of the debt to match the amortization of the corresponding initial borrowing costs and the discount on issue of the debt.

Taxation

Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial reporting and tax reporting bases of assets and liabilities, and loss or tax credits carry-forwards using enacted tax rate expected to be in effect at the time these differences are realized. Valuation allowances are recorded for deferred tax assets for which it is more likely than not that the assets will not be realized.

Interest income and interest expense

Interest income and interest expense are recorded on an accrual basis.

Financial instruments

At June 30, 2010 and December 31, 2009, the fair value of the notes payable (see Note 9), calculated based on quoted market prices was approximately $822 and $832 million, respectively.

The long-term receivables from MTS OJSC bear a market rate of interest and management believes that the book value approximates the market value of this receivable at June 30, 2010 and December 31, 2009.

The Company does not use derivatives for trading purposes.

3. DEBT ISSUANCE COSTS

Debt issuance costs are comprised of commissions and fees incurred related to the issue of the notes payable and associated with the loan agreements. As of June 30, 2010 and December 31, 2009, debt issuance costs related to the issue of the notes payable (see Note 9) amounted to $1,110,969 and $706,972 after amortization of $12,510,075 and $12,914,072 respectively.

4. OTHER CURRENT ASSETS

Other currents assets as of June 30, 2010 and December 31, 2009 include accrued interest related to the loan receivable from MTS OJSC (see Note 5) of $21,020,685 and $4,909,822, respectively, and other current assets in the amount of $1,815,129 and $1,813,802, respectively.

5. RECEIVABLES FROM RELATED PARTIES

As of June 30, 2010 and December 31, 2009 receivables from related parties are comprised of loans to MTS OJSC in the amounts of $800 million and of $800 million, respectively.

On October 15, 2003, the Company entered into a $400 million loan agreement with MTS OJSC that bears interest at 8.47% payable semi-annually in arrears. The loan matures on October 14, 2010.

On January 28, 2005, the Company entered into a $400 million loan agreement with MTS OJSC that bears interest at 8.011% payable semi-annually in arrears. The loan matures on January 28, 2012.

Accrued interest on these loans at June 30, 2010 and December 31, 2009 amounted to $21,020,685 and $4,909,822, respectively.

For the six months ended June 30, 2010 and 2009 the Company received interest payments under these loan agreements of $16,938,000 and $32,998,000, respectively.

6. ACCOUNTS PAYABLE

As of June 30, 2010 and December 31, 2009, accounts payable are mainly comprised of liability in the amount of $170,000,000 associated with a put and call option agreement with Nomihold to acquire the remaining 49% interest in Tarino, owner of Bitel (see Note 13).

As of June 30, 2010 and December 31, 2009 payables to legal consultants in the amount of $624,342 and $229,019, respectively, were recognized in the accompanying balance sheet.

7. ACCRUED LIABILITIES

As of June 30, 2010 and December 31, 2009, accrued liabilities are comprised of accrued interest on notes payable of $18,991,230 and of $2,991,229, respectively. An additional amounts of $1,092,287 and $1,304,504 were accrued for future payments to legal consultants as of June 30, 2010 and December 31, 2009 respectively.

8. DEFERRED INCOME

In 2005 the Company charged $3,571,939 to MTS OJSC to reimburse the debt issuance costs and issue discount incurred in originating the loans described in Note 9. This income has been deferred and is recognized as interest income in the statements of operations to match the amortization of the debt issuance costs and the issue discount.

As of June 30, 2010 and December 31, 2009 the balance on this account, is $953,338 (including current portion of deferred income in the amount of $497,706) and $1,432,925 (including current portion of deferred income in the amount of $995,412), respectively, net of accumulated amortization of $15,218,601 and $14,739,014, respectively.

9. NOTES PAYABLE

On October 14, 2003, the Company issued $400,000,000 notes bearing interest at 8.375% at par. Related debt issuance costs in the amount of $3,320,000 were capitalized. The cash proceeds, net of issuance costs of approximately $3,300,000, amounted to $396,700,000. These notes are fully and unconditionally guaranteed by MTS OJSC and will mature on October 14, 2010. The Company is required to make interest payments on the notes semi-annually in arrears on April 14 and October 14 of each year, commencing on April 14, 2004. The notes are listed on the Luxembourg Stock Exchange.

On January 28, 2005, the Company issued $400,000,000 8.00% notes at the price of 99.736%. Proceeds received from the notes, net of underwriting discount, were $398,944,000. Related debt issuance costs in the amount of $2,515,939 were capitalized. These notes are guaranteed by MTS OJSC and mature on January 28, 2012. The Company is required to make interest payments on the notes semi-annually in arrears on January 25 and July 25 of each year, commencing on July 25, 2005. The notes are listed on the Luxembourg Stock Exchange. The proceeds were loaned to MTS OJSC.

10. SHAREHOLDERS’ EQUITY

On December 10, 2001, the Company was incorporated with a share capital amounting to $125,000, represented by 1,000 shares with a nominal value of $125 each, fully subscribed and paid-up. On an annual basis, if the Company reports a profit for the year, Luxembourg law requires appropriation of an amount equal to at least 5 percent of the annual net income to a legal reserve until such reserve equals 10 percent of the issue capital. This reserve is not available for distribution. The amount of this reserve at June 20, 2010 and December 31, 2009 was $12,500 and $12,500, respectively.

11. INTEREST INCOME

For the six months ended June 30, 2010, interest income comprises of $33,049,305, interest income from MTS OJSC (see Note 5); of $479,587, relating to the recognition of deferred income (see Note 8).

For the six months ended June 30, 2009, interest income comprises of $33,255,713, interest income from MTS OJSC (see Note 5) and of $493,615, relating to the recognition of deferred income (see Note 8).

12. INTEREST EXPENSE

For the six months ended June 30, 2010 interest expense comprised mainly of $33,190,937, of interest expense, related to notes payable (see Note 9), $489,061, relating to the amortization of debt issuance costs and debt issue discount and premium (see Notes 3 and 9) $97,127, relating to the bank commission expense and other insignificant amounts totaled $106,244.

For the six months ended June 30, 2009 interest expense comprised mainly of $33,264,652, of interest expense, related to notes payable (see Note 9), $491,722, relating to the amortization of debt issuance costs and debt issue discount (see Notes 3 and 9) and other insignificant amounts totaled $133,729.

13. OPERATING EXPENSE

For the six months ended June 30, 2010 and 2009 operating expense comprised of consultancy and legal services expense relating to Bitel matter in the amount of $179,772 and $1,409,903, respectively.

14. COMMITMENTS AND CONTINGENCIES

As described in the financial statements for the year ended December 31, 2009, the Company is involved in a number of legal proceedings in the London Court of International Arbitration and the Isle of Man courts in respect of the acquisition and ownership of Bitel LLC. During the six months ended June 30, 2010 no significant changes occurred. Currently these proceedings are pending and it is not possible to predict their outcome or the amount of damages to be paid, if any.

MOBILE TELESYSTEMS FINANCE S.A.
3, avenue Pasteur
L-2311 Luxembourg, Grand-Duchy of Luxembourg
R.C.S. Luxembourg B 84 895
MANAGEMENT REPORT
concerning the accounts for the six months ended June 30, 2010

The board of directors hereby presents the management report and accounts of MOBILE TELESYSTEMS FINANCE S.A. (further “MTS Finance S.A.” or “the Company”) for the six months ended June 30, 2010.

As of June 30, 2010 total assets of the Company amounted to USD 824,385,048. During the six months ended June 30, 2010 the Company realized a net loss of USD 534,249.

GENERAL INFORMATION:

MTS Finance S.A. is a 100% beneficiary owned subsidiary of MTS OJSC, incorporated under the laws of Luxembourg on 10 December 2001, having its corporate seat in Luxembourg. Originally, the Company was created for initial public offering on the Luxemburg Stock Exchange.

OPERATIONS AND ACTIVITIES OF MTS FINANCE S.A.:

On January 30, 2003 the Company issued $400,000,000 notes bearing interest at 9.75% at per maturing on January 30, 2008;

On October 14, 2003 the Company issued $400,000,000 notes bearing interest at 8.375% at par, maturing on October 14, 2010;

On January 28, 2005 the Company issued $400,000,000 notes bearing interest at 8.00% at par, maturing on January 28, 2012.

The proceeds received from bonds issued were loaned to MTS OJSC in the total amount of USD 1,200,000,000 with maturities matching those of the bonds. All notes fully and unconditionally guaranteed by MTS OJSC.

On January 30, 2008, the Company redeemed $400,000,000 outstanding notes in the principal amount and interest accrued. The loan and interest was fully repaid by MTS OJSC by that date.

During the six months ended June 30, 2010, the Company has registered a total interest charge of USD 33,883,369 mainly attributable to the guaranteed bonds. An interest income of USD 33,528,892 generally relates to the long-term loans receivable.

During the six months ended June 30, 2010, the Company did not have other specific activities. The operating expenses are mainly attributable to consultants’ fees related to litigations regarding the acquisition of controlling share in Bitel LLC.

Neither have there been important events after the closing of the financial year.

RISKS:

The risk on the operations of MTS Finance is considered low. The bonds are fully guaranteed by the parent company, MTS OJSC, and the main income being generated by the long term loans granted to MTS OJSC.

MTS Finance does not incur any liquidity, foreign exchange nor interest rate risks as the characteristics of the loans receivable do match those of the bonds (same maturity, same currency, fixed interest rates).

FUTURE OUTLOOK:

The Company will continue its business and financial activities in the following year. The board of directors expects no change in the nature and size of business of the Company.

The board of directors:

Signed by

Ella BOGOSLAVSKAYA, Director
Olga NIKONOVA, Director
Sergey MOLODTSOV, Director