The History of Unification

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