<PAGE>
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 2
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-5706
------------------------
METROMEDIA INTERNATIONAL GROUP, INC.
(Exact name of registrant, as specified in its charter)
------------------------
DELAWARE 58-0971455
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)
------------------------
ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073-2137
(Address and zip code of principal executive offices)
(201) 531-8000
(Registrant's telephone number, including area code)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
<S> <C>
Common Stock, $1.00 par value American Stock Exchange
Pacific Stock Exchange
7.25% Cumulative Convertible Preferred Stock American Stock Exchange
Pacific Stock Exchange
</TABLE>
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. X
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant at August 27, 1999 computed by reference to the
last reported sale price of the Common Stock on the composite tape on such date
was $338,328,972.
The number of shares of Common Stock outstanding as of August 27, 1999 was
69,175,254.
DOCUMENTS INCORPORATED BY REFERENCE
None
.
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<PAGE>
PART I
ITEM 1. BUSINESS
METROMEDIA INTERNATIONAL GROUP, INC.
Metromedia International Group, Inc. ("MMG" or "the Company") is a global
communications company engaged in the development and operation of a variety of
communications businesses, including cellular telecommunications, fixed
telephony, international and long distance telephony, cable television, paging
and radio broadcasting, in Eastern Europe, the republics of the former Soviet
Union and the People's Republic of China and other selected emerging markets,
through its wholly owned subsidiary Metromedia International Telecommunications,
Inc. and its majority owned subsidiary Metromedia China Corporation, which
together with Metromedia International Telecommunications, Inc. is called the
"Communications Group."
The Company was organized in 1929 under Pennsylvania law and reincorporated in
1968 under Delaware law. On November 1, 1995, as a result of the merger of Orion
Pictures Corporation and Metromedia International Telecommunications with and
into wholly-owned subsidiaries of the Company and the merger of MCEG Sterling
Incorporated with and into the Company, the Company changed its name from "The
Actava Group Inc." to "Metromedia International Group, Inc.", and changed its
strategic focus to a global media, communications and entertainment company. On
July 10, 1997, the Company narrowed its strategic focus to a global
communications company when it consummated the sale of substantially all of its
entertainment assets, consisting of Orion Pictures Corporation, Samuel Goldwyn
Company and Motion Picture Corporation of America (and their respective
subsidiaries), including its feature film and television library of over 2,200
titles, to P&F Acquisition Corp., the parent company of Metro-Goldwyn-Mayer,
Inc., for a gross consideration of $573.0 million. The Company had operated the
entertainment group since the November 1, 1995 merger. In addition, on April 16,
1998, the Company sold to Silver Cinemas, Inc. its remaining entertainment
assets consisting of all of the assets of the Landmark theater group, except
cash, for an aggregate cash purchase price of approximately $62.5 million and
the assumption of certain Landmark liabilities.
The Company also owns Snapper, Inc., which is a wholly-owned subsidiary. The
Company owned Snapper prior to the November 1, 1995 merger and the subsequent
shift in the Company's business focus to a global communications company;
accordingly, the Company views Snapper as a non-core asset and is managing
Snapper in order to maximize stockholder value. Snapper manufactures
Snapper-Registered Trademark- brand premium-priced power lawnmowers, lawn
tractors, garden tillers, snowthrowers and related parts and accessories.
1
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
Set forth below is a chart of the Company's operational structure and business
segments:
[COMPANY'S OPERATIONAL CHART]
In 1998, the Company reported revenue of $30.2 million from the Communications
Group's operations in Eastern Europe and the former Soviet Union and $210.1
million from Snapper. Metromedia China did not generate consolidatable revenues
in 1998. The Company believes that its Communications Group's consolidated
revenues will increase as the Communications Group's joint ventures grow their
businesses and therefore will generate a greater share of the Company's total
consolidated revenues.
The Company owns approximately 39% of the outstanding common stock of RDM Sports
Group, Inc. In August 1997, RDM and certain of its affiliates filed a voluntary
bankruptcy petition under chapter 11 of the Bankruptcy Code. The chapter 11
trustee for RDM is in the process of selling all of RDM's assets to satisfy its
obligations to its creditors and the Company believes that its equity interest
will not be entitled to receive any distributions. The Company also holds
additional claims against RDM in the RDM proceeding. There can be no assurance
that the Company will receive any distribution with respect to such claims.
The year of 1998 was one of significant change and challenges in the business
environment in which the Company operates. The Company announced numerous
expansions and improvements to its networks, despite the economic downturn in
the former Soviet Union and much of Eastern Europe and slower growth in China.
The Company continuously monitors and reviews the performance of its operations
to maximize value to its shareholders. During 1998, the Company continued to
focus its growth on opportunities in communications businesses. The convergence
of cable television and telephony and the relationship of each business to
Internet access has provided the Company a unique opportunity.
2
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
However, as the Company has seen in the current year, the quick pace of
technological, regulatory and political change can effectively limit the
opportunities for the Company in some of the businesses in which it operates.
During 1997 and 1998, the Company completed the sales of its entertainment
assets, which has provided significant funds for the Company's expansion in
communications businesses. The Company saw limited growth opportunities in
trunked mobile radio and in July 1998 sold its investment in Protocall Ventures.
The Company still owns an interest in one trunked mobile radio venture and is
currently evaluating how best to maximize its value to the Company. With the
sale of these non-strategic assets the Company can focus on its core business of
providing affordable modern digital voice, data and multimedia communications
capabilities at the lowest possible capital cost in order to generate the
highest feasible return on investment.
The Company's strategy is as follows: Install modern wireless and wireline
technologies in combination to achieve the best mix of economy, performance and
accessibility to consumers. Then, market intensively a steadily expanding array
of value-added services including local telephone and cable service, specialized
cable programming, long-distance telephone service, cellular telephone service,
mobile telephone service and, ultimately, the Internet and high bandwidth
digital information and entertainment services.
The Company feels it can accomplish this goal by actively pursuing investments,
new licenses and agreements for communications services in new markets. The
Company continues to target emerging markets with strong economies which lack
adequate communications services. The Company will continue to pursue growth
opportunities through acquisitions.
The Company's businesses operate in an environment with significant competing
technologies and political and economic challenges. The Communications Group's
paging business is experiencing increasing competition from cellular telephony
in some of the markets in which it operates. There is an expectation of similar
competition in the future in other markets where the Communications Group has
paging operations. Despite a number of operating and marketing initiatives to
diminish the effects of the increased competition, including calling party pays,
the paging operations continued to generate operating losses in 1998. In the
current environment, the potential for growth in most of the markets the
Communications Group's paging operations compete in are limited in the near
term. Consistent with the Company's strategy to maximize its greatest value for
the capital employed, the Communications Group has developed a revised operating
plan to stabilize its paging operations. Under the revised plan, the
Communications Group intends to manage its paging business to a level that will
not require significant additional funding for its operations. The Company
anticipates that under the revised plan, the paging business's operating loss
will decrease significantly. As a result of the revised plan, the Company has
taken a non-cash, nonrecurring charge on its paging assets of $49.9 million,
which includes a $35.9 million write off of goodwill and other intangibles. The
non-cash, nonrecurring charge adjusted the carrying value of goodwill and other
intangibles, fixed assets and investments in and advances to Joint Ventures and
wrote down inventory.
The Company believes that there is an inherent value to delivery of data via
wireless transmission and the increased demand for data transmission may create
a valuable business for the use of its paging frequencies. The Company will
continue to explore these areas and other opportunities for the paging business.
During 1998, a number of the countries in which the Communications Group
operates experienced economic and financial difficulties. Adverse economic
conditions in Russia resulted in a national liquidity crisis, devaluation of the
rouble, higher interest rates and reduced opportunities for refinancing or
refunding of maturing debts. Although the Russian government announced policies
intended to
3
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
address the structural weakness in the Russian economy and financial sector, it
is unclear if such policies will improve the economic situation.
The financial crisis and the government's response may result in reduced
economic activity, a reduction in the availability of credit and the ability to
service debt, further increases in interest rates, an increased rate of
inflation or hyperinflation, further devaluation of the rouble, restrictions on
convertibility of the rouble and movements of hard currency and an increase in
the number of bankruptcies of entities, including bank failures, labor unrest
and strikes.
If the economic and financial situation in Russia and other emerging markets
does not improve, the reduced level of economic activity and the opportunity to
obtain financing in these markets could have a material adverse effect on the
operations of the Communications Group. If such factors should materialize the
Company expects such factors to affect its cable television, paging and radio
broadcasting businesses in Russia, Belarus and other emerging countries.
Current Chinese law and regulation prohibit foreign companies and joint ventures
in which they participate from providing telephony services to customers in
China and generally limit the role that foreign companies or their joint
ventures may play in the telecommunications industry. As a result, the
Communications Group's investments in joint ventures in China have been made
through a structure known as the Sino-Sino-Foreign joint venture, a widely used
method for foreign investment in the Chinese telecommunications industry, in
which the foreign venturer is a provider of telephony equipment, financing and
technical services to telecommunications operators and not a direct provider of
telephone service.
Since mid-1998, there has been uncertainty regarding possible significant
changes in the regulation of and policy concerning foreign participation in and
financing of the telecommunications industry in China, including the continued
viability of the sino-sino foreign structure and associated service and
consulting arrangements with China United Telecommunications Incorporated, known
generally as China Unicom, the operator of telephony services with which the
Communications Group's joint ventures have contracted. The Communications Group
has received notification from China Unicom stating that a department of the
Chinese government has requested termination of one of its four joint
telecommunications projects in China. Negotiations have begun with
representatives of China Unicom on the amount of compensation and terms of the
resolution of all issues relating to the termination of the venture. While the
notification letter involved only one of the Communications Group's joint
ventures, and the Communications Group has been informed by China Unicom that
the letter applies to one other joint venture, the Communications Group expects
that the other two telecommunications projects in which it has invested will
receive similar letters. In light of the current uncertainty, the Communications
Group is unable to estimate the impact of such negotiations and expected winding
up of its other two Chinese joint ventures. These negotiations, if adversely
concluded, could have a materially negative effect on the Communications Group's
financial position and operating results. The Communications Group is currently
evaluating other investment opportunities in China and recently announced the
establishment of a new joint venture in China to develop and operate an
e-commerce system. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments--Chinese Joint
Ventures."
The foregoing factors relating to economic and financial conditions in Russia
and other emerging markets, and to Chinese law and regulation relating to
foreign investment in the telecommunications industry, have not had a
significant effect on the Company's financial condition or results of operations
as of and for the year ended December 31, 1998. As is noted above, the Company
cannot yet predict the impact that such factors may have on its future financial
condition or results of operations. In addition, the Company reports the results
of the operations of the Communications Group's operations in Eastern Europe and
the republics of the former Soviet Union, and the distributable cash flow
4
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
generated by the telephony systems to which the Company's joint ventures provide
funding and services, on a three month lag and therefore the impact of such
factors, if any, are not yet fully reflected in the Company's results of
operations.
During 1998, the Company's Communications Group continued to experience
significant subscriber growth. Aggregate subscribers to the Communications
Group's joint ventures' various services at the 1998 fiscal year-end was
520,182, representing a growth of approximately 70% over the 1997 fiscal
year-end total of 305,198 subscribers. The Communications Group's financial
results for December 31 include the Communications Group's joint ventures for
the 12 months ending September 30th.
Metromedia Company, a Delaware general partnership, holds 7,989,206 shares of
the Company's common stock. John W. Kluge, the Company's Chairman of the Board,
and Stuart Subotnick, its Vice Chairman, President and Chief Executive Officer,
are Metromedia Company's partners. For a description of the securities of the
Company held by Metromedia Company and its affiliates, see "Item 12. Security
Ownership of Certain Beneficial Owners and Management." The Company and
Metromedia Company are parties to a management agreement under which Metromedia
Company provides management services to the Company, and to a trademark license
agreement, pursuant to which the Company uses the "Metromedia" name. See "Item
13. Certain Relationships and Related Transactions--Relationship with Metromedia
Company."
The Company's principal executive offices are located at One Meadowlands Plaza,
East Rutherford, New Jersey 07073-2137, telephone: (201) 531-8000.
Certain statements set forth below in this Form 10-K constitute "Forward-Looking
Statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934, as amended. See
"Special Note Regarding Forward-Looking Statements" on page 97.
DESCRIPTION OF BUSINESS GROUPS
COMMUNICATIONS GROUP
The Communications Group invests in communications businesses in two primary
geographic areas: Eastern Europe and the former Soviet Union, and China. The
percentage of consolidated revenues from operations in Eastern Europe and the
former Soviet Union for 1998, 1997 and 1996 were 13%, 10%, and 38%,
respectively. In Eastern Europe and the former Soviet Union, the Communications
Group generally owns 50% or more of the operating joint ventures in which it
invests. Currently, legal restrictions in China prohibit foreign participation
in the operation of or ownership in the telecommunications sector. The
Communications Group's China joint ventures invest in telephony system
construction and development for China Unicom. The completed telephony systems
are operated by China Unicom. The China joint ventures receive payments from
China Unicom based upon distributable cash flow generated by the systems, for a
cooperation period of 15-25 years for each expansion phase financed and
developed. These payments are in return for the joint venture providing
financing, technical advice, consulting and other services. Statistical data
regarding subscribers, population, etc. for the joint ventures in China relate
to the telephony systems of China Unicom with respect to which such joint
ventures provide funding and services. The Communications Group has received
notification from China Unicom stating that a department of the Chinese
government has requested termination of two of its four joint telecommunications
projects in China and the Communications Group expects that the other two
telecommunications projects in which it has invested will receive similar
letters. See "Management's Analysis of Financial Condition and Results of
Operations--Recent Developments--Chinese Joint Ventures."
At December 31, 1998, the Communications Group owned interests in and
participated with partners in the management of joint ventures that had 46
operational systems, consisting of 11 cable television
5
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
systems, 2 global system for mobile communiations or GSM cellular telephone
systems, 1 joint venture building out an operational GSM system and providing
financing, technical assistance and consulting services to the local system
operator, 1 international and long distance telephony provider, 1 wireless local
loop operator, 13 paging systems, and 17 radio broadcasting stations. In
addition, the Communications Group has interests in and participates with
partners in the management of joint ventures that, as of December 31, 1998, had
5 pre-operational systems, consisting of 1 wireless local loop service provider,
1 digital advanced mobile phone or DAMPS system cellular provider and 2
companies participating in the construction and development of local telephone
networks in China for up to 1 million lines and 1 joint venture which will
assist in the build out of a GSM system and provide financing, technical and
consulting service to the local operator. The Company believes that all of the
systems will be launched during 1999.
The Company's Communications Group's joint ventures experienced significant
growth in 1998. Total subscribers at the end of the 1998 fiscal year-end was
520,182 compared with 305,198 at fiscal year-end 1997, an increase of
approximately 70%. The Company's financial results for December 31 include the
Communications Group's joint ventures for the 12 months ending September 30th.
Total combined revenues reported by the Communications Group's consolidated and
unconsolidated joint ventures for the years ended December 31, 1998, 1997, and
1996 were $130.1 million, $91.2 million, and $57.2 million, respectively. The
Communications Group invested approximately $105.9, $104.7 million, and $52.2
million during the years ended December 31, 1998, 1997, and 1996, respectively,
in the construction and development of its consolidated and unconsolidated joint
ventures' communications networks and broadcasting stations.
The following chart summarizes operating statistics by service type of both the
licensed pre-operational and operational systems constructed by the
Communications Group's joint ventures:
<TABLE>
<CAPTION>
TARGET
MARKETS POPULATION/
OPERATIONAL HOUSEHOLDS
PRE-OPERATIONAL AT (MILLIONS) (A) AGGREGATE
MARKETS AT DECEMBER AT SUBSCRIBERS AT
DECEMBER 31, DECEMBER 31, DECEMBER 31,
31, ----------- -------------- -------------------
COMMUNICATIONS SERVICE 1998 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------ ---------- ---- ---- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Telephony (b):
Cellular Telecommunications............................... 2(c) 3(d) 3 13.5 13.5 94,084 21,842
Fixed Telephony (e)....................................... 3 1 -- 49.4(f) 41.8 n/a n/a
International and Long Distance Telephony (f)............. -- 1 1 5.5 5.5 n/a n/a
Cable Television............................................ -- 11 9 9.6 9.5 315,864 225,525
Paging (g).................................................. -- 13 11 103.0 89.5 110,234 57,831
Radio Broadcasting.......................................... -- 17 15 10.7 10.7 n/a n/a
--- ---- ---- -------- --------
5 46 39 520,182 305,198
--- ---- ---- -------- --------
--- ---- ---- -------- --------
</TABLE>
- ------------------------------
(a) Covers both pre-operational markets and operational markets. Target
population is provided for paging and telephony other than fixed telephony
and target households are provided for cable television systems, radio
stations and fixed telephony.
(b) During 1998, the Communications Group sold all of its interests in trunked
mobile radio, with the exception of its trunk mobile radio operation in
Kazakhstan, Spectrum. In addition, the Company wrote down the carrying value
of its investment in Spectrum since it is a non-strategic asset, although
the Communications Group will continue to operate the joint venture to
maximize its ultimate value to the Company.
(c) The Communications Group owns 46% of a pre-operational DAMPS cellular
telephone joint venture in the Tyumen region of the Russian Federation and a
second pre-operational joint venture in Ningbo City which is participating
in the build out of a GSM system and providing financing, technical
assistance and consulting services to the system operator.
6
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
(d) The Communications Group's operational systems include its joint ventures
operating a GSM system in Latvia and Georgia and its joint venture in Ningbo
City, China, which is participating in the build-out of an operational GSM
system by providing financing, technical assistance and consulting services
to the system's operator. The Communications Group has received notification
from China Unicom stating that a department of the Chinese government has
requested termination of two of its four joint telecommuncations projects in
China and the Communications Group expects that the other two
telecommunications projects in which it has invested will receive similar
letters. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Recent Developments--Chinese Joint Ventures."
(e) The Communications Group owns 38% of a pre-operational wireless local loop
system licensed to provide services throughout Azerbaijan, and owns 54%
interests in two pre-operational joint ventures in China that are
participating in the construction and development of a local telephone
network for up to one million lines.
(f) Reflects the population of Sichuan Province and Chongqing Municipality in
China where the Communications Group is participating in the construction of
local wireline networks, and Kazakhstan where the Communications Group's
joint venture is licensed to operate. The Communications Group has received
notification from China Unicom stating that a department of the Chinese
government has requested termination of two of its four joint
telecommuncations projects in China and expects that the other two
telecommunications projects in which it has invested will receive similar
letters. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Recent Developments--Chinese Joint Ventures."
(g) Target population for the Communications Group's paging joint ventures
includes the total population in the jurisdictions where such joint ventures
are licensed to provide services. In many markets, however, the
Communications Group's paging system currently only covers the capital city.
7
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
JOINT VENTURE OWNERSHIP STRUCTURES
The following table summarizes the Communications Group's joint ventures and
subsidiaries at December 31, 1998, as well as the amounts contributed, amounts
loaned net of repayments and total amounts invested in such joint ventures and
subsidiaries at December 31, 1998 (in thousands).
<TABLE>
<CAPTION>
AMOUNT AMOUNT
CONTRIBUTED LOANED TOTAL
TO JOINT TO JOINT INVESTED IN
COMPANY VENTURE/ VENTURE/ JOINT VENTURE/
JOINT VENTURE (1) OWNERSHIP % SUBSIDIARY SUBSIDIARY SUBSIDIARY (2)
- -------------------------------------------------------- ------------ ----------- ---------- ---------------
<S> <C> <C> <C> <C>
CELLULAR TELECOMMUNICATIONS
Baltcom GSM (Latvia).................................... 22% $ 13,736 $ -- $ 13,736
Magticom (Tbilisi, Georgia)............................. 35% 2,450 17,138 19,588
Tyumenruskom (Tyumen, Russia) (3)....................... 46% 986 1,387 2,373
Ningbo Ya Mei Telecommunications Co., Ltd. (Ningbo City,
China) (4)............................................ 41% 9,530 22,961 32,491
Ningbo Ya Lian Telecommunications Co., Ltd. (Ningbo
Municipality, China) (3) (4).......................... 41% 5,046 2,009 7,055
----------- ---------- ---------------
31,748 43,495 75,243
----------- ---------- ---------------
FIXED TELEPHONY
Sichuan Tai Li Feng Telecommunications Co., Ltd.
(Sichuan Province, China) (3) (5)..................... 54% 11,087 9,315 20,402
Chongqing Tai Le Feng Telecommunications Co., Ltd.
(Chongqing Municipality, China) (3) (5)............... 54% 13,581 2,478 16,059
Instaphone (Kazakhstan)................................. 50% 28 1,631 1,659
Caspian American Telecommunications (Azerbaijan) (3)
(6)................................................... 38% 200 5,409 5,609
----------- ---------- ---------------
24,896 18,833 43,729
----------- ---------- ---------------
INTERNATIONAL AND LONG DISTANCE TELEPHONY
Telecom Georgia (Tbilisi, Georgia)...................... 30% 2,554 -- 2,554
----------- ---------- ---------------
CABLE TELEVISION (14)
Romsat Cable TV (Bucharest, Romania) (7)................ 100% 2,405 6,633 9,038
Viginta (Vilnius, Lithuania) (7)........................ 55% 397 3,174 3,571
ATK (Archangelsk, Russia) (8)........................... 81% 1,597 150 1,747
Kosmos TV (Moscow, Russia).............................. 50% 1,093 13,032 14,125
Baltcom TV (Riga, Latvia)............................... 50% 819 12,260 13,079
Ayety TV (Tbilisi, Georgia)............................. 49% 779 8,569 9,348
Kamalak TV (Tashkent, Uzbekistan)....................... 50% 400 2,996 3,396
Sun TV (Chisinau, Moldova).............................. 50% 400 7,122 7,522
Alma TV (Almaty, Kazakhstan)............................ 50% 222 6,372 6,594
Cosmos TV (Minsk, Belarus).............................. 50% 400 4,268 4,668
Teleplus (St. Petersburg, Russia)....................... 45% 990 1,419 2,409
----------- ---------- ---------------
9,502 65,995 75,497
----------- ---------- ---------------
</TABLE>
8
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
<TABLE>
<CAPTION>
AMOUNT AMOUNT
CONTRIBUTED LOANED TOTAL
TO JOINT TO JOINT INVESTED IN
COMPANY VENTURE/ VENTURE/ JOINT VENTURE/
JOINT VENTURE (1) OWNERSHIP % SUBSIDIARY SUBSIDIARY SUBSIDIARY (2)
- -------------------------------------------------------- ------------ ----------- ---------- ---------------
<S> <C> <C> <C> <C>
PAGING
Baltcom Paging (Estonia) (7)............................ 85% $ 3,715 $ 2,653 $ 6,368
CNM (Romania) (7)....................................... 54% 490 12,877 13,367
Paging One Services (Austria) (7) (13).................. 100% 1,036 10,833 11,869
Eurodevelopment (Ukraine) (7)........................... 51% 930 1,539 2,469
Baltcom Plus (Latvia)................................... 50% 250 3,093 3,343
Paging One (Tbilisi, Georgia)........................... 45% 250 1,589 1,839
Raduga Poisk (Nizhny Novgorod, Russia).................. 45% 330 51 381
PT Page (St. Petersburg, Russia)........................ 40% 1,100 49 1,149
Kazpage (Kazakhstan) (9)................................ 26-41% 521 407 928
Kamalak Paging (Tashkent, Samarkand, Bukhara and
Andijan, Uzbekistan).................................. 50% 435 2,131 2,566
Alma Page (Almaty and Ust-Kamenogorsk, Kazakhstan)...... 50% -- 2,314 2,314
Paging Ajara (Batumi, Georgia).......................... 35% 43 283 326
Mobile Telecom (Russia) (10)............................ 50% 7,500 352 7,852
----------- ---------- ---------------
16,600 38,171 54,771
----------- ---------- ---------------
RADIO BROADCASTING
Radio Juventus (Budapest, Hungary) (7).................. 100% 8,107 1,012 9,119
SAC (Moscow, Russia) (7)................................ 83% 631 2,499 3,130
Radio Skonto (Riga, Latvia) (7)......................... 55% 302 83 385
Radio One (Prague, Czech Republic) (7).................. 80% 627 484 1,111
NewsTalk Radio (Berlin, Germany) (7).................... 85% 2,758 5,625 8,383
Radio Vladivostok, (Vladivostok, Russia) (7)............ 51% 267 47 314
Country Radio (Prague, Czech Republic) (7).............. 85% 2,040 -- 2,040
Radio Georgia (Tbilisi, Georgia) (7) (11)............... 51% 560 257 817
Radio Katusha (St. Petersburg, Russia) (7) (11)......... 75% 464 805 1,269
Radio Nika (Socci, Russia).............................. 51% 260 -- 260
AS Trio LSL (Estonia) (11).............................. 49% 1,536 409 1,945
----------- ---------- ---------------
17,552 11,221 28,773
----------- ---------- ---------------
OTHER (12)
Spectrum (Kazakhstan)................................... 33% 200 1,645 1,845
----------- ---------- ---------------
TOTAL................................................... $ 103,052 $ 179,360 $ 282,412
----------- ---------- ---------------
----------- ---------- ---------------
</TABLE>
- ------------------------------
(1) Each parenthetical notes the area of operations for each operational joint
venture or the area for which each pre-operational joint venture is
licensed.
(2) Total investment does not include any income or losses.
(3) Pre-operational systems as of December 31, 1998.
(4) Ningbo Ya Mei Telecommunications is supporting the development by China
Unicom, a Chinese telecommunications operator, of a GSM mobile telephone
system in Ningbo City, China. Ningbo Ya Lian Telecommunications is similarly
supporting development by China Unicom of expansion of GSM services
throughout Ningbo Municipality, China. Both joint ventures provide
financing, technical assistance and consulting services to the Chinese
operator. The Communications Group has received notification from China
Unicom stating that a department of the Chinese government has requested
termination of two of its four joint telecommunications projects in China
and the Communications Group expects that the other two telecommunications
projects in which it has invested will receive similar letters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments--Chinese Joint Ventures."
9
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ITEM 1. BUSINESS (CONTINUED)
(5) Sichuan Tai Li Feng Telecommunications and Chongqing Tai Le Feng
Telecommunications are supporting the development by China Unicom of
fixed-line, public switched telephone networks in Sichuan Province and
Chongqing Municipality, China, respectively. Both joint ventures provide
financing, technical assistance and consulting services to the Chinese
operator. In January 1999, the fixed wireline telephony systems in Sichuan
and Chongqing commenced commercial operations. The Communications Group has
received notification from China Unicom stating that a department of the
Chinese government has requested termination of two of its four joint
telecommunications projects in China and the Communications Group expects
that the other two telecommunications projects in which it has invested will
receive similar letters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments--Chinese
Joint Ventures."
(6) In August 1998, the Communications Group acquired a 76% interest in
Omni-Metromedia Caspian, Ltd., a company that owns 50% of a joint venture in
Azerbaijan, Caspian American. Caspian American has been licensed by the
Ministry of Communications of Azerbaijan to provide high speed wireless
local loop services and digital switching throughout Azerbaijan.
Omni-Metromedia has committed to provide up to $40.5 million in loans to
Caspian American for the funding of equipment acquisition and operational
expenses in accordance with Caspian American's business plans. Caspian
American Telecommunications launched commercial operations in April 1999. In
May 1999, the Communications Group sold 2.2% of Omni-Metromedia thereby
reducing its ownership interest in Caspian American Telecommunications to
37%.
(7) Results of operations are consolidated with the Company's financial
statements.
(8) The investment in this venture was made in the quarter ended December 31,
1998. The joint venture's results of operations will be consolidated with
the Company's financial statements in the quarter ended March 31, 1999.
(9) Kazpage is comprised of a service entity and 10 paging joint ventures that
provide services in Kazakhstan. The Company's interest in the joint ventures
ranges from 26% to 41% and its interest in the service entity is 51%.
Amounts described as loaned in the above table represent loans to the
service entity which in turn funds the joint ventures. The results of
operations of the service entity are consolidated with the Company's
financial statements.
(10) The Company's purchase of Mobile Telecom closed during June 1998. The
Company purchased its 50% interest in Mobile Telecom for $7.0 million plus
two additional earnout payments to be made on February 14, 2000 and February
14, 2001. Each of the two earnout payments is to be equal to $2.5 million,
adjusted up or down based upon performance compared to certain financial
targets. Simultaneously with the purchase of Mobile Telecom, the Company
purchased 50% of a related pager distribution company for $500,000.
(11) Radio Katusha includes two radio stations operating in St. Petersburg,
Russia and AS Trio LSL includes five radio stations operating in various
cities throughout Estonia. Radio Georgia includes two radio stations
operating in Georgia.
(12) In July 1998 the Communications Group sold its share of Protocall Ventures
Limited. As part of the transaction, Protocall Ventures Limited repaid its
outstanding debt to the Communications Group. The Communications Group
retained Protocall Ventures Limited's interest in Spectrum. The Company
recorded a gain of approximately $7.1 million on the sale. The Company's
interest in Spectrum of $1.6 million was written down and offset against the
gain on the sale of Protocall Ventures.
(13) On July 2, 1999, Paging One Services entered into an agreement to sell
certain of its assets and transfer its customers to a competing service
provider in Austria. Pursuant to such agreement, Paging One shall transfer
title to such assets and complete the transfer of its customers to the buyer
by September 3, 1999.
(14) In June 1999, Ala TV, a joint venture 51% owned by the Communications Group
and 4% owned by its 50% owned Kazakh joint venture Alma TV, launched cable
television services in Bishkek, Kyrgyzstan.
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ITEM 1. BUSINESS (CONTINUED)
The following table summarizes by country the amounts contributed, amounts
loaned net of repayments and total amounts invested in the Communications
Group's joint ventures and subsidiaries at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
AMOUNT AMOUNT TOTAL
CONTRIBUTED LOANED INVESTED
TO JOINT TO JOINT IN JOINT
VENTURE/ VENTURE/ VENTURE/
COUNTRY SUBSIDIARY % SUBSIDIARY % SUBSIDIARY %
- ---------------------------------------- ----------- --------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Austria................................. $ 1,036 1.0 $ 10,833 6.0 $ 11,869 4.2
Azerbaijan.............................. 200 0.2 5,409 3.0 5,609 2.0
Belarus................................. 400 0.4 4,268 2.4 4,668 1.7
Czech Republic.......................... 2,667 2.6 484 0.3 3,151 1.2
Estonia................................. 5,251 5.1 3,062 1.7 8,313 2.9
Georgia................................. 6,636 6.4 27,836 15.5 34,472 12.2
Germany................................. 2,758 2.7 5,625 3.1 8,383 3.0
Hungary................................. 8,107 7.9 1,012 0.6 9,119 3.2
Kazakhstan.............................. 971 0.9 12,369 6.9 13,340 4.7
Latvia.................................. 15,107 14.6 15,436 8.6 30,543 10.8
Lithuania............................... 397 0.4 3,174 1.8 3,571 1.3
Moldova................................. 400 0.4 7,122 4.0 7,522 2.7
People's Republic of China.............. 39,244 38.1 36,763 20.5 76,007 26.9
Romania................................. 2,895 2.8 19,510 10.9 22,405 7.9
Russia.................................. 15,218 14.8 19,791 11.0 35,009 12.2
Ukraine................................. 930 0.9 1,539 0.9 2,469 0.9
Uzbekistan.............................. 835 0.8 5,127 2.8 5,962 2.2
----------- --------- ---------- --------- ----------- ---------
$ 103,052 100.0 $ 179,360 100.0 $ 282,412 100.0
----------- --------- ---------- --------- ----------- ---------
----------- --------- ---------- --------- ----------- ---------
</TABLE>
BUSINESS STRATEGY
The Communications Group's markets generally have large populations, with high
density and strong economic potential, but lack reliable and efficient
communications service. The Communications Group believes that most of these
markets have a growing number of persons who desire and can afford high quality
communications services. The Communications Group has assembled a management
team consisting of executives who have significant experience in the
communications services industry and in operating businesses in developing
markets. This management team believes that the Communications Group's systems
can be constructed with relatively low capital investments and focuses on
markets where the Company can provide multiple communications services. The
Company believes that the establishment of a far-reaching communications
infrastructure is crucial to the development of the economies of these
countries, and such development will, in turn, supplement the growth of the
Communications Group.
The Communications Group believes that the performance of its joint ventures has
demonstrated that there is significant demand for its services in its license
areas. While the Communications Group's operating systems have experienced rapid
growth to date, many of the systems are still in early stages of rolling out
their services, and therefore, the Communications Group believes it will
significantly increase its subscriber and customer bases as these systems
mature. In addition, as an early entrant in many markets, the Communications
Group believes that it has developed a reputation for providing quality service
and has formed important relationships with local entities. As a result, the
Company
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ITEM 1. BUSINESS (CONTINUED)
believes it will be able to capitalize on opportunities to provide additional
communications services in its markets as new licenses are awarded.
The Communications Group continually explores new investment opportunities for
communications systems in Eastern Europe, the former Soviet Union, China and
other emerging markets. In the former Soviet Union, the Communications Group
principally utilizes wireless local loop telephony technology which offers a
high quality, cost effective alternative to operators seeking to replace or
compete with antiquated telephone systems. This technology can provide telephony
system operators with competitive advantages in speed of deployment, low unit
cost and ability to deliver high speed facsimile, data communication and
Internet access services. This range and depth of the Communications Group's
capabilities in advanced communications technology and business development
makes the Communications Group a uniquely attractive joint venture partner for
parties seeking to exploit the substantial growth opportunities present in the
emerging communications markets. The Communications Group believes that it is
well positioned to convert these capabilities into a continuing stream of new
investment projects.
The Communications Group's objective is to develop its core business of
providing affordable modern digital voice, data and multimedia communications
capabilities to consumers at the lowest possible capital cost in order to
generate the highest feasible return on investment. The Communications Group
intends to achieve its objective and expand its subscriber and customer bases,
as well as its revenues and cash flow, by pursuing the following strategies:
INSTALL MODERN WIRELESS AND WIRELINE TECHNOLOGIES IN COMBINATION TO ACHIEVE THE
BEST MIX OF ECONOMY, PERFORMANCE AND ACCESSIBILITY TO CONSUMERS. The
Communications Group's cable television joint ventures utilize three possible
distribution technologies; microwave multipoint distribution system, wireline
cable or a hybrid combination of microwave multipoint distribution and wireline
cable in which microwave multipoint distribution acts as a backbone to deliver
programming to wireline cable networks for further distribution to the customer.
UTILIZE LOW COST WIRELESS TECHNOLOGIES THAT ALLOW FOR RAPID BUILD-OUT. Many
markets where the Communications Group has or is pursuing wireless licenses have
limitations on wireline construction above ground and/or underground. The use of
wireless technologies has allowed and will continue to allow the Communications
Group to build-out its existing and future license areas, where such
technologies are appropriate, quickly and at a low cost.
COMPLETE BUILD-OUT OF EXISTING LICENSE AREAS. Since its formation in 1990, the
Communications Group has been investing in joint ventures to obtain
communications licenses in certain emerging markets. During the years ended
December 31, 1998, 1997, and 1996, the Communications Group invested
approximately $105.9 million, $104.7 million, and $52.2 million, respectively,
in the construction and development of its consolidated and unconsolidated joint
ventures' communications networks and broadcast stations in existing license
areas.
AGGRESSIVELY GROW THE SUBSCRIBER AND ADVERTISER BASE IN EXISTING LICENSE
AREAS. The Communications Group's existing license areas, in the aggregate,
represent a large potential revenue base. The Communications Group is
aggressively marketing its services in these areas and is experiencing
significant increases in its subscriber count and advertising base. The
Communications Group believes it will continue to add subscribers by (i)
targeting each demographic in its markets with customized communications
services, (ii) cross-marketing and bundling communications services to existing
customers, (iii) providing technologically-advanced services and a high level of
customer service, (iv) providing new and targeted programming on its radio
stations to increase advertising revenue, and
12
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
(v) opportunistically acquiring additional existing systems in its service areas
and in other strategic areas to increase its subscriber base.
INVEST IN VERTICAL BUSINESSES ALLIED TO CORE TELECOMMUNICATIONS. The
Communications Group is actively pursuing partnerships with data service
providers, information service operators, Internet access providers and firms
developing electronic commerce applications. Such businesses build vertically
upon the core communications infrastructure for which the Communications Group
has already established a position and reputation. These vertical business
opportunities offer prospects of extraordinary growth and substantially lower
restrictions on foreign participation.
PURSUE ADDITIONAL OPPORTUNITIES IN EXISTING MARKETS. The Communications Group
is pursuing opportunities to provide additional communications services in
regions in which it currently operates. This strategy enables the Communications
Group to (i) leverage its existing infrastructure and brand loyalty, (ii)
capitalize on marketing opportunities afforded by bundling its services, and
(iii) build brand loyalty and awareness. The Communications Group believes that
it has several competitive advantages that will enable it to obtain additional
licenses and/or agreements in these markets, including (i) established
relationships with local strategic joint venture partners and local government,
(ii) a proven track record of handling and operating quality systems, and (iii)
a fundamental understanding of the regions' political, economic and cultural
climate.
INVEST IN NEW MARKETS. The Communications Group is actively pursuing
investments in joint ventures to obtain new licenses and/or agreements for
communications services in new markets. The Company is targeting emerging
markets with strong economic potential which lack adequate communications
services. In evaluating whether to enter a new market, the Communications Group
assesses, among other factors, (i) the potential demand for the Communications
Group's services and the availability of competitive services, (ii) strength of
local partners, and (iii) the political, social and economic climate. The
Communications Group has identified several attractive opportunities in Eastern
Europe and the Pacific Rim. In addition, in 1998, the Communications Group
acquired a 38% interest in a joint venture licensed to provide wireless local
loop telephone services in the Republic of Azerbaijan and a 46% interest in a
joint venture licensed to provide digital advanced mobile phone or DAMPS system
cellular service in the Tyumen region of Russia.
TELEPHONY
The Communication Group's telephony line of business consists of cellular
telecommunications, fixed telephony and international and long distance
telephony calling.
CELLULAR TELECOMMUNICATIONS
OVERVIEW. The Communications Group owns a 22% interest in Baltcom GSM which
operates a nationwide cellular telecommunications system in Latvia. The
Communications Group also owns a 35% interest in Magticom, a joint venture that
operates cellular telecommunications systems in major cities in Georgia and is
licensed to provide nationwide services. Western Wireless International Inc., a
leading U.S. cellular provider, is a partner in each of these joint ventures.
The Communications Group believes that there is a large demand for cellular
telephone service in each of Latvia and Georgia due to the limited supply and
poor quality of wireline telephone service in these markets as well as the
rapidly growing demand for the mobility offered by cellular telephony service.
Landline telephone penetration is 25% in Latvia and 9% in Georgia. The demand
for reliable and mobile telephone service is increasing rapidly and the pace is
expected to continue as commerce in these regions continues to experience rapid
growth.
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ITEM 1. BUSINESS (CONTINUED)
In 1998, the Communications Group acquired a 46% interest in a pre-operational
joint venture licensed to provide DAMPS service in the Tyumen region of Russia.
The Communications Group expects such joint venture to commence operations in
1999.
The Communications Group owns a 70% interest in a joint venture that finances
and provides supporting services to the China Unicom GSM system in Ningbo City,
China. This system launched commercial service in 1997. The Communications Group
has received notification from China Unicom stating that a department of the
Chinese government has requested termination of two of its four joint
telecommunications projects in China and the Communications Group expects that
the other two telecommunications projects in which it has invested will receive
similar letters. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments-- Chinese Joint
Ventures."
TECHNOLOGY. The Communications Group's cellular telephone networks in Latvia,
Georgia and the cellular network to which it provides funding and services in
China operate using the GSM standard. GSM is the standard for cellular service
throughout Western Europe and Asia, which allows the Communications Group's
customers to roam throughout the region. GSM's mobility is a significant
competitive advantage compared to competing advanced mobile phone or AMPS
systems which cannot readily offer international roaming service.
MARKETING. The Communications Group targets its cellular telephony services
toward the rapidly growing number of individuals, corporations and other
organizations with a need for mobility, ready access to a high quality voice
transmission service and the ability to conduct business outside of the
workplace or home. The Communications Group sells cellular phones at a small
mark-up to cost. This pass-through strategy encourages quick market penetration
and early acceptance of cellular telephony as a desirable addition to existing
fixed telephony service.
Management believes that its cellular systems will benefit from several
competitive advantages in each of its markets. The Communications Group intends
to market its cellular telephony service to customers of its existing cable
television and paging services in both Latvia and Georgia. The Communications
Group believes that this database of names will be useful in marketing its
cellular telephony services, as these are customers who have already exhibited
an interest in modern communications services. The Communications Group's
systems are developed to provide levels of quality and performance significantly
better than those of the competing operator, thereby positioning these systems
to compete effectively for new mobile customers as well as to seize a portion of
the competing operator's customer base.
COMPETITION. The Company's cellular joint ventures face competition in each of
their markets.
Baltcom GSM's primary competitor in Latvia is Latvia Mobile Telecom which
operates two systems. Latvia Mobile Telecom commenced service in 1995. Latvia
Mobile Telecom operates a second system using the older, less efficient
technology that the Communications Group believes will pose less of a
competitive threat than Latvia Mobile Telecom's GSM system. The Communications
Group believes that Magticom's primary competitors in Georgia are Geocell, a
Georgian-Turkish Joint Venture using a GSM system and an existing smaller
provider of cellular telephony services which uses the AMPS technology in its
network, both of which commenced service prior to Magticom. The Communications
Group's primary competition in the Tyumen region will be from a GSM provider.
Baltcom GSM competes with Latvia Mobile Telecom on the basis of price of
service. Baltcom prices its service slightly below the Latvia Mobile Telecom
pricing and has captured approximately one third of the Latvian cellular market.
In Georgia the pricing between operators is essentially the same and the
14
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
competition is for brand name awareness. Magticom has captured approximately one
half of the Georgian cellular market.
The Communications Group's operating partner in China is China Unicom, the first
company franchised to provide public wireless and wireline telephone service in
China that is independent of China Telecom, the historical Chinese monopoly
provider of telephony services. China Unicom competes in both the wireless and
wireline markets with China Telecom, the established operator in each of those
markets. However, China Unicom's systems, including those supported by the
Communications Group, have successfully captured initial positions in China's
rapidly expanding urban telecom markets. Chinese government policy is aimed at
assuring China Unicom's ultimate success as a measure of creating open
competition in the country's telecommunications industry.
The low level of penetration and often poor quality provided by the fixed line
telephone systems in the emerging markets where the Communications Group's
activities are focused create an ideal competitive opportunity for cellular
operators. The low penetration of existing fixed line services means a large,
unserved market exists for cellular operators. The poor quality of existing
fixed line services creates an opportunity for cellular operators to provide
more reliable, higher quality services as an alternative to the fixed line
networks.
The Company's cellular joint ventures are the second entrants in most of their
markets and therefore have the disadvantage of facing the established initial
cellular providers in those markets. However, barriers to entry in cellular
telecommunications markets are very high, as the number of licenses for a
particular market is typically limited and initiation of a cellular system
requires substantial capital expenditures. Therefore, although the Company's
cellular joint ventures face difficulties in taking market share from the
initial operators in their markets, the Company does not anticipate that these
markets will become further fragmented because of these barriers to entry.
FIXED TELEPHONY
OVERVIEW. The Communications Group is currently exploring a number of
investment opportunities in wireless local loop telephony systems in certain
countries in Eastern Europe and the former Soviet Union and other selected
emerging markets and has installed test systems in certain of these markets. The
Communications Group believes that the proposed wireless local loop telephony
technology it is using is a time and cost effective means of improving the
communications infrastructure in such markets. The current telephone systems in
these markets may be antiquated, overloaded, or both and consumers in these
markets often must wait several years to obtain telephone service.
The Communications Group believes that wireless local loop technology is a rapid
and cost effective method to increase the number of subscribers to local
telephone services. Wireless local loop telephony systems can provide telephone
access to a large number of apartment dwellers through a single microwave
transceiver installed on their building. This microwave transceiver sends
signals to and from a receiver located adjacent to a central office of the
public switched telephone network where the signal is routed from or into such
network. This system eliminates the need to build fixed wireline infrastructure
between the central office and the subscribers' building, thus reducing the time
and expense involved in expanding telephone service to customers.
In 1998, the Communications Group acquired a 38% interest in Caspian American
Telecommunications, a joint venture licensed to provide wireless local loop
telephone services in the Republic of Azerbaijan. Caspian American is currently
building out its systems and negotiating an interconnection agreement with the
public switched telephone network. Caspian American launched
15
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
commercial service in April 1999. The Communications Group has formed several
other joint ventures that are currently exploring opportunities to provide
wireless local loop services.
The Communications Group owns 92% interests in joint ventures financing and
supporting China Unicom's development of a wireline public switched telephone
network in the Sichuan and Chongqing regions of southern China. China Unicom
commercially launched public switched telephone network services in the capital
cities of Sichuan and Chongqing in January 1999. The Communications Group has
received notification from China Unicom stating that a department of the Chinese
government has requested termination of two of its four joint telecommunications
projects in China and the Communications Group expects that the other two
telecommunications projects in which it has invested will receive similar
letters. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Developments--Chinese Joint Ventures."
TECHNOLOGY. Wireline network investments funded and serviced by the
Communications Group in China employ high speed fiber optic systems capable of
handling integrated voice, data and video traffic. These systems are
competitively superior to the pre-existing metallic networks commonly deployed
in China.
MARKETING. The wireline networks being assisted by the Communications Group's
joint ventures in the Sichuan and Chongqing regions of China target large
business and government users needing high reliability, high capacity
communications. These modern, fiber optic based networks compete very
effectively against the antiquated and overloaded systems common to China's
urban areas. The rapidly developing demand for advanced communications services
in China's industrial and commercial sectors creates a significant competitive
advantage for these high capacity, high speed networks. In addition, the spare
capacity of facilities deployed to capture large commercial business can
subsequently be marketed, at very low incremental cost, to serve the surrounding
residential communities.
COMPETITION. While the existing wireline telephone systems in Eastern Europe
and the former Soviet Union are often antiquated and provide inferior quality
service, the fact that the network infrastructure is already in place means that
it is a source of competition for the Communications Group's proposed wireless
telephony operations. The Communications Group does not have or expect to have
exclusive franchises with respect to its wireless telephony operations and may
therefore face more significant competition in the future from highly
capitalized entities seeking to provide services similar to or competitive with
the Communications Group's services in its markets.
In certain markets, cellular telephone operators exist and represent a
competitive alternative to the Communications Group's proposed wireless local
loop telephony systems. A cellular telephone can be operated in the same manner
as a wireless loop telephone in that either type of service can simulate
conventional telephone service by providing local, long distance and
international calling from a fixed position in its service area. However, while
cellular telephony enables a subscriber to move from one place in a city to
another while using the service, wireless local loop telephony is intended to
provide fixed telephone services which can be deployed as rapidly as cellular
telephony but at a lower cost per line. This lower cost makes wireless local
loop telephony a more attractive telephony alternative to a large portion of the
populations in the Communications Group's markets that do not require mobile
communications. In addition, because the wireless local loop technology which
the Communications Group is using operates at 64 kilobits per second, it can be
used for high speed facsimile and data transmission, including Internet access.
The low level of penetration and often poor quality provided by the national
telephone systems in the emerging markets where the Communications Group's
activities are focused create an ideal competitive opportunity for the
Communications Group's operators. The low penetration of existing national
16
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ITEM 1. BUSINESS (CONTINUED)
services means a large, unserved market exists for new operators. The poor
quality of existing services creates a strong incentive for customers to switch
to the price competitive, yet higher quality services made possible by the new
operators' more modern networks. The Communications Group believes that such
factors offset most of the competitive advantage that would otherwise be enjoyed
by an entrenched national telecom monopoly.
INTERNATIONAL AND LONG DISTANCE TELEPHONY
OVERVIEW. The Communications Group owns approximately 30% of Telecom Georgia.
Telecom Georgia is the primary international and long distance telephony service
provider in Georgia. Telecom Georgia has interconnect arrangements with several
international long distance carriers such as Sprint and Telespazio. For every
international call made to Georgia through Telecom Georgia, a payment is due to
Telecom Georgia by the interconnect carrier and for every call made from Telecom
Georgia to another country, Telecom Georgia charges its subscribers and pays a
destination fee to the interconnect carrier.
Since Telecom Georgia commenced operations, long distance traffic in and out of
Georgia has increased dramatically as Telecom Georgia has expanded the number of
available international telephone lines.
COMPETITION. Although Telecom Georgia remains the major provider of
international and long distance services, barriers to entry to this market are
very low and competition is expected to increase significantly with the opening
of the market in 1998. Currently there are several new entrants offering
international telephone service. The Communications Group believes that Telecom
Georgia competes primarily on the basis of tariffs and contractual
relationships.
CABLE TELEVISION
OVERVIEW. The Communications Group commenced offering cable television services
in 1992 through its joint ventures' Kosmos TV in Moscow, Russia, and Baltcom TV
in Riga, Latvia. The Communications Group currently has interests in Joint
Ventures which offer cable television services in 11 markets in Eastern Europe
and the former Soviet Union that reported 315,864 subscribers at December 31,
1998, an increase of approximately 40% from 225,525 subscribers at December 31,
1997. In 1998, the Communications Group purchased an 81% interest in a wireless
cable television system operating in Archangelsk, Russia. In June 1999, Ala TV,
a joint venture 51% owned by the Communications Group and 4% owned by its Kazakh
joint venture Alma TV, launched cable television services in Bishkek,
Kyrgyzstan. The Communications Group believes that there is a growing demand for
multi-channel television services in each of the markets where its joint
ventures are operating, which demand is being driven by the lack of quality
television and alternative entertainment options in these markets and the
growing demand for local language entertainment programming.
TECHNOLOGY. The Communications Group's cable television joint ventures utilize
three possible distribution technologies: microwave multipoint distribution,
wireline cable or a hybrid combination of microwave multipoint distribution and
wireline cable in which microwave multipoint distribution acts as a backbone to
deliver programming to wireline cable networks for further distribution to the
customer. The Communications Group believes that microwave multipoint
distribution is an attractive technology to utilize for the delivery of
multi-channel television services in these markets because (i) the initial
construction costs of a microwave multipoint distribution system generally are
significantly lower than wireline cable or direct-to-home satellite
transmission, (ii) the time required to construct a wireless cable network is
significantly less than the time required to build a standard wireline cable
television network covering a comparably-sized service area, (iii) the high
communications tower typically utilized
17
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
by the microwave multipoint distribution system combined with the high density
of multi-family dwelling units in these markets gives the microwave multipoint
distribution systems very high line of sight penetration, (iv) the wide
bandwidth of the spectrum typically licensed to each of the Company's joint
ventures gives each system the ability to broadcast a sufficiently wide variety
of attractive international and localized programming, and (v) microwave
multipoint distribution is a highly effective means to distribute programming to
wireline cable headends eliminating the need for much of the satellite receiving
equipment at each headend.
In each microwave multipoint distribution system operated by the Communications
Group's joint ventures, multichannel signals are broadcast in all directions
from a transmission tower which, in the case of such Joint Ventures' systems, is
typically the highest structure in the city and, as a result, has very high line
of sight penetration. Specialized compact receiving antenna systems, installed
by the Communications Group on building rooftops as part of the system or to
mini-headends in hybrid wireline systems, receive the multiple channel signals
transmitted by the transmission tower. The signal is then transmitted to each
subscriber through a coaxial cabling system within the building or wireline
system. In each city where the Communications Group provides or expects to
provide service, a substantial percentage of the population (e.g., approximately
90% in Moscow) lives in large, multi-dwelling apartment buildings. This
infrastructure significantly reduces installation costs and eases penetration of
cable television services into a city because a single microwave multipoint
distribution receiving location can bring service to numerous apartment
buildings or wireline cable networks serving a large number of people. In order
to take advantage of such benefits, in many areas, the Communications Group is
wiring buildings and/or neighborhoods so that it can serve all of the residents
in the area through one microwave receiving location or directly from the cable
headend. Subscribers to the Communications Group's premium tiered services
typically utilize a set-top converter which descrambles the signal and also
serves as a channel selector. The Communications Group generally utilizes the
same equipment across all of its cable television systems, which enables it to
realize purchasing efficiencies in the build-out of its networks.
While the Communications Group's cable television systems are generally leading
providers of multi-channel television services in each of its markets, in many
markets there are several small undercapitalized wireline competitors. The
Communications Group's joint ventures in Bucharest, Romania and Chisinau,
Moldova have each acquired existing wireline systems. The Communications Group
believes that there are additional acquisition/consolidation opportunities in
several of its markets and will pursue the acquisition of select competitors on
an opportunistic basis.
PROGRAMMING. The Communications Group believes that programming is a critical
component in building successful cable television systems. The Communications
Group currently offers a wide variety of programming including English, French,
German, Romanian and Russian programming, some of which is dubbed or subtitled
into the local language. In order to maximize penetration and revenues per
subscriber, the cable television joint ventures generally offer multiple tiers
of service including, at a minimum, a "lifeline" service, a "basic" service and
a "premium" service. The lifeline service generally provides programming of
local off-air channels and an additional two to four channels such as
MTV-Europe, Eurosport, Nickelodeon, VH-1, Cartoon Network, CNN International,
and Discovery Channel. The basic and premium services generally include the
channels which constitute the lifeline service, as well as an additional number
of satellite channels and a movie channel that offers recent and classic movies.
The content of each programming tier varies from market to market, but generally
includes channels such as MTV-Europe, Eurosport, Nickelodeon, National
Geographic, Cartoon Network, ESPN International, CNN, Star TV, and Discovery
Channel. Each tier also generally offers localized programming.
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ITEM 1. BUSINESS (CONTINUED)
One of the Communications Group's joint ventures offers pay-per-view movies in
one of its markets and the Communications Group plans to add similar services to
its program lineups in certain of its other markets. The subscriber pre-pays for
pay-per-view services and the intelligent decoders that the joint venture uses
automatically deduct the purchase of a particular service from the prepayment.
MARKETING. The Communications Group offers several tiers of programming in each
market and strives to price the lowest tier at a level that is affordable to a
large percentage of the population and that generally compares in price to
alternative entertainment products. Each cable television joint venture also
targets its cable television services toward foreign national households,
embassies, foreign commercial establishments and international or local hotels.
The Communications Group believes that a growing number of subscribers to local
broadcast services will demand the superior quality programming and increased
viewing choices offered by its cable television service. Upon launching a
particular system, the Communications Group uses a combination of event
sponsorships, billboard, radio and broadcast television advertising to increase
awareness in the marketplace about its services.
COMPETITION. The cable TV industry in Eastern Europe and the former Soviet
Union, although still less developed than in the United States, is emerging as
one of the key elements of the region's telecommunications sector. Similar to
developments in the U.S. and western Europe, the Company expects cable
television to become a broadband alternative to the existing telephone networks.
As the Internet gains popularity in the countries of Eastern Europe and former
Soviet Union, the Communications Group believes that cable television will be
able to attract increasing capital, including capital from western investors.
Major telecommunications companies may enter the cable television market to
utilize the broadband advantages of the cable systems' wired networks because
the poor quality of most of the telephone networks in the region makes cable
television's advantages there even more significant than in the United States.
As a result, the Company's cable television joint ventures may face competition
from highly capitalized international and local companies with greater capital
resources and experience than the Company.
Each of the Communications Group's cable television systems competes with other
cable television operators, direct to home satellite providers as well as over
the air broadcast television. The Company's cable television ventures
successfully compete against each type as follows:
- Quality of programming line-ups: The Company offers quality programming
and has established key relationships with many international-programming
providers. For example the Company has the exclusive cable rights to show
Russian language Nickelodeon at its joint ventures.
- Price of services: The Company provides tiered pricing and services to
allow for a low entry point and an upgrade path for higher levels of
services. Most joint ventures have a package at the same rate or slightly
lower than competing services.
- Customer service: The Company provides superior customer service by
employing proven western style management techniques.
- Barriers to entry: The Company pre-wires certain geographic areas to
create a barrier to entry in location where it perceives a competitive
threat.
In some markets, the Company's cable television joint ventures are the market
leaders and in others they share the market with various competitors.
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ITEM 1. BUSINESS (CONTINUED)
PAGING
OVERVIEW. The Communications Group's paging business provides traditional
paging services. The underlying premise for the paging business has been the
availability of service to mobile subscribers at a price significantly lower
than alternative mobile messaging services. When the Communications Group
entered the paging business, the price for cellular communication was
significantly higher than for its paging services which were a viable, low cost
alternative to GSM cellular telephony. At such time, customers could receive
messages and information via the pager at a fraction of the cost of GSM cellular
service.
The paging business is now operating in an increasingly competitive environment.
The most significant impact has been the accelerated growth of GSM use in those
markets in which the Company has paging operations. In the past two years the
number of GSM subscribers has significantly increased in Europe generally and in
many parts of Central and Eastern Europe in particular. For example, in Austria
GSM subscribers grew from approximately 384,000 or 5% penetration at the end of
1995 to approximately 2,271,000 or 28% penetration at the end of 1998.
The combination of deregulation and availability of attractively priced
financing has changed the GSM mobile telephony business by increasing the number
of competitors. This increased level of competition has resulted in new and
innovative pricing structures. The combination of reduced handset prices,
calling party pays tariffs and the introduction of prepaid calling cards has
significantly reduced the cost of entry for GSM subscribers. The GSM phone
service includes voice mail and in many cases short messaging service which is
very similar to paging messaging. A prepaid GSM subscriber can purchase a GSM
handset for approximately $150, receive incoming calls for free (paid for by the
calling party), use voice mail and the short messaging service and only pay for
calls made using the prepaid card.
The Communications Group recognized this competitive risk during 1997 and 1998
and in response rolled out its own programs to reposition its paging services in
a unique fashion. Such programs as calling party pays and "web paging" were
introduced as new applications.
The Communications Group now believes that it will not be able to effectively
compete for its traditional paging customers in those markets where GSM is
combined with calling party pays tariffs and prepaid calling cards. Accordingly,
the Communications Group has evaluated each of its paging properties, revised
operating plans and determined that a write down of the carrying value of its
investment is appropriate.
The Communications Group believes that its paging businesses in Moscow, Ukraine
and Uzbekistan are relatively unaffected by the GSM competition and continue to
be viable business opportunities and have not been written down. Although GSM is
available in those markets, the Company believes that the regulators are
unlikely to allow calling party pays tariffs for the foreseeable future.
TECHNOLOGY. Paging is a one-way wireless messaging technology that uses an
assigned frequency and a specific pager identifier to contact a paging customer
within a geographic service area. The Communications Group offers several types
of pagers. However, substantially all of the Communications Group's subscribers
choose alphanumeric pagers, which emit a variety of tones and display as many as
240 characters. Depending on the market, the joint ventures offer alphanumeric
pagers which have Latin and/or Cyrillic (Russian language) character display.
The effective signal coverage area of a paging transmitter typically encompasses
a radius of between 15 and 20 miles from each transmitter site. Obstructions,
whether natural, such as mountains, or man-made, such as large buildings, can
interfere with the signal. Multiple transmitters are often used to
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ITEM 1. BUSINESS (CONTINUED)
cover large geographic areas, metropolitan areas containing tall buildings or
areas with mountainous terrain.
MARKETING. The Communications Group intends to manage its paging business to a
level that will not require significant additional funding for its operations.
The Communications Group believes that its paging operations in Moscow, Ukraine
and Uzbekistan are unaffected by the GSM competition and are viable business
opportunities. In these markets, paging services are targeted toward people who
spend a significant amount of time outside of their offices, have a need for
mobility or are business people without ready access to telephones. The
Communications Group targets its paging systems primarily to local businesses,
young consumers, the police, the military and expatriates. Paging provides an
affordable way for local businesses to communicate with employees in the field
and with their customers, and for young adults to communicate with each other
while away from a telephone. Subscribers pay a monthly fee which entitles them
to either a fixed or unlimited number of pages each month.
COMPETITION. The Communications Group believes that its joint ventures are
leading providers of paging services in each of their respective markets. In
some of the Communications Group's paging markets, however, the Communications
Group has experienced and expects to continue to experience competition from
existing small, local, paging operators who have limited areas of coverage, and
from, in a few cases, paging operators established by Western European and U.S.
investors with substantial experience in paging. In addition, as noted above
there has been increased competition from GSM providers which has adversely
impacted the Communications Group's paging operations. The Communications Group
does not have or expect to have exclusive franchises with respect to its paging
operations and may therefore face more significant competition in its markets in
the future from highly capitalized entities seeking to provide similar services.
RADIO BROADCASTING
OVERVIEW. The Communications Group entered the radio broadcasting business in
Eastern Europe through the acquisition of Radio Juventus in Hungary in 1994.
Today, the Company is a leading operator of radio stations in Eastern Europe and
the former Soviet Union and owns and operates, through joint ventures, 17 radio
stations. During 1998, the joint ventures in Estonia and Georgia each opened an
additional radio station.
The Communications Group's radio broadcasting strategy is generally to acquire
underdeveloped properties (i.e., stations with insignificant ratings and little
or no positive cash flow) at attractive valuations. The Communications Group
then installs experienced radio management to improve performance through
increased marketing and focused programming. Management utilizes its programming
expertise to tailor specifically the programming of each station utilizing
sophisticated research techniques to identify opportunities within each market,
and programs its stations to provide complete coverage of a demographic or
format type. This strategy allows each station to deliver highly effective
access to a target demographic and capture a higher percentage of the radio
advertising audience share.
PROGRAMMING. Programming in each of the Communications Group's markets is
designed to appeal to the particular interests of a specific demographic group
in such markets. The Communications Group's radio programming formats generally
consist of popular music from the United States, Western Europe and the local
region. News is delivered by local announcers in the language appropriate to the
region, and announcements and commercials are locally produced. By developing a
strong listener base comprised of a specific demographic group in each of its
markets, the Communications Group believes
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ITEM 1. BUSINESS (CONTINUED)
it will be able to attract advertisers seeking to reach these listeners. The
Communications Group believes that the technical programming and marketing
expertise that it provides to its joint ventures enhances the performance of the
joint ventures' radio stations.
MARKETING. Radio station programming is generally targeted towards that segment
which the Communications Group believes to be the most affluent within the
25-to-55-year-old demographic in each of its radio markets. Each station's
format is intended to appeal to the particular listening interests of this
consumer group in its market. This focus is intended to enable each joint
venture to present to advertisers the most desirable market for the advertisers'
products and services, thereby heightening the value of the station's commercial
advertising time. Advertising on these stations is sold to local and
international advertisers.
COMPETITION. While the Communications Group's radio stations are generally
leaders in each of their respective markets, they compete in each market with
stations currently in operation or anticipated to be in service shortly. Other
media businesses, including broadcast television, cable television, newspapers,
magazines and billboard advertising also compete with the Communications Group's
radio stations for advertising revenues.
For the most part the Company's radio stations compete with other radio stations
and other advertising media on the basis of the cost to the advertiser per
targeted listener reached. The radio stations that have the greatest reach
generally obtain the highest rate. In addition, certain demographic groups
usually men or women, age 25-54 are favored by advertisers. The Company's radio
stations are generally programmed to reach the highest rated demographic groups
in their markets.
Radio stations may experience further competition from other media. As private
cable television stations emerge in Eastern Europe and the former Soviet Union,
the Company expects that such systems will drive the price of television
advertising down, thus competing directly with radio stations for advertising
revenues. In addition to broadcast television, print media, and outdoor
advertising, the Communications Group believes that a new medium, the Internet,
will also attract a portion of advertising expenditures in each respective
market.
OTHER
OVERVIEW. In July 1998, the Communications Group sold its investment in
Protocall Ventures. The Communications Group currently owns an interest in a
joint venture operating a trunked mobile radio service in Kazakhstan, servicing
1,245 subscribers. The Communications Group is currently evaluating how to best
maximize its value to the Company. Trunked mobile radio systems are commonly
used by construction teams, security services, taxi companies, service
organizations and other groups with a need for significant internal
communications. Trunked mobile radio allows such users to communicate with
members of a closed user group without incurring the expense or delay of the
public switched telephone network, and also provides the ability to provide
dispatch service (i.e., one sender communicating to a large number of users on
the same network). The Communications Group believes that lower costs and the
ability to provide dispatch services affords trunked mobile radio significant
advantages over cellular telephony or the public switched telephone network in
fleet applications.
COMPETITION. The Communications Group is a leading provider of trunked mobile
radio in Kazakhstan although it faces competition from other trunked mobile
radio service providers and from private networks. Trunked mobile radio also
faces competition from cellular providers, especially for users who need access
to the public switched telephone network for most of their needs and from paging
providers for users who need only one-way communication and private branch
exchanges, where users do not need mobile communications.
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ITEM 1. BUSINESS (CONTINUED)
LICENSES
The Communications Group's operations are subject to governmental regulation in
its markets and its operations require certain governmental approvals. There can
be no assurance that the Communications Group will be able to obtain all
necessary approvals to operate additional cable television, wireless telephony
or paging systems or radio broadcasting stations in any of the markets in which
it is seeking to establish additional businesses.
The licenses pursuant to which the Communications Group's businesses operate are
issued for limited periods, including certain licenses which are renewable
annually. Certain of these licenses expire over the next several years. As of
December 31, 1998, two of the licenses held by the Communications Group had
expired, although the Communications Group has been permitted to continue
operations while the decision on reissuance is pending. One of these licenses is
for the Communications Group's radio joint venture in Hungary. Subsequent to
December 31, 1998, the license for the Communications Group's radio joint
venture in Hungary was renewed for a period of 8 years. Certain other licenses
held or used by seven joint ventures will expire during 1999. The failure of
such licenses to be renewed may have a material adverse effect on the Company's
results of operations. Additionally, certain of the licenses pursuant to which
the Communications Group's businesses operate contain network build-out
milestone clauses. The failure to satisfy such milestones could result in the
loss of such licenses which may have a material adverse effect on the
Communications Group.
The Company's joint ventures will apply for renewals of their licenses. While
there can be no assurance that these licenses will be renewed, based on past
experience, the Communications Group expects to obtain such renewals.
Licenses to operate in China are held by the Communications Group's operating
partner, China Unicom. China Unicom obtained licenses in 1997 to provide
wireless services interconnected with China's national public network for the
Ningbo City GSM system supported by the Communications Group's investment. China
Unicom obtained licenses in January 1999 to provide public wireline telephone
service for the Sichuan and Chongqing systems supported by the Communications
Group's investments. These licenses are subject to periodic review and renewal
by China's Ministry of Information Industry. The Communications Group has
received notification from China Unicom stating that a department of the Chinese
government has requested termination of two of its four joint telecommunications
projects in China and the Communications Group expects that the other two
telecommunications projects in which it has invested will receive similar
letters. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Developments-- Chinese Joint Ventures."
LIQUIDITY ARRANGEMENTS
Generally, the Communications Group owns 50% or more of the equity in a joint
venture with the balance of such equity being owned by a local entity, often a
government-owned enterprise. In China, the Communications Group's joint ventures
enter into network system cooperation contracts under which the joint ventures
are responsible for financing, providing technical advice on the construction,
and management consulting services on the operation of the relevant networks. In
some cases, the Communications Group owns or acquires interests in entities
(including competitors) that are already licensed and are providing service.
Each joint venture's day-to-day activities are managed by a local management
team selected by its board of directors or its shareholders. The operating
objectives, business plans and capital expenditures of a joint venture are
approved by its board of directors, or in certain cases, by its shareholders. In
most cases, an equal number of directors or managers of the joint venture are
selected by the Communications Group and its local partner. In other cases, a
different
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ITEM 1. BUSINESS (CONTINUED)
number of directors or managers of the joint venture may be selected by the
Communications Group on the basis of its percentage ownership interest.
In many cases, the credit agreement pursuant to which the Company loans funds to
a joint venture provides the Company with the right to appoint the general
manager of the joint venture and to approve unilaterally the annual business
plan of the joint venture. These rights continue so long as amounts are
outstanding under the credit agreement. In other cases, such rights may also
exist by reason of the Company's percentage ownership interest in the joint
venture or under the terms of the joint venture's governing instruments.
The Communications Group's joint ventures in Eastern Europe and the former
Soviet Union are limited liability entities which are permitted to enter into
contracts, acquire property and assume and undertake obligations in their own
names. Because these joint ventures are limited liability companies, the joint
ventures' equity holders have liability limited to the extent of their
investment. Under the joint venture agreements, each of the Communications Group
and the local joint venture partner is obligated to make initial capital
contributions to the joint venture. In general, a local joint venture partner
does not have the resources to make cash contributions to the joint venture. In
such cases, the Company has established or plans to establish an agreement with
the joint venture whereby, in addition to cash contributions by the Company,
both the Company and the local partner make in-kind contributions (usually
communications equipment in the case of the Company and frequencies, space on
transmitting towers and office space in the case of the local partner), and the
joint venture signs a credit agreement with the Company pursuant to which the
Company loans the joint venture certain funds. Typically, such credit agreements
provide for interest payments to the Company at rates ranging generally from
prime to prime plus 6% and for payment of principal and interest from 90% of the
joint venture's available cash flow. Prior to repayment of its credit agreement,
a joint venture is significantly limited or prohibited from distributing profits
to its shareholders. As of December 31, 1998, the Company had obligations to
fund up to an additional $49.4 million with respect to funding the various
credit lines the Company has extended to its joint ventures in Eastern Europe
and the former Soviet Union. The Company's funding commitments under such credit
lines are contingent upon its approval of the joint ventures' business plans. To
the extent that the Company does not approve a joint venture's business plan,
the Company is not required to provide funds to such joint venture under the
credit line. The distributions (including profits) from the joint venture to the
Company and the local partner are made on a pro rata basis in accordance with
their respective ownership interests.
The Communications Group's joint ventures in China are foreign-invested, limited
liability entities that are legal persons under China's laws and are permitted
to enter into contracts, acquire property and undertake obligations in their own
names. The joint ventures' owners have liability only for the amount of their
subscribed for but unpaid registered capital contributions in the ventures. Such
ventures are limited under their current approvals to total paid-in capital plus
debt of approximately $30 million. The Group's Ningbo joint ventures are equity
ventures, organized under laws that require contribution of paid-in capital by
the owning partners in proportion to their respective share of ownership and
regulate dividend distribution to the owners in proportion to their respective
equity share. The Communications Group's Sichuan and Chongqing joint ventures
are cooperative ventures, organized under laws that permit the owning partners
to determine themselves each party's relative share of direct capital
contribution and dividend distribution. In each case, the venture's owners were
required to invest and register 40% of the venture's total investment within a
predetermined period after the venture was licensed. Additional funds, up to the
total investment limits set for the ventures, can then be contributed as
additional paid-in capital, loaned to the ventures by the owners or borrowed
from other sources. In each of its China joint ventures, the Communications
Group has agreed to loan funds that may be required by the venture in excess of
paid-in capital, if alternative debt financing is unavailable or unattractive.
The Communications Group has extended loans to each of the China joint
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ITEM 1. BUSINESS (CONTINUED)
ventures at interest rates ranging from 8%-10% and on terms permitting repayment
by the venture as cash flows permit. Repayments of such loans takes precedence
over distributions to the ventures' owners. The ventures have also secured
supplier credit for certain equipment purchased by China Unicom and backed by
the ventures' letters of credit. Such supplier financing is treated as the
ventures' funding of China Unicom's projects. The Communications Group's
ownership interests in the China joint ventures and its loans to the joint
ventures are registered with China's State Administration of Foreign Exchange,
thereby assuring the venture's subsequent ability to convert Chinese currency
revenues and to make dividend distributions and loan repayments in U.S. dollars.
Ningbo Ya Mei Telecommunications, Ltd., one of the Communications Group's two
joint ventures in Ningbo Municipality, China, has received a letter from China
Unicom stating that the supervisory department of the Chinese government had
requested that China Unicom terminate the project with Ningbo Ya Mei. The
Communications Group has been informed by China Unicom that the letter also
applies to Ningbo Ya Lian Telecommunications, Ltd., the Communications Group's
other Ningbo joint venture. The notification letter from China Unicom requested
that negotiations begin immediately regarding the amounts to be paid to Ningbo
Ya Mei, including return of investment made and appropriate compensation and
other matters related to the winding up of Ningbo Ya Mei's activities as a
result of this notice. Negotiations regarding the terms of the termination have
begun and are continuing. The content of the negotiations includes determining
the investment principal of Ningbo Ya Mei and Ningbo Ya Lian, appropriate
compensation and other matters related to termination of contracts. The letter
further stated that due to technical reasons which were not specified, the cash
distribution plan for the first half of 1999 had not been decided, and that
China Unicom also expected to discuss this subject with Ningbo Ya Mei. As a
result, the Communications Group cannot currently determine the amount of
compensation Ningbo Ya Mei and Ningbo Ya Lian will receive.
While there can be no assurance that China Unicom will provide similar letters
to the Communications Group's other two sino-sino-foreign telephony-related
joint ventures, the Communications Group expects that these joint ventures will
also be the subject of project termination negotiations. The Communications
Group cannot yet predict the effect on it of the Ningbo Ya Mei joint venture
negotiations and the expected winding up of the Communications Group's other two
telephony-related joint ventures, but the Communications Group believes such
negotiations, if adversely concluded, or the failure to make scheduled cash
distributions, could have a material adverse effect on its financial position
and results of operations. Depending on the amount of compensation it receives,
the Company will record a non cash charge equal to the difference between the
sum of the carrying values of its investment and advances made to joint ventures
plus goodwill less the cash compensation it receives from the joint ventures
which China Unicom has paid. The Company's investment in and advances to joint
ventures and goodwill balance at June 30, 1999 were approximately $71 million
and $67 million respectively. The Communications Group is currently evaluating
other investment opportunities in China and has recently announced the
establishment of a new joint venture in China to develop and operate an
e-commerce system.
In addition to loaning funds to the joint ventures, the Communications Group
often provides certain services to many of the joint ventures for a fee. The
Communications Group often does not require start-up joint ventures to reimburse
it for certain services that it provides such as engineering advice, assistance
in locating programming, and assistance in ordering equipment. As each joint
venture grows, the Communications Group institutes various payment mechanisms to
have the joint venture reimburse it for such services where they are provided.
The failure of the Company to obtain reimbursement of such services will not
have a material impact on the Company's results of operations.
Under existing legislation in certain of the Communications Group's markets,
distributions from a joint venture to its partners is subject to taxation. The
laws in the Communications Group's markets vary
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ITEM 1. BUSINESS (CONTINUED)
markedly with respect to the tax treatment of distributions to joint venture
partners and such laws have also recently been revised significantly in many of
the Communications Group's markets. There can be no assurance that such laws
will not continue to undergo major changes in the future which could have a
significant negative impact on the Company and its operations.
RISKS ASSOCIATED WITH THE COMPANY
THE COMPANY EXPECTS TO CONTINUE TO INCUR LOSSES FROM ITS CONTINUING OPERATIONS,
WHICH COULD PREVENT IT FROM PURSUING ITS GROWTH STRATEGIES AND COULD CAUSE IT
TO DEFAULT UNDER ITS DEBT OBLIGATIONS.
The Company cannot assure you that it will succeed in establishing an adequate
revenue base or that its services will be profitable or generate positive cash
flow. The Company has reported substantial losses from operations over the
previous three years. For the three months ended March 31, 1999 and for the
years ended December 31, 1998, 1997 and 1996, it reported a loss from continuing
operations of approximately $11.3 million, $136.0 million, $130.9 million and
$72.1 million, respectively, and a net loss of $11.3 million, $123.7 million,
net income of $88.4 million, and a net loss of $115.2 million, respectively. The
Company expects that it will report significant operating losses, including
losses attributable to Snapper, Inc., for the fiscal year ended December 31,
1999. In addition, many of the Communications Group's joint ventures are still
in the early stages of their development and the Communications Group expects to
continue to generate significant losses as it continues to build-out and market
its services. Accordingly, the Company expects to generate consolidated losses
for the foreseeable future.
Continued losses and negative cash flow may prevent the Company from pursuing
its strategies for growth and could cause it to be unable to meet its debt
service obligations, its capital expenditures or working capital needs.
CHINESE GOVERNMENTAL AUTHORITIES ARE CAUSING THE TERMINATION OF CERTAIN OF THE
COMMUNICATIONS GROUP'S JOINT VENTURES, WHICH COULD HAVE NEGATIVE EFFECTS ON
THE COMMUNICATIONS GROUP'S FINANCIAL POSITION AND RESULTS OF OPERATIONS.
Because legal restrictions in China prohibit foreign participation in the
operation or ownership in the telecommunications sector, the Communications
Group's telecommunications joint ventures in China have been established so as
to provide financing, technical advice, consulting and other services for the
construction and development of telephony networks for China Unicom, a Chinese
telecommunications operator.
The Communications Group has recently been notified by China Unicom that a
department of the Chinese government had requested termination of two of its
joint telecommunications projects. Negotiations have commenced with
representatives of China Unicom on the amount of compensation and terms of the
resolution of all issues between the parties. The content of the negotiations
includes determining the investment principal of these joint ventures,
appropriate compensation and other matters related to termination of contracts.
The Communications Group was further notified that due to technical reasons
which were not specified, the cash distribution plan for the first half of 1999
had not been decided and that China Unicom also expected to discuss this subject
with the joint ventures. As a result, the Communications Group cannot assure you
that it will receive compensation from the Chinese government for the
termination of its joint ventures or that the compensation that it will receive,
if any, will be adequate.
While the notification only involved two of the Communications Group's
telecommunications joint ventures, the Communications Group expects that the
other two telecommunications projects in which it has invested will receive
similar notifications. In light of the current uncertainty, the Communications
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ITEM 1. BUSINESS (CONTINUED)
Group is unable to estimate the impact on its financial condition and results of
operations of such negotiations and expected winding up of its other two Chinese
telecommunications joint ventures. The Communications Group believes that
negotiations, if adversely concluded, could have a materially negative effect on
the Communications Group's financial position and operating results. Depending
on the amount of compensation it receives, the Company will record a non cash
charge equal to the difference between the sum of the carrying values of its
investment and advances made to joint ventures plus goodwill less the cash
compensation it receives from the joint ventures which China Unicom has paid.
The Company's investment in and advances to joint ventures and goodwill balance
at June 30, 1999 were approximately $71 million and $67 million respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Developments-- Chinese Joint Ventures."
THE COMPANY WILL BE UNABLE TO MEET ITS OBLIGATIONS IF IT DOES NOT RECEIVE
DISTRIBUTIONS FROM ITS SUBSIDIARIES AND ITS SUBSIDIARIES HAVE NO OBLIGATIONS
TO MAKE ANY PAYMENTS TO IT.
The Company is a holding company with no direct operations and no assets of
significance other than the stock of its subsidiaries. As such, the Company is
dependent on the earnings of its subsidiaries and the distribution or other
payment of these earnings to it to meet the Company's obligations, including its
ability to make distributions to its stockholders. The Company's subsidiaries
are separate legal entities that have no obligation to pay any amounts the
Company owes to third parties, whether by dividends, loans or other payments.
Snapper, Inc.'s credit facility contains substantial restrictions on dividends
and other payments by Snapper to the Company. In addition, many of the
Communications Group's joint ventures are in their early stages of development
and are operating businesses that are capital intensive. As a result, the
Company will only be able to rely on cash on hand, proceeds from the disposition
of non-core assets and net proceeds from additional financings through a public
or private sale of debt or equity securities to meet its cash requirements,
including the making of any distributions to the Company stockholders.
THE COMPANY MAY NOT BE ABLE TO RAISE THE SUBSTANTIAL ADDITIONAL FINANCING THAT
WILL BE REQUIRED TO SATISFY ITS LONG-TERM BUSINESS OBJECTIVES, WHICH WOULD
FORCE IT TO SIGNIFICANTLY CURTAIL ITS BUSINESS OBJECTIVES AND MAY MATERIALLY
AND ADVERSELY AFFECT ITS RESULTS OF OPERATIONS.
Many of the Company's joint ventures operate businesses that are capital
intensive and require the investment of significant amounts of capital in order
to construct and develop operational systems and market their services. As a
result, the Company will require substantial additional financing to satisfy its
long-term business objectives, including its on-going working capital,
acquisition and expansion requirements. The Company may seek to raise this
additional capital through the public or private sale of debt or equity
securities. If the Company incurs additional debt, it may become subject to
additional or more restrictive financial covenants and ratios. The Company
cannot assure you that additional financing will be available to it on
acceptable terms, if at all. If adequate additional funds are not available, the
Company may be required to curtail significantly its long-term business
objectives and its results from operations may be materially and adversely
affected.
THE COMMUNICATIONS GROUP MAY BE MATERIALLY AND ADVERSELY AFFECTED BY COMPETITION
FROM LARGER GLOBAL COMMUNICATIONS COMPANIES OR THE EMERGENCE OF COMPETING
TECHNOLOGIES IN ITS CURRENT OR FUTURE MARKETS.
The Communications Group operates in businesses which are highly competitive and
that compete with many other well-known communications and media companies, many
of which have established operating infrastructures and substantially greater
financial, management and other resources. The Communications Group also faces
potential competition from competing technologies which could
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ITEM 1. BUSINESS (CONTINUED)
emerge over time in Eastern Europe, the republics of the former Soviet Union and
other selected emerging markets and compete directly with their operations. For
example, the Communications Group believes that it will not be able to
effectively compete for its traditional paging customers in markets where GSM
technology is combined with calling party pays and prepaid calling card service.
In addition, the Communications Group does not expect to maintain or to be
granted exclusive licenses to operate its communications businesses in any of
the markets where it currently provides or plans to provide its services.
THE COMMUNICATIONS GROUP MAY NOT BE ABLE TO ATTRACT CONSUMERS TO ITS SERVICES,
WHICH WOULD NEGATIVELY IMPACT ITS OPERATING RESULTS.
The Communications Group's operating results are dependent upon its ability to
attract and maintain subscribers to its cable, paging and telephony systems and
the sale of commercial advertising time on its radio stations. These in turn
depend on the following factors, several of which are beyond the Communications
Group's control:
- the general economic conditions in the markets where the Communications
Group's cable, telephone systems, paging and radio stations are located,
- the relative popularity of the Communications Group's systems, including
its radio stations,
- the demographic characteristics of the potential subscribers to the
Communications Group's systems and audience of its radio stations,
- the technical attractiveness to customers of the equipment and service of
the Communications Group's systems, and
- the activities of its competitors.
THE COMMUNICATIONS GROUP CANNOT ASSURE YOU THAT IT WILL SUCCESSFULLY COMPLETE
THE CONSTRUCTION OF ITS SYSTEMS, WHICH WOULD JEOPARDIZE LICENSES FOR ITS
SYSTEMS OR PROVIDE OPPORTUNITIES TO ITS COMPETITORS.
Most of the Communications Group's joint ventures require substantial
construction of new systems and additions to the physical plants of existing
systems. Construction projects are adversely affected by cost overruns and
delays not within the Communications Group's control or the control of its
subcontractors, such as those caused by governmental changes and material or
equipment shortages or delays in delivery of material or equipment. The
Communications Group cannot assure you that this construction will be completed
on time or on budget. The failure to complete construction of a communications
system on a timely basis could jeopardize the franchise or license for the
Communications Group's system or provide opportunities to its competitors.
THE COMMUNICATIONS GROUP MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT AND MANAGE
THE GROWTH OF ITS VENTURES WHICH WOULD AFFECT ITS GROWTH STRATEGY.
Many of the Communications Group's ventures are either in developmental stages
or have only recently commenced operations and the Communications Group has
incurred significant operating losses to date. The Communications Group is
currently pursuing additional investments in a variety of communications
businesses both in its existing markets and in additional markets. In
implementing and managing its strategy of growing its businesses, the
Communications Group must:
- assess the strengths and weaknesses of development opportunities,
- evaluate the costs and uncertain returns of developing and constructing
the facilities for operating systems, and
- integrate and manage the operations of existing and additional systems.
The Communications Group cannot assure you that it will successfully implement
its growth strategy.
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ITEM 1. BUSINESS (CONTINUED)
THE GOVERNMENT LICENSES ON WHICH THE COMMUNICATIONS GROUP DEPENDS TO OPERATE
MANY OF ITS BUSINESSES COULD BE CANCELLED OR NOT RENEWED, WHICH WOULD IMPAIR
THE DEVELOPMENT OF ITS SERVICES.
The Communications Group's joint ventures' operations are subject to
governmental regulation and approvals in the markets in which these joint
ventures operate. The Communications Group's joint ventures operate under
licenses that are issued for limited periods. Some of these licenses expire over
the next several years, and some are renewable annually. The Communications
Group's failure to renew these licenses may have a material adverse effect on
it. Seven licenses held or used by the Communications Group's joint ventures
will expire during 1999. For most of the licenses held or used by the
Communications Group's joint ventures, no statutory or regulatory presumption
exists for renewal by the current license holder and the Communications Group
cannot assure you that these licenses will be renewed upon the expiration of
their current terms.
Additionally, some of the licenses pursuant to which the Communications Group's
businesses operate contain network build-out milestones. The Communications
Group's failure to renew any of these licenses or meet these milestones could
result in the loss of these licenses, which may have a material adverse effect
on its operations. In addition, the Communications Group cannot assure you that
its joint ventures will obtain the necessary approvals to operate additional
cable television, fixed telephony or paging systems or radio broadcast stations
in any of the markets in which it is seeking to establish its business.
THE COMMUNICATIONS GROUP DOES NOT FULLY CONTROL ITS JOINT VENTURES' OPERATIONS,
STRATEGIES AND FINANCIAL DECISIONS AND CANNOT ASSURE YOU THAT IT WILL BE ABLE
TO MAXIMIZE ITS RETURN ON ITS INVESTMENTS.
The Communications Group has invested in virtually all of its joint ventures
with local partners. Although the Communications Group exercises significant
influence in the management and operations of the joint ventures in which it has
an ownership interest and intends to invest in the future only in joint ventures
in which it can exercise significant influence in management, the degree of its
voting power and the voting power and veto rights of its joint venture partners
may limit the Communications Group from effectively controlling the operations,
strategies and financial decisions of the joint ventures in which it has an
ownership interest. As a result, the Communications Group is dependent on the
continuing cooperation of its partners in the joint ventures and any significant
disagreements among the participants could have a material adverse effect on its
ventures. In addition, in some markets where the Communications Group conducts
or may in the future conduct business, certain decisions of a joint venture also
require government approval. As a result, the Communications Group cannot assure
you that it will be able to maximize its return on its investments.
In addition, in many instances, the Communications Group's partners in a joint
venture include a governmental entity or an affiliate of a governmental entity.
This poses a number of risks, including:
- the possibility of decreased governmental support or enthusiasm for the
venture as a result of a change of government or government officials,
- a change of policy by the government, and
- the ability of the governmental entities to exert undue control or
influence over the project in the event of a dispute or otherwise.
In addition, to the extent the Communications Group's joint ventures become
profitable and generate sufficient cash flows in the future, it cannot assure
you that the joint ventures will pay dividends or return capital at any time.
Moreover, the Communications Group's equity interests in these investments
generally are not freely transferable. Therefore, the Communications Group
cannot assure you of its ability to realize economic benefits through the sale
of its interests in its joint ventures.
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ITEM 1. BUSINESS (CONTINUED)
THE COMMUNICATIONS GROUP'S DEPENDENCE ON LOCAL OPERATORS, INTERCONNECT PARTIES
OR LOCAL CUSTOMERS MAY MATERIALLY AND ADVERSELY AFFECT ITS OPERATIONS.
The Communications Group is dependent on local operators or interconnect parties
for a substantial amount of its telephony operations. For example, the
Communications Group has recently been notified by the Chinese
telecommunications operator with which it operates its Chinese joint ventures
that a department of the Chinese government had requested termination of two of
its telecommunications joint ventures. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Recent Developments--Chinese
Joint Ventures." Also, the Communications Group's cellular telephone ventures in
Latvia and Georgia are dependent on the public switched telephone networks for
the completion of most of their calls. The Communications Group cannot assure
you that these ventures will continue to have access to these networks or that
they will be able to have access to these networks with favorable tariffs. The
loss of access to these networks or increases in tariffs could have a material
adverse effect upon these ventures.
THE COMMUNICATIONS GROUP CANNOT ASSURE YOU THAT ITS EQUIPMENT WILL BE APPROVED
BY THE AUTHORITIES REGULATING THE MARKETS IN WHICH IT OPERATES, WHICH COULD
HAVE A MATERIAL ADVERSE EFFECT ON ITS OPERATIONS IN THESE MARKETS.
Many of the Communications Group's proposed operations will be dependent upon
approval of its proposed equipment by the communications authorities of the
markets in which the Communications Group and its joint ventures operate or plan
to operate. The Communications Group cannot assure you that the equipment it
plans to use in these markets will be approved. The failure to obtain a type
approval for the Communications Group's equipment could have a materially
adverse effect on many of its proposed operations.
THE COMMUNICATIONS GROUP MAY NOT BE ABLE TO KEEP PACE WITH THE EMERGENCE OF NEW
TECHNOLOGIES AND CHANGES IN MARKET CONDITIONS WHICH WOULD MATERIALLY AND
ADVERSELY AFFECT ITS RESULTS OF OPERATIONS.
The communications industry has been characterized in recent years by rapid and
significant technological changes and changes in market conditions. Competitors
could introduce new or enhanced technologies with features which would render
the Communications Group's technology obsolete or significantly less marketable.
The Communications Group's ability to compete successfully will depend to a
large extent on its ability to respond quickly and adapt to technological
changes and advances in its industry. There can be no assurance that the
Communications Group will be able to keep pace, or will have the financial
resources to keep pace, with the technological demands of the marketplace.
CERTAIN FAILURES TO ADDRESS THE YEAR 2000 PROBLEM MAY CAUSE DISRUPTIONS IN THE
OPERATION OF THE COMMUNICATIONS GROUP'S NETWORKS AND THE COMMUNICATIONS
GROUP'S SERVICES TO CUSTOMERS.
Many computer and communications network systems, terminal devices, software
products and manufacturing devices will not function properly in the year 2000
and beyond due to a once-common programming standard that represents years using
two digits. This problem is often referred to as the year 2000 problem. It is
possible that the Communications Group's and its joint venture partners'
currently installed computer and communications network systems, terminal
devices, software products, manufacturing devices or other information
technology systems, including embedded technology, or those of its and its joint
venture partners' suppliers, contractors, interconnect parties or major systems
developers working either alone or in conjunction with other softwares or
systems, will not properly function in the year 2000 because of the year 2000
problem. The Communications Group is not directly responsible for the year 2000
readiness of many of its joint ventures and in some cases has no access to the
joint venture's management regarding these matters. Russia and the other
republics of the former Soviet Union appear to be substantially behind Western
countries in their year 2000 compliance and
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<PAGE>
ITEM 1. BUSINESS (CONTINUED)
readiness. If the Communications Group and its joint venture partners, or its
customers, suppliers, contractors, interconnect parties and major systems
developers are unable to address their year 2000 issues in a timely manner, a
material adverse effect on the Communications Group's results of operations and
financial condition could result. The Communications Group and its joint venture
partners are currently working to evaluate and resolve the potential impact of
the year 2000 on its processing of date-sensitive information and network
systems. The Communications Group cannot assure you that the year 2000 problem
will only have a minimal cost impact or that its joint venture partners and
other companies will convert their systems on a timely basis and that their
failure will not have an adverse effect on the Communications Group's systems.
METROMEDIA COMPANY EFFECTIVELY CONTROLS THE COMPANY AND HAS THE POWER TO
INFLUENCE THE DIRECTION OF ITS OPERATIONS AND PREVENT A CHANGE OF CONTROL.
Metromedia Company and its affiliates collectively own approximately 26% of the
outstanding shares of common stock of the Company and are its largest
stockholders. They have nominated or designated a majority of the members of the
board of directors. In accordance with the charter of the Company and Delaware
law, in the future, the majority of the members of the board of directors will
nominate the directors for election to the board of directors. However, for the
foreseeable future it is likely that directors designated or nominated by
Metromedia Company will continue to constitute a majority of the members of the
board of directors. As a result, Metromedia Company will likely control the
direction of future operations of the Company, including decisions regarding
acquisitions and other business opportunities, the declaration of dividends and
the issuance of additional shares of capital stock and other securities. This
concentration of ownership may have the effect of delaying, deferring or
preventing a change of control of the Company. The Company's certificate of
incorporation and by-laws also contain provisions which may also have the effect
of delaying, deferring or preventing a change of control of it.
THE COMPANY COULD INCUR ENVIRONMENTAL LIABILITIES AS A RESULT OF ITS CURRENT
OPERATIONS AND PAST DIVESTITURES THE COST OF WHICH COULD MATERIALLY AFFECT ITS
RESULTS OF OPERATIONS.
The Company has been in operation since 1929 through its predecessors and, over
the years, has operated in diverse industries including equipment, sporting
goods and furniture manufacturing, sheet metal processing, and trucking. The
Company has divested almost all of its non-communications and non-media-related
operations. However, in the course of these divestitures, it has retained
certain indemnification obligations for environmental cleanup matters and, in
one case, a contaminated parcel at which it has undertaken cleanup activities.
In other cases, particularly for operations that the Company divested in the
past, it could incur unanticipated environmental cleanup obligations, to the
extent they may exist or arise in the future, as a result of changes in legal
requirements that have occurred since these divestitures or otherwise. Because
some divestitures may have occurred many years ago, the Company cannot assure
you that environmental matters will not arise in the future that could have a
material adverse effect on its results of operations or financial condition.
THE COMMUNICATIONS GROUP OPERATES IN COUNTRIES WITH SIGNIFICANT POLITICAL,
SOCIAL AND ECONOMIC UNCERTAINTIES WHICH COULD HAVE A MATERIAL ADVERSE EFFECT
ON ITS OPERATIONS IN THESE AREAS.
The Communications Group operates in countries in Eastern Europe, the republics
of the former Soviet Union, China and other selected emerging markets. These
countries face significant political, social and economic uncertainties which
could have a material adverse effect on its operations in these areas. These
uncertainties include:
- possible internal military conflicts,
- civil unrest fueled by economic and social crises in those countries,
31
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ITEM 1. BUSINESS (CONTINUED)
- political tensions between national and local governments which often
result in the enactment of conflicting legislation at various levels and
may result in political instability,
- bureaucratic infighting between government agencies with unclear and
overlapping jurisdictions,
- high unemployment, high inflation, high foreign debt, weak currencies and
the possibility of widespread bankruptcies,
- unstable governments,
- pervasive regulatory control of the state over the telecommunications
industry (see "--Laws restricting foreign investments in the
telecommunications industry could adversely affect the Communications
Group's operations in these countries" and "--Chinese governmental
authorities are causing the termination of certain of the Communications
Group's joint ventures, which could have negative effects on the
Communications Group's financial position and results of operations"),
- uncertainty whether many of the countries in which the Communications
Group operates will continue to receive the substantial financial
assistance they have received from several foreign governments and
international organizations which helps to support their economic
development,
- failure by government entities to meet their outstanding foreign debt
repayment obligations, and
- the risk of increased support for a renewal of centralized authority and
increased nationalism resulting in possible restrictions on foreign
ownership and/or discrimination against foreign owned businesses.
The Communications Group cannot assure you that the pursuit of economic reforms
by the governments of any of these countries will continue or prove to be
ultimately effective, especially in the event of a change in leadership, social
or political disruption or other circumstances affecting economic, political or
social conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Recent Developments--Chinese Joint
Ventures."
THE COMPANY FACES ENHANCED ECONOMIC, LEGAL AND PHYSICAL RISKS BY OPERATING
ABROAD.
The Company has invested substantially all of its resources in operations
outside of the United States and plans to make additional international
investments in the near future. The Company runs a number of risks by investing
in foreign countries including:
- loss of revenue, property and equipment from expropriation,
nationalization, war, insurrection, terrorism and other political risks,
(see "--Laws restricting foreign investments in the telecommunications
industry could adversely affect the Communications Group's operations in
these countries" and "--Chinese governmental authorities are causing the
termination of certain of the Communications Group's joint ventures, which
could have negative effects on the Communications Group's financial
position and results of operations"),
- increases in taxes and governmental royalties and involuntary changes to
its licenses issued by, or contracts with, foreign governments or their
affiliated commercial enterprises,
- official data published by the governments of many of the countries in
which it operates is substantially less reliable than that published by
Western countries,
- changes in foreign and domestic laws and policies that govern operations
of overseas-based companies,
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ITEM 1. BUSINESS (CONTINUED)
- amendments to, or different interpretations or implementations of, foreign
tax laws and regulations that could adversely affect the profitability
after tax of the Communications Group's joint ventures,
- criminal organizations in certain of the countries in which the
Communications Group operates that could threaten and intimidate our
businesses. The Communications Group cannot assure you that pressures from
criminal organizations will not increase in the future and have a material
adverse effect on its operations, and
- high levels of corruption and non-compliance with the law exists in many
countries in which the Communications Group operates businesses. This
problem significantly hurts economic growth in these countries and the
ability of the Communications Group to compete on an even basis with other
parties. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Recent Developments--Chinese Joint Ventures."
LAWS RESTRICTING FOREIGN INVESTMENTS IN THE TELECOMMUNICATIONS INDUSTRY COULD
ADVERSELY AFFECT THE COMMUNICATIONS GROUP'S OPERATIONS IN THESE COUNTRIES.
The Communications Group may also be materially and adversely affected by laws
restricting foreign investment in the field of communications. Some countries in
which the Communications Group operates, including the Russian Federation and
China, have extensive restrictions on foreign investments in the communications
field. There is no way of predicting whether additional ownership limitations
will be enacted in any of the Communications Group's markets, or whether any
such law, if enacted, will force the Communications Group to reduce or
restructure its ownership interest in any of its ventures. If additional
ownership limitations are enacted in any of the Communications Group's markets
and the Communications Group is required to reduce or restructure its ownership
interests in any ventures, it is unclear how this reduction or restructuring
would be implemented, or what impact this reduction or restructuring would have
on the Communications Group and on its financial condition or results of
operations.
Current Chinese law and regulations prohibit foreign companies and joint
ventures in which they participate from providing telephony services to
customers in the Russian Federation and China and generally limit the role that
foreign companies or their joint ventures may play in the telecommunications
industry. Since mid-1998, there has been uncertainty regarding possible
significant changes in the regulation of and policy concerning foreign
participation in and financing of the telecommunications industry in China,
including the continued viability of the structure that the Communications Group
currently use for its investments in the Chinese telecommunications industry. If
the Chinese laws or regulations change and restrict further the participation of
foreign companies in the Chinese telecommunications market or the Chinese
authorities challenge the validity of the Communications Group's operations in
China:
- the Communications Group's licenses to operate in China could be
invalidated,
- the legal validity of its contracts could be challenged which would
deprive the Communications Group of avenues of legal recourse,
- the Communications Group could be exposed to fines or criminal sanctions,
or
- the Company could not obtain financing within China or abroad.
See "--Chinese governmental authorities are causing the termination of certain
of the Communications Group's joint ventures, which could have negative effects
on the Communications Group's financial position and results of operations."
The Russian Federation has periodically proposed legislation that would limit
the ownership percentage that foreign companies can have in radio and television
businesses and/or limit the number of radio
33
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
and television businesses that any company could own in a single market. While
this proposed legislation has not been enacted, it is possible that this
legislation could be enacted in Russia and that other countries in Eastern
Europe and the republics of the former Soviet Union may enact similar
legislation which could have a material adverse effect on our business
operations, financial condition or prospects.
CURRENCY CONTROL RESTRICTION IN THE COMMUNICATIONS GROUP'S MARKETS MAY HAVE A
NEGATIVE EFFECT ON ITS BUSINESS.
The existence of currency control restrictions in certain of the Communications
Group's markets may make it difficult for the Communications Group to convert or
repatriate its foreign earnings and adversely affect its ability to pay overhead
expenses, meet its debt obligations and continue to expand its communications
business. The Communications Group's joint ventures often require specific
licenses from the central banks of many of the countries in which they operate
for certain types of foreign currency loans, leases and investments. The joint
ventures' failure to obtain these currency licenses could result in the
imposition of fines and penalties, significant delays in purchasing equipment
and resulting difficulties in generating cash flows. The documentary
requirements for obtaining the currency licenses are burdensome and the
Communications Group cannot assure you that the licensing entity will not impose
additional, substantive requirements for the grant of a license or deny a
request for a license on an arbitrary basis. Furthermore, the time typically
taken by the relevant central banks to issue these licenses can be lengthy, in
some cases up to one year or more.
RECENT ECONOMIC DIFFICULTIES IN RUSSIA AND OTHER EMERGING MARKETS COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE COMMUNICATIONS GROUP'S OPERATIONS IN THESE
COUNTRIES.
In 1998, a number of emerging market economies suffered significant economic and
financial difficulties resulting in liquidity crises, devaluation of currencies,
higher interest rates and reduced opportunities for financing. At this time, the
prospects for recovery for the economies of Russia and the other republics of
the former Soviet Union and Eastern Europe negatively affected by the economic
crisis remain unclear. The economic crisis has resulted in a number of defaults
by borrowers in Russia and other countries and a reduced level of financing
available to investors in these countries. The devaluation of many of the
currencies in the region has also negatively affected the U.S. dollar value of
the revenues generated by certain of the Communications Group's joint ventures
and may lead to certain additional restrictions on the convertibility of certain
local currencies. The Communications Group expects that these problems will
negatively affect the financial performance of certain of its cable television,
telephony, radio broadcasting and paging ventures.
HIGH INFLATION IN THE COMMUNICATIONS GROUP'S MARKETS MAY HAVE A NEGATIVE EFFECT
ON THE COMMUNICATION GROUP'S BUSINESS.
Some of the Communications Group's subsidiaries and joint ventures operate in
countries where the inflation rate is extremely high. Since the break-up of the
Soviet Union, the economies of many of the former republics have been
characterized by high rates of inflation. Inflation in Russia increased
dramatically following the August 1998 financial crisis and there are increased
risks of inflation in Kazakhstan. The inflation rates in Belarus have been at
hyper inflationary levels for some years and as a result, the currency has
essentially lost all intrinsic value.
In addition, the value of the currencies in the countries in which the
Communications Group does business tend to fluctuate, sometimes significantly.
In general, their values have tended to decline against the U.S. dollar. To the
extent that the Communications Group is required to invoice in local currencies,
this may affect the amount of revenues it actually realizes. The Communications
Group's operating results will be hurt if it is unable to increase its prices
enough to offset any increase in the
34
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ITEM 1. BUSINESS (CONTINUED)
rate of inflation, or if anti-inflationary legislation holding down prices is
enacted or if it is unable to hedge against foreign exchange risks.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES IN THE COUNTRIES IN WHICH METROMEDIA
OPERATES COULD NEGATIVELY IMPACT THE COMMUNICATIONS GROUP'S RESULTS OF
OPERATIONS IN THESE COUNTRIES.
The value of the currencies in the countries in which the Communications Group
operates tends to fluctuate, sometimes significantly. For example, during 1998
and in the early part of 1999, the value of the Russian Rouble has been under
considerable economic and political pressure and has suffered significant
declines against the U.S. dollar and other currencies. The Communications Group
currently does not hedge against exchange rate risk and therefore could be
negatively impacted by declines in exchange rates between the time one of its
joint ventures receives its funds in local currency and the time it distributes
these funds in U.S. dollars to the Communications Group.
THE COMMERCIAL AND CORPORATE LEGAL STRUCTURES ARE STILL DEVELOPING IN THE
COMMUNICATIONS GROUP'S TARGET MARKETS WHICH CREATES UNCERTAINTIES AS TO THE
PROTECTION OF ITS RIGHTS AND OPERATIONS IN THESE MARKETS.
Commercial and corporate laws in Eastern Europe, the republics of the former
Soviet Union and China are significantly less developed or clear than comparable
laws in the United States and countries of Western Europe and are subject to
frequent changes, preemption and reinterpretation by local or administrative
regulations, by administrative officials and, in the case of Eastern Europe and
republics of the former Soviet Union, by new governments. There are also often
inconsistencies among laws, presidential decrees and governmental and
ministerial orders and resolutions, and conflicts between local, regional and
national laws and regulations. In some cases, laws are imposed with retroactive
force and punitive penalties. In other cases, laws go unenforced. The result has
been considerable legal confusion which creates significant obstacles to
creating and operating the Communications Group's joint ventures. The
Communications Group cannot assure you that the uncertainties associated with
the existing and future laws and regulations in its markets will not have a
material adverse effect on its ability to conduct its business and to generate
profits. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Recent Developments--Chinese Joint Ventures."
There is also significant uncertainty as to the extent to which local parties
and entities, particularly government authorities, in the Communications Group's
markets will respect the Communications Group's contractual and other rights and
also the extent to which the "rule of law" has taken hold and will be upheld in
each of these countries. The courts in many of the Communications Group's
markets often do not have the experience, resources or authority to resolve
significant economic disputes and enforce their decisions, and may not be
insulated from political considerations and other outside pressures. The
Communications Group cannot assure you that the licenses held by its businesses
or the contracts providing its businesses access to the airwaves or other rights
or agreements essential for operations will not be significantly modified,
revoked or canceled without justification. If that happens, the Communications
Group's ability to seek legal redress may be substantially delayed or even
unavailable in such cases. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Developments--Chinese
Joint Ventures."
RUSSIAN LAW MAY HOLD THE COMMUNICATIONS GROUP LIABLE FOR THE DEBTS OF ITS
SUBSIDIARIES, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS FINANCIAL
CONDITION.
Generally, under the Civil Code of the Russian Federation and the Law of the
Russian Federation on Joint Stock Companies, shareholders in a Russian joint
stock company are not liable for the obligations of the joint stock company, and
only bear the risk of loss of their investment. However, if a parent company has
the capability under its charter or by contract to direct the decision-making of
a
35
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
subsidiary company, the parent company will bear joint and several
responsibility for transactions concluded by its subsidiary in carrying out its
direction. In addition, a parent company capable of directing the actions of its
subsidiary is secondarily liable for its subsidiary's debts if the subsidiary
becomes insolvent or bankrupt as a result of the action or inaction of its
parent. In this instance, other shareholders of the subsidiary could claim
compensation for the subsidiary's losses from the parent company which caused
the subsidiary to take action or fail to take action, knowing that this action
or failure to take action would result in losses. It is possible that the
Communications Group may be deemed to be this type of parent company for some of
its subsidiaries, and could therefore be liable in some cases for the debt of
these subsidiaries, which could have a material adverse effect on it.
THE COMMUNICATIONS GROUP OPERATES IN COUNTRIES WHERE THE LAWS MAY NOT ADEQUATELY
PROTECT SHAREHOLDER RIGHTS WHICH COULD PREVENT THE COMMUNICATIONS GROUP FROM
REALIZING FULLY THE ECONOMIC BENEFITS OF ITS INVESTMENTS IN THESE COUNTRIES.
Shareholders have limited rights and legal protections under the laws in many of
the countries in which the Communications Group operates. The concept of
fiduciary duties on the part of management or directors to their companies is
also new and is not well developed. In some cases, the officers of a company may
take actions without regard to or in contravention of the directions of the
shareholders or the board of directors appointed by the shareholders.
In other cases, a shareholder's ownership interest may be diluted without its
knowledge or approval or even erased from the shareholder's ownership registry.
The Communications Group cannot assure you that it could obtain legal redress
for any such action in the court systems of these countries.
THE COMPANY MAY DEFAULT UNDER ITS SNAPPER CREDIT FACILITY, WHICH COULD
MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS STRATEGY AND RESULTS OF
OPERATIONS.
The Company has defaulted under its Snapper credit facility and although this
default has been waived, we cannot assure you that it will not default again
under this facility. Any default could materially and adversely affect the
Company's business strategy and results of operations. See "Item 7--Management's
Discussion and Analysis--Liquidity--Snapper."
THE COMPANY IS INVOLVED IN LEGAL PROCEEDINGS, WHICH COULD ADVERSELY AFFECT ITS
FINANCIAL CONDITION.
The Company is involved in several legal proceedings in connection with its
investment in RDM Sports Group, Inc. See "--Investment in RDM."
If the Company is unsuccessful in defending against the allegations made in
these proceedings, an award of the magnitude being sought in these legal
proceedings would have a material adverse effect on its financial condition and
results of operations. The Company intends to vigorously defend these actions
because it believes that it acted appropriately in connection with the matters
at issue in these proceedings. In addition, the Company cannot assure you that
it will not determine that the advantages of entering into a settlement outweigh
the risk and expense of protracted litigation or that ultimately it will be
successful in defending against these allegations.
THE COMPANY'S FUTURE RESULTS OF OPERATIONS MAY BE SUBSTANTIALLY DIFFERENT FROM
ITS STATEMENTS ABOUT ITS FUTURE PROSPECTS AND YOU SHOULD NOT UNDULY RELY ON
THESE STATEMENTS.
Any statements in this document about the Company's expectations, beliefs,
plans, objectives, assumptions or future events or performance are not
historical facts and are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are often but not always
made through the use of words or phrases like "believes," "expects," "may,"
"will," "should" or "anticipates" or the
36
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
negative of these words or phrases or other variations on these words or phrases
or comparable terminology, or by discussions of strategy that involves risks and
uncertainties.
These forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the Company's actual results, performance or
achievements or industry results to be materially different from any future
results, performance or achievements expressed or implied by these
forward-looking statements. These risks, uncertainties and other factors
include, among others:
- general economic and business conditions, which will, among other things,
impact demand for the Company's products and services,
- industry capacity, which tends to increase during strong years of the
business cycle,
- changes in public taste, industry trends and demographic changes,
- competition from other communications companies, which may affect the
Communication Group's ability to generate revenues,
- political, social and economic conditions and changes in laws, rules and
regulations or their administration or interpretation, particularly in
Eastern Europe, the former Soviet Union, China and other selected emerging
markets, which may affect the Communications Group's results of
operations,
- timely completion of construction projects for new systems for the joint
ventures in which the Communications Group has invested, which may impact
the costs of these projects,
- developing legal structures in Eastern Europe, the former Soviet Union,
China and other selected emerging markets, which may affect the
Communications Group's ability to enforce its legal rights,
- cooperation of local partners in the Communications Group's communications
investments in Eastern Europe, the former Soviet Union, China and other
selected emerging markets, which may affect its results of operations,
- exchange rate fluctuations,
- license renewals for the Communications Group's communications investments
in Eastern Europe, the former Soviet Union, China and other selected
emerging markets,
- the loss of any significant customers,
- changes in business strategy or development plans,
- the quality of management,
- the availability of qualified personnel,
- changes in or the failure to comply with government regulation, and
- other factors referenced in this document.
Accordingly, any forward-looking statement is qualified in its entirety by
reference to these risks, uncertainties and other factors and you should not
place any undue reliance on them. Furthermore, any forward-looking statement
speaks only as of the date on which it is made. New factors emerge from time to
time and it is not possible for the Company to predict which will arise. In
addition, the Company cannot assess the impact of each factor on its business or
the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
Furthermore, this Annual Report on Form 10-K/A constitutes a Year 2000 Readiness
Disclosure Statement, and the statements in this report are subject to the Year
2000 Information and Readiness
37
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
Disclosure Act, and the Company hereby claims the protection of this Act for
this report and all information contained herein.
SNAPPER
GENERAL. Snapper manufactures Snapper-Registered Trademark- brand power lawn
and garden equipment for sale to both residential and commercial customers. The
residential equipment includes self-propelled and push-type walk behind
lawnmowers, rear engine riding lawnmowers, garden tractors, zero turn radius
lawn equipment, garden tillers, snow throwers, and related parts and
accessories. The commercial mowing equipment includes commercial quality
self-propelled walk-behind lawnmowers, and wide area walk-behind mowers and
front- and mid-mount zero turn radius lawn equipment. The percentage of
consolidated revenues from Snapper's operation for 1998, 1997 and 1996 were 87%,
90% and 62%, respectively.
Snapper products are premium-priced, generally selling at retail from $300 to
$10,500. Snapper sells to and supports directly an approximately 5,000-dealer
network for the distribution of its products. Snapper distributes these products
through facilities in McDonough, Georgia totaling 367,000 square feet and other
leased warehouse facilities in Dallas, Texas, Reno, Nevada and Greenville, Ohio
to better serve growing customer needs. Snapper also sells its products through
foreign distributors and offered a limited selection of residential walk-behind
lawnmowers and rear-engine riding lawnmowers through approximately 250 of The
Home Depot locations through August 1998, when Snapper terminated its
relationship with The Home Depot.
Due to a shift in strategic direction to focus exclusively on the independent
dealer network. Snapper terminated its business relationship with The Home Depot
in August of 1998. Since the majority of Snapper's competitors had elected to
distribute product through retail establishments, Snapper has decided to align
its product distribution directly through the independent dealer network
channel. In an effort to capitalize on this decision, Snapper has developed a
comprehensive strategy to expand its independent dealer base by soliciting new
dealers based on Snapper's commitment to customer service and this chosen method
of distribution of product. The Home Depot net sales accounted for revenues of
$6.3 million and $6.0 million in 1998 and 1997 respectively. Since the
termination of Snapper's relationship with The Home Depot, Snapper has added
approximately 300 new dealers representing sales commitments in orders of $9.6
million.
A large percentage of the residential and commercial sales of lawn and garden
equipment are made during a 17-week period from early spring to mid-summer.
Although some sales are made to the dealers and distributors prior and
subsequent to this period, the largest volume of sales is made during this time.
The majority of revenues during the late fall and winter periods are related to
snow thrower shipments. Snapper has an agreement with a financial institution
which makes floor-plan financing for Snapper products available to dealers. This
agreement provides financing for dealer inventories and accelerates cash flow to
Snapper. Under the terms of this agreement, a default in payment by one of the
dealers on the program is non-recourse to Snapper. If there is a default by a
dealer Snapper is obligated to repurchase any new and unused equipment recovered
from the dealership. At December 31, 1998 there was approximately $96.4 million
outstanding under this floor-plan financing arrangement. The Company has
guaranteed Snapper's payment obligations under this arrangement.
Snapper also makes available, through General Electric Credit Corporation, a
retail customer revolving credit plan. This credit plan allows consumers to pay
for Snapper products over time. Consumers also receive Snapper credit cards
which can be used to purchase additional Snapper products.
Snapper manufactures its products in McDonough, Georgia at facilities totaling
approximately 1.0 million square feet. Excluding engines, transmissions and
tires, Snapper manufactures a substantial
38
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
portion of the component parts for its products. Most of the parts and material
for Snapper's products are commercially available from a number of sources.
During the three years ended December 31, 1998, Snapper spent an average of $3.8
million per year for research and development. Although it holds several design
and mechanical patents, Snapper is not dependent upon such patents, nor does it
believe that patents play an important role in its business. Snapper does
believe, however, that the registered trademark "Snapper-Registered Trademark-"
is an important asset in its business. Snapper walk-behind mowers are subject to
Consumer Product Safety Commission safety standards and are designed and
manufactured in accordance therewith.
The lawn and garden industry is highly competitive with the competition being
based on price, image, quality, and service. Although no one company dominates
the market, the Company believes that Snapper is a significant manufacturer of
lawn and garden products. A large number of companies, some of which are better
capitalized than Snapper, manufacture and distribute products that compete with
Snapper's, including The Toro Company, Lawn-Boy (a product of The Toro Company),
Sears Roebuck and Co., Deere and Company, Ariens Company, Honda Corporation,
Murray Ohio Manufacturing, American Yard Products, Inc., MTD Products, Inc. and
Simplicity Manufacturing, Inc.
INVESTMENT IN RDM
In December 1994, the Company acquired 19,169,000 shares of RDM common stock,
representing approximately 39% of the outstanding shares of RDM common stock as
of the date thereof, in exchange for all of the issued and outstanding capital
stock of four of its wholly owned subsidiaries. At the time of the transaction,
RDM, a New York Stock Exchange listed company, through its operating
subsidiaries, was a leading manufacturer of fitness equipment and toy products
in the United States.
In connection with the transaction pursuant to which the Company acquired the
RDM shares, the Company, RDM and certain officers of RDM entered into a
shareholders agreement, pursuant to which, among other things, the Company
obtained the right to designate four individuals to serve on RDM's Board of
Directors, subject to certain reductions.
In June 1997, RDM entered into a $100.0 million revolving credit facility with a
syndicate of lenders led by Foothill Capital Corporation and used a portion of
the proceeds of such facility to refinance its existing credit facility. In
order to induce Foothill to extend the entire amount of the RDM credit facility,
Metromedia Company, an affiliate of the Company, provided Foothill with a $15.0
million letter of credit that could be drawn by Foothill (i) upon five days
notice, if RDM defaulted in any payment of principal or interest or breached any
other convenant or agreement in the RDM credit facility and as a result of such
other default the lenders accelerated the amounts outstanding under the RDM
credit facility, subject, in each such case, to customary grace periods, or (ii)
immediately, upon the bankruptcy or insolvency of RDM. In consideration for the
Metromedia Company letter of credit, RDM issued to Metromedia Company 10-year
warrants to acquire 3,000,000 shares of RDM common stock, exercisable after 90
days from the date of issuance at an exercise price of $.50 per share. In
accordance with the terms of the agreement entered into in connection with the
RDM credit facility, Metromedia Company offered the Company the opportunity to
substitute its letter of credit for the Metromedia Company letter of credit and
to receive the RDM warrants. On July 10, 1997, the Company's Board of Directors
elected to substitute its letter of credit for Metromedia Company's letter of
credit and the RDM warrants were assigned to the Company.
On August 22, 1997, RDM announced that it had failed to make the August 15, 1997
interest payment due on its subordinated debentures and that it had no present
ability to make such payment. As a result, on August 22, 1997, Foothill declared
an event of default under the RDM credit facility and accelerated all amounts
outstanding under such facility. On August 29, 1997, RDM and certain of its
39
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
affiliates each subsequently filed voluntary petitions for relief under chapter
11 of the Bankruptcy Code. Since the commencement of their respective chapter 11
cases, RDM and its affiliates have discontinued ongoing business operations and
their assets are being liquidated. As of August 22, 1997, the closing price per
share of RDM common stock was $.50 and the quoted market value of the Company's
investment in RDM was approximately $9.6 million. As a result of RDM's financial
difficulties and uncertainties, the New York Stock Exchange halted trading in
the shares of RDM common stock and the Company believes that it will not receive
any compensation for its equity interest.
After the commencement of the chapter 11 cases, Foothill drew the entire amount
of the letter of credit. Consequently, the Company will become subrogated to
Foothill's secured claims against the Company in an amount equal to the drawing
under the letter of credit, following payment in full of Foothill. The Company
intends to vigorously pursue its subrogation claims in the chapter 11 cases.
However, it is uncertain whether the Company will succeed in any such
subrogation claims or if it is successful in asserting any such subrogation
claims, whether RDM's remaining assets will be sufficient to pay them.
On February 18, 1998, the Office of the United States Trustee filed a motion to
appoint a chapter 11 trustee in the United States Bankruptcy Court for the
Northern Division of Georgia. RDM and its affiliates subsequently filed a motion
to convert the chapter 11 cases to cases under chapter 7 of the Bankruptcy Code.
On February 19, 1998, the bankruptcy court granted the United States Trustee's
motion and ordered that a chapter 11 trustee be appointed. The bankruptcy court
also ordered that the chapter 11 cases not convert to cases under chapter 7 of
the Bankruptcy Code. On February 25, 1998, each of the Company's designees on
RDM's board of directors submitted a letter of resignation.
The chapter 11 trustee is in the process of selling all of RDM's assets to
satisfy its obligations to its creditors and the Company believes that its
equity interest will not be entitled to receive any distributions.
On August 19, 1998, a purported class action lawsuit, THEOHAROUS V. FONG, ET
AL., Civ. No. 1:98CV2366, was filed in United States District Court for the
Northern District of Georgia. On October 19, 1998, a second purported class
action lawsuit with substantially the same allegations, SCHUETTE V. FONG, ET
AL., Civ. No. 1:98CV3034, was filed in United States District Court for the
Northern District of Georgia. On June 7, 1999, plaintiffs in each of these
lawsuits filed amended complaints. The amended complaints allege that certain
officers, directors and shareholders of RDM, including the Company and current
and former officers of the Company who served as directors of RDM, are liable
under federal securities laws for misrepresenting and failing to disclose
information regarding RDM's alleged financial condition during the period
between November 7, 1995 and August 22, 1997, the date on which RDM publicly
disclosed that its management had discussed the possibility of filing for
bankruptcy. The amended complaints also allege that the defendants, including
the Company and current and former officers of the Company who served as
directors of RDM, are secondarily liable as controlling persons of RDM.
Plaintiffs in these lawsuits seek the following relief: unspecified compensatory
damages, reasonable costs and expenses, including counsel fees and expert fees,
and such other and further relief as the court may deem just and proper.
On December 30, 1998, the chapter 11 trustee of RDM brought an adversary
proceeding in the bankruptcy of RDM, HAYS, ET AL. V. FONG, ET AL., Adv. Proc.
No. 98-1128, in the United States Bankruptcy Court, Northern District of
Georgia, alleging that current and former officers of the Company, while serving
as directors on the board of RDM, breached fiduciary duties allegedly owed to
RDM's shareholders and creditors in connection with the bankruptcy of RDM. On
January 25, 1999, the plaintiff filed a first amended complaint. The official
committee of unsecured creditors of RDM
40
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
has moved to proceed as co-plaintiff or to intervene in this proceeding, and the
official committee of bondholders of RDM has moved to intervene in or join the
proceeding. Plaintiffs in this adversary proceeding seek the following relief
against current and former officers of the Company who served as directors of
RDM: actual damages in an amount to be proven at trial, reasonable attorney's
fees and expenses, and such other and further relief as the court deems just and
proper.
On February 16, 1999, the creditors' committee brought an adversary proceeding,
THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF RDM SPORTS GROUP, INC. AND
RELATED DEBTORS V. METROMEDIA INTERNATIONAL GROUP, INC., Adv. Proc. No. 99-1023,
seeking in the alternative to recharacterize as contributions to equity a
secured claim in the amount of $15 million made by the Company arising out of
the Company's provision of a $15.0 million letter of credit to RDM's working
capital lenders, or to equitably subordinate such claim made by Metromedia
against RDM and other debtors in the bankruptcy proceeding. On March 3, 1999,
the RDM bondholders' committee brought an adversary proceeding, THE OFFICIAL
COMMITTEE OF BONDHOLDERS OF RDM SPORTS GROUP, INC. V. METROMEDIA INTERNATIONAL
GROUP, INC., Adv. Proc. No. 99-1029, with substantially the same allegations as
the above proceeding. In addition to the equitable and injunctive relief sought
by plaintiffs described above, plaintiffs in these adversary proceedings seek
actual damages in an amount to be proven at trial, reasonable attorneys' fees,
and such other and further relief as the court deems just and proper.
LANDMARK SALE
On April 16, 1998, the Company sold to Silver Cinemas, Inc. all of the assets of
the Company's Landmark theater group, except cash, for an aggregate cash
purchase price of approximately $62.5 million and the assumption of certain
Landmark liabilities. The sale of Landmark combined with the sale of the
Company's entertainment assets in 1997 has provided the Company with funds for
its expansion in communications businesses. With the sale of these non-strategic
assets the Company is focusing on its core business of providing affordable
modern digital voice, data and multimedia communications capabilities.
ENVIRONMENTAL PROTECTION
Snapper's manufacturing plant is subject to federal, state and local
environmental laws and regulations. Compliance with such laws and regulations
has not affected materially nor is it expected to affect materially Snapper's
competitive position. Snapper's capital expenditures for environmental control
facilities, its incremental operating costs in connection therewith and
Snapper's environmental compliance costs were not material in 1998 and are not
expected to be material in future years.
The Company has agreed to indemnify a former subsidiary of the Company for
certain obligations, liabilities and costs incurred by the subsidiary arising
out of environmental conditions existing on or prior to the date on which the
subsidiary was sold by the Company in 1987. Since that time, the Company has
been involved in various environmental matters involving property owned and
operated by the subsidiary, including clean-up efforts at landfill sites and the
remediation of groundwater contamination. The costs incurred by the Company with
respect to these matters have not been material during any year through and
including the year ended December 31, 1998. As of December 31, 1998, the Company
had a remaining reserve of approximately $2.2 million to cover its obligations
to its former subsidiary. During 1996, the Company was notified by certain
potentially responsible parties at a superfund site in Michigan that the former
subsidiary may also be a potentially responsible party at the superfund site.
The former subsidiary has agreed to participate in remediation in a global
settlement that is subject to court approval, but the amount of the liability
has not been finally determined. The Company believes that such liability will
not exceed the reserve.
41
<PAGE>
ITEM 1. BUSINESS (CONTINUED)
The Company, through a wholly owned subsidiary, owns approximately 17 acres of
real property located in Opelika, Alabama. The Opelika property was formerly
owned by Diversified Products Corporation, a former subsidiary of the Company
that used the Opelika property as a storage area for stockpiling cement, sand
and mill scale materials needed for or resulting from the manufacture of
exercise weights. In June 1994, Diversified Products discontinued the
manufacture of exercise weights and no longer needed to use the Opelika property
as a storage area. The Opelika property was transferred to the Company's wholly
owned subsidiary in connection with the sale of the Company's former sporting
goods subsidiary. In connection with such sale, the Company entered into an
environmental indemnity agreement under which the Company is obligated for costs
and liabilities resulting from the presence on or migration of regulated
materials from the Opelika property. The Company's obligations under the
environmental indemnity agreement with respect to the Opelika property are not
limited. The environmental indemnity agreement does not cover environmental
liabilities relating to any property now or previously owned by Diversified
Products except for the Opelika property.
On January 22, 1996, the Alabama Department of Environmental Management advised
the Company that the Opelika property contains an "unauthorized dump" in
violation of Alabama environmental regulations. The letter from the Department
of Environmental Management required the Company to present for the Department
of Environmental Management's approval a written environmental remediation plan
for the Opelika property. The Company retained an environmental consulting firm
to develop an environmental remediation plan for the Opelika property. In 1997,
the Company received the consulting firm's report. The Company has conducted a
grading and capping in accordance with the remediation plan and has reported to
the Department of Environmental Management that the work was successfully
completed. The Company has proposed to the Department of Environmental
Management an accelerated groundwater monitoring schedule. If the Department of
Environmental Management responds favorably, the Company anticipates closure of
this site in 1999. The Company believes that its reserve of approximately
$100,000 will be adequate to cover any further costs.
EMPLOYEES
As of March 9, 1999, the Company had approximately 1,000 regular employees.
Approximately 600 employees were represented by unions under collective
bargaining agreements. In general, the Company believes that its employee
relations are good.
SEGMENT AND GEOGRAPHIC DATA
Business segment data and information regarding the Company's foreign revenues
by country area are included in notes 2, 3 and 13 to the Notes to Consolidated
Financial Statements included in Item 8 hereof.
42
<PAGE>
ITEM 2. PROPERTIES
The following table contains a list of the Company's principal properties.
<TABLE>
<CAPTION>
NUMBER OF
------------------------
<S> <C> <C> <C>
DESCRIPTION OWNED LEASED LOCATION
- ------------------------------------------ ----------- ----------- ------------------------------------------
COMMUNICATIONS GROUP:
Office space.............................. -- 1 Stamford, Connecticut
Office space.............................. -- 1 Moscow, Russia
Office space.............................. -- 1 Vienna, Austria
Office space.............................. -- 1 New York, New York
Office space.............................. -- 1 Beijing, People's Republic of China
GENERAL CORPORATE:
Office space.............................. -- 1 East Rutherford, New Jersey
SNAPPER:
Manufacturing plant....................... 1 -- McDonough, Georgia
Distribution facility..................... -- 2 McDonough, Georgia
Distribution facility..................... -- 1 Dallas, Texas
Distribution facility..................... -- 1 Greenville, Ohio
Distribution facility..................... -- 1 Reno, Nevada
</TABLE>
The Company's management believes that the facilities listed above are generally
adequate and satisfactory for their present usage and are generally well
utilized.
ITEM 3. LEGAL PROCEEDINGS
FUQUA INDUSTRIES, INC. SHAREHOLDER LITIGATION
IN RE FUQUA INDUSTRIES, INC. SHAREHOLDER LITIGATION, Del. Ch., Consolidated C.A.
No. 11974, plaintiff Virginia Abrams filed a purported class and derivative
action in the Delaware Court of Chancery on February 22, 1991 against Fuqua
Industries, Inc., Intermark, Inc., the then-current directors of Fuqua
Industries and certain past members of the board of directors. The action
challenged certain transactions which were alleged to be part of a plan to
change control of the board of Fuqua Industries from J.B. Fuqua to Intermark and
sought a judgment against defendants in the amount of $15.7 million, other
unspecified money damages, an accounting, declaratory relief and an injunction
prohibiting any business combination between Fuqua Industries and Intermark in
the absence of approval by a majority of Fuqua Industries' disinterested
shareholders. Subsequently, two similar actions, styled BEHRENS V. FUQUA
INDUSTRIES, INC. ET AL., Del. Ch., C.A. No. 11988 and FREBERG V. FUQUA
INDUSTRIES, INC. ET AL., Del. Ch., C.A. No. 11989 were filed with the same
court. On May 1, 1991, the court ordered all of the foregoing actions
consolidated. On October 7, 1991, all defendants moved to dismiss the complaint.
Plaintiffs thereafter took three depositions during the next three years.
On December 28, 1995, plaintiffs filed a consolidated second amended derivative
and class action complaint, purporting to assert additional facts in support of
their claim regarding an alleged plan, but deleting their prior request for
injunctive relief. On January 31, 1996, all defendants moved to dismiss the
second amended complaint. After the motion was briefed, oral argument was held
on November 6, 1996. On May 13, 1997, the court issued a decision on defendants'
motion to dismiss, the court dismissed all of plaintiffs' class claims and
dismissed all of plaintiffs' derivative claims except for the claims that Fuqua
Industries board members (i) entered into an agreement pursuant to which Triton
Group, Inc. (which was subsequently merged into Intermark) was exempted from 8
Del. C. 203 and
43
<PAGE>
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
(ii) undertook a program pursuant to which 4.9 million shares of Fuqua
Industries common stock were repurchased, allegedly both in furtherance of an
entrenchment plan. On January 16, 1998, the court entered an order implementing
the May 13, 1997 decision. The order also dismissed one of the defendants from
the case with prejudice and dismissed three other defendants without waiver of
any rights plaintiffs might have to reassert the claims if the opinion were to
be vacated or reversed on appeal.
On February 5, 1998, plaintiffs filed a consolidated third amended derivative
complaint and named as defendants Messrs. J.B. Fuqua, Klamon, Sanders, Scott,
Warner and Zellars. The complaint alleged that defendants (i) entered into an
agreement pursuant to which Triton was exempted from 8 Del. C. 203 and (ii)
undertook a program pursuant to which 4.9 million shares of Fuqua Industries
common stock were repurchased, both allegedly in furtherance of an entrenchment
plan. For their relief, plaintiffs seek damages and an accounting of profits
improperly obtained by defendants.
In March 1998, defendants J. B. Fuqua, Klamon, Sanders, Zellars, Scott and
Warner filed their answers denying each of the substantive allegations of
wrongdoing contained in the third amended complaint. The Company also filed its
answer, submitting itself to the jurisdiction of the Court for a proper
resolution of the claims purported to be set forth by the plaintiffs.
Discovery is ongoing. The individual defendants have also filed motions to
disqualify Abrams and Freberg as derivative plaintiffs. No decision has been
rendered with respect to either motion.
MICHAEL SHORES V. SAMUEL GOLDWYN COMPANY, ET AL.
On May 20, 1996, a purported class action lawsuit, MICHAEL SHORES V. SAMUEL
GOLDWYN COMPANY, ET AL., Case No. BC 150360, was filed in the Superior Court of
the State of California. Plaintiff Michael Shores alleged that, in connection
with the merger of the Samuel Goldwyn Company, directors and majority
shareholder breached their fiduciary duties to the public shareholders of the
Samuel Goldwyn Company. In amended complaints, plaintiff subsequently added
claims that the Company had aided and abetted other defendants' fiduciary
breaches and had negligently misrepresented and/or omitted material facts in the
Company's prospectus issued in connection with the merger. The Company
successfully demurred to the first and second amended complaints and plaintiff
filed a third amended complaint, which included only the negligent
misrepresentation claim against the Company. The plaintiff agreed to settle the
action in exchange for a payment by defendants in the amount of $490,000, which
payment constitutes a complete and final satisfaction of the claims asserted by
the plaintiff and a plaintiff class certified solely for the purposes of the
settlement. The settlement and the settlement class were approved by the court
on October 8, 1998. Members of the class have been notified of the settlement
and were able to file proofs of claim until February 15, 1999, which claims are
now being processed. At a hearing on July 7, 1999, the court approved the final
distribution of the settlement fund.
SAMUEL GOLDWYN, JR. V. METRO-GOLDWYN-MAYER INC., ET AL.
On October 29, 1997, Samuel Goldwyn, Jr., the former chairman of the Samuel
Goldwyn Company, filed SAMUEL GOLDWYN, JR. V. METRO-GOLDWYN-MAYER INC., ET AL.,
Case No. BC 180290, in Superior Court of the State of California, alleging that
the Company fraudulently induced him and the Samuel Goldwyn, Jr. Family Trust to
enter into various agreements in connection with the merger of the Samuel
Goldwyn Company (since renamed Goldwyn Entertainment Company); breached an
agreement to guarantee the performance of Goldwyn Entertainment Company's
obligations to the Trust; and used, without permission, the "Goldwyn" trademark.
The action also alleged that the Company and other defendants breached Mr.
Goldwyn's employment agreement and fiduciary duties owed to him and the Trust,
both
44
<PAGE>
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
before and after the sale of Goldwyn Entertainment Company to
Metro-Goldwyn-Mayer Inc. After the Company successfully demurred to the
trademark and the breach of fiduciary duty claims, the plaintiffs amended their
pleading, revising and reasserting the trademark and breach of fiduciary duty
claims. Following a period of discovery, the Company reached a settlement with
the plaintiffs. The court ordered the plaintiffs' claims against the Company
dismissed with prejudice on January 11, 1999.
SYDNEY H. SAPSOWITZ AND SID SAPSOWITZ & ASSOCIATES, INC. V. JOHN W. KLUGE,
STUART SUBOTNICK, METROMEDIA INTERNATIONAL GROUP, INC., ET AL.
On June 30, 1997, the plaintiffs in SYDNEY H. SAPSOWITZ AND SID SAPSOWITZ &
ASSOCIATES, INC. V. JOHN W. KLUGE, STUART SUBOTNICK, METROMEDIA INTERNATIONAL
GROUP, INC., ORION PICTURES CORPORATION, LEONARD WHITE, ET AL. filed a lawsuit
in Superior Court of the State of California alleging $28.7 million in damages
from the breach of an agreement to pay a finder's fee in connection with the
Entertainment Group Sale. The Company believes it has meritorious defenses and
is vigorously defending such action. Discovery is proceeding.
ANTHONY NICHOLAS GEORGIOU, ET AL. V. MOBIL EXPLORATION AND PRODUCING SERVICES,
INC., METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC., ET AL.
On January 14, 1998, ANTHONY NICHOLAS GEORGIOU, ET AL. V. MOBIL EXPLORATION AND
PRODUCING SERVICES, INC., METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC., ET
AL., Civil Action No. H-98-0098, was filed in the United States District Court
for the Southern District of Texas. Plaintiffs claim that Metromedia
International Telecommunications conspired against and tortiously interfered
with plaintiffs' potential contracts involving certain oil exploration and
production contracts in Siberia and telecommunications contracts in the Russian
Federation. Plaintiffs are claiming damages, for which all defendants could be
held jointly and severally liable, of an amount in excess of $395.0 million. On
or about February 27, 1998 Metromedia International Telecommunications filed its
answer denying each of the substantive allegations of wrongdoing contained in
the complaint. The contracts between plaintiff Tiller International Limited and
defendant Mobil Exploration and Producing Services, Inc. which are at issue in
this case contain broad arbitration clauses. In accordance with these
arbitration clauses, Mobil Exploration and Producing Services instituted
arbitration proceeding before the London Court of International Arbitration on
July 31, 1997. On August 27, 1998, Judge David Hittner entered an order staying
and administratively closing the Houston litigation pending final completion of
arbitration proceedings in Great Britain. As such, this matter is presently
inactive. The parties have engaged in some discovery. The Company believes it
has meritorious defenses and is vigorously defending this action.
FOR A DISCUSSION OF LEGAL PROCEEDINGS IN CONNECTION WITH RDM, SEE "ITEM 1.
BUSINESS--INVESTMENT IN RDM".
INDEMNIFICATION AGREEMENTS
In accordance with Section 145 of the General Corporation Law of the State of
Delaware, pursuant to the Company's Restated Certificate of Incorporation, the
Company has agreed to indemnify its officers and directors against, among other
things, any and all judgments, fines, penalties, amounts paid in settlements and
expenses paid or incurred by virtue of the fact that such officer or director
was acting in such capacity to the extent not prohibited by law.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1998.
45
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Since November 2, 1995, the Common Stock has been listed and traded on the
American Stock Exchange and the Pacific Stock Exchange under the symbol "MMG".
Prior to November 2, 1995, the Common Stock was listed and traded on both the
New York Stock Exchange and the Pacific Stock Exchange under the symbol "ACT."
The following table sets forth the quarterly high and low closing sales prices
per share for the Company's Common Stock as reported by the American Stock
Exchange.
<TABLE>
<CAPTION>
MARKET PRICE OF COMMON STOCK
----------------------------------------
<S> <C> <C> <C> <C>
QUARTERS ENDED 1998 1997
- ----------------------------------------------------------------- ------------------ ------------------
<CAPTION>
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
March 31......................................................... $15 3/16 $ 9 5/8 $11 7/8 $ 9 3/16
June 30.......................................................... 17 7/8 11 1/16 13 1/16 7 7/16
September 30..................................................... 13 9/16 3 3/4 12 7/8 10 7/8
December 31...................................................... 6 1/4 2 3/4 14 1/4 8 3/4
</TABLE>
Holders of Common Stock are entitled to such dividends as may be declared by the
Company's Board of Directors and paid out of funds legally available for the
payment of dividends. The Company has not paid a dividend to its stockholders
since the dividend declared in the fourth quarter of 1993, and has no plans to
pay cash dividends on the Common Stock in the foreseeable future. The Company
intends to retain earnings to finance the development and expansion of its
businesses. The decision of the board of directors as to whether or not to pay
cash dividends in the future will depend upon a number of factors, including the
Company's future earnings, capital requirements, financial condition, and the
existence or absence of any contractual limitations on the payment of dividends.
The Company's ability to pay dividends is limited because the Company operates
as a holding company, conducting its operations solely through its subsidiaries.
Certain of the Company's subsidiaries' existing credit arrangements contain, and
it is expected that their future arrangements will similarly contain,
substantial restrictions on dividend payments to the Company by such
subsidiaries. See Item 7 -- "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As of August 27, 1999, there were approximately 6,932 record holders of Common
Stock. The last reported sales price for the Common Stock on such date was
$6 9/16 per share as reported by the American Stock Exchange.
46
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, YEAR ENDED
------------------------------------------ FEBRUARY 28,
1998 1997 1996 (1) 1995 (2) 1995
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues (3)........................................... $ 240,292 $ 204,328 $ 36,592 $ 5,158 $ 3,545
Equity in losses of unconsolidated investees (4)....... (18,151) (53,150) (7,835) (6,367) (1,785)
Loss from continuing operations (3) (4) (5)............ (135,986) (130,901) (72,146) (36,265) (19,141)
Income (loss) from discontinued operations (3)......... 12,316 234,036 (38,592) (344,329) (50,270)
Loss from extraordinary items (6)...................... -- (14,692) (4,505) (32,382) --
Net income (loss)...................................... $(123,670) $ 88,443 $(115,243) $(412,976) $ (69,411)
Income (loss) per common share--Basic:
Continuing operations................................ $ (2.19) $ (2.02) $ (1.33) $ (1.48) $ (0.95)
Discontinued operations.............................. .18 3.50 (0.71) (14.03) (2.48)
Extraordinary items.................................. -- (0.22) (0.08) (1.32) --
Net income (loss).................................... $ (2.01) $ 1.26 $ (2.12) $ (16.83) $ (3.43)
Ratio of earnings to fixed charges (7)................. n/a n/a n/a n/a n/a
Weighted average common shares outstanding............. 68,955 66,961 54,293 24,541 20,246
Dividends per common share............................. -- -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets (8)....................................... $ 609,641 $ 789,272 $ 513,118 $ 328,600 $ 40,282
Notes and subordinated debt............................ 51,834 79,416 190,754 171,004 24,948
</TABLE>
- ------------------------------
(1) The consolidated financial statements for the year ended December 31, 1996
include two months (November and December 1996) of the results of operations
of Snapper.
(2) The consolidated financial statements for the year ended December 31, 1995
include operations for Actava and MCEG Sterling from November 1, 1995 and
two months for Orion (January and February 1995) that were included in the
February 28, 1995 consolidated financial statements. The net loss for the
two month duplicate period is $11.4 million.
(3) On July 10, 1997 and April 16, 1998, the Company completed the sales of its
entertainment group and the Landmark theater group, respectively. These
transactions have been treated as discontinuances of business segments and,
accordingly, the Company's consolidated financial statements reflect the
results of operations of the entertainment group and Landmark as
discontinued segments.
(4) Included in the year ended December 31, 1997 are equity in losses and
writedown of investment in RDM of $45.1 million.
(5) For the year ended December 31, 1998, in connection with the Communications
Group's paging operations, the Company adjusted the carrying value of
goodwill and other intangibles, fixed assets, investments in and advances to
joint ventures and wrote down inventory. The total non-cash nonrecurring
charge and write down was $49.9 million.
(6) For each of the years ended December 31, 1997, 1996 and 1995 the
extraordinary items reflect the loss on the repayment of debt in each
period.
(7) For purposes of this computation, earnings are defined as pre-tax earnings
or loss from continuing operations of the Company before adjustment for
minority interests in consolidated subsidiaries or income or loss from
equity investees attributable to common stockholders plus (i) fixed charges
and (ii) distributed income of equity investees. Fixed charges are the sum
of (i) interest expensed and capitalized, (ii) amortization of deferred
financing costs, premium and debt discounts, (iii) the portion of operating
lease rental expense that is representative of the interest factor (deemed
to be one-third) and (iv) dividends on preferred stock. The ratio of
earnings to fixed charges of the Company was less than 1.00 for each of the
years ended December 31, 1998, 1997, 1996 and 1995 and for the year ended
February 28, 1995; thus, earnings available for fixed charges were
inadequate to cover fixed charges for such periods. The deficiency in
earnings to fixed charges for the years ended December 31, 1998, 1997, 1996
and 1995 and for the year ended February 28, 1995 were: $141.1 million,
$95.3 million, $64.3 million, $30.1 million and $17.4 million, respectively.
(8) Total assets include the net assets of the entertainment group and Landmark.
The net assets (liabilities) of the entertainment group at December 31, 1996
and 1995 and February 28, 1995 were $11.0 million, $12.1 million and ($8.5)
million, respectively. The revenues of the entertainment group for the years
ended December 31, 1996 and 1995 and February 28, 1995 were $135.6 million,
$133.8 million and $191.2 million, respectively. At December 31, 1997 and
1996, the net assets of Landmark, which was acquired on July 2, 1996, were
$46.8 million and $46.5 million, respectively. The revenues of Landmark for
the period July 2, 1996 to December 31, 1996 were $29.6 million.
47
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes thereto and the "Business"
section included as Item 1 herein.
GENERAL
The business activities of the Company are composed of two operating groups, the
Communications Group and Snapper. The Communications Group consists of two
geographic areas, Eastern Europe and the former Soviet Union, and China. The
operations in Eastern Europe and the former Soviet Union are as follows: (i)
various types of telephony services; (ii) cable television; (iii) paging
services; and (iv) radio broadcasting. The Company's Communications Group has
investments in various telephony services in China. The Company manufactures
lawn and garden products through Snapper.
During 1998, the Company continued to focus its growth on opportunities in
communications businesses. The convergence of cable television and telephony and
the relationship of each business to Internet access has provided the Company a
unique opportunity. However, as the Company has seen in the current year, the
quick pace of technological, regulatory and political change can effectively
limit the opportunities for the Company in some of the businesses in which it
operates. On July 10, 1997, the Company sold the stock of Orion, including
substantially all of the assets of its entertainment group, consisting of Orion,
Goldwyn and Motion Picture Corporation of America (and their respective
subsidiaries) which included a feature film and television library of over 2,200
titles, to P&F, the parent company of Metro-Goldwyn-Mayer for a gross
consideration of $573.0 million of which $296.4 million of the proceeds from the
entertainment group sale was used to repay amounts outstanding under the
entertainment group's credit facilities and other indebtedness of the
entertainment group. In addition, on April 16, 1998, the Company sold to Silver
Cinemas, Inc. all of the assets of the Landmark theater group, except cash, for
an aggregate cash purchase price of approximately $62.5 million and the
assumption of certain Landmark liabilities. The sale of the Company's
entertainment assets has provided funds for the Company's expansion in
communications businesses. In addition, the Company saw limited growth
opportunities for it in trunked mobile radio and in July 1998 sold its
investment in Protocall Ventures. The Company still owns an interest in one
trunked mobile radio venture and the Company is currently evaluating how to best
maximize its value to the Company.
When the Communications Group entered the paging business, the price for
cellular communication was significantly higher than for its paging services
which were a viable, low cost alternative to GSM cellular telephony. At such
time, customers could receive messages and information via the pager at a
fraction of the cost of GSM cellular service. The paging business is now
operating in an increasingly competitive environment. The most significant
impact has been the accelerated growth of GSM use in those markets in which the
Company has paging operations. In the past two years the number of GSM
subscribers has significantly increased in Europe generally and in many parts of
Central and Eastern Europe in particular.
The Communications Group recognized this competitive risk during 1997 and 1998
and in response rolled out its own programs to reposition its paging services in
a unique fashion. Such programs as calling party pays and "web paging" were
introduced as new applications.
During the fourth quarter of 1998 the Company determined that its marketing
programs had failed to reposition its paging services and that it would not be
able to effectively compete for its traditional paging customers in those
markets where GSM is combined with calling party pays tariffs and prepaid
calling cards. Since its operating and marketing initiatives failed to diminish
the effects of the increased competition, the paging operations continued to
generate operating losses in 1998. In the current
48
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
environment, the potential for growth in most of the markets the Communications
Group paging operations competes in is limited. Consistent with the Company's
strategy to maximize value for the capital employed, the Communications Group
has developed a revised operating plan to stabilize its paging operations.
Accordingly, the Communications Group has evaluated each of it paging
properties, revised operating plans and determined that a write down of the
carrying value of its investment is appropriate.
Under the revised plan, the Communications Group intends to manage its paging
business to a cash flow break even level that will not require significant
additional funding for its operations. The Company has determined that the
Communications Group's estimated future undiscounted cash flows from the revised
plan are below the carrying value of the Communications Group's long-lived
assets, and has adjusted the carrying value of these long-lived assets to zero
based on its expectation of break even cash flows. As a result of the revised
plan, the Company has taken a non-cash, nonrecurring charge on its paging assets
of $49.9 million, which includes a $35.9 million write off of goodwill and other
intangibles. The non-cash, nonrecurring charge adjusted the carrying value of
goodwill and other intangibles, fixed assets of $4.4 million and investments in
and advances to joint ventures of $5.4 million and wrote down inventory of $4.2
million. The write down relates to both consolidated joint ventures and
subsidiaries and joint ventures recorded under the equity method. The Company
has adjusted its investments in certain paging operations which are recorded
under the equity method to zero and does not intend to provide significant
additional funding to these equity investees, and unless it provides future
funding will no longer record its proportionate share of any future net losses
of these investees. It is anticipated that under the revised plan the
Communications Group's paging business's operating losses will decrease
significantly.
The Communications Group believes that its paging businesses in Moscow, Ukraine
and Uzbekistan are relatively unaffected by the GSM competition and continue to
be viable business opportunities and have not been written down. Although GSM is
available in those markets, the Company believes that the regulators are
unlikely to allow calling party pays tariffs for the foreseeable future.
In addition, the Company has reviewed the amortization periods for the remaining
goodwill and intangibles associated with licenses for its operations in Eastern
Europe and the republics of the former Soviet Union and will revise these
amortization periods commencing in the quarter ending September 30, 1999.
The Company will amortize intangibles associated with licenses and goodwill over
a period not to exceed ten (10) years. This change in estimates will be
accounted for prospectively and will result in additional annual amortization
expense of approximately $4.4 million.
On November 1, 1995, Orion, Metromedia International Telecommunications, Inc,
the Company and MCEG Sterling consummated a merger. In connection with this
merger, the Company changed its name from "The Actava Group Inc." to "Metromedia
International Group, Inc." As part of the merger, the Company adopted a formal
plan to dispose of Snapper and, as a result, Snapper was classified as an asset
held for sale and the results of its operations were not included in the
consolidated results of operations of the Company from November 1, 1995 to
October 31, 1996. Subsequently, the Company announced its intention to actively
manage Snapper to maximize its long term value to the Company. The operations of
Snapper are included in the accompanying consolidated financial statements as of
November 1, 1996.
The Communications Group's consolidated revenues represented approximately 13%
of the Company's total revenues and Snapper's revenues represented approximately
87% of the Company's total revenues
49
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
for the fiscal year ended December 31, 1998. The Company expects that the
Communications Group's percentage of the Company's total revenues will increase
as the Communications Group's joint ventures grow their businesses.
In addition, as of April 1, 1997, for financial statement reporting purposes,
the Company no longer qualified to treat its investment in RDM as a discontinued
operation and the Company included in its results of operations the Company's
share of the earnings and losses of RDM. On August 29, 1997, RDM and certain of
its affiliates filed voluntary bankruptcy petitions under chapter 11. The
Company does not believe it will be entitled to any distributions from its
equity interest in RDM.
COMMUNICATIONS GROUP
The Company, through the Communications Group, is the owner of various interests
in joint ventures that are currently in operation or planning to commence
operations in Eastern Europe, the former Soviet Union, China and other selected
emerging markets. The Communications Group's joint ventures currently offer
cellular telecommunications, fixed telephony, international and long distance
telephony services, cable television, paging, and radio broadcasting. The
Communications Group's joint ventures' partners are principally governmental
agencies or ministries.
The Communications Group reports its activity and invests in communications
businesses in two primary geographic areas in Eastern Europe and the former
Soviet Union, and in the People's Republic of China. In Eastern Europe and the
former Soviet Union, the Communications Group generally owns 50% or more of the
operating joint ventures in which it invests. Currently, legal restrictions in
China prohibit foreign ownership and operation in the telecommunications sector.
The Communications Group's China joint ventures invest in telephony system
construction and development networks being undertaken by China Unicom. The
completed systems are operated by China Unicom. The Communications Group's China
joint ventures receive payments from China Unicom based on revenues and profits
generated by the systems in return for their providing financing, technical
advice and consulting and other services. Statistical data in this document
regarding subscribers, population, etc. for the joint ventures in China relate
to the telephony systems of China Unicom to which such joint ventures provide
funding and services. The Communications Group has received notification from
China Unicom stating that a department of the Chinese government has requested
termination of two of its four joint telecommunications projects in China and
the Communications Group expects that the other two telecommunications projects
in which it has invested will receive similar letters. See "--Recent
Developments--Chinese Joint Ventures."
The Company's financial statements consolidate only the accounts and results of
operations of 16 of the Communications Group's 46 operating joint ventures at
December 31, 1998. Investments in other companies and joint ventures which are
not majority owned, or which the Communications Group does not control, but over
which the Communications Group exercises significant influence, have been
accounted for using the equity method. Investments of the Communications Group
or its consolidated subsidiaries over which significant influence is not
exercised are carried under the cost method. See Notes 2 and 3 to the "Notes to
Consolidated Financial Statements" of the Company for the year ended December
31, 1998, for those joint ventures recorded under the equity method and their
summary financial information.
The Communications Group accounts for the majority of its joint ventures under
the equity method of accounting since it generally does not exercise control.
Under the equity method of accounting, the Communications Group reflects the
cost of its investments, adjusted for its share of the income or losses of the
joint ventures, on its balance sheet. The losses recorded in the years ended
1998 and 1997
50
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
represent the Communications Group's equity in the losses of the joint ventures
in Eastern Europe, the former Soviet Union and China. Equity in the losses of
the joint ventures by the Communications Group are generally reflected according
to the level of ownership of the joint venture by the Communications Group until
such joint venture's contributed capital has been fully depleted. The
Communications Group recognizes the full amount of losses generated by the joint
venture when the Communications Group is the sole funding source of the joint
ventures.
The Company expects the Communications Group's percentage of total revenues will
continue to increase. In addition, the Company anticipates that its telephony
line of business will grow at a faster rate than the other lines of businesses
in the Communications Group.
SNAPPER
Snapper manufactures Snapper-Registered Trademark- brand premium-priced power
lawnmowers, lawn tractors, garden tillers, snowthrowers and related parts and
accessories. The lawnmowers include rear engine riding mowers, front-engine
riding mowers or lawn tractors, and self-propelled and push-type walk-behind
mowers. Snapper also manufactures a line of commercial lawn and turf equipment
under the Snapper brand. Snapper provides lawn and garden products through
distribution channels to domestic and foreign retail markets.
The following tables set forth operating results for the years ended December
31, 1998, 1997 and 1996, for the Company's Communications Group's two geographic
areas and the lawn and garden products operations.
51
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
SEE NOTE 1
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET UNION
---------------------------------------------------------------------------------------
INTERNATIONAL
CELLULAR AND LONG RADIO
TELECOM- FIXED DISTANCE CABLE BROAD-
MUNICATIONS TELEPHONY TELEPHONY TELEVISION PAGING CASTING OTHER
----------- ------------- ------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues................................. 22,091 30 27,187 31,440 20,426 19,215 6,249
Depreciation and amortization............ 9,384 13 1,927 13,597 3,161 1,440 1,087
Operating income (loss).................. (5,665) (403) 7,849 (5,212) (19,999) 1,046 (2,571)
CONSOLIDATED
Revenues................................. -- -- -- 3,444 4,204 17,081 3,200
Gross profit.............................
Nonrecurring charge...................... -- -- -- -- 6,280 -- --
Depreciation and amortization............ -- -- -- 1,541 1,591 1,228 481
Operating income (loss).................. -- -- -- (1,475) (20,632) 1,171 (186)
UNCONSOLIDATED JOINT VENTURES
Revenues................................. 22,091 30 27,187 27,996 16,222 2,134 3,049
Depreciation and amortization............ 9,384 13 1,927 12,056 1,570 212 606
Operating income (loss).................. (5,665) (403) 7,849 (3,737) 633 (125) (2,385)
Net income (loss)........................ (12,821) (495) 5,333 (8,985) (3,384) (221) (3,220)
Equity in income (losses) of
unconsolidated investees (Note 2)...... (5,867) (515) 1,600 (3,877) (7,460) (108) (884)
Gain on sale of Protocall Ventures, net..
Foreign currency loss....................
Minority interest........................
Interest expense.........................
Interest income..........................
Income tax benefit.......................
Discontinued operations..................
Net loss.................................
<CAPTION>
SEGMENT COMMUNICATIONS
HEAD- GROUP-- CORPORATE
QUARTERS TOTAL CHINA SNAPPER HEADQUARTERS CONSOLIDATED
----------- --------- --------------- --------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues................................. 2,279 128,917
Depreciation and amortization............ 5,784 36,393
Operating income (loss).................. (87,519) (112,474)
CONSOLIDATED
Revenues................................. 2,279 30,208 -- 210,084 -- $ 240,292
Gross profit............................. 62,690
Nonrecurring charge...................... 34,037 40,317 -- -- -- 40,317
Depreciation and amortization............ 5,784 10,625 3,226 6,728 9 20,588
Operating income (loss).................. (87,519) (108,641) (14,504) (7,607) 896 (129,856)
UNCONSOLIDATED JOINT VENTURES
Revenues................................. -- 98,709 3,483
Depreciation and amortization............ -- 25,768 2,662
Operating income (loss).................. -- (3,833) (660)
Net income (loss)........................ -- (23,793) (3,567)
Equity in income (losses) of
unconsolidated investees (Note 2)...... -- (17,111) (1,040) -- -- (18,151)
Gain on sale of Protocall Ventures, net.. 5,527 -- -- -- 5,527
Foreign currency loss.................... (137) -- -- -- (137)
Minority interest........................ 1,527 8,331 -- -- 9,858
Interest expense......................... (16,331)
Interest income.......................... 12,746
Income tax benefit....................... 358
Discontinued operations.................. 12,316
------------
Net loss................................. $ (123,670)
------------
------------
</TABLE>
Note 1: The Company evaluates the performance of its operating segments based on
earnings before interest, taxes, depreciation, and amortization. The above
segment information and the discussion of the Company's operating segments is
based on operating income (loss) which includes depreciation and amortization.
In addition, the Company evaluates the performance of the Communications Group's
operating segment in Eastern Europe and the republics of the former Soviet Union
on a combined basis. The Company is providing as supplemental information an
analysis of combined revenues and operating income (loss) for its consolidated
and unconsolidated joint ventures in Eastern Europe and the republics of the
former Soviet Union. As previously discussed, legal restrictions in China
prohibit foreign participation in the operations or ownership in the
telecommunications sector. The above segment information for the Communications
Group's China joint ventures represents the investment in network construction
and development of telephony networks for China Unicom. The above segment
information does not reflect the results of operations of China Unicom's
telephony networks. The Company has received notification from China Unicom
stating that a department of the Chinese government has requested termination of
two of its four joint telecommunications projects in China and the Company
expects that the other two telecommunications projects in which it has invested
will receive similar letters. See "--Recent Developments--Chinese Joint
Ventures."
Note 2: Equity in income (losses) of unconsolidated investees reflects
elimination of intercompany interest expense.
52
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET UNION
---------------------------------------------------------------------------------------------
INTERNATIONAL
CELLULAR AND LONG RADIO SEGMENT
TELECOM- DISTANCE CABLE BROAD- HEAD-
MUNICATIONS TELEPHONY TELEVISION PAGING CASTING OTHER QUARTERS
------------- --------------- ----------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues.................... 2,587 30,866 23,314 12,999 16,015 4,004 1,885
Depreciation and
amortization.............. 2,380 1,287 9,648 1,630 699 981 4,906
Operating income (loss)..... (6,761) 17,244 (6,831) (3,905) 4,182 (3,325) (39,440)
CONSOLIDATED
Revenues.................... -- -- 1,902 3,318 13,549 598 1,885
Gross profit................
Depreciation and
amortization.............. -- -- 791 790 607 89 4,906
Operating income (loss)..... -- -- (1,953) (4,084) 3,935 145 (39,440)
UNCONSOLIDATED JOINT
VENTURES
Revenues.................... 2,587 30,866 21,412 9,681 2,466 3,406 --
Depreciation and
amortization.............. 2,380 1,287 8,857 840 92 892 --
Operating income (loss)..... (6,761) 17,244 (4,878) 179 247 (3,470) --
Net income (loss)........... (8,129) 14,030 (9,875) (1,318) 121 (4,053) --
Equity in income (losses) of
unconsolidated investees
(Note 2).................. (2,027) 4,209 (7,212) (761) 159 (1,601) --
Foreign currency gain
(loss)....................
Minority interest...........
Interest expense............
Interest income.............
Income tax benefit..........
Discontinued operations.....
Extraordinary items.........
Net income..................
<CAPTION>
COMMUNICATIONS
GROUP-- CORPORATE
TOTAL CHINA SNAPPER HEADQUARTERS CONSOLIDATED
--------- ----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
COMBINED
Revenues.................... 91,670
Depreciation and
amortization.............. 21,531
Operating income (loss)..... (38,836)
CONSOLIDATED
Revenues.................... 21,252 -- 183,076 -- $ 204,328
Gross profit................ 59,080
Depreciation and
amortization.............. 7,183 2,566 6,973 12 16,734
Operating income (loss)..... (41,397) (17,871) (15,246) (5,561) (80,075)
UNCONSOLIDATED JOINT
VENTURES
Revenues.................... 70,418 1,422
Depreciation and
amortization.............. 14,348 1,179
Operating income (loss)..... 2,561 (187)
Net income (loss)........... (9,224) (1,982)
Equity in income (losses) of
unconsolidated investees
(Note 2).................. (7,233) (861) -- (45,056) (53,150)
Foreign currency gain
(loss).................... (770) 56 -- -- (714)
Minority interest........... 561 8,332 -- -- 8,893
Interest expense............ (20,922)
Interest income............. 9,840
Income tax benefit.......... 5,227
Discontinued operations..... 234,036
Extraordinary items......... (14,692)
------------
Net income.................. $ 88,443
------------
------------
</TABLE>
53
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
SEE NOTE 3
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET UNION
-------------------------------------------------------------------------------------
INTERNATIONAL
AND LONG SEGMENT
DISTANCE CABLE BROAD- HEAD-
TELEPHONY TELEVISION PAGING CASTING OTHER QUARTERS TOTAL
------------- ----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues.................... 19,177 15,243 10,864 10,899 1,030 1,634 58,847
Depreciation and
amortization.............. 617 5,964 1,645 257 493 5,445 14,421
Operating income (loss)..... 3,122 (5,990) (943) 279 (1,409) (29,902) (34,843)
CONSOLIDATED
Revenues.................... -- 170 2,880 9,363 -- 1,634 14,047
Gross profit................
Depreciation and
amortization.............. -- 302 461 174 -- 5,445 6,382
Operating income (loss)..... -- (832) (427) 2,102 -- (29,902) (29,059)
UNCONSOLIDATED JOINT
VENTURES
Revenues.................... 19,177 15,073 7,984 1,536 1,030 -- 44,800
Depreciation and
amortization.............. 617 5,662 1,184 83 493 -- 8,039
Operating income (loss)..... 3,122 (5,158) (516) (1,823) (1,409) -- (5,784)
Net income (loss)........... 2,997 (7,954) (1,687) (2,149) (1,690) -- (10,483)
Equity in income (losses) of
unconsolidated investees
(Note 2).................. 899 (5,011) (1,232) (1,896) (595) -- (7,835)
Foreign currency loss....... (255)
Minority interest........... 666
Interest expense............
Interest income.............
Income tax expense..........
Discontinued operations.....
Extraordinary items.........
Net loss....................
<CAPTION>
COMMUNICATIONS SNAPPER-
GROUP-- SNAPPER ASSET HELD CORPORATE
CHINA PRO-FORMA FOR SALE HEADQUARTERS CONSOLIDATED
----------------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
COMBINED
Revenues....................
Depreciation and
amortization..............
Operating income (loss).....
CONSOLIDATED
Revenues.................... -- 153,168 (130,623) -- $ 36,592
Gross profit................ 22,570
Depreciation and
amortization.............. 21 7,266 (6,010) 18 7,677
Operating income (loss)..... (2,729) (27,298) 17,933 (9,373) (50,526)
UNCONSOLIDATED JOINT
VENTURES
Revenues.................... --
Depreciation and
amortization.............. --
Operating income (loss)..... --
Net income (loss)........... --
Equity in income (losses) of
unconsolidated investees
(Note 2).................. -- -- -- (7,835)
Foreign currency loss....... -- -- -- (255)
Minority interest........... -- -- -- 666
Interest expense............ (19,090)
Interest income............. 5,308
Income tax expense.......... (414)
Discontinued operations..... (38,592)
Extraordinary items......... (4,505)
------------
Net loss.................... $ (115,243)
------------
------------
</TABLE>
Note 3: Snapper Pro-Forma information represents the results of operations of
Snapper as if it had been consolidated as of January 1, 1996. Snapper -
Asset Held for Sale represents the result of operations for January 1,
1996 to October 31, 1996 when Snapper was recorded as an asset held for
sale.
54
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997, AND YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
LEGEND
C = Consolidated
E = Equity method
P = Pre-operational
N/A = Not applicable
N/M = Not meaningful
COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION
The following sets forth, by line of business, the Communications Group's
consolidated and unconsolidated subsidiaries and joint ventures, the
Communications Group's ownership percentage and selected income statement
information for the years ended December 31, 1998, 1997 and 1996 (in thousands):
TELEPHONY
CELLULAR TELECOMMUNICATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C> <C>
JOINT VENTURE/SUBSIDIARY OWNERSHIP % 1998 1997 1996
- ------------------------------------------------------------------------------ ----------------- ----- --------- ---------
Baltcom GSM (Latvia).......................................................... 22% E E P
Magticom (Tbilisi, Georgia)................................................... 35% E E P
Tyumenruskom (Tyumen, Russia)................................................. 46% P N/A N/A
</TABLE>
UNCONSOLIDATED JOINT VENTURES
The following table sets forth the revenues, operating loss, net loss and equity
in losses of the Communications Group's investment in unconsolidated joint
ventures recorded under the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
---------- --------- ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues................................................ $ 22,091 $ 2,587 -- 754% N/A
Operating loss.......................................... $ (5,665) $ (6,761) -- (16)% N/A
Net loss................................................ $ (12,821) $ (8,129) -- 58% N/A
Equity in losses of joint ventures...................... $ (5,867) $ (2,027) -- 189% N/A
</TABLE>
REVENUES. Revenues for cellular communications reflects the result of
operations in Latvia and Georgia, both of which commenced operations in 1997,
and were active for six months and one month, respectively, during that year.
Increases in 1998 are a result of having twelve months of operations. Total
subscribers increased to 49,607 in 1998 from 10,429 in 1997.
OPERATING LOSS. Included in operating loss in 1998 were cost of services
provided of $7.3 million, selling, general and administrative expenses of $11.0
million and depreciation and amortization of $9.4 million. For the year ended
December 31, 1997, operating loss includes cost of services provided of $2.3
million, selling, general and administrative expenses of $4.7 million and
depreciation and amortization charges of $2.4 million. The decreased operating
loss in 1998 as compared to 1997 is a
55
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
result of increasing revenue while controlling selling, general and
administrative costs at the operation in Latvia, offset by increased selling,
general and administrative expenses incurred at the operations in Georgia.
NET LOSS. Included in net losses in 1998 and 1997 was interest expense of $6.8
million and $1.0 million, respectively. The increase in interest expense in 1998
from the prior year represents additional borrowings by the joint ventures to
fund and expand their operations. Additionally, net losses in 1998 and 1997
included foreign currency losses of $326,000 and $333,000, respectively. Foreign
currency losses represent the remeasurement of the joint ventures' financial
statements, using the U.S. dollar as the functional currency.
EQUITY IN LOSSES OF JOINT VENTURES. Equity in losses of joint ventures
represents the Communications Group's proportionate share of the net losses of
the Communications Group's joint venture in 1998 and 1997. The increase in
equity in losses of joint ventures in 1998 is the result of having twelve months
of operations.
FIXED TELEPHONY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C> <C>
JOINT VENTURE/SUBSIDIARY OWNERSHIP % 1998 1997 1996
- ------------------------------------------------------------------------------ ----------------- ----- --------- ---------
Instaphone (Kazakhstan)....................................................... 50% E P N/A
Caspian American Telecommunications (Azerbaijan).............................. 38% P N/A N/A
</TABLE>
UNCONSOLIDATED JOINT VENTURES
The following table sets forth the revenues, operating loss, net loss and equity
in losses of the Communications Group's investment in unconsolidated joint
ventures recorded under the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE
1998 1997 1996 1998 TO 1997
--------- ----- ----- ---------------
<S> <C> <C> <C> <C>
Revenues....................................................... $ 30 -- -- N/A
Operating loss................................................. $ (403) -- -- N/A
Net loss....................................................... $ (495) -- -- N/A
Equity in losses of joint ventures............................. $ (515) -- -- N/A
<CAPTION>
% CHANGE
1997 TO 1996
---------------
<S> <C>
Revenues....................................................... N/A
Operating loss................................................. N/A
Net loss....................................................... N/A
Equity in losses of joint ventures............................. N/A
</TABLE>
EQUITY IN LOSSES OF JOINT VENTURES. Results above are those of the
Communications Group's joint venture in Kazakhstan. Operations have been delayed
by the lack of success in securing an interconnection agreement with the local
ministry. Included in the operating loss are cost of services provided of
$13,000, selling, general and administrative expenses of $407,000 and
depreciation charges of $13,000. Included in net loss are interest charges of
$96,000.
An interconnection agreement is required to access public switched traffic from
a private overlay network such as the Company's Instaphone fixed telephony
venture in Kazakhstan. The lack of an interconnection agreement essentially
precludes the joint venture from establishing viable commercial operations, even
though it meets the Company's requirement to be classified as an operational
joint venture. When Instaphone is granted an interconnection agreement it will
begin to market its services and implement its business plan. At the current
time the Communications Group can not determine when Instaphone will be able to
enter into an acceptable interconnection agreement.
56
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
INTERNATIONAL AND LONG DISTANCE TELEPHONY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
<S> <C> <C> <C>
JOINT VENTURE/SUBSIDIARY OWNERSHIP % 1998 1997
- ------------------------------------------------------------------------------- ----------------- ----- -----
Telecom Georgia (Tbilisi, Georgia)............................................. 30% E E
<CAPTION>
<S> <C>
JOINT VENTURE/SUBSIDIARY 1996
- ------------------------------------------------------------------------------- -----
Telecom Georgia (Tbilisi, Georgia)............................................. E
</TABLE>
UNCONSOLIDATED JOINT VENTURES
The following table sets forth the revenues, operating income, net income and
equity in income of the Communications Group's investment in Telecom Georgia
which is recorded under the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 27,187 $ 30,866 $ 19,177 (12)% 61%
Operating income..................................... $ 7,849 $ 17,244 $ 3,122 (54)% 452%
Net income........................................... $ 5,333 $ 14,030 $ 2,997 (62)% 368%
Equity in income of joint ventures................... $ 1,600 $ 4,209 $ 899 (62)% 368%
</TABLE>
REVENUES. International and long distance calling revenues are generated at
Telecom Georgia which handles international calls inbound to and outbound from
the Republic of Georgia. Revenues for the year ended December 31, 1998 as
compared to the year ended December 31, 1997 decreased by approximately $6.3
million due to the contractual reductions in termination accounting rates in
Telecom Georgia's international settlement agreements for traffic with its
overseas carriers and the corresponding decrease in tariffs. This was offset by
increased revenue of approximately $2.6 million resulting from increased
minutes. The increase in international toll calling revenue for the year ended
December 31, 1997 as compared to the year ended December 31, 1996 is directly
attributable to increases in both the incoming and outgoing minutes streams.
OPERATING INCOME. Included in operating income in 1998, 1997 and 1996 were
costs of services provided of $9.8 million, $7.6 million and $9.0 million,
respectively. Selling and administrative expenses were $7.6 million in 1998,
$4.8 million in 1997 and $6.5 million in 1996. Also included in operating income
in 1998, 1997 and 1996 were depreciation and amortization charges of $1.9
million, $1.3 million and $617,000, respectively.
NET INCOME. Included in net income in 1998, 1997 and 1996 were interest charges
of $375,000, $382,000 and $65,000, respectively. Also included in net income
were foreign currency losses of $972,000, $1.1 million and $60,000 in 1998, 1997
and 1996, respectively. Additionally, income taxes were $1.2 million and $1.7
million in 1998 and 1997, respectively. The increase in both operating and net
income from 1996 to 1997 and decreases from 1997 to 1998 are partially due to
the impact of favorable settlements with international carriers of approximately
$2.0 million in 1997, for costs related to 1996 call revenues. Additionally,
during 1996 and 1997, Telecom Georgia was the only entity licensed to handle
international call traffic in and out of Georgia. In 1998 several new market
entrants started providing international telephone service.
EQUITY IN INCOME OF JOINT VENTURE. Equity in income of joint venture represents
the Communications Group's proportionate share of Telecom Georgia's net income
in 1998, 1997 and 1996.
57
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
CABLE TELEVISION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C> <C>
JOINT VENTURE/SUBSIDIARY OWNERSHIP % 1998 1997 1996
- ------------------------------------------------------------------------------ --------------- ----- --------- ---------
Romsat Cable TV (Bucharest, Romania).......................................... 100% C C C
Viginta (Vilnius, Lithuania).................................................. 55% C C C
ATK (Archangelsk, Russia)..................................................... 81% P N/A N/A
Kosmos TV (Moscow, Russia).................................................... 50% E E E
Baltcom TV (Riga, Latvia)..................................................... 50% E E E
Ayety TV (Tbilisi, Georgia)................................................... 49% E E E
Kamalak TV (Tashkent, Uzbekistan)............................................. 50% E E E
Sun TV (Chisinau, Moldova).................................................... 50% E E E
Alma TV (Almaty, Kazakhstan).................................................. 50% E E E
Cosmos TV (Minsk, Belarus).................................................... 50% E E E
Teleplus (St. Petersburg, Russia)............................................. 45% E P N/A
</TABLE>
CONSOLIDATED SUBSIDIARIES AND JOINT VENTURES
The following table sets forth the consolidated revenues and operating loss for
cable television (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues................................................ $ 3,444 $ 1,902 $ 170 81% 1,019%
Operating loss.......................................... $ (1,475) $ (1,953) $ (832) (24)% 135%
</TABLE>
REVENUES. The revenue increases from cable television for the year ended
December 31, 1998 as compared to the year ended December 31, 1997, and for the
year ended December 31, 1997 as compared to the year ended December 31,1996 were
the result of the expansion of the Communications Group's strategy to increase
the customer base by wiring buildings in advance acquiring wired networks and
targeting for a lower priced, broader based program package. In Romania, this
resulted in an increase of $1.7 million in 1997 from $170,000 in 1996. In 1998,
the strategy was expanded to Lithuania and an increase of approximately $391,000
was realized. This was coupled with another acquisition in Romania during 1998
which resulted in an increase in revenue of approximately $1.2 million. This
strategy was first implemented in 1996 and expanded in 1997 to all cable joint
ventures.
OPERATING LOSS. Included in operating loss in 1998 were cost of services
provided of $1.2 million, selling, general and administrative expenses of $2.2
million and depreciation and amortization of $1.5 million. For the year ended
December 31, 1997, cost of services provided of $835,000, selling, general and
administrative expenses of $2.2 million and depreciation and amortization
charges of $791,000 are included in operating loss. For the year ended December
31, 1996, cost of services provided of $268,000, selling, general and
administrative expenses of $432,000 and depreciation and amortization charges of
$302,000 are included in operating loss. The reduction in operating loss in 1998
compared to 1997 reflects the strategy to increase the customer base as noted
above. In 1997 as compared to 1996, operating loss was negatively impacted by
the programming operation in Romania, which provided local language subtitling
and dubbing services. In 1998, this function was outsourced. This entity
contributed approximately $766,000 of the operating loss in 1997.
58
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
UNCONSOLIDATED JOINT VENTURES
The following table sets forth the revenues, operating loss, net loss and equity
in losses of the Company's investment in unconsolidated joint ventures recorded
under the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 27,996 $ 21,412 $ 15,073 31% 42%
Operating loss....................................... $ (3,737) $ (4,878) $ (5,158) (23)% (5)%
Net loss............................................. $ (8,985) $ (9,875) $ (7,954) (9)% 24%
Equity in losses of joint ventures................... $ (3,877) $ (7,212) $ (5,011) (46)% 44%
</TABLE>
REVENUES. During 1998, revenues increased at the cable operations in Almaty,
Kazakhstan, Chisnau, Moldova, Minsk, Belarus and Tashkent, Uzbekistan and
accounted for approximately $1.7 million, $1.7 million, $845,000 and $633,000,
respectively, of the increase in revenues of the equity investees. However, the
Communications Group is intentionally slowing the growth of its joint venture in
Belarus, as a result of policies adopted by various governmental entities which
may adversely affect the operations of the venture. These include foreign
exchange controls which, coupled with scarcity of hard currency, limit the
ability of the joint venture to purchase equipment abroad. Additionally, the
Communications Group decided not to move ahead with a proposal to wire certain
parts of the city of Minsk for cable television after it was informed by the
city of Minsk that this expansion would be subject to the payment of an
additional fee. During 1997, the strategy of wiring buildings for a lower cost
tier, coupled with the use of microwave multipoint distribution for localized
product and individual installations, was expanded to all cable joint ventures
contributing to revenue increases of approximately $1.5 million, $1.2 million
and $1.4 million at the operations in Tashkent, Uzbekistan, Chisnau, Moldova and
Almaty, Kazakhstan, respectively.
OPERATING LOSS. Included in operating loss in 1998 were cost of services
provided of $3.6 million, selling, general and administrative expenses of $16.1
million and depreciation and amortization of $12.1 million. For the year ended
December 31, 1997, cost of services provided of $4.2 million, selling, general
and administrative expenses of $13.3 million and depreciation and amortization
charges of $8.9 million are included in operating loss. For the year ended
December 31, 1996, cost of services provided of $3.5 million, selling, general
and administrative expenses of $11.1 million and depreciation and amortization
charges of $5.7 million are included in operating loss. The improvements in
operating results reflect the fact that certain operating costs are fixed and
the number of subscribers increased, reducing the operating loss per subscriber,
combined with cost savings achieved through economies of scale resulting from
contract renegotiation with programmers and other suppliers. This favorable
effect was partially offset during 1998 by the operating loss incurred at the
joint venture in St. Petersburg, Russia, which commenced operations in 1998.
NET LOSS. Included in net losses in 1998, 1997 and 1996 was interest expense of
$4.5 million, $3.6 million and $2.6 million, respectively. The increases in
interest expense in 1998 and 1997 from the prior years represented additional
borrowings by the joint ventures to fund and expand their operations. Also
included in net loss are foreign currency losses of $427,000, $796,000 and
$159,000 for 1998, 1997 and 1996, respectively.
EQUITY IN LOSSES OF JOINT VENTURES. The Communications Group initially
recognizes its proportionate share of the net income or loss of its joint
ventures. However, for 1998, 1997 and 1996, the Communications Group recognized
the full amount of losses generated in certain joint ventures since
59
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
the contributed capital of the joint venture has been depleted and the
Communications Group was generally the sole funding source.
COMBINED RESULTS OF OPERATIONS
The following table sets forth the revenues, depreciation and amortization and
operating loss on a combined basis of the Communications Group's consolidated
and unconsolidated subsidiaries and joint ventures (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
---------- --------- --------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues............................................ $ 31,440 $ 23,314 $ 15,243 35% 53%
Depreciation and amortization....................... $ (13,597) $ (9,648) $ (5,964) 41% 62%
Operating loss...................................... $ (5,212) $ (6,831) $ (5,990) (24)% 14%
</TABLE>
ANALYSIS OF COMBINED RESULTS OF OPERATIONS. As noted above, subscriber growth
and revenue increases in 1998 and 1997 were the result of implementing a new
strategy by which buildings were wired in advance and targeted for a lower
priced, broader band program package. Total subscribers increased from 69,118 in
1996 to 225,525 in 1997 and 315,864 in 1998. In 1998, the improvement in
operating results reflects the favorable relationship between certain fixed
operating costs and the increase in subscribers as described above, combined
with cost savings achieved through economies of scale resulting in contract
renegotiations with programmers and other suppliers.
PAGING
OVERVIEW. The Communications Group's paging business provides traditional
paging services. The underlying premise for the paging business has been the
availability of service to mobile subscribers at a price significantly lower
than alternative mobile messaging services. When the Communications Group
entered the paging business, the price for cellular communication was
significantly higher than for its paging services which were a viable, low cost
alternative to GSM cellular telephony. At such time, customers could receive
messages and information via the pager at a fraction of the cost of GSM cellular
service.
The paging business is now operating in an increasingly competitive environment.
The most significant impact has been the accelerated growth of GSM use in those
markets in which the Company has paging operations. In the past two years the
number of GSM subscribers has significantly increased in Europe generally and in
many parts of Central and Eastern Europe in particular. For example, in Austria
GSM subscribers grew from approximately 384,000 or 5% penetration at the end of
1995 to approximately 2,271,000 or 28% penetration at the end of 1998.
The combination of deregulation and availability of attractively priced
financing has changed the GSM mobile telephony business by increasing the number
of competitors. This increased level of competition has resulted in new and
innovative pricing structures. The combination of reduced handset prices,
calling party pays tariffs and the introduction of prepaid calling cards has
significantly reduced the cost of entry for GSM subscribers. The GSM phone
service includes voice mail and in many cases short messaging service which is
very similar to paging messaging. A prepaid GSM subscriber can purchase a GSM
handset for approximately $150, receive incoming calls for free (paid for by the
calling party or calling party pays), use voice mail and the short messaging
service and only pay for calls made using the prepaid card.
60
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Communications Group recognized this competitive risk during 1997 and 1998
and in response rolled out its own programs to reposition its paging services in
a unique fashion. Such programs as calling party pays and "web paging" were
introduced as new applications.
During the fourth quarter of 1998 the Company determined that its marketing
programs had failed to reposition its paging services and that it would not be
able to effectively compete for its traditional paging customers in those
markets where GSM is combined with calling party pays tariffs and prepaid
calling cards. Since its operating and marketing initiatives failed to diminish
the effects of the increased competition, the paging operations continued to
generate operating losses in 1998. Accordingly, the Communications Group has
evaluated each of it paging properties, revised operating plans and determined
that a write down of the carrying value of its investment is appropriate. Under
the revised plan, the Communications Group intends to manage its paging business
to a cash flow break even level that will not require significant additional
funding for its operation. It is anticipated that under the revised plan the
Communications Group's paging business operating losses will decrease
significantly.
The Communications Group believes that its paging businesses in Moscow, Ukraine
and Uzbekistan are relatively unaffected by the GSM competition and continue to
be viable business opportunities and have not been written down. Although GSM is
available in those markets, the Company believes that the regulators are
unlikely to allow calling party pays tariffs for the foreseeable future.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C> <C>
JOINT VENTURE/SUBSIDIARY OWNERSHIP % 1998 1997 1996
- ------------------------------------------------------------------------------ ------------- ----- --------- ---------
Baltcom Paging (Tallinn, Estonia)............................................. 85% C C E
CNM (Romania)................................................................. 54% C C C
Paging One Services (Austria)................................................. 100% C C N/A
Eurodevelopment (Ukraine)..................................................... 51% C N/A N/A
Baltcom Plus (Riga, Latvia)................................................... 50% E E E
Paging One (Tbilisi, Georgia)................................................. 45% E E E
Raduga Poisk (Nizhny Novgorod, Russia)........................................ 45% E E E
PT Page (St. Petersburg, Russia).............................................. 40% E E E
Kazpage (Kazakhstan).......................................................... 26-41% E E N/A
Kamalak Paging (Tashkent, Samarkand, Bukhara and Andijan, Uzbekistan)......... 50% E E E
Alma Page (Almaty and Ust-Kamenogorsk, Kazakhstan)............................ 50% E E E
Paging Ajara (Batumi, Georgia)................................................ 35% E E E
Mobile Telecom (Russia)....................................................... 50% E N/A N/A
</TABLE>
61
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
CONSOLIDATED SUBSIDIARIES AND JOINT VENTURES
The following table sets forth the consolidated revenues and operating loss for
paging (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
---------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $ 4,204 $ 3,318 $ 2,880 27% 15%
Operating loss........................................ $ (20,632) $ (4,084) $ (427) 405% 856%
</TABLE>
REVENUES. The increase in revenues in the year ended December 31, 1998 as
compared to the year ended December 31, 1997 is attributable to an increase of
approximately $623,000 realized at the paging operations in Vienna, Austria
coupled with an acquisition during the fourth quarter of 1998 of a paging
operation in Ukraine. Further, the purchase of an additional interest of the
operation in Tallinn, Estonia during 1997 accounted for an increase of
approximately $467,000 of revenue for the year ended December 31, 1998 as
compared to the year ended December 31, 1997 as the results of operations were
consolidated for a full year in 1998. These gains were offset by reduced 1998
revenues at the venture in Bucharest, Romania of approximately $696,000.
The increase in revenues in the year ended December 31, 1997 as compared to
December 31, 1996 is partially the result of the purchase of an additional
interest in the venture in Tallinn, Estonia as noted above. The results of this
venture were consolidated for part of the year in 1997 and accounted for under
the equity method in 1996 and part of 1997.
OPERATING LOSS. Included in operating loss in 1998 were cost of services
provided of $5.1 million, selling, general and administrative expenses of $18.1
million, including an impairment charge of $6.2 million and depreciation and
amortization of $1.6 million. For the year ended December 31, 1997, cost of
services provided of $1.3 million, selling, general and administrative expenses
of $5.3 million and depreciation and amortization charges of $790,000 are
included in operating loss. For the year ended December 31, 1996, cost of
services provided of $1.2 million, selling, general and administrative expenses
of $1.6 million and depreciation and amortization charges of $461,000 are
included in operating loss. The increase in the operating loss for the year
ended December 31, 1998 as compared to the year ended December 31, 1997 was
primarily due to increased losses incurred at the operations in Romania, Estonia
and Austria of approximately $4.2 million, $971,000 and $715,000, respectively.
These losses were partially due to increased marketing, advertising, technical
and distribution expenses incurred to introduce calling party pays service.
Calling party pays subscribers are not required to pay a monthly fee for
service. Instead, the calling party sending the paging message is required to
call a toll line for which the calling party is billed by the local telephone
company. The joint venture then receives a fee from the local telephone company
for each call made to the pager. In connection with its revised plan for its
paging operations, the operating loss for 1998 includes a write off of inventory
of $4.2 million included in cost of sales and the impairment charge of $6.2.
million which is comprised of a write off of fixed assets of $4.4 million and an
intangible asset write off of $1.8 million.
The increased operating loss for the year ended December 31, 1997 as compared to
the year ended December 31, 1996 is primarily attributable to the operating
losses of approximately $2.9 million for the start up of the Austrian paging
operations.
62
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
UNCONSOLIDATED JOINT VENTURES
The following table sets forth the revenues, operating income (loss), net loss
and equity in losses of the Communications Group's investment in unconsolidated
joint ventures, which are recorded under the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE
% CHANGE 1997 TO
1998 1997 1996 1998 TO 1997 1996
--------- --------- --------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $ 16,222 $ 9,681 $ 7,984 68% 21%
Operating income (loss)............................... $ 633 $ 179 $ (516) 254% N/M
Net loss.............................................. $ (3,384) $ (1,318) $ (1,687) 157% (22)%
Equity in losses of joint ventures.................... $ (7,460) $ (761) $ (1,232) 880% (38)%
</TABLE>
REVENUES. Increased revenues for the year ended December 31, 1998 as compared
to the year ended December 31, 1997 are partially attributable to the
acquisition of a paging operation in Moscow, Russia. Additionally, revenue
growth was partially attributable to increases of approximately $555,000 and
$888,000 at paging operations in Nizhny Novgorod, Russia and Kazakhstan. During
1997, increases in revenues of approximately $738,000 and $635,000 achieved at
the paging operations in Nizhny Novgorod, Russia and Tashkent, Uzbekistan,
respectively, were principally responsible for the overall growth.
OPERATING INCOME (LOSS). Included in operating income (loss) in 1998, 1997 and
1996 were costs of services of $4.1 million, $3.0 million and $2.8 million,
respectively; selling and administrative expenses of $9.9 million, $5.7 million
and $4.5 million, respectively; and depreciation and amortization charges of
$1.6 million, $841,000 and $1.2 million, respectively.
NET LOSS. Included in net loss in 1998, 1997 and 1996 were interest expenses of
$851,000, $800,000 and $769,000, respectively; foreign currency losses of $2.2
million, $512,000 and $143,000, respectively; and income taxes of $883,000,
$201,000 and $235,000, respectively.
EQUITY IN LOSSES OF JOINT VENTURES. As noted above, the Communications Group
recognizes its proportionate share of the net income or loss of its joint
ventures. However, for 1998, 1997 and 1996, the Communications Group recognized
the full amount of losses generated by the joint ventures since the contributed
capital of the joint ventures had been depleted and the Communications Group was
generally the sole funding source. In addition, included in equity in losses of
joint ventures is a write down of paging investments of $5.4 million in
connection with its revised plan for its paging operations.
COMBINED RESULTS OF OPERATIONS
The following table sets forth the revenues, depreciation and amortization and
operating loss on a combined basis of the Communications Group's consolidated
and unconsolidated subsidiaries and joint ventures (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
---------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues............................................ $ 20,426 $ 12,999 $ 10,864 57% 20%
Depreciation and amortization....................... $ 3,161 $ 1,630 $ 1,645 94% (1)%
Operating loss...................................... $ (19,999) $ (3,905) $ (943) 412% 314%
</TABLE>
ANALYSIS OF COMBINED RESULTS OF OPERATIONS. In 1998, subscriber and revenue
growth were partially attributable to the acquisition of a paging operation in
Moscow, Russia and revenue growth at existing joint ventures. Total subscribers
increased from 44,836 in 1996 to 57,831 in 1997 and 110,234 in 1998. Increases
in operating loss in 1998 were partially due to the increased marketing,
advertising, technical
63
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
and distribution expenses incurred to introduce calling party pays service and
the impact of non-cash nonrecurring charges of $10.5 million in connection with
the Communications Group's revised operating plan. During 1997, increases in
revenue of approximately $738,000 and $635,000 achieved at paging operations in
Nizhny Novgorod, Russia and Tashkent, Uzbekistan, respectively, were primarily
attributable for the overall growth. Increases in the operating income for
certain existing joint ventures in 1997 were offset by operating losses of $2.9
million for the start up of the Austrian paging operations.
RADIO BROADCASTING
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C> <C>
JOINT VENTURE/SUBSIDIARY OWNERSHIP % 1998 1997 1996
- ------------------------------------------------------------------------------ --------------- ----- ----- ---------
Radio Juventus (Budapest, Hungary)............................................ 100% C C C
SAC (Moscow, Russia).......................................................... 83% C C C
Radio Skonto (Riga, Latvia)................................................... 55% C C C
Radio One (Prague, Czech Republic)............................................ 80% C C C
NewsTalk Radio (Berlin, Germany).............................................. 85% C C N/A
Radio Vladivostok, (Vladivostok, Russia)...................................... 51% C P N/A
Country Radio (Prague, Czech Republic)........................................ 85% C P N/A
Radio Georgia (Tbilisi, Georgia).............................................. 51% C P N/A
Radio Katusha (St. Petersburg, Russia)........................................ 75% C E E
Radio Nika (Socci, Russia).................................................... 51% E E E
AS Trio LSL (Tallinn, Estonia)................................................ 49% E E N/A
</TABLE>
CONSOLIDATED SUBSIDIARIES AND JOINT VENTURES
The following table sets forth the consolidated revenues and operating losses
for radio broadcasting (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- --------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $ 17,081 $ 13,549 $ 9,363 26% 45%
Operating income...................................... $ 1,171 $ 3,935 $ 2,102 (70)% 87%
</TABLE>
REVENUES. The revenue growth for the year ended December 31, 1998 as compared
to the year ended December 31, 1997 and for the year ended December 31, 1997 as
compared to the year ended December 31, 1996 was due to increases in the number
of advertising spots sold and increases in the price of the advertising spots.
Further the acquisition of three radio stations in 1997 accounted for
approximately $1.0 million of the revenue increase in 1998. The ability to sell
additional spots at a higher rate is dependent on an increase in audience
ratings. The Communications Group has increased its audience share through the
use of market research to determine programming formats and marketing
strategies, including employing U.S. trained sales managers. The increase for
the year ended December 31, 1998 was partially offset by a decrease in revenues
at the radio operation in Hungary. This was the result of increased competition
from television and from a new national radio network.
OPERATING INCOME. Included in operating income in 1998, 1997 and 1996 were
depreciation and amortization charges of $1.2 million, $607,000 and $174,000,
respectively. Selling, general and administrative expenses for 1998, 1997 and
1996 were $14.7 million, $9.0 million and $6.8 million, respectively. The
decrease in operating income for the year ended December 31, 1998 as compared to
the year ended December 31, 1997 is primarily attributable to an increased loss
of approximately
64
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
$4.3 million incurred at the radio station in Berlin, Germany, which was
acquired during the third quarter of 1997. Increased programming and other
expenses associated with the News Talk format at this station account for the
loss. The News Talk format has higher start up costs than traditional music
radio stations.
The increase in operating income from 1996 to 1997 is a result of the increases
in revenue growth and is reflective of management's philosophy to continually
develop existing audience share and revenue base, offset by the effects of start
up costs of new stations acquired in 1997.
UNCONSOLIDATED JOINT VENTURES
The following table sets forth the revenues, operating income (loss), net income
(loss) and equity in income (losses) of the Communications Group's investment in
unconsolidated joint ventures, which are recorded under the equity method (in
thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues................................................ $ 2,134 $ 2,466 $ 1,536 (13)% 61%
Operating income (loss)................................. $ (125) $ 247 $ (1,823) N/M N/M
Net income (loss)....................................... $ (221) $ 121 $ (2,149) N/M N/M
Equity in income (losses) of joint ventures............. $ (108) $ 159 $ (1,896) N/M N/M
</TABLE>
REVENUES. The decrease in revenues in the year ended December 31, 1998 as
compared to the year ended December 31, 1997 is partially the result of the 1998
purchase of an additional interest in the venture in St. Petersburg, Russia
resulting in a change in accounting from the equity method. The results of this
venture were consolidated in 1998 and accounted for under the equity method in
1997. This was offset by an increase in revenues of approximately $1.1 million
at the stations in Tallinn, Estonia for the year ended December 31, 1998 as
compared to the year ended December 31, 1997.
The increase in revenues in 1997 as compared to 1996 is a result of successfully
implementing the strategy described above, which resulted in an increase of
approximately $1.1 million at the station in St. Petersburg, Russia.
Additionally, the acquisition during 1997 of a multi-station radio group in
Estonia contributed approximately $744,000 to the revenue increase.
OPERATING INCOME. Included in operating loss in 1998 were selling, general and
administrative expenses of $2.0 million and depreciation and amortization of
$212,000. For the year ended December 31, 1997, selling, general and
administrative expenses of $2.1 million and depreciation and amortization
charges of $92,000 are included in operating loss. For the year ended December
31, 1996, selling, general and administrative expenses of $3.3 million and
depreciation and amortization charges of $83,000 are included in operating loss.
The increase in operating income from 1996 to 1997 is a result of the increases
in revenue growth and is reflective of management's philosophy to continually
develop existing audience share and revenue base. During 1998, this was offset
by the effects of start up costs of new stations acquired.
NET LOSS. Included in net loss in 1998, 1997 and 1996 were interest charges of
$15,000, $82,000 and $257,000, respectively; and foreign currency losses of
$75,000 in 1998 and $69,000 in 1997.
EQUITY IN LOSSES OF JOINT VENTURES. The Communications Group initially
recognizes its proportionate share of the net income or loss of its joint
ventures. However, in 1996, the Communications Group recognized the full amount
of losses generated by the joint ventures since the contributed capital of the
joint venture had been depleted and the Communications Group was generally the
sole funding source.
65
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
COMBINED RESULTS OF OPERATIONS
The following table sets forth the revenues, depreciation and amortization, and
operating income on a combined basis of the Communications Group's consolidated
and unconsolidated subsidiaries and joint ventures (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- --------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 19,215 $ 16,015 $ 10,899 20% 47%
Depreciation and amortization........................ $ 1,440 $ 699 $ 257 106% 172%
Operating income..................................... $ 1,046 $ 4,182 $ 279 (75)% 1,399%
</TABLE>
ANALYSIS OF COMBINED RESULTS OF OPERATIONS. As noted above, revenues continued
to grow in 1998 as the Communications Group was able to sell additional spots at
higher rates and from the acquisition of radio stations. The increased revenue
growth in 1998 was offset by the loss incurred by the Company's radio station in
Berlin and the decrease in operating income from the effects of increased
competition on the radio station in Hungary. The increase in revenues in 1997 as
compared to 1996 is a result of successfully implementing the strategy described
above, which resulted in an increase of approximately $1.1 million at the
station in St. Petersburg, Russia. Additionally, the acquisition during 1997 of
a multi-station radio group in Estonia contributed approximately $744,000 to the
revenue increase.
OTHER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C> <C>
JOINT VENTURE/SUBSIDIARY OWNERSHIP % 1998 1997 1996
- ------------------------------------------------------------------------------ ------------- --------- --------- ---------
Spectrum (Kazakhstan)......................................................... 33% E E P
Protocall Ventures Ltd........................................................ 24-56% N/A C/E C/E
</TABLE>
CONSOLIDATED SUBSIDIARIES AND JOINT VENTURES
The following table sets forth the consolidated revenues and operating income
(loss) for trunked mobile radio (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- ----- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues..................................................... $ 3,200 $ 598 -- 435% N/A
Operating income (loss)...................................... $ (186) $ 145 -- N/M N/A
</TABLE>
REVENUES AND OPERATING INCOME (LOSS). Operations of the consolidated trunked
mobile radio ventures for the years ended December 31, 1998 and 1997 reflect the
activities of the Protocall Venture's operations in Portugal, Spain and Belgium
prior to the sale of Protocall Ventures in July 1998. The increased revenue for
the year ended December 31, 1998 as compared to December 31, 1997 is primarily
attributable to the purchase of an additional interest in the Portugal operation
during the fourth quarter of 1997. Thus the 1997 consolidated results include
three months of activity for the Portuguese operation as compared to nine months
in 1998. Prior to the purchase of the additional interest, the operations in
Portugal were accounted for under the equity method of accounting as discussed
below.
66
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
UNCONSOLIDATED JOINT VENTURES
The following table sets forth the revenues, operating loss, net loss and equity
in losses of the Communications Group's investment in unconsolidated joint
ventures, which are recorded under the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $ 3,049 $ 3,406 $ 1,030 (10)% 231%
Operating loss........................................ $ (2,385) $ (3,470) $ (1,409) (31)% 146%
Net loss.............................................. $ (3,220) $ (4,053) $ (1,690) (21)% 140%
Equity in losses of joint ventures.................... $ (884) $ (1,601) $ (595) (45)% 169%
</TABLE>
REVENUES. Revenues for the year ended December 31, 1998 reflect an increase of
approximately $1.3 million of revenues generated at the venture in Kazakhstan as
compared to the year ended December 31, 1997. This gain was offset by the effect
of purchasing an additional interest of the operation in Portugal, which results
of operations were consolidated through the date of sale, as discussed above.
OPERATING LOSS. Included in operating loss in 1998, 1997 and 1996 were costs of
services of $1.9 million, $497,000 and $600,000 respectively; selling and
administrative expenses of $2.9 million, $5.5 million and $1.3 million,
respectively; and depreciation and amortization charges of $606,000, $892,000
and $493,000, respectively.
NET LOSS. Included in net loss in 1998, 1997 and 1996 were interest charges of
$815,000, $460,000 and $223,000, respectively.
EQUITY IN LOSSES OF JOINT VENTURES. Equity in losses of joint ventures
represent the Communications Group's proportionate share of the net losses of
the joint ventures.
COMBINED RESULTS OF OPERATIONS
The following table sets forth the revenues, depreciation and amortization, and
operating loss on a combined basis of the Communications Group's consolidated
and unconsolidated subsidiaries and joint ventures (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $ 6,249 $ 4,004 $ 1,030 56% 289%
Depreciation and amortization......................... $ 1,087 $ 981 $ 493 11% 99%
Operating loss........................................ $ (2,571) $ (3,325) $ (1,409) (23)% 136%
</TABLE>
ANALYSIS OF COMBINED RESULTS OF OPERATIONS. Revenues in 1997 compared to 1996
increased as the Communications Group increased its investment in Protocall
Ventures and expanded its operations in additional markets. In July 1998 the
Communications Group sold its investment in Protocall Ventures. Revenues and
operating loss for the last six months of 1998 reflect the operations of
Spectrum, the Communications Group's trunked mobile radio investment in
Kazakhstan. For 1999, the Company expects to have both lower revenues and
operating loss from its trunked mobile radio operations.
67
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
SEGMENT HEADQUARTERS
Segment headquarters represents the costs associated with executives,
administration, logistics and joint venture support of the consolidated and
unconsolidated joint ventures. The following table sets forth the consolidated
revenues and operating losses for the segment headquarters (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
---------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $ 2,279 $ 1,885 $ 1,634 21% 15%
Nonrecurring charges.............................. $ 34,037 -- -- N/M N/M
Operating loss.................................... $ (87,519) $ (39,440) $ (29,902) 122% 32%
</TABLE>
REVENUES. The increased revenue from 1997 to 1998 and from 1996 to 1997
reflects an increase in programming and management fee revenues from the
Communications Group's unconsolidated subsidiaries.
NONRECURRING CHARGES. In connection with the Communications Group's revised
operating plan for its paging operations, the Communications Group recorded a
non-cash, nonrecurring charge for the write off of $34.0 million of goodwill.
The goodwill was originally recorded in connection with the November 1, 1995
merger of the Company, Orion, Metromedia International Telecommunications and
MCEG Sterling.
68
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OPERATING LOSS. Included in operating losses in 1998, 1997 and 1996 were
depreciation and amortization charges of $5.8 million, $4.9 million and $5.4
million, respectively. The increase in the net loss from 1997 to 1998 and from
1996 to 1997 is attributable to additional expenses associated with the increase
in the number of joint ventures and the need for the Communications Group to
support and assist the operations of the joint ventures. In addition, in 1998
the increase in operating loss was attributable to the nonrecurring charge
described above, write down of approximately $4.5 million of telephony
inventory, and a severance accrual of approximately $1.8 million.
The following table sets forth minority interest, foreign currency loss and gain
on the sale of Protocall Ventures for the consolidated operations of the
Communications Group--Eastern Europe and the Republics of the Former Soviet
Union.
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
--------- --------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Foreign currency loss...................................... $ (137) $ (770) $ (255) (82)% 202%
Minority interest.......................................... $ 1,527 $ 561 $ 666 172% (16)%
Gain on sale of Protocall Ventures, net.................... $ 5,527 $ -- $ -- N/M N/M
</TABLE>
FOREIGN CURRENCY LOSS, MINORITY INTEREST AND GAIN ON SALE OF PROTOCALL VENTURES,
NET. For the years ended December 31, 1998, 1997 and 1996 foreign currency loss
represents losses from consolidated joint ventures and subsidiaries operating in
highly inflationary economies. Foreign currency losses represent the
remeasurement of the ventures' financial statements, in all cases using the U.S.
dollar as the functional currency. U.S. dollar transactions are shown at their
historical value. Monetary assets and liabilities denominated in local
currencies are translated into U.S. dollars at the prevailing period-end
exchange rate. All other assets and liabilities are translated at historical
exchange rates. Results of operations have been translated using the monthly
average exchange rates. The foreign currency loss is the transaction differences
resulting from the use of these different rates. For the years ended December
31, 1998, 1997 and 1996, minority interest represents the allocation of losses
by the Communications Group's majority owned subsidiaries and joint ventures to
its minority ownership interest. The increase in 1998 represents the allocation
of losses from Telcell Wireless, LLC, a subsidiary of Metromedia International
Telecommunication that owns the interest in Magticom Limited. In 1998, the
Communications Group sold its share of Protocall Ventures. As part of the
transaction, Protocall Ventures repaid the outstanding amount of its debt to the
Communications Group. The Company recorded a gain on the sale of Protocall
Ventures of approximately $7.1 million. The gain on the sale has been offset by
the write down in the Communications Group's investment in Spectrum of $1.6
million.
69
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
COMMUNICATIONS GROUP--CHINA
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
<S> <C> <C> <C> <C>
JOINT VENTURE/SUBSIDIARY OWNERSHIP % 1998 1997 1996
- --------------------------------------------------------------------------- ----------------- --------- --------- ---------
CELLULAR TELECOMMUNICATIONS
Ningbo Ya Mei Telecommunications Co., Ltd.
(Ningbo City, China)..................................................... 70% E E N/A
Ningbo Ya Lian Telecommunications Co., Ltd.
(Ningbo Municipality, China)............................................. 70% P N/A N/A
FIXED TELEPHONY
Sichuan Tai Li Feng
Telecommunications Co., Ltd.
(Sichuan Province, China)................................................ 92% P P N/A
Chongqing Tai Le Feng
Telecommunications Co., Ltd.
(Chongqing Municipality, China).......................................... 92% P P N/A
Beijing Metromedia-Jinfeng Communications
Technology Development Co., Ltd.......................................... 60% N/A P P
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTABLE
CASH FLOW %
CHINA UNICOM PROJECT TO JOINT VENTURE
- ------------------------------------ ------------------------------------
<S> <C> <C>
Ningbo Project I.................... 73%
Ningbo Project II................... 73%
Sichuan Province.................... 78%
Chongqing Municipality.............. 78%
</TABLE>
JOINT VENTURE INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NINGBO NINGBO SICHUAN CHONGQING
JV JV II JV JV TOTAL
--------- --------- --------- ----------- ---------
Revenues................................................... $ 3,429 $ -- $ -- $ 54 $ 3,483
Depreciation and amortization.............................. $ 2,418 $ -- $ 38 $ 206 $ 2,662
Operating income (loss).................................... $ 707 $ (46) $ (691) $ (630) $ (660)
Net loss................................................... $ (1,877) $ (47) $ (1,054) $ (589) $ (3,567)
Equity in income (losses) of joint ventures................ $ 133 $ (27) $ (632) $ (514) $ (1,040)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
<S> <C> <C> <C> <C> <C>
NINGBO SICHUAN CHONGQING
JV JV JV TOTAL
--------- --------- ----------- ---------
Revenues................................................... $ 1,422 $ -- $ -- $ 1,422
Depreciation and amortization.............................. $ 1,154 $ 25 $ -- $ 1,179
Operating income (loss).................................... $ 56 $ (223) $ (20) $ (187)
Net loss................................................... $ (1,814) $ (153) $ (15) $ (1,982)
Equity in losses of joint ventures......................... $ (706) $ (141) $ (14) $ (861)
</TABLE>
The Communications Group has received notification from China Unicom stating
that a department of the Chinese government has requested termination of two of
its four joint telecommunications projects
70
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
in China and the Communications Group expects that the other two
telecommunications projects in which it has invested will receive similar
letters. See "--Recent Developments--Chinese Joint Ventures."
The following table sets forth operating loss, equity in losses of joint
ventures and minority interests for the Communications Group's various
telephony-related joint ventures in China (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
---------- ---------- --------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating loss.................................. $ (14,504) $ (17,871) $ (2,729) (19)% 555%
Equity in losses of joint ventures.............. $ (1,040) $ (861) -- 21% N/A
Minority interests.............................. $ 8,331 $ 8,332 -- -- N/A
</TABLE>
OPERATING LOSS. The operating loss for the year ended December 31, 1998
decreased $3.4 million to $14.5 million. The decrease in operating loss is
principally attributable to non-cash employee compensation and costs of $6.8
million in 1997 which included $1.5 million related to the dissolution of a
joint venture in China. The non-cash expenses were partially offset by personnel
costs of $3.8 million. The Company launched two new joint ventures, Chongqing
Tai Le Feng Telecommunications Co., Ltd. and Ningbo Ya Lian Telecommunications
Co., Ltd., each of which necessitated recruitment of additional support staff.
The wireline telephone network project supported by the Company's Sichuan Tai Li
Feng joint venture began actual network construction in early 1998. Joint
planning of expansion to the Ningbo City GSM network was undertaken with the
Company's Chinese partners in the first half of 1998. These latter measures
necessitated recruitment of additional engineering staff to support the
activities. Finally, the Company undertook an aggressive effort in early 1998 to
secure additional projects in China, including due diligence and discussion of
draft documentation of joint venture contracts with several potential partners.
This resulted in legal and research expenses of $1.4 million, considerably in
excess of those experienced in 1997. In addition, depreciation and amortization
expenses increased by $660,000 in 1998 from the prior year.
EQUITY IN LOSSES OF JOINT VENTURES. Equity in losses of the Communications
Group's joint ventures in China amounted to $1.0 million in 1998 as compared to
$861,000 in 1997. The majority of the 1998 losses arise from the absence of any
joint venture revenues during the pre-operational state of the projects each
venture supports. The joint ventures in the pre-operational stage contributed
$1.2 million of the 1998 losses. The Company's wireline telephone network joint
venture in Sichuan Province and the Chongqing Municipality remained in a
pre-operational state as of December 31, 1998 but network construction activity
preliminary to the commercial service launch in January 1999 was aggressive
throughout the year. The Company's only operational venture in China during
1998, supporting the Ningbo City GSM network, recorded income of $133,000. The
Ningbo City project generated $3.4 million in 1998 revenues to the joint
venture.
MINORITY INTERESTS. For the years ended December 31, 1998 and 1997, minority
interests represents the allocation of losses to Metromedia China Corporation's
minority ownership.
INFLATION AND FOREIGN CURRENCY
Certain of the Communications Group's subsidiaries and joint ventures operate in
countries where the rate of inflation is extremely high relative to that in the
United States. While the Communications Group's subsidiaries and joint ventures
attempt to increase their subscription rates to offset increases in operating
costs, there is no assurance that they will be able to do so. Therefore,
operating costs may rise faster than associated revenue, resulting in a material
negative impact on operating results. The
71
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Company itself is generally negatively impacted by inflationary increases in
salaries, wages, benefits and other administrative costs, the effects of which
to date have not been material to the Company.
In 1998, a number of emerging market economies suffered significant economic and
financial difficulties. Adverse economic conditions in Russia resulted in a
national liquidity crisis, devaluation of the rouble, higher interest rates and
reduced opportunity for refinancing or refunding of maturing debts. Although the
Russian government announced policies intended to address the structural
weakness in the Russian economy and financial sector, it is unclear if such
policies will improve the economic situation.
The financial crisis and the government's planned response may result in reduced
economic activity, a reduction in the availability of credit and the ability to
service debt, further increases in interest rates, an increased rate of
inflation or hyperinflation, further devaluation of the rouble, restrictions on
convertibility of the rouble and movements of hard currency, an increase in the
number of bankruptcies of entities, including bank failures, labor unrest and
strikes.
If the economic and financial situation in the Russian Federation and other
emerging markets does not improve, the reduced level of economic activity and
the opportunity to obtain financing in these markets could have a material
adverse effect on the operations of the Communications Group. If such factors
should materialize the Company expects such factors would affect its cable
television, paging and radio broadcasting businesses in Russia and Belarus and
certain other markets.
In addition, the Georgian lari experienced significant devaluation from
September 1998 to March 1999. This devaluation could negatively impact the
conversion to U.S. dollars of cash flows generated in certain telephony and
cable television joint ventures.
The Communications Group's strategy is to minimize its foreign currency risk. To
the extent possible, the Communications Group bills and collects all revenues in
U.S. dollars or an equivalent local currency amount adjusted on a monthly basis
for exchange rate fluctuations. The Communications Group's subsidiaries and
joint ventures are generally permitted to maintain U.S. dollar accounts to
service their U.S. dollar denominated debt and current account obligations,
thereby reducing foreign currency risk. As the Communications Group's
subsidiaries and joint ventures expand their operations and become more
dependent on local currency based transactions, the Communications Group expects
that its foreign currency exposure will increase. The Communications Group does
not hedge against foreign exchange rate risks at the current time and therefore
could be subject in the future to any declines in exchange rates between the
time a subsidiary or a joint venture receives its funds in local currencies and
the time it distributes such funds in U.S. dollars to the Communications Group.
SNAPPER
The following table sets forth Snapper's results of operations for the years
ended December 31, 1998, 1997 and 1996. In order to enhance comparability, the
following discussion of Snapper's results of operations includes pro forma
information for 1996 and gives effect as if Snapper had been included in the
Company's results of operations on January 1, 1996 (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
---------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues......................................... $ 210,084 $ 183,076 $ 153,168 15% 20%
Gross profit..................................... $ 62,690 $ 59,080 $ 22,570 6% 162%
Operating loss................................... $ (7,607) $ (15,246) $ (27,298) (50)% (44)%
</TABLE>
REVENUES. In 1998, Snapper's sales were $210.1 million, compared to $183.1
million in 1997. Sales of lawn and garden equipment contributed the majority of
the revenues during both periods. Sales were
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
lower in 1997 due to unseasonably cool weather during April and May, as well as
$25.4 million of sales reductions in 1997 due to repurchases of certain
distributor inventory.
Snapper's 1997 sales were $183.1 million compared to $153.2 million in 1996. In
1997, Snapper completed the implementation of its program to sell products
directly to its dealers. In implementing this program to restructure its
distribution network, Snapper repurchased certain distributor inventory which
resulted in sales reductions of $25.4 million in 1997 and $24.5 million in 1996.
Sales of lawn and garden power equipment contributed to the majority of the
revenues for the two periods. During 1997, lawn and garden equipment sales were
much lower than anticipated due to unseasonably cool weather in April and May,
and due to the impact of reduced distributor sales due to the repurchase of
distributor inventories. During the last quarter of 1997, Snapper sold older
lawn and garden equipment repurchased from the distributors at reduced prices.
In addition, mild winter weather during the fourth quarter of 1997 negatively
impacted sales of snow throwers. In order to manage the levels of field
inventories in 1996, the factory produced at reduced levels compared to prior
years. This reduction adversely impacted sales, but did result in a decrease of
inventory levels.
GROSS PROFIT. Gross profit was $62.7 million and $59.1 million in 1998 and
1997, respectively. The 1998 gross profit percentage of 29.8%, as compared to
32.3% in 1997, decreased due to sales of older equipment during the period at
special pricing to help eliminate older inventory acquired in the distributor
repurchases during 1997 and a $2.7 million inventory write down for excess parts
in 1998. Although the gross profit margin decreased in 1998 due to special
pricing on old equipment resold in 1998 and an inventory write down, the gross
profit in 1998 as compared to 1997 increased by $3.6 million.
Gross profit was $59.1 million and $22.6 million in 1997 and 1996, respectively.
Snapper obtained higher gross margins of 32.3% in 1997, as compared to 14.7% in
1996, principally from its distribution network restructuring. In 1997, the
lower than expected gross profit arose from lower than anticipated sales as
noted above. The gross profit in 1996 was the result of lower sales volumes
reducing plant efficiency.
OPERATING LOSS. Snapper had an operating loss of $7.6 million in 1998 and $15.2
million in 1997. Selling, general and administrative expenses decreased by $3.1
million in 1998 as compared to 1997, principally due to $1.4 million of
inventory repurchase expenditures related to nine distributor repurchases during
1997 that were not incurred in 1998, and $1.6 million in lower advertising
expenditures in 1998. Depreciation and amortization charges were $6.7 million
and $7.0 million in 1998 and 1997, respectively. Depreciation and amortization
reflected the depreciation of Snapper's property, plant and equipment as well as
the amortization of the goodwill associated with the acquisition of Snapper.
Snapper had operating losses of $15.2 million and $27.3 million in 1997 and
1996, respectively. Selling, general and administrative expenses were $67.4
million in 1997 and $42.6 million in 1996. The increase in selling, general and
administrative expenses in 1997 reflects additional television commercial
expenditures to assist Snapper dealers during the distributor network
restructuring and increased distribution costs due to higher sales in 1997. In
1997 and 1996, Snapper also incurred acquisition expenses related to the
purchase of inventory from nine and eighteen distributorships during the
periods, respectively. Depreciation and amortization charges were $7.0 million
and $7.3 million in 1997 and 1996. Depreciation and amortization reflected the
depreciation of Snapper's property, plant, and equipment as well as the
amortization of the goodwill associated with the acquisition of Snapper.
Although gross profit increased by $36.5 million in 1997 as compared to 1996,
the operating loss in 1997 was the result of lower sales primarily due to
unseasonably cool weather in April and May and milder winter weather during the
fourth quarter, in addition to the repurchase of distributor inventories during
the year. Reduced production levels and the repurchase of distributor
inventories during the year contributed significantly to the operating loss in
1996.
73
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CORPORATE HEADQUARTERS
Corporate headquarters costs reflect the management fee paid to Metromedia
Company under the management agreement, investor relations, legal and other
professional costs, insurance and other corporate costs. See "Item 13--Certain
Relationships and Related Transactions-Relationships with Metromedia Company."
The following table sets forth the operating income (loss) for Corporate
Headquarters (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
----------- ---------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating income (loss)......................... $ 896 $ (5,561) $ (9,373) N/M (41)%
</TABLE>
OPERATING INCOME (LOSS). For the year ended December 31, 1998, Corporate
Headquarters had income of $896,000 which represented the reversal of $6.6
million in self-insurance liabilities offset by corporate general and
administrative expenses including the management fee. For the years ended
December 31, 1998 and 1997, Corporate Headquarters had general and
administrative expenses of approximately $5.7 million and $5.5 million,
respectively. For the year ended December 31, 1996, corporate general and
administrative expenses were $9.4 million. In 1996, Corporate Headquarters
incurred costs associated with the closing of Actava's corporate headquarters in
connection with the November 1, 1995 merger. No such costs were incurred in
1997.
COMPANY CONSOLIDATED
The following table sets forth on a consolidated basis the following items for
the years ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1998 1997 1996 1998 TO 1997 1997 TO 1996
----------- ---------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Interest expense.................................. $ (16,331) $ (20,922) $ (19,090) (22)% 10%
Interest income................................... $ 12,746 $ 9,840 $ 5,308 30% 85%
Income tax benefit (expense)...................... $ 358 $ 5,227 $ (414) N/M N/M
Equity in losses of and writedown of RDM.......... $ -- $ (45,056) $ -- N/M N/M
Discontinued operations........................... $ 12,316 $ 234,036 $ (38,592) N/M N/M
Extraordinary items............................... $ -- $ (14,692) $ (4,505) N/M N/M
Net income (loss)................................. $ (123,670) $ 88,443 $ (115,243) N/M N/M
</TABLE>
INTEREST EXPENSE. Interest expense decreased $4.6 million to $16.3 million for
the year ended December 31, 1998. The decrease in interest expense was due to
the repayment of debt at the corporate level in March and August 1997, partially
offset by an increase in borrowings at Snapper. Interest expense increased $1.8
million to $20.9 million in 1997, primarily due to the inclusion of interest
from the Snapper credit facility partially offset by the repayment of the
outstanding debentures in August 1997 at the corporate level.
INTEREST INCOME. Interest income increased $2.9 million to $12.7 million in
1998, principally from investment of funds at the corporate level from the
preferred stock offering in September 1997 and the funds from the sale of the
Landmark theater group in April 1998. Interest income increased $4.5 million to
$9.8 million in 1997, principally from investment of funds at the corporate
level from the preferred stock offering in September 1997 and increased interest
income resulting from increased
74
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
borrowings under the Communications Group's credit facilities and its joint
ventures for their operating and investing cash requirements.
INCOME TAX BENEFIT (EXPENSE). For the year ended December 31, 1998, the income
tax benefit that would have resulted from applying the federal statutory rate of
35% was $47.7 million. The income tax benefit was reduced principally by losses
attributable to foreign operations, equity losses in joint ventures currently
not deductible and a 100% valuation allowance on the current year loss not
utilized. The income tax benefit in 1998 for continuing operations in 1998 was
principally the result of the utilization of the current year operating loss to
offset the gain of the Landmark sale.
For the years ended December 31, 1997 and 1996, the income tax benefit that
would have resulted from applying the federal statutory rate of 35% was $47.6
million and $25.1 million, respectively. The income tax benefit in 1997 and 1996
was reduced principally by losses attributable to foreign operations, equity
losses in joint ventures currently not deductible and a 100% valuation allowance
on the current year loss not utilized, as well as, in 1997, the impact of the
alternative minimum tax in connection with the sale of the Company's
entertainment group. The income tax benefit for continuing operations in 1997
was principally the result of the utilization of the current year operating loss
to offset the gain of the entertainment group sale. The income tax expense in
1996 reflects foreign taxes in excess of the federal credit.
NET INCOME (LOSS), INCLUDING EQUITY IN LOSSES OF AND WRITEDOWN OF INVESTMENT IN
UNCONSOLIDATED INVESTEES, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEMS. Net
loss was $123.7 million for the year ended December 31, 1998. The net loss for
1998 includes a gain from discontinued operations from the sale of the Landmark
theater group of $3.7 million and a refund of tax payments made in prior years
by the Company's entertainment group of $8.7 million, and the gain of $7.1
million from the sale of the Communications Group's trunked mobile radio
investment, Protocall Ventures partially reduced by the write down of its
trunked mobile radio venture in Kazakhstan of $1.6 million. For the year ended
December 31, 1997 net income was $88.4 million. The net income for the year
ended December 31, 1997 includes the gain on the entertainment group sale of
$266.3 million and losses from the discontinued operations of $32.3 million, an
extraordinary loss of $14.7 million relating to the early extinguishment of the
Company's debentures and equity loss and a further write down of the investment
in RDM amounting to $45.1 million. In addition, the net loss in 1998 and net
income in 1997 included equity in losses of the Communications Group's joint
ventures of $18.2 million and $8.1 million, respectively.
Operating loss increased to $129.9 million for the year ended December 31, 1998
from $80.1 million for the year ended December 31, 1997. The increase in
operating loss reflects a full year of operations in 1998 as compared to ten
months of operations in 1997 for the Communications Group's joint ventures in
China and an increase in selling, general and administrative costs by the
Communications Group in supporting the continued expansion of operations in
Eastern Europe and the former Soviet Union and the impact of the non-cash,
nonrecurring charge in connection with the Communications Group's revised
operating plan for its paging operations of $40.3 million.
For the year ended December 31, 1997, net income was $88.4 million as compared
to a net loss of $115.2 million for the prior year. The net income in 1997
includes the gain on the entertainment group sale of $266.3 million and losses
from discontinued operations of $32.3 million, an extraordinary loss of $14.7
million relating to the early extinguishment of debt and a further write down of
the Company's investment in RDM amounting to $45.1 million. The 1996 loss from
discontinued operations and extraordinary loss are attributable to the write
down of the Company's investment in RDM to its net realizable value, the loss
from operations of the entertainment group, income from operations of
75
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Landmark and the loss associated with the refinancing of the entertainment group
debt facility as part of the acquisition of the Samuel Goldwyn Company and
Motion Picture Corporation of America in July 1996. In addition, net income in
1997 and net loss in 1996 included equity in losses of the Communications
Group's joint ventures of $8.1 million and $7.8 million, respectively.
Operating loss increased to $80.1 million for the year ended December 31, 1997
from $50.5 million for the year ended December 31, 1996. The increase in
operating loss reflects the $5.9 million increase in Snapper's operating loss in
1997, compared to the period of November 1, 1996 to December 31, 1996 and
increases in selling, general and administrative costs due principally to the
continued growth of the Communications Group.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
The Company is a holding company and, accordingly, does not generate cash flows
from operations. The Communications Group is dependent on the Company for
significant capital infusions to fund its operations and make acquisitions, as
well as to fulfill its commitments to make capital contributions and loans to
its joint ventures. Such funding requirements are based on the anticipated
funding needs of its joint ventures and certain acquisitions committed to by the
Company. Cash amounts to be expended in connection with the Company's proposed
acquisition of PLD Telekom (see "Recent Developments") are expected to be funded
from cash on hand. In addition, future capital requirements of the
Communications Group, including future acquisitions, will depend on available
funding from the Company and on the ability of the Communications Group's joint
ventures to generate positive cash flows. Snapper is restricted under covenants
contained in its credit agreement from making dividend payments or advances,
other than certain permitted debt repayments, to the Company and the Company has
periodically funded the short-term working capital needs of Snapper.
There are 70,000,000 shares of preferred stock authorized and 4,140,000 shares
were outstanding as of December 31, 1998 and 1997.
On September 16, 1997 the Company completed a public offering of 4,140,000
shares of $1.00 par value, 7 1/4% cumulative convertible preferred stock with a
liquidation preference of $50.00 per share, generating net proceeds of
approximately $199.4 million. Dividends on the preferred stock are cumulative
from the date of issuance and payable quarterly, in arrears, commencing on
December 15, 1997. The Company may make any payments due on the preferred stock,
including dividend payments and redemptions (i) in cash; (ii) through issuance
of the Company's common stock or (iii) through a combination thereof. If the
Company were to elect to continue to pay the dividend in cash, the annual cash
requirement would be $15.0 million. During 1998, the Company paid its four
quarterly dividends on the preferred stock in cash. The preferred stock is
convertible at the option of the holder at any time, unless previously redeemed,
into the Company's common stock, at a conversion price of $15.00 per share
equivalent to a conversion rate of 3 1/3 shares of common stock for each share
of preferred stock, subject to adjustment under certain conditions.
The preferred stock is redeemable at any time on or after September 15, 2000, in
whole or in part, at the option of the Company, initially at a price of $52.5375
and thereafter at prices declining to $50.00 per share on or after September 15,
2007, plus in each case all accrued and unpaid dividends to the redemption date.
Upon any change of control, as defined in the certificate of designation of the
preferred stock each holder of preferred stock shall, in the event that the
market value at such time is less than the conversion price of $15.00, have a
one-time option to convert the preferred stock into the
76
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Company's common stock at a conversion price equal to the greater of (i) the
market value, as of the change of control date, as defined in the certificate of
designation, and (ii) $8.00. In lieu of issuing shares of the Company's common
stock, the Company may, at its option, make a cash payment equal to the market
value of the Company's common stock otherwise issuable.
Since each of the Communications Group's joint ventures operates or invests in
businesses, such as cable television, fixed telephony and cellular
telecommunications, that are capital intensive and require significant capital
investment in order to construct and develop operational systems and market its
services, the Company will require in addition to its cash on hand, additional
financing in order to satisfy its long-term business objectives including its
on-going working capital requirements, funding of pre-operational joint ventures
and acquisition and expansion requirements. Such additional capital may be
provided through the public or private sale of equity or debt securities, of the
Company or by separate equity or debt financings by the Communications Group or
certain companies of the Communications Group or proceeds from the sale of
assets. No assurance can be given that such additional financing will be
available to the Company on acceptable terms, if at all. If adequate additional
funds are not available, the Company may be required to curtail significantly
its long-term business objectives and the Company's results of operations may be
materially and adversely affected. The Company believes that its cash on hand
will be sufficient to fund the Company's working capital requirements for the
remainder of 1999.
Management believes that its long-term liquidity needs will be satisfied through
a combination of the Company's successful implementation and execution of its
growth strategy to become a global communications and media company and the
Communications Group's joint ventures achieving positive operating results and
cash flows through revenue and subscriber growth and control of operating
expenses.
As the Communications Group is in the early stages of development, the Company
expects to generate significant consolidated net losses for the foreseeable
future as the Communications Group continues to build out and market its
services.
COMMUNICATIONS GROUP
The Communications Group has invested significantly, in cash or equipment
through capital contributions, loans and management assistance and training, in
its joint ventures. The Communications Group has also incurred significant
expenses in identifying, negotiating and pursuing new telecommunications
opportunities in selected emerging markets.
The Communications Group and many of its joint ventures are experiencing
continuing losses and negative operating cash flow since many of the businesses
are in the development and start-up phase of operations.
For 1998, the Communications Group's primary source of funds was from the
Company in the form of inter-company loans.
Until the Communications Group's operations generate positive cash flow, the
Communications Group will require significant capital to fund its operations,
and to make capital contributions and loans to its joint ventures. The
Communications Group relies on the Company to provide the financing for these
activities. The Company believes that as more of the Communications Group's
joint ventures commence operations and reduce their dependence on the
Communications Group for funding, the Communications Group will be able to
finance its own operations and commitments from its operating cash flow and will
be able to attract its own financing from third parties. There can be no
assurance,
77
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
however, that additional capital in the form of debt or equity will be available
to the Communications Group at all or on terms and conditions that are
acceptable to the Communications Group or the Company, and as a result, the
Communications Group will continue to depend upon the Company for its financing
needs. In addition, the Communications Group has received notification from
China Unicom stating that a department of the Chinese government has requested
termination of two of its four joint telecommunications projects in China and
the Communications Group expects that the other two telecommunications projects
in which it has invested will receive similar letters. See "--Recent
Developments--Chinese Joint Ventures."
Credit agreements between the joint ventures and the Communications Group are
intended to provide such ventures with sufficient funds for operations and
equipment purchases. The credit agreements generally provide for interest to
accrue at rates ranging from the prime rate to the prime rate plus 6% and for
payment of principal and interest from 90% of the joint venture's available cash
flow, as defined, prior to any distributions of dividends to the Communications
Group or its joint venture partners. The credit agreements also often provide
the Communications Group the right to appoint the general director of the joint
venture and the right to approve the annual business plan of the joint venture.
Advances under the credit agreements are made to the joint ventures in the form
of cash for working capital purposes, as direct payment of expenses or
expenditures, or in the form of equipment, at the cost of the equipment plus
cost of shipping. As of December 31, 1998, the Communications Group was
committed to provide funding under the various charter fund agreements and
credit lines in an aggregate amount of approximately $212.1 million, of which
$49.4 million remained unfunded. The Communications Group's funding commitments
under a credit agreement are contingent upon its approval of the joint venture's
business plan. To the extent that the Communications Group does not approve a
joint venture's business plan, the Communications Group is not required to
provide funds to the joint venture under the credit line.
The Communications Group's consolidated and unconsolidated joint ventures'
ability to generate positive operating results is dependent upon their ability
to attract subscribers to their systems, the sale of commercial advertising time
and their ability to control operating expenses. Management's current plans with
respect to the joint ventures are to increase subscriber and advertiser bases
and thereby operating revenues by developing a broader band of programming
packages for cable television and radio broadcasting and by offering additional
services and options for telephony services. By offering the large local
populations of the countries in which the joint ventures operate desired
services at attractive prices, management believes that the joint ventures can
increase their subscriber and advertiser bases and generate positive operating
cash flow, reducing their dependence on the Communications Group for funding of
working capital. Additionally, advances in the price performance of telephony
technology are expected to reduce capital requirements per subscriber. Further
initiatives to develop and establish profitable operations include reducing
operating costs as a percentage of revenue and assisting joint ventures in
developing management information systems and automated customer care and
service systems. No assurances can be given that such initiatives will be
successful or if successful, will result in such reductions. Additionally, if
the joint ventures do become profitable and generate sufficient cash flows in
the future, there can be no assurance that the joint ventures will pay dividends
or will return capital at any time.
EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET UNION
The fixed telephony, cellular, international and long distance telephony and
cable television businesses in the aggregate are capital intensive. The
Communications Group generally provides the primary source of funding for its
joint ventures both for working capital and capital expenditures, with the
78
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
exception of its GSM joint ventures. The Communications Group's joint venture
agreements generally provide for the initial contribution of cash or assets by
the joint venture partners, and for the provision of a line of credit from the
Communications Group to the joint venture. Under a typical arrangement, the
Communications Group's joint venture partner contributes the necessary licenses
or permits under which the joint venture will conduct its business, studio or
office space, transmitting tower rights and other equipment. The Communications
Group's contribution is generally cash and equipment, but may consist of other
specific assets as required by the applicable joint venture agreement.
In June 1997, the Communications Group's Latvian GSM joint venture, Baltcom GSM,
entered into certain agreements with the European Bank for Reconstruction and
Development pursuant to which the European Bank for Reconstruction and
Development agreed to lend up to $23.0 million to Baltcom GSM in order to
finance its system buildout and operations. Baltcom GSM's ability to borrow
under these agreements is conditioned upon reaching certain gross revenue
targets. The loan has an interest rate equal to the 3-month London interbank
offered rate or LIBOR plus 4% per annum, with interest payable quarterly. The
principal amount must be repaid in installments starting in March 2002 with
final maturity in December 2006. The shareholders of Baltcom GSM were required
to provide $20.0 million to Baltcom GSM as a condition precedent to European
Bank for Reconstruction and Development funding the loan. In addition, the
Communications Group and Western Wireless agreed to provide or cause one of the
shareholders of Baltcom GSM to provide an additional $7.0 million in funding to
Baltcom GSM if requested by European Bank for Reconstruction and Development
which amount has been provided. In August 1998, the European Bank for
Reconstruction and Development and Baltcom GSM amended their loan agreement in
order to provide Baltcom GSM the right to finance the purchase of up to $3.5
million in additional equipment from Northern Telecom, B.V. As part of such
amendment, the Communications Group and Western Wireless agreed to provide
Baltcom GSM the funds needed to repay Northern Telecom, B.V., if necessary, and
to provide Baltcom GSM debt service support for the loan agreement with the
European Bank for Reconstruction and Development in an amount not to exceed the
greater of $3.5 million or the aggregate of the additional equipment purchased
from Northern Telecom, N.V. plus interest payable on the financing.
As part of the financing, the European Bank for Reconstruction and Development
was also provided a 5% interest in the joint venture which it can put back to
Baltcom GSM at certain dates in the future at a multiple of Baltcom GSM's
earnings before interest, taxes, depreciation and amortization or EBITDA, not to
exceed $6.0 million. The Company and Western Wireless have guaranteed the
obligation of Baltcom GSM to pay such amount. All of the shareholders of Baltcom
GSM, including Metromedia International Telecommunications, pledged their
respective shares to the European Bank for Reconstruction and Development as
security for repayment of the loan. Under the European Bank for Reconstruction
and Development agreements, amounts payable to the Communications Group are
subordinated to amounts payable to the European Bank for Reconstruction and
Development.
In April 1997, the Communications Group's Georgian GSM Joint Venture, Magticom,
entered into a financing agreement with Motorola, Inc. pursuant to which
Motorola agreed to finance 75% of the equipment, software and service it
provides to Magticom up to an amount equal to $15.0 million. Interest on the
financed amount accrues at 6-month London interbank offered rate or LIBOR plus
5% per annum, with interest payable semi-annually. Repayment of principal with
respect to each drawdown commences twenty-one months after such drawdown with
the final payment being due 60 months after such drawdown. All drawdowns must be
made within 3 years of the initial drawdown date. Magticom is obligated to
provide Motorola with a security interest in the equipment provided by Motorola
to the extent permitted by applicable law. As additional security for the
financing, the Company has guaranteed Magticom's repayment obligation to
Motorola. In June 1998, the financing agreement was
79
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
amended and Motorola agreed to make available an additional $10.0 million in
financing. Interest on the additional $10.0 million accrues at 6-month LIBOR
plus 3.5%. The Company has guaranteed Magticom's repayment obligation to
Motorola, under such amendment to Motorola.
The Communications Group and Western Wireless have funded the balance of the
financing to Magticom through a combination of debt and equity. Repayment of
indebtedness owed to such partners is subject to certain conditions set forth in
the Motorola financing agreements.
In January 1998, the Communications Group entered into a loan agreement with DSC
Finance Corporation pursuant to which DSC agreed to finance 50% of the equipment
it provides to the Communications Group up to $35.0 million. In June 1998, the
Company agreed to guarantee the Communications Group's obligation to repay DSC
under such loan agreement.
As of August 1998, the Communication Group acquired a 76% interest in
Omni-Metromedia Caspian, Ltd., a company that owns 50% of a joint venture in
Azerbaijan, Caspian American. Caspian American has been licensed by the Ministry
of Communications of Azerbaijan to provide high speed wireless local loop
services and digital switching throughout Azerbaijan. Omni-Metromedia has
committed to provide up to $40.5 million in loans to Caspian American for the
funding of equipment acquisition and operational expense in accordance with
Caspian American's business plans. The Communications Group is obligated to
contribute approximately $5.0 million in equity to Omni-Metromedia and to lend
up to $36.5 million in accordance with Caspian American's business plan. In May
1999, the Communications Group sold 2.2% of the shares of Omni-Metromedia to
Verbena Servicos e Investimentos, S.A., thereby reducing its ownership interest
in Caspian American from 38% to 37%.
As part of the transaction, the Communications Group has sold a 17.1%
participation in the $36.5 million loan to AIG Silk Road Fund, Ltd., which
requires AIG Silk Road Fund to provide the Communications Group 17.1% of the
funds to be provided under the loan agreement and entitles AIG Silk Road Fund to
17.1% of the repayments to the Communications Group. The Communications Group
has agreed to repurchase such loan participation from AIG Silk Road Fund in
August 2005 on terms and conditions agreed by the parties. In addition, the
Communications Group has provided AIG Silk Road Fund the right to put its 15.70%
ownership interest in Omni-Metromedia and to the Communications Group starting
in February 2001 for a price equal to seven times the EBITDA of Caspian American
minus debt, as defined, multiplied by AIG Silk Road Fund's percentage ownership
interest.
In addition, in May 1999, the Communications Group sold a 2.35% participation in
the $36.5 million loan to Verbena Servicos e Investimentos, which requires
Verbena Servicos e Investimentos to provide the Communications Group 2.35% of
the funds to be provided under the loan agreement and entitles Verbena Servicos
e Investimentos to 2.35% of the repayments to the Communications Group. The
Communications Group has agreed to repurchase such loan participation from
Verbena Servicos e Investimentos in August 2005 on terms and conditions agreed
by the parties. In addition, the Communications Group provided Verbena Servicos
e Investimentos the right to put its 2.20% ownership interest in Omni Metromedia
to the Communications Group starting in February 2001 for a price equal to seven
times the EBITDA of Caspian American minus debt, as defined, multiplied by
Verbena Servicos e Investimentos percentage ownership interest
In January 1999, Caspian American entered into an equipment purchase agreement
with Innowave Tadiran Telecommunications Wireless Systems, Ltd. to purchase
wireless local loop telecommunications equipment. In connection with such
agreement, the Communications Group provided Innowave Tadiran a payment
guarantee of $2.0 million.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
As part of its investment in Tyumenruskom announced in November 1998 the
Communications Group agreed to provide a guarantee of payment of $6.1 million to
Ericsson Radio Systems, A.B. for equipment financing provided by Ericsson to one
of the Communication Group's wholly owned subsidiaries and to its 46% owned
Joint Venture, Tyumenruskom. Tyumenruskom is purchasing a digital advanced
mobile phone or DAMPS cellular system from Ericsson in order to provide fixed
and mobile cellular telephone in the regions of Tyumen and Tobolsk, Russia. The
Communications Group has agreed to make a $1.7 million equity contribution to
Tyumenruskom and to lend the joint venture up to $4.0 million for start-up costs
and other operating expenses. Tyumenruskom also intends to provide wireless
local loop telephone services.
The license pursuant to which the Communications Group's radio joint venture in
Hungary, Radio Juventus, operates expired on December 31, 1998. The
Communications Group participated in a competitive tender for a regional
broadcasting license to cover Budapest and certain other areas in Hungary. The
Communications Group has been informed that its bid in the tender has been
accepted and anticipates receiving a new license shortly. The Communications
Group expects the license fee to be approximately $8.0 million payable over 8
years in Hungarian forints adjusted for inflation.
SICHUAN JV AND CHONGQING JV
On May 21, 1996, Asian American Telecommunications, an indirect majority-owned
subsidiary of the Company, entered into a joint venture agreement with China
Huaneng Technology Development Corp. for the purpose of establishing Sichuan Tai
Li Feng Telecommunications Co., Ltd., known as Sichuan JV. Also on May 21, 1996,
Sichuan JV entered into a network systems cooperation contract, with China
Unicom. The contract covers the funding, construction and development of a fixed
line public services telephone network providing local telephone service in
cities within Sichuan Province and long distance telephone service among those
cities known as the Sichuan network. The initial project covered by the contract
includes development of 50,000 local telephone lines in Chengdu and Chongqing
cities, and construction of a fiber optic long distance facility between these
two cities. Subsequent projects covered by the contract and the existing and
future joint ventures may expand services to one million local telephone lines
in cities throughout Sichuan Province, and to construct fiber optic long
distance facilities among these cities. The contract has a cooperation term of
twenty-five years.
Under the contract, China Unicom will be responsible for the construction and
operation of the Sichuan network, while Sichuan JV will provide financing and
consulting services for the project. Distributable cash flows, as defined in the
contract, are to be distributed 22% to China Unicom and 78% to Sichuan JV
throughout the term of the contract. Sichuan JV holds non-transferable title to
all assets acquired or constructed with the funds that it provides to China
Unicom, except for any assets used to provide inter-city long distance service,
title to which immediately passes to China Unicom. On the tenth anniversary of
completion of the Sichuan network's initial phase, title to assets held by
Sichuan JV will transfer to China Unicom. Sichuan JV and China Unicom consider
the cost of all assets acquired or constructed with investment funds from
Sichuan JV to be part of Sichuan JV's contribution to the contract, regardless
of whether Sichuan JV holds title to such assets.
The total amount to be invested in Sichuan JV is $29.5 million with equity
contributions from its shareholders amounting to $12.0 million. Asian American
Telecommunications has made capital contributions to Sichuan JV of $11.1 million
of its total $11.4 million contribution and China Huaneng Technology Development
has contributed $600,000. The remaining investment will be in the form of up to
$17.5 million of loans from Asian American Telecommunications, plus deferred
payment credit from the manufacturers of the equipment used in construction of
the Sichuan network. As of December 31, 1998, Asian American Telecommunications
had loans outstanding to Sichuan JV in the amount of
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
$9.3 million. These loans bear interest at 10% per annum. Ownership of the
Sichuan JV is 92% by Asian American Telecommunications and 8% by China Huaneng
Technology Development.
Asian American Telecommunications also has a consulting contract with China
Huaneng Technology Development covering the latter's assistance with operations
in China. Under the contract, Asian American Telecommunications is obligated to
pay China Huaneng Technology Development an annual consulting fee of RMB 15.0
million (U.S. $1.8 million at December 31, 1998 exchange rates).
In May 1997, Chongqing Municipality was made a separate region from Sichuan
Province administered directly by the Chinese government. In an amendment to the
network systems cooperation contract China Unicom agreed to recognize Chongqing
Municipality as being covered by the terms of that contract, thereby explicitly
extending Sichuan JV's rights and obligations under that contract to include the
newly independent Chongqing Municipality, including rights and obligations for
any long distance services developed by China Unicom between cities in Chongqing
Municipality and those of Sichuan Province. On September 9, 1997, Asian American
Telecommunications entered into a Joint Venture Agreement with China Huaneng
Technology Development for the purpose of establishing Chongqing JV. Sichuan JV
and Chongqing JV entered into an agreement whereby Chongqing JV assumed the
rights and obligations of Sichuan JV under the contract, as amended, that relate
to financing of and consulting services for those portions of the originally
contemplated Sichuan network that would lie within Chongqing Municipality.
Rights and obligations under the contract, as amended, that relate to financing
and consulting services for those portions of the originally contemplated
Sichuan network lying within the redefined boundaries of Sichuan Province (a
redefinition of the Sichuan network) would remain with Sichuan JV.
The total amount to be invested in Chongqing JV is $29.5 million with registered
capital contributions from its shareholders amounting to $14.8 million. Asian
American Telecommunications has made capital contributions of $13.6 million of
its total $14.1 million contribution and China Huaneng has contributed $740,000.
The remaining investment in Chongqing JV will be in the form of up to $14.7
million of loans from Asian American Telecommunications plus deferred payment
credit from the manufacturers of the equipment used in construction of the
Chongqing network. As of December 31, 1998, Asian American Telecommunications
had loans outstanding to Chongqing JV in the amount of $2.5 million. The loans
bear interest at 10% per annum. Ownership in Chongqing JV is 92% by Asian
American Telecommunications and 8% by China Huaneng Technology Development.
Commercial operations were launched on the Chongqing network and Sichuan network
in January 1999.
Sichuan JV and Chongqing JV may also provide additional capital for China
Unicom's later expansion of the public switched telephone network within and
between Sichuan Province and Chongqing Municipality up to a capacity of one
million total subscribers. China Unicom is responsible for construction,
operation, management and maintenance of the public switched telephone network.
Sichuan JV and Chongqing JV provide financing, consulting and technical support
services to China Unicom in exchange for receiving 78% of distributable cash
flow from China Unicom's public switched telephone network and long distance
operations within and between Sichuan Province and Chongqing Municipality for a
25-year period, payable semi-annually.
In December 1997, Sichuan JV and Chongqing JV entered into a phase 1 loan with
Northern Telecom Communications, known as Nortel, for the purchase of up to
$20.0 million of Nortel equipment during the first phase of the Sichuan
Chongqing project. The Company secured the phase 1 loan repayment with a $20.0
million letter of credit. Nortel had the right to draw on the $20.0 million
letter of credit in January and July of 1999 for amounts due Nortel at such
times for phase 1 equipment purchases. In
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
December 1998, Nortel, Sichuan JV, Chongqing JV, China Unicom and the Company
executed a settlement of various outstanding matters pertaining to this phase 1
loan. Under this settlement, except for amounts owed for equipment and interest
of $3.4 million which are payable in July 1999, all outstanding deferred amounts
owed to Nortel were paid. The loan agreements between Nortel and the joint
ventures were terminated. The $20.0 million letter of credit associated with the
phase 1 loan agreement was reduced to $3.4 million and Nortel has the right to
draw on the $3.4 million in July 1999. Commercial service was launched on the
phase 1 network in January 1999.
The estimated total investment for phase 1 is approximately $29.5 million in
Sichuan Province and approximately $29.5 million in Chongqing Municipality. As
of December 31, 1998 Asian American Telecommunication's the Company's
majority-owned subsidiary has contributed in registered capital and loans $20.4
million and $16.1 million to Sichuan JV and Chongqing JV, respectively.
The Company has received notification from China Unicom stating that a
department of the Chinese government has requested termination of two of its
four joint telecommunications projects in China and the Company expects that the
other two telecommunications projects in which it has invested will receive
similar letters. See "--Recent Developments--Chinese Joint Ventures."
NINGBO JV
Asian American Telecommunications entered into a joint venture agreement with
Ningbo United Telecommunications Investment Co., Ltd. on September 17, 1996 for
the purpose of establishing Ningbo Ya Mei Telecommunications Co., Ltd. known as
Ningbo JV. Previously Ningbo United Telecommunications had entered into a
network system cooperation contract with China Unicom, covering development of a
GSM telecommunications project in the City of Ningbo, Zhejiang Province, for
China Unicom. The project entails construction of a mobile communications
network with a total capacity of 50,000 subscribers. China Unicom constructed
and operates the network. Under the contract, Ningbo United Telecommunications
is to provide financing and consulting services to China Unicom. The cooperation
period for the this contract is fifteen years.
With the formation of Ningbo JV, Ningbo United Telecommunications assigned all
of its rights and obligations under the network system cooperation contract to
Ningbo JV. This assignment of rights and obligations was explicitly ratified by
China Unicom in an amendment to the contract. Ningbo United Telecommunications
also agreed to assign rights of first refusal on additional telecommunications
projects to Ningbo JV in the event such rights are granted to Ningbo United
Telecommunications by China Unicom. Distributable cash flows, as defined in the
amended contract, are to be distributed 27% to China Unicom and 73% to Ningbo JV
throughout the contract's cooperation period. Under the amended contract, Ningbo
JV will hold non-transferable title to 70% of all assets acquired or constructed
by China Unicom with investment funds provided by Ningbo JV. Ningbo JV's title
to these assets will transfer to China Unicom as Ningbo JV's funding of the
assets is returned by distributions from China Unicom. Ningbo JV and China
Unicom consider the cost of all assets acquired with funding from Ningbo JV to
be part of Ningbo JV's contribution to the contract, regardless of whether
Ningbo JV holds title to such assets.
The initial amount to be invested in Ningbo JV was $29.5 million with registered
capital contributions from its investors amounting to $11.9 million. Asian
American Telecommunications has currently provided $8.3 million in capital
contributions, representing 70% of Ningbo JV's registered capital Ningbo United
Telecommunications provided $3.6 million of registered capital contributions to
Ningbo JV, representing 30% of Ningbo JV's equity. Ningbo JV has arranged loans
with Asian American Telecommunications, manufacturers of the equipment for the
project and banks. As of December 31,
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
1998, Asian American Telecommunications had long term loans to Ningbo JV in the
amount of $23.0 million. A substantial portion of these loans was incurred to
refinance previous loans from manufacturers. These loans bear interest at 10%
per annum. Ownership in Ningbo JV is 70% by Asian American Telecommunications
and 30% by Ningbo United Telecommunications.
The project was completed and put into commercial service in mid-August 1997.
Ningbo JV has received a letter from China Unicom stating that the supervisory
department of the Chinese government had requested that China Unicom terminate
the project with Ningbo JV. The Communications Group has been informed by China
Unicom that the letter also applies to Ningbo JV II. The notification letter
from China Unicom requested that negotiations begin immediately regarding the
amounts to be paid to Ningbo JV, including return of investment made and
appropriate compensation and other matters related to the winding up of Ningbo
JV's activities as a result of this notice. Negotiations regarding the terms of
the termination have begun and are continuing. The content of the negotiations
includes determining the investment principal of the Ningbo joint ventures,
appropriate compensation and other matters related to termination of contracts.
The letter further stated that due to technical reasons which were not
specified, the cash distribution plan for the first half of 1999 had not been
decided, and that China Unicom also expected to discuss this subject with Ningbo
JV. As a result, the Company cannot currently determine the amount of
compensation the Ningbo joint ventures will receive.
While there can be no assurance that China Unicom will provide similar letters
to the Company's other two sino-sino-foreign telephony-related joint ventures,
the Company expects that these joint ventures will also be the subject of
project termination negotiations. The Company cannot yet predict the effect on
it of the Ningbo joint ventures' negotiations and the expected winding up of the
Company's other two telephony-related joint ventures, but the Company believes
such negotiations, if adversely concluded, or the failure to make scheduled cash
distributions, could have a material adverse effect on its financial position
and results of operations. Depending on the amount of compensation it receives,
the Company will record a non cash charge equal to the difference between the
sum of the carrying values of its investment and advances made to joint ventures
plus goodwill less the cash compensation it receives from the joint ventures
which China Unicom has paid. The Company's investment in and advances to joint
ventures and goodwill balance at June 30, 1999 were approximately $71 million
and $67 million respectively. The Company is currently evaluating other
investment opportunities in China and recently announced the establishment of a
new joint venture in China to develop and operate an e-commerce system.
NINGBO JV II
On March 26, 1998, Ningbo JV and China Unicom signed an amendment to the
original Ningbo contract covering expansion of China Unicom's GSM service
throughout Ningbo Municipality. The expansion is being undertaken as a separate
project, and provides capacity for an additional 25,000 GSM subscribers within
Ningbo Municipality. The feasibility study for the expansion project was
completed on March 6, 1998 and forecasts a total budget of approximately $17.0
million. The terms of the Ningbo expansion agreement match those of the
underlying Ningbo United contract, except that the Ningbo expansion agreement
will have its own cooperation period of fifteen years. In the Ningbo expansion
agreement, China Unicom and Ningbo JV explicitly contemplated establishment of a
separate joint venture to provide financing and consulting services to the
expansion project.
Pursuant to the Ningbo expansion agreement, Asian American Telecommunications
and Ningbo United Telecommunications entered into a second Joint Venture
Agreement and formed Ningbo Ya Lian Telecommunications Co., Ltd., known as
Ningbo JV II. In an amendment to the Ningbo expansion agreement dated July 1,
1998, China Unicom and Ningbo JV agreed to assign all rights and obligations
originally held by Ningbo JV under the Ningbo Expansion Agreement to Ningbo JV
II.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The total amount to be invested in Ningbo JV II is $18.0 million with registered
capital contributions from its investors amounting to $72 million. As of
December 31, 1998, Asian American Telecommunications had made its $5.0 million
registered capital contribution, and Ningbo United Telecommunications had made
its $2.2 million registered capital contribution. The remaining investment in
Ningbo JV II beyond planned registered capital contributions from its investors
will be in the form of up to $10.8 million of loans from Asian American
Telecommunications plus deferred payment credit from the manufacturers of the
equipment used in construction of the expansion network. As of December 31,
1998, Asian American Telecommunications had loans outstanding to Ningbo JV II in
the amount of $2.0 million. This loan bears interest at 8% per annum. Ownership
in Ningbo JV II is 70% by Asian American Telecommunications and 30% by Ningbo
United Telecommunications.
Commercial services commenced on the completed portions of the Ningbo expansion
in November 1998. The network was fully completed and in service in February
1999.
The Company has received notification from China Unicom stating that a
department of the Chinese government has requested termination of two of its
four joint telecommunications projects in China and the Company expects that the
other two telecommunications projects in which it has invested will receive
similar letters. See "--Recent Developments--Chinese Joint Ventures."
RISKS ASSOCIATED WITH THE COMPANY
The ability of the Communications Group and its joint ventures to establish
profitable operations is subject to significant political, economic and social
risks inherent in doing business in emerging markets such as Eastern Europe, the
former Soviet Union and China. These include matters arising out of government
policies, economic conditions, imposition of or changes in government
regulations and policies, imposition of or changes to taxes or other similar
charges by governmental bodies, exchange rate fluctuations and controls, civil
disturbances, deprivation or unenforceability of contractual rights, and taking
of property without fair compensation. These and other risks associated with the
Company are discussed more fully above. See Item Business 1--Risks Associated
with the Company. See also "--Recent Developments--Chinese Joint Ventures."
The Communications Group's strategy is to minimize its foreign currency risk. To
the extent possible, in countries that have experienced high rates of inflation,
the Communications Group bills and collects all revenues in U.S. dollars or an
equivalent local currency amount adjusted on a monthly basis for exchange rate
fluctuations. The Communications Group's joint ventures are generally permitted
to maintain U.S. dollar accounts to serve their U.S. dollar obligations, thereby
reducing foreign currency risk. As the Communications Group and its joint
ventures expand their operations and become more dependent on local currency
based transactions, the Communications Group expects that its foreign currency
exposure will increase. The Communications Group does not hedge against foreign
exchange rate risks at the current time and, therefore, could be subject in the
future to any declines in exchange rates between the time a joint venture
receives its funds in local currencies and the time it distributes such funds in
U.S. dollars to the Communications Group.
The Communications Group's investments in Joint Ventures in China have been made
through a structure known as the sino-sino-foreign joint venture, an arrangement
in which the foreign invested sino-sino-foreign Joint Venture is a provider of
Telephony equipment, financing and technical services to telecommunications
operators and not a direct provider of telephone service. Since mid-1998,
positions unofficially taken by some departments of the Chinese government have
raised uncertainty
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
regarding the continued viability of the sino-sino-foreign structure and, as a
result, the Communications Group's associated financing, service and consulting
arrangements with China Unicom. The Communications Group has received
notification from China Unicom stating that a department of the Chinese
government has requested termination of one of its joint telecommunications
projects in China. The Communications Group has been informed by China Unicom
that the letter also applies to a second joint venture. Negotiations have begun
with representatives of China Unicom on the amount of compensation and terms of
the resolution of all issues relating to the termination of the ventures. While
the notification letter, as orally modified by China Unicom, involved only two
of the Communications Group's joint ventures, the Communications Group expects
that the other two telecommunications projects in which it has invested will
receive similar letters. In light of the current uncertainty, the Communications
Group is unable to estimate the impact of such negotiations and expected winding
up of its other two Chinese joint ventures. Negotiations, if adversely
concluded, could have a materially negative effect on the Communications Group's
financial position and operating results. See "--Recent Developments--Chinese
Joint Ventures."
For a discussion of the factors relating to economic and financial conditions in
Russia and other emerging markets, and to Chinese law and regulation relating to
foreign investment in the telecommunications industry, that the Communications
Group confronts, see Item 1 "Business--Risks Associated with the Company." Such
risks have not had an effect on the Company's financial condition or results of
operations as of and for the year ended December 31, 1998. As is noted above,
the Company cannot yet predict the impact that such factors may have on its
financial condition or results of operations. In addition, the Company reports
the results of the operations of the Communications Group's operations in
Eastern Europe and the republics of the former Soviet Union and the
distributable cash flow generated by the telephony networks of China Unicom on a
three month lag and therefore the impact of such factors, if any, are not yet
fully reflected in the Company's results of operations.
SNAPPER
On November 26, 1996, Snapper entered into a credit agreement with AmSouth Bank
of Alabama, pursuant to which AmSouth had agreed to make available to Snapper a
revolving line of credit up to $55.0 million, upon the terms and subject to
conditions contained in such Snapper credit agreement for a period ending on
January 1, 1999. The Snapper revolver was guaranteed by the Company, and was
repaid. Interest under the Snapper revolver was payable at Snapper's option at a
rate equal to either (i) prime plus .5% (from November 26, 1996 through May 25,
1997) and prime plus 1.5% (from May 26, 1997 to January 1, 1999 and (ii) the
London interbank offered rate or LIBOR (as defined in the old Snapper credit
agreement) plus 2.5% (from November 26, 1996 through May 25, 1997) and LIBOR
plus 3.5% (from May 26, 1997 to January 1, 1999).
The old Snapper credit agreement contained standard representations and
warranties, covenants and events of default and provided for the grant of a
security interest in substantially all of Snapper's assets. The Snapper revolver
was secured by a first priority security interest in all of Snapper's assets and
properties and was also entitled to the benefit of a replenishable $1.0 million
cash collateral account, which was initially funded by Snapper. Under the old
Snapper credit agreement, AmSouth could draw upon amounts in the cash collateral
account to satisfy any payment defaults by Snapper and Messrs. Kluge and
Subotnick, Chairman of the Board of the Company and Vice Chairman, President and
Chief Executive Officer of the Company, respectively, were obligated to
replenish such account any time amounts were so withdrawn up to the entire
amount of the Snapper revolver.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
At December 31, 1996, Snapper was not in compliance with certain of these
covenants. The Company and AmSouth amended the old Snapper credit agreement to
provide for (i) an annual administrative fee to be paid on December 31, 1997,
(ii) an increase in Snapper's borrowing rates as of December 31, 1997 (from
prime rate to prime rate plus 1.50% and from LIBOR plus 2.50% to LIBOR plus
4.00%), and (iii) an increase in Snapper's commitment fee as of December 31,
1997 from .50% per annum to .75% per annum. As part of the amendment to the old
Snapper credit agreement AmSouth waived: (i) the covenant defaults as of
December 31, 1996 (ii) the $250,000 semi-annual administrative fee requirement
which was set to commence on May 26, 1997 and (iii) the mandatory borrowing rate
and commitment fee increase that was to occur on May 26, 1997. Furthermore, the
amendment replaced certain existing financial covenants with covenants on
minimum quarterly cash flow and equity requirements, as defined. In addition,
the Company and AmSouth agreed to a $10.0 million credit facility.
On April 30, 1997, Snapper closed a $10.0 million working capital facility with
AmSouth which amended Snapper's then existing $55.0 million facility. The
working capital facility (i) provided AmSouth with a PARI PASSU collateral
interest in all of Snapper's assets (including rights under a make-whole and
pledge agreement made by Metromedia Company in favor of AmSouth in connection
with the Snapper revolver), (ii) accrued interest on borrowings at AmSouth's
floating prime rate (the same borrowing rate as the Snapper revolver), and (iii)
was due and payable on October 1, 1997. On October 1, 1997 the Company repaid
the $10.0 million Working Capital Facility.
On November 12, 1997, Snapper amended and restated the old Snapper credit
agreement to increase the amount of the revolving line of credit from $55.0
million to $80.0 million. The Snapper revolver bore interest at an applicable
margin above the prime rate (up to 1.5%) or a LIBOR rate (up to 4.0%). The
Snapper revolver was to mature on January 1, 2000. The Snapper revolver was
guaranteed by the Company and Messrs. Kluge and Subotnick agreed to guarantee
$10.0 million of the Snapper revolver. The old Snapper credit agreement, as
amended and restated, continued to contain certain financial covenants regarding
maintaining minimum tangible net worth and satisfying certain quarterly cash
flow requirements.
At June 30, 1998, Snapper was not in compliance with certain financial covenants
under the old Snapper credit agreement. The Company and AmSouth amended the
agreement to provide for a reduction of the line of credit as of August 11,
1998. As part of the amendment, the lender waived the covenant defaults as of
June 30, 1998. At September 30, 1998, Snapper was not in compliance with certain
financial covenants under such agreement.
On November 11, 1998, Snapper entered into a Loan and Security Agreement with
Fleet Capital Corporation, as agent and as the initial lender, pursuant to which
the lenders agreed to provide Snapper with a $5.0 million term loan facility and
a $55.0 million revolving credit facility, the proceeds of which were used to
refinance Snapper's obligations under the old Snapper credit agreement and will
also be used for working capital purposes. The Snapper loan will mature in
November 2003 subject to automatic one year renewals and is guaranteed by the
Company up to $10.0 million (increasing to $15.0 million on the occurrence of
specified events). Snapper was in compliance with all bank covenants under the
loan agreement at December 31, 1998.
Interest under the Snapper loan agreement is payable at the Company's option at
a rate equal to either (i) the prime rate plus .25% (from November 11, 1998
through March 31, 2000) or at the prime rate, the prime rate plus .25% or .5%
(from April 1, 2000 to the Snapper loan agreement termination date) depending on
meeting certain leverage ratios or (ii) the London interbank offering or LIBOR
rate (as defined in the Snapper loan agreement) plus 3.0% (from November 11,
1998 through March 31, 2000)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
or LIBOR plus 2.50%, 2.75%, 3.00%, 3.25% (from April 1, 2000 to the Snapper loan
agreement termination date) depending on meeting certain leverage ratios. The
Snapper loan agreement contains customary covenants, including delivery of
certain monthly, quarterly, and annual financial information; delivery of
budgets and other information related to Snapper; limitations on Snapper's
ability to (i) sell, transfer, lease (including sale-leaseback), or otherwise
dispose of all or any portion of its assets or merge with any person; (ii)
acquire an equity interest in another business; (iii) enter into any contracts,
leases, sales, or other transactions with any division or any affiliate of the
Company, without the prior written consent of Fleet; (iv) declare or pay any
dividends or make any distributions upon any of its stock or directly or
indirectly apply any of its assets to the redemption, retirement, purchase or
other acquisition of its stock; (v) make any payments to the Company on a
subordinated promissory note issued by Snapper to the Company; (vi) make capital
expenditures that exceed $5.0 million in any fiscal year or exceed $2.0 million
financed for longer than three years in any fiscal year; and (vii) make loans,
issue additional indebtedness, or make any guarantees. In addition, Snapper is
required to maintain at all times as of the last day of each month a specified
net worth, as well as a quarterly specified fixed charge coverage ratio. The
Snapper loan agreement is secured by a continuing security of interest on all of
Snapper's assets and properties.
Snapper's capital expenditures during 1998, 1997 and 1996 were $3.9 million,
$5.6 million and $5.8 million respectively. Under Snapper's current loan
agreement, Snapper's capital expenditures in 1999 cannot exceed $2.5 million,
and in future years cannot exceed $2.0 million annually. The Company does not
expect that the limits on capital expenditures under Snapper's current loan
agreement will negatively impact on Snapper's ability to fund necessary capital
expenditures.
Snapper has entered into various long-term manufacturing and purchase agreements
with certain vendors for the purchase of manufactured products and raw
materials. As of December 31, 1998, noncancellable commitments under these
agreements amounted to approximately $14.7 million.
Snapper has an agreement with a financial institution which makes available
floor plan financing to dealers of Snapper products. This agreement provides
financing for dealer inventories and accelerates Snapper's cash flow. Under the
terms of the agreement, a default in payment by a dealer is nonrecourse to
Snapper. However, Snapper is obligated to repurchase any new and unused
equipment recovered from the dealer. At December 31, 1998, there was
approximately $96.4 million outstanding under this floor plan financing
arrangement. The Company has guaranteed Snapper's payment obligations under this
agreement.
The Company believes that Snapper's available cash on hand, the cash flow
generated by operating activities, borrowings from the Snapper loan agreement
and, on an as needed basis, short-term working capital funding from the Company,
will provide sufficient funds for Snapper to meet its obligations and capital
requirements.
RECENT DEVELOPMENTS
ACQUISITION OF PLD
On May 18, 1999, Metromedia International Group, Inc. entered into an agreement
and plan of merger with PLD Telekom Inc. pursuant to which a wholly owned
subsidiary of the Company will be merged with and into PLD Telekom with PLD
Telekom as the surviving corporation. Following the consummation of the merger,
PLD Telekom will become a wholly owned subsidiary of the Company.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
PLD Telekom is a major provider of high quality, long distance and international
telecommunications services in the former Soviet Union. Its five principal
business units are PeterStar, which provides integrated local, long distance and
international telecommunications in St. Petersburg through a fully digital fiber
optic network; Teleport-TP, which provides international telecommunications
services from Moscow and operates a pan-Russian satellite-based long distance
network; Baltic Communications Limited, which provides dedicated international
telecommunications services in St. Petersburg; ALTEL, which is the principal
provider of cellular service in the republic of Kazakhstan; and BELCEL, which
provides the only national cellular service in Belarus.
METROMEDIA BRIDGE LOAN AGREEMENT
The Company entered into a bridge loan agreement with PLD Telekom pursuant to
which it has agreed to extend revolving bridge loans to PLD Telekom of up to
$7.0 million at an annual interest rate of 10.0% to fund PLD Telekom's ongoing
operations during the period from the execution of the merger agreement to the
earlier of the consummation of the merger or the termination or expiration of
the merger agreement. All amounts payable under the bridge loan agreement are
due and payable on the earlier of (x) termination or expiration of the merger
agreement or (y) October 31, 1999. The loans under this agreement are secured by
a pledge by PLD Telekom of approximately 58% of the capital stock of PLD
Telekom's Technocom Limited subsidiary. The bridge loan agreement contains
negative covenants that restrict PLD Telekom's activities during this period.
TECHNOCOM ARRANGEMENTS
The Company and PLD Telekom have also entered into option modification
agreements with the two minority shareholders of Technocom Limited, a subsidiary
of PLD, pursuant to which PLD Telekom will purchase all of these two
shareholders' shares of Technocom Limited for an aggregate purchase price of
$12.6 million, equal to 50% of the price PLD Telekom would have been otherwise
obligated to pay for these shares beginning on June 30, 1999.
AGREEMENT TO EXCHANGE AND CONSENT; TERMS OF METROMEDIA NOTES
It is a condition to the completion of the merger that the holders of at least
95% in aggregate principal amount of each of PLD Telekom's 14% senior discount
notes due 2004 and 9% convertible subordinated notes due 2006 agree to exchange
their PLD Telekom notes for new Metromedia notes with the terms described below
and consent to certain amendments to the existing indentures for their PLD
Telekom notes.
In order to ensure satisfaction of this condition, the Company has entered into
an agreement to exchange and consent with holders of $122,230,000 in aggregate
principal amount of PLD Telekom's senior discount notes (or approximately 99.4%
of the outstanding senior discount notes) and holders of $25,000,000 in
aggregate principal amount of PLD Telekom's convertible subordinated notes (or
approximately 94.3% of the outstanding convertible subordinated notes), in which
such noteholders have agreed to:
(a) exchange $1,000 principal amount of their PLD Telekom notes for $1,000,
in the case of PLD Telekom's 14.0% senior discount notes, or $900, in the
case of PLD Telekom's 9.0% convertible subordinated notes, accreted
amount of new Metromedia notes subject only to consummation of the merger
and the registration with the Securities and Exchange Commission of
exchange notes that will be identical to the new MMG notes and will be
exchanged for the new MMG notes 20 business days after consummation of
the merger;
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
(b) consent to certain amendments to the PLD Telekom note indentures that
will eliminate substantially all restrictive covenants from these
indentures and release the properties and assets of PLD from the security
and collateral arrangements that currently secure the payment of all
amounts due on the PLD Telekom notes; and
(c) waive certain events of default under the PLD Telekom notes that would
result from the consummation of the merger as well as the payment of
interest that would become due under the PLD Telekom notes until the
earlier of the termination of the merger agreement or October 31, 1999.
In order to satisfy the noteholders' condition with respect to the registration
of Metromedia exchange notes, the Company has filed a registration statement on
Form S-4 to register the exchange notes that will be offered to holders of PLD
Telekom notes that accept new Metromedia notes upon consummation of the merger.
The new MMG notes and the exchange notes will have identical terms. The MMG
notes will mature on the anniversary of the closing of the merger in 2007 and
will accrete in value until the date that is 2 1/2 years from the closing of the
merger, at a rate of 10 1/2% per year, compounded semi-annually, to a principal
amount of $1,291.55 for each $1,000 accreted value at original issuance on the
date that is 2 1/2 years from the closing of the merger. The notes will not pay
cash interest before the date that is 2 1/2 years from the closing of the
merger. Thereafter, the notes will pay interest in cash semi-annually at a rate
of 10 1/2% per year. The Company will not be able to redeem any of the notes
before the date that is 2 1/2 years form the closing of the merger. The Company
will be able to redeem the notes at any time thereafter, at the Company's sole
option, in whole or in part, at a redemption price equal to the principal amount
of the notes, plus accrued and unpaid interest, if any, through but excluding
the date of redemption.
If a change in control of the Company occurs, holders of the MMG notes will have
the right to require the Company to make an offer to repurchase all of the notes
at a purchase price in cash equal to 101% of their accreted value, plus accrued
and unpaid interest, if any, through but excluding the date of repurchase.
The indenture under which the MMG notes will be issued will limit the Company's
ability and its subsidiaries' ability to:
(a) incur additional indebtedness or issue capital stock or preferred stock,
(b) pay dividends on, and repurchase or redeem the Company and subsidiaries'
capital stock and repurchase or redeem subordinated obligations,
(c) invest and sell assets and subsidiary stock,
(d) engage in transactions with related entities, and
(e) incur additional liens.
In addition, the indenture for the notes will limit the Company's ability to
engage in consolidations, mergers and transfers of substantially all of its
assets and also contains limitations on restrictions on distributions from its
subsidiaries. All of these limitations and prohibitions have a number of
important qualifications and exceptions.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
TRAVELERS NOTE AND WARRANT MODIFICATION AGREEMENT
Metromedia and PLD Telekom have also entered into a Note and Warrant
Modification Agreement, dated as of May 18, 1999, with The Travelers Insurance
Company and The Travelers Indemnity Company. This agreement provides that all
principal payable by PLD Telekom to Travelers under their Revolving Credit Note
and Warrant Agreement, dated as of November 26, 1997, with PLD Telekom will be
deferred until the earlier of (x) the date of the consummation of the merger or
(y) termination of the merger agreement. Furthermore, upon the consummation of
the merger, Travelers will relinquish all warrants held or to which it may be
entitled to purchase shares of common stock of PLD Telekom.
In consideration for Traveler's agreement to defer the payment of principal and
to relinquish its PLD Telekom warrants at closing, PLD Telekom will repay $8.5
million of the Travelers loan upon consummation of the merger and the remaining
amount outstanding under the Travelers credit agreement, $4.9 million, on the
earlier of (x) August 30, 2000 or (y) one year from the closing date of the
merger. The interest rate on the amount outstanding will be an annual rate of
10.5% payable monthly. Travelers will also be entitled to receive at the closing
of the merger, 100,000 shares of PLD Telekom common stock, which will be
converted in the merger into shares of Metromedia common stock at the applicable
exchange ratio, and 10-year warrants to purchase 700,000 shares of the Company's
common stock at a price to be determined in December 2000 that will be between
$10.00 and $15.00 per share. However, if the amount outstanding has not fully
been repaid by the earlier of August 30, 2000 or one year from the closing date,
then the exercise price of the warrants will be reset to $.01. Travelers will
also maintain its existing security interests in certain PLD Telekom assets and
its debt will be guaranteed by the Company and three of PLD Telekom's
subsidiaries.
NEWS LETTER AGREEMENT
The Company has also entered into a Letter Agreement, dated as of May 18, 1999,
with News America Incorporated. Pursuant to this agreement, News America has
agreed that it will not exercise its rights upon the occurrence of any defaults
of PLD Telekom under the Revolving Credit Agreement, dated as of September 30,
1998, with PLD Telekom until the earlier of the completion of the merger or the
termination or expiration of the merger agreement. News America has also agreed
not to exercise any rights that it may have to convert its loans under the
credit agreement into shares of common stock of PLD Telekom between the signing
and the closing of the merger. At closing all principal, $6.5 million
outstanding as of June 30, 1998, and accrued interest, payable at a reduced
10.0% interest rate, will be payable in full and News America will also be
released from its obligations under $3.1 million of guarantees made of amounts
outstanding under the Travelers Credit Agreement.
VOTING AGREEMENT AND REGISTRATION RIGHTS AGREEMENT
In connection with the Company's agreement to merge with PLD, the Company
entered into an agreement with News America and its affiliate, which together
hold 14,381,780 shares of PLD Telekom common stock representing approximately
38% of the outstanding voting power of PLD Telekom common stock. These
stockholders have agreed to vote in favor of the merger and against any
competing proposal at the special meeting of stockholders of PLD Telekom that
will vote on the merger. In return, the Company has entered into a registration
rights agreement with News America and its affiliate which provides that the
Company will put in place a shelf registration statement no later than six
months after the merger is consummated to register the shares of common stock of
the Company that News America and its affiliate will receive in the merger.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In addition, Metromedia Company, which with its partners is the largest
stockholder of the Company, has agreed to grant News America and its affiliate
tag-along rights on sales by Metromedia Company of the Company's common stock.
So long as News America and its affiliate own more than 5% of the stock of the
Company, each time Metromedia Company and its partners sell their stock of the
Company, News America and its affiliate will have the right to sell a
proportionate amount of their stock of the Company to the buyer.
The voting agreement will terminate if the merger agreement is terminated.
CHINESE JOINT VENTURES
Ningbo JV has received a letter from China Unicom stating that the supervisory
department of the Chinese government had requested that China Unicom terminate
the project with Ningbo JV. The Communications Group has been informed by China
Unicom that the letter also applies to Ningbo IV II. The notification letter
from China Unicom requested that negotiations begin immediately regarding the
amounts to be paid to Ningbo JV, including return of investment made and
appropriate compensation and other matters related to the winding up of Ningbo
JV's activities as a result of this notice. Negotiations regarding the terms of
the termination have begun and are continuing. The content of the negotiations
includes determining the investment principal of the Ningbo joint ventures,
appropriate compensation and other matters related to termination of contracts.
The letter further stated that due to technical reasons which were not
specified, the cash distribution plan for the first half of 1999 had not been
decided, and that China Unicom also expected to discuss this subject with Ningbo
JV. As a result, the Company cannot currently determine the amount of
compensation the Ningbo joint ventures will receive.
While there can be no assurance that China Unicom will provide similar letters
to the Company's other two sino-sino-foreign telephony-related joint ventures,
the Company expects that these joint ventures will also be the subject of
project termination negotiations. The Company cannot yet predict the effect on
it of the Ningbo joint ventures' negotiations and the expected winding up of the
Company's other two telephony-related joint ventures, but the Company believes
such negotiations, if adversely concluded, or the failure to make scheduled cash
distributions, could have a material adverse effect on its financial position
and results of operations. Depending on the amount of compensation it receives,
the Company will record a non cash charge equal to the difference between the
sum of the carrying values of its investment and advances made to joint ventures
plus goodwill less the cash compensation it receives from the joint ventures
which China Unicom has paid. The Company's investment in and advances to joint
ventures and goodwill balance at June 30, 1999 were approximately $71 million
and $67 million respectively. The Company is currently evaluating other
investment opportunities in China and recently announced the establishment of a
new joint venture in China to develop and operate an e-commerce system.
MMG CONSOLIDATED
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operations for the year ended December 31, 1998 was $61.4 million,
a decrease in cash used in operations of $62.4 million from the prior year.
Losses from operating activities include significant non-cash items such as
discontinued operations, depreciation, amortization, equity in losses of
investees, nonrecurring charge of the Communications
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Group's writeoff of goodwill and other intangibles and fixed assets, early
extinguishment of debt, gain on sale of assets, and losses allocable to minority
interests. Excluding discontinued operations and extraordinary items, non-cash
items decreased $2.1 million from $64.9 million to $62.8 million for the years
ended December 31, 1997 and 1998, respectively. The decrease relates principally
to equity losses. Changes in operating assets and liabilities, net of the effect
of acquisitions and dispositions, increased cash flows for the year ended
December 31, 1998 by $11.9 million and decreased cash flows by $57.8 million,
for the year ended December 31, 1997.
The increase in cash flows for the year ended December 31, 1998 resulted from
the Company's decision to significantly decrease its production of inventory at
Snapper in the current year partially offset by increased losses in the
Communications Group's operations due to the start-up nature of these operations
and increases in selling, general and administrative expenses to support the
increase in the number of joint ventures.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash provided from investing activities for the years ended December 31, 1998
and 1997 was $106.6 million and $75.4 million, respectively. The principal
sources of funds from investing activities in 1998 were proceeds from maturities
of short-term investments of $103.1 million and the net proceeds of $57.3
million from the sale of the Landmark theater group and proceeds of $14.5
million from the sale of Protocall Ventures. The principal source of funds from
investing activities in 1997 was the net proceeds from the entertainment group
sale of $276.6 million. The principal uses of funds for the year ended December
31, 1998 were investments in and advances to joint ventures of $48.2 million,
acquisitions by the Communications Group of $11.0 million and additions to
property, plant and equipment of $11.4 million. The principal uses of funds for
the year ended December 31, 1997 were investments in and advances to joint
ventures of $64.7 million, acquisitions by the Communications Group of $17.9
million and additions to property, plant and equipment of $10.5 million.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash used in financing activities was $37.2 million, for the year ended December
31, 1998 as compared to cash provided by financing activities of $88.7 million,
for the year ended December 31, 1997. Funds used in financing activities in 1998
were for the preferred stock dividend of $15.0 million and the repayment of debt
of $77.5 million, principally the prior Snapper revolver, which was partially
offset by proceeds of $49.9 million from the November 1998 Snapper loan, and
$5.3 million from the exercise of stock options. Financing activities in 1997
includes the net proceeds of $199.4 million from the issuance of 4,140,000
shares of 7 1/4% cumulative convertible preferred stock. Of the $156.7 million
of payments of debt, $155.0 million relates to the payment on the Company's
debentures.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operations for the year ended December 31, 1997 was $123.8 million,
an increase in cash used in operations of $60.6 million from the prior year.
Net income (loss) includes significant non-cash items including the gain on the
entertainment group sale, operating loss of discontinued operations, equity in
losses and writedown of investment in RDM, losses on early extinguishment of
debt, depreciation, amortization, equity in losses of Joint Ventures and losses
allocable to minority interests. Excluding the gain on the entertainment group
sale of
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
$266.3 million in 1997 non-cash items increased to $111.9 million from $60.8
million in 1996. The increase was principally attributable to the increase in
depreciation and amortization associated with the consolidation of Snapper,
losses from discontinued operations and the equity losses and writedown of the
Company's investment in RDM, partially offset by losses allocable to Asian
American Telecommunications' minority owners. Changes in assets and liabilities,
net of the effect of acquisitions, decreased cash flows for 1997 and 1996 by
$57.8 million and $8.7 million, respectively.
The decrease in cash flows in 1997 resulted from the increased losses in the
Communications Group's operations due to the start-up nature of these operations
and increases in selling, general and administrative expenses to support the
increase in the number of joint ventures and the inclusion of Snapper's
operating losses in 1997. The increase in operating assets principally reflects
increases in inventory of Snapper's products.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash provided by investing activities in 1997 was $75.4 million as compared to
cash used in investing activities of $23.6 million in the prior year. The
principal reason for the increase in cash provided by investing activities was
the net proceeds from the entertainment group sale of $276.6 million. Cash used
in investments in and advances to joint ventures and additions to property,
plant and equipment were $64.7 million and $10.5 million, respectively, in 1997
as compared to $37.8 million and $5.1 million, respectively in 1996. In
addition, the Communications Group utilized $17.9 million of funds net of cash
acquired in acquisitions in 1997.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities was $88.7 million in 1997, as compared to
$155.5 million in 1996. In 1997, funds from financing activities includes the
net proceeds of $199.4 million from the issuance of 4,140,000 shares of 7 1/4%
cumulative convertible preferred stock as compared to 1996 which includes the
net proceeds of $190.6 million from the issuance of 18,400,000 shares of common
stock. Of the $156.8 million of payments in 1997 in notes and subordinated debt,
$155.0 million relates to payment of the Company's debentures. Of the $81.6
million of payments in 1996 on notes and subordinated debt, $28.8 million was
the repayment of the revolving credit agreement by the Company.
YEAR 2000 SYSTEM MODIFICATIONS
The Company is currently working to evaluate and resolve the potential impact of
the Year 2000 on the processing of date-sensitive information and network
systems. The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the Year 2000, which could result in
miscalculations or system failures resulting from recognition of a date using
"00" as the year 1900 rather than the year 2000. The Company expects to make
some of the necessary modifications through its ongoing investment in system
upgrades.
The Company has delegated responsibility to a group of executives to coordinate
the identification, evaluation and implementation of changes to computer systems
and applications necessary to achieve the Company's goal of a Year 2000 date
conversion which would minimize the impact on the Company's subsidiaries, joint
ventures and their subscribers and customers, and avoid disruption to business
operations. The Company is also focusing on outside forces that may affect the
Company's operations, including the Company's and its subsidiaries' and joint
ventures' vendors, banks and utility companies. The Company's analysis of the
Year 2000 problem is on-going and will be continuously updated through the
remainder of 1999 as necessary.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company has developed a Year 2000 project plan for the Company, its
subsidiaries and unconsolidated joint ventures. However, The Company is not
directly responsible for Year 2000 readiness of many of its joint ventures and
in some cases has no access to the joint venture's management regarding these
matters. Executives of the Company are responsible for monitoring Year 2000
activities across all subsidiaries and joint ventures. Individual joint ventures
and subsidiaries are responsible for initiating and executing specific Year 2000
action plans.
The Company has completed its inventory of information technology and
non-information technology systems. Joint venture information technology and
non-information technology systems have principally been reviewed on a line of
business basis for cable television, telephony, radio and paging ventures. The
mission critical systems identified for the Company's joint ventures are those
that relate to revenue generation, customer service and collection and billing.
Non-information technology mission critical systems include GSM switches,
ACS/Tocom systems, satellite program delivery systems and paging terminals and
related equipment.
The Company has initiated communications with all of its suppliers and its joint
ventures' suppliers of mission critical systems. The Company has accepted the
service providers' statement of Year 2000 compliance as evidence in its
assessment phase. For those mission critical systems determined not to be
compliant, the Company is in the process of replacing or remediating the system
at each significant joint venture or subsidiary. In addition, limited testing
has been performed at certain joint ventures and at the subsidiaries and joint
venturers' technical facilities.
The Company recognizes that to the extent its remediation efforts and those of
its joint ventures fail to prevent Year 2000 problems from arising, a temporary
interruption of service and loss of revenue may occur. High level contingency
plans have been developed which include the removal of noncompliant technology
from service on a temporary basis, replacing systems, or reverting to manual
processes to deal with such possible occurrences. The Company expects to
complete this project prior to January 1, 2000.
Based on the preliminary data, the Company's estimate is that the Year 2000
effort will cost approximately $750,000 to $1.0 million, covering the period
from January 1, 1998 through December 31, 1999, out of a total expected cost of
information systems of $10.4 million for this period, although there can be no
assurance as to the ultimate cost of the Year 2000 effort or the total cost of
information systems. Such costs will be expensed as incurred, except to the
extent such costs are incurred for the purchase or lease of capital equipment.
As of December 31, 1998, the Company has incurred $595,000 in respect of its
Year 2000 conversion effort, or 60% to 79% of the total estimated cost. The
Company expects that the source of funds for Year 2000 costs will be cash on
hand. No other information systems projects of the Company and its subsidiaries
and joint ventures have been deferred due to the Year 2000 efforts.
The Company's Communications Group is heavily dependent on third parties, many
of whom are themselves heavily dependent on technology. In some cases, the
Company's third-party dependence is on vendors of technology who are themselves
working toward solutions to Year 2000 problems. Moreover, the Company is
dependent on the continued functioning of basic, heavily computerized services
such as banking and telephony. Further, the Company's Communications Group's
businesses are located in countries where basic services are operated by the
government or other governmental entities and the Company may not be able to
obtain information on Year 2000 problems. In certain joint ventures of the
Communications Group, the Company does not have a controlling management
interest and cannot unilaterally cause the joint venture to commit the necessary
resources to solve any
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Year 2000 problems. However, substantially all of the Company's joint ventures
operate or are planned to operate in countries where reliance on automated
systems is substantially less significant, and more recent, than in the United
States. Therefore, the Company believes that, in the event Year 2000 problems
arise in such joint ventures, the local operators of such joint ventures and
customers and vendors should be able to revert to manual methods. If the
Company, its joint ventures in which it does not have a controlling management
interest, and their respective customers and vendors are unable to solve any
Year 2000 issues, a material adverse effect on the Company's results of
operations and financial condition could result.
The above information is based on the Company's current estimates using numerous
assumptions of future events. Given the complexity of the Year 2000 issues and
possible unidentified risks, actual results may vary from those anticipated and
discussed above.
This document constitutes a Year 2000 Readiness Disclosure Statement, and the
statements in this Form 10-K are subject to the Year 2000 Information and
Readiness Disclosure Act, and the Company hereby claims the protection of this
Act for this document and all information contained herein.
NEW ACCOUNTING DISCLOSURES
ACCOUNTING FOR DERIVATIVES
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities", was issued. SFAS 133
established accounting and reporting standards for derivative instruments and
for hedging activities. SFAS 133 requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. The accounting for the gain or loss due to changes in fair value of
the derivative instrument depends on whether the derivative instrument qualifies
as a hedge. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 can not be applied retroactively to
financial statements of prior periods. The Company anticipates that the adoption
of SFAS 133 will not have a material impact on the Company's consolidated
financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks. In addition to the market risk
associated with interest rate movements on outstanding debt and currency rate
movements on non-U.S. dollar denominated assets and liabilities, other examples
of risk include collectibility of accounts receivable and significant political,
economic and social risks inherent in doing business in emerging markets such as
Eastern Europe, the former Soviet Union and China.
With the exception of Snapper, the Company did not have any significant long
term obligations at December 31, 1998. Since Snapper's bank debt is a floating
rate instrument, its carrying value approximates its fair value. A 100 basis
point increase in the level of interest rates with all other variables held
constant would result in an increase in interest expense of $477,000. In
addition, a 100 basis point increase in interest rates on Snapper's floor plan
financing to its distributors and dealers would have resulted in an increase in
interest expense of $826,000.
The Company does not hedge against foreign exchange rate risks at the current
time. In the majority of the countries that the Communications Group's joint
ventures operate, there currently do not exist derivative instruments to allow
the Communications Group to hedge foreign currency risk. In addition, at the
current time the majority of the Communications Group's joint ventures are in
the early stages
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
of development and the Company does not expect in the near term to repatriate
significant funds from the Communications Group's joint ventures. "Item 7.
Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Inflation and Foreign Currency" contains additional information on
risks associated with the Company's investments in Eastern Europe, the former
Soviet Union and China.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K including, without limitation, statements
under "Item 1 Business", "Item 3--Legal Proceedings" and "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations"
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "believes," "expects," "may," "will," "should" or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involves risks and
uncertainties. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, which will, among other
things, affect demand for the Company's products and services; industry
capacity, which tends to increase during strong years of the business cycle;
changes in public taste and industry trends; demographic changes; competition
from other communications companies, which may affect the Company's ability to
enter into or acquire new joint ventures or to generate revenues; political,
social and economic conditions and changes in laws, rules and regulations or
their administration or interpretation, particularly in Eastern Europe and the
former Soviet Union, China and selected other emerging markets, which may affect
the Company's results of operations; timely completion of construction projects
for new systems for the joint ventures in which the Company has invested, which
may impact the costs of such projects; developing legal structures in Eastern
Europe and the former Soviet Union, China and other selected emerging markets,
which may affect the Company's results of operations; cooperation of local
partners for the Company's communications investments in Eastern Europe and the
former Soviet Union, China and other selected emerging markets, which may affect
the Company's results of operations; exchange rate fluctuations; license
renewals for the Company's communications investments in Eastern Europe and the
former Soviet Union, China and other selected emerging markets; the loss of any
significant customers; changes in business strategy or development plans;
quality of management; availability of qualified personnel; changes in or the
failure to comply with government regulations; and other factors referenced
herein. Any forward-looking statement speaks only as of the date on which it is
made. New factors emerge from time to time and it is not possible for the
Company to predict which will arise. In addition, the Company cannot assess the
impact of each factor on its business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required under this item are
included in Item 14 of this Report.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS OF METROMEDIA
The Company's board of directors, which presently consists of nine members, is
divided into three classes. The Class I Directors were elected for a term
expiring at the annual meeting of stockholders to be held in 1999, the Class II
Directors were elected for a term expiring at the annual meeting of stockholders
to be held in 2000, and the Class III Directors were elected for a term expiring
at the annual meeting of stockholders to be held in 2001. Members of each class
hold office until their successors are elected and qualified. At each succeeding
annual meeting of the stockholders of the Company, the successors of the class
of directors whose terms expire at that meeting shall be elected by a plurality
vote of all votes cast at such meeting and will hold office for a three-year
term. The Class I Directors, whose terms expire at the Company's annual meeting
of stockholders to be held in 1999, are John W. Kluge, Stuart Subotnick and John
P. Imlay, Jr. The Class II Directors, whose terms expire at the Company's annual
meeting of stockholders to be held in 2000, are Richard J. Sherwin and Leonard
White. The Class III Directors, whose terms expire at the Company's annual
meeting of stockholders to be held in 2001, are Silvia Kessel, Carl E. Sanders,
Arnold L. Wadler and Clark A. Johnson.
The directors of the Company and their respective ages, positions and
backgrounds are as follows:
<TABLE>
<CAPTION>
CLASS OF DIRECTOR
NAME, PRINCIPAL OCCUPATION FOR PAST FIVE YEARS AND CERTAIN DIRECTORSHIPS AGE DIRECTORS SINCE
- -------------------------------------------------------------------------------------- --- ---------- -----------
<S> <C> <C> <C>
John P. Imlay, Jr..................................................................... 62 Class I 1993
Served from 1990 until December 1996 as Chairman of Dun & Bradstreet Software
Services, Inc., an application software company located in Atlanta, Georgia. Mr.
Imlay is the former Chairman of Management Science America, a mainframe applications
software company. Management Science America was acquired by Dun & Bradstreet
Software Services, Inc. in 1990. Mr. Imlay is also a director of the Atlanta
Falcons, a National Football League team, IMS Health, Inc., World Access, Inc. and
The Gartner Group. Mr. Imlay is a member of the audit committee and the compensation
committee.
John W. Kluge......................................................................... 84 Class I 1995
Chairman of the board of directors of the Company since November 1, 1995. Chairman
of the Board and a director of Orion Pictures Corporation from 1992 until July 1997.
Chairman and President of Metromedia Company and its predecessor-in-interest,
Metromedia, Inc. for over five years. Director of Metromedia Fiber Network, Inc.,
Conair Corporation and Occidental Petroleum Corporation. Mr. Kluge is Chairman of
the executive committee and the nominating committee.
</TABLE>
98
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (CONTINUED)
<TABLE>
<CAPTION>
CLASS OF DIRECTOR
NAME, PRINCIPAL OCCUPATION FOR PAST FIVE YEARS AND CERTAIN DIRECTORSHIPS AGE DIRECTORS SINCE
- -------------------------------------------------------------------------------------- --- ---------- -----------
<S> <C> <C> <C>
Stuart Subotnick...................................................................... 57 Class I 1995
President and Chief Executive Officer since December 4, 1996 and Vice Chairman of
the board of directors of the Company since November 1, 1995. Vice Chairman of the
board and a director of Orion Pictures Corporation from 1992 until July 1997
Executive Vice President of Metromedia Company and its predecessor-in-interest,
Metromedia, Inc. for over five years. Director of Metromedia Fiber Network, Inc.
Carnival Cruise Lines, Inc., and Chairman of Big City Radio, Inc. Mr. Subotnick is a
member of the executive committee.
Richard J. Sherwin.................................................................... 55 Class II 1995
Co-President of Metromedia International Telecommunications, Inc. Mr. Sherwin has
served as Co-President and director of Metromedia International Telecommunications
and its predecessor companies for over five years. Prior to that, Mr. Sherwin served
as the Chief Operating Officer of Graphic Scanning Corp., a paging and wireless
telecommunications company.
Leonard White......................................................................... 59 Class II 1995
President and Chief Executive Officer of Rigel Enterprises, a management and private
investment firm, since July 1997. Served as President and Chief Executive Officer of
Orion Pictures Corporation from March 1992 until July 1997 and Metromedia
Entertainment Group from 1995 until July 1997. Chairman of the Board and Chief
Executive Officer of Orion Home Entertainment Corporation, a subsidiary of Orion
Home Entertainment, from March 1991 until March 1992. President and Chief Operating
Officer of Orion Home Video division of Orion Home Entertainment from March 1987
until March 1991. Mr. White is a director of Metromedia Fiber Network, Inc., Big
City Radio, Inc. and American Film Technologies. Mr. White is Chairman of the audit
committee and a member of the compensation committee.
Clark A. Johnson...................................................................... 67 Class III 1990
Mr. Johnson served as chairman and Chief Executive Officer of Pier 1 Imports, Inc.,
a specialty retailer of decorative home furnishings, from August 1988 until his
retirement in February 1999. Mr. Johnson is a director of Albertson's, Inc.,
Anacomp, Inc., Heritage Media Corporation, InterTAN, Inc. and Pier 1 Imports, Inc.
Mr. Johnson is a member of the compensation and audit committees.
</TABLE>
99
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (CONTINUED)
<TABLE>
<CAPTION>
CLASS OF DIRECTOR
NAME, PRINCIPAL OCCUPATION FOR PAST FIVE YEARS AND CERTAIN DIRECTORSHIPS AGE DIRECTORS SINCE
- -------------------------------------------------------------------------------------- --- ---------- -----------
<S> <C> <C> <C>
Silvia Kessel......................................................................... 49 Class III 1995
Executive Vice President, Chief Financial Officer and Treasurer of the Company since
August 29, 1996 and Senior Vice President, Chief Financial Officer and Treasurer of
Metromedia since November 1, 1995. Executive Vice President and a director of Orion
Pictures Corporation from January 1993 until June 1997. Senior Vice President of
Orion from June 1991 to November 1992. Senior Vice President of Metromedia Company
since January 1994. President of Kluge & Company for over five years. Managing
Director of Kluge & Company for over five years. Director and Executive Vice
President of Metromedia Fiber Network, Inc. and Big City Radio, Inc. and Director of
Liquid Audio, Inc., an internet music company. Ms. Kessel is a member of the
nominating committee.
Carl E. Sanders....................................................................... 73 Class III 1967
Engaged in the private practice of law as Chairman of Troutman Sanders, a law firm
located in Atlanta, Georgia. Director of the Company since 1967, except for a
one-year period from April 1970 to April 1971. Former Governor of the State of
Georgia and a director of Carmike Cinemas, Inc., Norrell Corporation, Healthdyne,
Inc., World Access, Inc. and formerly a director of RDM Sports Group, Inc. from
December 1994 to May 1997. Mr. Sanders is Chairman of the compensation committee.
Arnold L. Wadler...................................................................... 56 Class III 1995
Executive Vice President, General Counsel and Secretary of the Company since August
29, 1996 and Senior Vice President, General Counsel and Secretary of the Company
since November 1, 1995. Senior Vice President, Secretary and General Counsel of
Metromedia Company and its predecessor-in-interest, Metromedia, Inc., for over five
years. Director, Executive Vice President, General Counsel and Secretary of
Metromedia Fiber Network, Inc. and Big City Radio, Inc. Director of Orion Pictures
Corporation from 1992 until July 1997. Mr. Wadler is Chairman of the nominating
committee.
</TABLE>
MEETINGS AND CERTAIN COMMITTEES OF THE BOARD
The Company's board of directors held four regular meetings in 1998. In
addition, the Company's board of directors (including the executive committee)
took action by unanimous written consent four times in 1998. All directors
attended at least 75% of the aggregate total number of meetings of the Company's
board of directors and all committees of the Company's board of directors on
which they served except John W. Kluge who attended 50% of such meetings.
The Company's board of directors has delegated certain functions to the
following standing committees:
THE EXECUTIVE COMMITTEE. The Company's executive committee is authorized to
exercise, to the extent permitted by law, all of the powers of the board of
directors in the management and affairs of the Company. The executive committee
took action by unanimous written consent nine times in 1998. The current members
of the executive committee are Messrs. Kluge and Subotnick.
100
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (CONTINUED)
THE AUDIT COMMITTEE. The audit committee is responsible for:
- reviewing the professional services and independence of Company's
independent auditors and the scope of the annual external audit
recommended by the independent auditors,
- ensuring that the scope of the annual external audit is sufficiently
comprehensive,
- reviewing, in consultation with the Company's independent auditors and the
Company's finance and accounting departments, the plan and results of the
annual external audit, the adequacy of the Company's internal control
systems and the results of the Company's internal audit and
- reviewing with management and the Company's independent auditors the
Company's annual and quarterly financial statements, financial reporting
practices and the results of such external audit. The audit committee met
four times during 1998. The current members of the audit committee are
Messrs. Imlay, Johnson and White.
THE COMPENSATION COMMITTEE. The compensation committee's functions are to
review, approve, recommend and report to the board of directors on matters
specifically relating to the compensation of the Company's executive officers
and other key executives and to administer the Company's stock option plans. The
compensation committee held two meetings during 1998. In addition, the
compensation committee took action by unanimous written consent two time during
1998. The current members of the compensation committee are Gov. Sanders and
Messrs. Imlay, Johnson and White.
THE NOMINATING COMMITTEE. The nominating committee's principal function is to
identify candidates and recommend to the Company's board of directors nominees
for membership on the board of directors. The nominating committee expects
normally to be able to identify from its own resources the names of qualified
nominees, but it will accept from stockholders recommendations of individuals to
be considered as nominees, provided the Company's stockholders follow procedures
specified in the Company's by-laws.
These procedures provide that, in order to nominate an individual to the board
of directors, a stockholder must provide timely notice of such nomination in
writing to the secretary of the Company and a written statement by the candidate
of his or her willingness to serve. Such notice must include the information
required to be disclosed in solicitations for proxies for election of directors
pursuant to Regulation 14A under the Securities Exchange Act of 1934, along with
the name, record address, class and number of shares of common stock
beneficially owned by the stockholder giving such notice. To be timely, notice
must be received by the Company not less than 60 days nor more than 90 days
prior to the first anniversary of the date of the Company's annual meeting for
the preceding year. However, in the event the date of the annual meeting of
stockholders is advanced by more than 30 days or delayed by more than 60 days
from this anniversary date, this notice must be received within 10 days
following public disclosure by the Company of the date of the annual or special
meeting at which directors are to be elected. For purposes of this notice
requirement, disclosure shall be deemed to be first made when disclosure of such
date of the annual or special meeting of stockholders is first made in a press
release reported by the Dow Jones News Service, Associated Press or other
comparable national news service, or in a document which has been publicly filed
by the Company with the Securities and Commission pursuant to Sections 13, 14 or
15(d) of the Securities Exchange Act of 1934. Any such nominations should be
submitted in writing to the Company, One Meadowlands Plaza, East Rutherford, New
Jersey 07073-2137, Attention: Arnold L. Wadler, Secretary. The Company's
nominating committee took action by unanimous written consent once in 1998. The
current members of the nominating committee are Messrs. Kluge and Wadler and Ms.
Kessel.
101
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (CONTINUED)
COMPENSATION OF DIRECTORS
During 1998, each director who was not employed by the Company or affiliated
with Metromedia Company received a $2,000 monthly retainer plus a separate
attendance fee for each meeting of the board of directors or committee of the
board of directors in which such director participated. During 1998, the
attendance fees were $1,200 for each meeting of the board of directors attended
by a non-employee director in person and $500 for each meeting of the board of
directors in which a non-employee director participated by conference telephone
call. Members of committees of the board of directors are paid $500 for each
meeting attended.
Prior to December 13, 1995, non-employee directors were entitled to receive
options to purchase shares of common stock under the Company's 1991 Non-Employee
Director Stock Option Plan. Under this plan, each non-employee director who was
a director of the Company on August 3, 1992 was granted an option to purchase
10,000 shares of common stock at an exercise price of $11.875, the closing price
of the common stock on the trading day immediately preceding the date of grant.
Options granted to these non-employee directors became fully vested as to all
10,000 shares upon approval of certain amendments to this plan at the Company's
1993 annual meeting of stockholders.
This plan further provided that each person who became a non-employee director
after August 3, 1992 would receive an option to purchase 10,000 shares of
Company common stock on the day such director is elected as a director, at an
exercise price equal to the closing price of the common stock on the trading day
preceding such director's election. Options granted to these non-employee
directors became fully vested and exercisable as to all 10,000 shares on March
31 in the year after the date the Non-Employee Director was elected, provided
the Company had net income for the year in which the non-employee director was
elected or earnings equal to or better than budgeted results for such year.
All options granted under the plan have a term of ten years. The plan had
originally been scheduled to terminate on June 27, 2001. However, at a meeting
of the board of directors held on December 13, 1995, the board terminated the
plan. Options outstanding as of December 13, 1995 are unaffected by the
termination of the plan.
On August 29, 1996, the Company's stockholders adopted the 1996 Metromedia
International Group, Inc. Incentive Stock Plan. Pursuant to this plan, at a
compensation committee meeting held on January 31, 1996, the Company granted
options to purchase 50,000 shares of common stock at an exercise price of
$12.75, the closing price of the common stock on the trading day immediately
preceding the date of grant to each director other than Messrs. Wadler, Sherwin
and White and Ms. Kessel. On March 26, 1997, the Company cancelled all such
options and reissued them at an exercise price of $9.31 (See "Ten Year
Option/SAR Repricing" table below), 20,000 of these options were vested as of
that date. An additional 10,000 options vested on March 26, 1998. In addition,
on March 26, 1997, the Company granted options to Messrs. Imlay, Johnson and
Sanders to purchase an additional 25,000 shares of the Company common stock at
an exercise price of $9.31 per share, of which 5,000 options vested as of the
grant date and the remainder vest ratably over a four year period.
In November 1997, the Company amended and restated this plan to, among other
things:
- increase the maximum number of options which may be granted to any
optionee to one million,
- permit the compensation committee to grant non-tandem stock options and
stock appreciation rights,
- more narrowly circumscribe the "change of control" provisions of the plan
and
- make a number of technical amendments to the plan.
102
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (CONTINUED)
EXECUTIVE OFFICERS OF METROMEDIA
The executive officers of the Company and their respective ages and positions
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
John W. Kluge.......................... 84 Chairman
Stuart Subotnick....................... 57 Vice Chairman, President and Chief Executive Officer
Silvia Kessel.......................... 49 Executive Vice President, Chief Financial Officer and Treasurer
Arnold L. Wadler....................... 56 Executive Vice President, General Counsel and Secretary
Robert A. Maresca...................... 64 Senior Vice President
Vincent D. Sasso, Jr................... 41 Vice President
</TABLE>
The following is a biographical summary of the experience of the executive
officers of the Company other than those who are also directors. For the
backgrounds of each of the Company's directors, including biographical
information, see "Election of Directors" below.
Mr. Maresca has served as a Senior Vice President of the Company since November
1, 1995 and has served as a Senior Vice President-Finance of the Company for
over five years.
Mr. Sasso has served as Metromedia's Vice President of financial reporting since
July 1996. Prior to that time, Mr. Sasso served in a number of positions at KPMG
LLP from November 1984 to June 1996, including partner from July 1994 to June
1996.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The Company's Chief Executive Officer and its other most highly compensated
executive officers are employed and paid by Metromedia Company, and Metromedia
Company provides the services of such executive officers to Metromedia pursuant
to a management agreement. See "Item 13. Certain Relationships and Related
Transactions". The Company has allocated a portion of such management fee to the
payment of the salaries of its Chief Executive Officer and other executive
officers based upon the services provided to the Company by such officers on
behalf of Metromedia Company.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth information on compensation
awarded to, earned by or paid to the Chief Executive Officer and the Company's
other most highly compensated executive officers for services rendered to the
Company and its subsidiaries during the fiscal year ended December 31, 1998,
1997, and 1996. Messrs. Subotnick, Wadler, Maresca, Sasso and Ms. Kessel were
employed and paid by the Company and amounts shown below with respect to each of
them reflect the portion of their compensation paid by the Company to Metromedia
Company in respect of such executive's services to the Company, pursuant to the
management agreement. The Company estimates that Messrs. Subotnick, Wadler,
Maresca, Sasso and Ms. Kessel spent approximately 20, 20, 20, 30 and 20 hours
per week, respectively, working on matters for the Company. The compensation
expensed by the Company and paid to Metromedia Company pursuant to the
management agreement includes
103
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
payment for salary only and does not include any payment relating to bonus or
other compensation. No other amounts were paid by the Company to these executive
officers during 1998.
<TABLE>
<CAPTION>
AWARDS NUMBER OF
SECURITIES
OTHER ANNUAL UNDERLYING STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS COMPENS.($)
- --------------------------------------------- ---- --------- -------- --------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stuart Subotnick............................. 1998 $ 765,000 -- -- -- --
President and Chief Executive Officer 1997 $ 750,000 -- -- 1,050,000 --
1996 $ 55,328(1) -- -- -- --
Silvia Kessel................................ 1998 $ 382,500 -- -- -- --
Executive Vice President, Chief Financial 1997 $ 375,000 -- -- 250,000 --
Officer and Treasurer 1996 $ 350,000 -- -- -- --
Arnold L. Wadler............................. 1998 $ 382,500 -- -- -- --
Executive Vice President, General Counsel 1997 $ 375,000 -- -- 250,000 --
and Secretary 1996 $ 350,000 -- -- -- --
Robert A. Maresca............................ 1998 $ 220,000 -- -- -- --
Senior Vice President and Chief Accounting 1997 $ 220,000 -- -- 75,000 --
Officer 1996 $ 200,000 -- -- -- --
Vincent D. Sasso, Jr......................... 1998 $ 180,000 -- -- -- --
Vice President of Financial Reporting 1997 $ 175,000 -- -- 75,000 --
1996 $ 75,000(2) -- -- -- --
</TABLE>
- ------------------------
(1) Mr. Subotnick was appointed President and Chief Executive Officer on
December 4, 1996. The amounts shown for Mr. Subotnick reflect the portion of
the payment made by the Company to Metromedia Company for the period
December 4, 1996 through December 31, 1996.
(2) Mr. Sasso was appointed Vice President of Financial Reporting in July of
1996. The amount shown for Mr. Sasso reflects the portion of the payment
made by the Company to Metromedia Company from such period through December
31, 1996.
104
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
AGGREGATED OPTION AND SAR EXERCISES IN 1998
AND FISCAL YEAR-END OPTION AND SAR VALUES
The following table sets forth information concerning the exercise of options or
SARs by the named executive officers during the 1998 fiscal year and the number
of unexercised options and SARs held by such officers at the end of the 1998
fiscal year.
FISCAL YEAR END VALUE $5.438
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED IN
VALUE REALIZED SECURITIES UNDERLYING THE
(MARKET PRICE UNEXERCISED OPTIONS/SARS MONEY OPTIONS/SARS
SHARES AT AT FISCAL YEAR END(#) AT FISCAL YEAR END($)
ACQUIRED ON EXERCISE LESS -------------------------- --------------------------
NAME EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stuart Subotnick........... -0- -0- 430,000 620,000 -0- -0-
Arnold L. Wadler........... -0- -0- 150,000 100,000 -0- -0-
Silvia Kessel.............. -0- -0- 150,000 100,000 -0- -0-
Robert A. Maresca.......... -0- -0- 45,000 30,000 -0- -0-
Vincent D. Sasso, Jr....... -0- -0- 30,000 45,000 -0- -0-
</TABLE>
TEN-YEAR OPTION/SAR REPRICINGS
The following table sets forth information concerning the repricing of stock
options held by any named executive officer during the last ten years.
<TABLE>
<CAPTION>
NUMBER OF MARKET PRICE OF EXERCISE PRICE AT NEW LENGTH OF ORIGINAL
SECURITIES UNDERLYING STOCK AT TIME OF TIME OF EXERCISE OPTION TERMINATION
OPTIONS/SAR'S REPRICING OR REPRICING OR PRICE(1) AT
NAME DATE REPRICED OR AMENDED($) AMENDMENT($) AMENDMENT($) ($) DATE OF REPRICING
- --------------------- --------- ----------------------- ----------------- ----------------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Stuart Subotnick..... 3/26/97 50,000 $ 9.3125 $ 12.75 $ 9.31 8 years/10 months
President and Chief
Executive Officer
Arnold L. Wadler..... 3/26/97 250,000 $ 9.3125 $ 12.75 $ 9.31 8 years/10 months
Executive Vice
President, General
Counsel and
Secretary
Silvia Kessel........ 3/26/97 250,000 $ 9.3125 $ 12.75 $ 9.31 8 years/10 months
Executive Vice
President, Chief
Financial Officer
and Treasurer
Robert A. Maresca.... 3/26/97 75,000 $ 9.3125 $ 12.75 $ 9.31 8 years/10 months
Senior Vice
President and Chief
Accounting Officer
</TABLE>
- ------------------------
(1) At the time of repricing 40% of the options were vested, the remaining 60%
vest ratably over a three year period.
105
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with certain officers
and directors. These indemnification agreements provide for indemnification of
such directors and officers to the fullest extent authorized or permitted by
law. They also provide for:
- advancement by the Company of expenses incurred by the director or officer
in defending certain litigation
- the appointment in certain circumstances of an independent legal counsel
to determine whether the director or officer is entitled to
indemnification and
- the continued maintenance by the Company of directors' and officers'
liability insurance which currently consists of $15 million of primary
coverage. These indemnification agreements were approved by the
stockholders of the Company at its 1993 annual meeting of stockholders.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who beneficially own more than 10%
of the outstanding common stock, to file with the Securities and Exchange
Commission and the American Stock Exchange initial reports of ownership and
reports of changes in ownership of common stock. Such officers, directors and
greater than 10% stockholders are required by the regulations of the Securities
and Exchange Commission to furnish the Company with copies of all reports that
they file under Section 16(a). To the Company's knowledge, based solely on a
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, all Section 16(a) filing
requirements applicable to the Company's officers, directors and greater than
10% beneficial owners were complied with by such persons during fiscal year
ended December 31, 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors consists of Gov. Sanders
and Messrs. Imlay, Johnson and White. The compensation committee is comprised
entirely of independent directors and is responsible for developing and making
recommendations to the board with respect to the Company's executive
compensation policies.
COMPENSATION COMMITTEE REPORT ON COMPENSATION
The following report of the compensation committee discusses the Company's
executive compensation policies generally and, specifically, the relationship of
the Company's performance in 1998 to the compensation by the Company of its
executive officers:
The Company's executive officers are employed and paid by Metromedia Company,
and Metromedia Company provides the services of such executive officers to the
Company pursuant to a management agreement. For the year ended December 31,
1998, the Company paid Metromedia Company a management fee of $3.5 million
pursuant to the management agreement. The Company has allocated a portion of
such management fee to the payment of the salaries of the Company's executive
officers based upon the services provided to the Company by such officers on
behalf of Metromedia Company.
BACKGROUND. In general, the Company's compensation committee seeks to link the
compensation allocable to the services provided by each executive officer to the
performance of the Company and to the management fee payable pursuant to the
management agreement. In addition, the members of the Company's compensation
committee constitute all of the members of the Company's board of directors
106
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
who are not affiliated with Metromedia Company, and such members are therefore
the directors whose approval is required to authorize the management fee under
the management agreement. Within these parameters, the executive compensation
program attempts to provide an overall level of executive compensation, as a
component of the management fee, that is competitive with companies of
comparable size, similar market and operating characteristics and similar
prospects.
During 1996, the Company's compensation committee reviewed total officer
compensation against a market comparison group of approximately 12 companies in
the communications industry to assess the competitiveness of the compensation of
the Company's executive officers. During 1997, the compensation committee
reviewed chief executive officer and chairman compensation against a market
comparison group of 11 companies in the communications industry to assess
further the competitiveness of the compensation of the Company's chief executive
officer. The compensation committee has since obtained updated information
regarding compensation of the 1997 comparison group.
In such reviews, the compensation committee considered the Company's executive
compensation in view of the Company's size, the number of operating units, and
the role and responsibilities of the Company's executive officers. In comparing
the compensation of its executives with that of executives of companies in the
two comparison groups, the compensation committee considered the competitiveness
of the amounts of the management fee allocated to salaries of the Company's
executive officers, assuming that such amounts were paid directly to such
officers, and taking cognizance of the fact that such officers performed duties
for Metromedia Company in addition to their duties for the Company, and received
additional compensation therefor. The compensation committee also considered the
differences between the business of the Company and the businesses of the
members of the comparison groups.
The companies included in the NASDAQ Telecommunications Index for purposes of
analyzing the performance of the Company's common stock during 1998 (see
"Performance Graph" below) are not identical to the 12 companies in the 1996
comparison group or the 11 companies in the 1997 comparison group. Nevertheless,
the Company believes that the cross-section of companies included in the NASDAQ
Telecommunications Index and the two comparison groups are sufficiently similar
and provide a reasonable basis for the compensation committee to develop
justified compensation policies and for an investor to evaluate the performance
of the Company's common stock.
STOCK OPTIONS. The Company's compensation committee believes that the grant of
stock options will motivate executives to create long-term growth in shareholder
value. Pursuant to the Company's 1996 Stock Option Plan, the Company grants
options at the discretion of the compensation committee, usually annually. The
number of option shares covered by such grants is determined based upon
assessment of the individual's performance. The compensation committee considers
the recommendation of and relies on information provided by the Company's Chief
Executive Officer in determining the number of option shares to be granted to
the non-CEO executive officers. The compensation committee believes that the
periodic grant of time-vested stock options provides an incentive that focuses
the executives' attention on managing the business as owners of an equity stake
in the Company. It further motivates executives to maximize long-term growth and
profitability because the value of the options increases only as the Company's
stock price increases after the option grant.
In March 1997, the compensation committee reviewed certain options previously
granted to employees of the Company and the market price of the Company's common
stock during the past year. The committee recognized that options issued by the
Company are utilized as compensation and to provide incentives to improve the
Company's performance and thereby positively influence the market price for the
Company's common stock for the benefit of all shareholders. The committee
determined that the
107
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ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
market price had declined despite the Company's significant accomplishments,
that certain options previously granted under the stock option plan were at
exercise prices significantly in excess of the current market prices of the
Company's common stock, and that these outstanding stock options, if left in
place, would not achieve the underlying objectives discussed above.
Accordingly, on March 26, 1997, the Company granted replacement stock options to
replace certain previously issued stock options under such plan. The replacement
options did not involve the grant of any additional shares. The Company granted
the replacement options at an exercise price of $9.31 per share, the fair market
value per share of shares of the Company's common stock on such date. No other
option repricing or exchange has occurred in the past ten years.
CHIEF EXECUTIVE OFFICER COMPENSATION
The Summary Compensation Table sets forth amounts of the management fee paid
during 1998 to Metromedia Company and allocable to compensation of Stuart
Subotnick, the Company's President and Chief Executive Officer, by the Company.
The compensation committee established the amount of the management fee
allocable to Mr. Subotnick's base salary in December 1996 upon the resignation
of the former chief executive officer of the Company, Mr. John D. Phillips, and
the compensation committee subsequently increased this amount. The compensation
committee determined the amount of the management fee allocable to Mr.
Subotnick's base salary by analyzing the compensation of chief executive
officers in the comparison groups, along with the amounts previously paid to Mr.
Phillips. The compensation committee believes such analysis is reasonable.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
One of the factors the compensation committee considers in connection with
compensation matters is the anticipated tax treatment to the Company and to the
executives of the compensation arrangements. The deductibility of certain types
of compensation depends upon the timing of an executive's vesting in, or
exercise of, previously granted rights. Moreover, interpretation of, and changes
in, the tax laws and other factors beyond the compensation committee's control
also affect the deductibility of compensation. Accordingly, the compensation
committee will not necessarily limit executive compensation to that deductible
under Section 162(m) of the Code. The compensation committee will consider
various alternatives to preserving the deductibility of compensation payments
and benefits to the extent consistent with its other compensation objectives.
The foregoing report of the compensation committee shall not be deemed to be
incorporated by reference into any filing of Metromedia under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except
to the extent that the Company specifically incorporates such information by
reference, and shall not otherwise be deemed filed under such acts.
Submitted by the compensation
committee
of the Company's board of directors as
of
March 29, 1999
John P. Imlay, Jr.
Clark A. Johnson
Carl E. Sanders
Leonard White
108
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (CONTINUED)
PERFORMANCE GRAPH
As the Company views Snapper as a non-core asset which it manages solely in
order to maximize shareholder value, it does not believe that it would be
appropriate for it to compare its performance with that of companies operating
in a line of business similar to Snapper's line of business. Rather, the Company
believes that its performance should be compared to that of telecommunications
companies because the telecommunications business constitutes the strategic
focus of its business operations. As a result, the following graph sets forth
the Company's total stockholder return as compared to the Standard & Poor's 500
Index and the NASDAQ Telecommunications Stock Index for the five year period
from January 1, 1993 through December 31, 1998. The total stockholder return
assumes $100 invested at the beginning of the period in the Company's common
stock, the Standard & Poor's 500 Index and the NASDAQ Telecommunications Index.
METROMEDIA INTERNATIONAL GROUP, INC. CUMULATIVE TOTAL RETURN
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF CUMULATIVE TOTAL RETURN SINCE DECEMBER 1993 AMONG
<S> <C> <C> <C> <C>
Metromedia International Group, Inc. & Select Indices
1993 1994 1995 1996
Metromedia Int. Group, Inc. $100 $122 $187 $132
S&P 500 Index $100 $101 $139 $170
NASDAQ Telecomm Index $100 $84 $113 $117
<CAPTION>
<S> <C> <C>
1997 1998
Metromedia Int. Group, Inc. $127 $72
S&P 500 Index $227 $291
NASDAQ Telecomm Index $166 $271
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Metromedia Int. Group, Inc................................................. $ 100 $ 122 $ 187 $ 132 $ 127
S&P 500 Index.............................................................. $ 100 $ 101 $ 139 $ 170 $ 227
NASDAQ Telecomm Index...................................................... $ 100 $ 84 $ 113 $ 117 $ 166
<CAPTION>
1998
---------
<S> <C>
Metromedia Int. Group, Inc................................................. $ 72
S&P 500 Index.............................................................. $ 291
NASDAQ Telecomm Index...................................................... $ 271
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 1999 certain information
regarding each person, including any "group" as that term is used in Section
13(d)(3) of the Securities Exchange Act of 1934,
109
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
known to own beneficially as such term is defined in Rule 13d-3 under the
Exchange Act, more than 5% of the Company's outstanding common stock. In
accordance with the rules promulgated by the Securities and Exchange Commission,
such ownership includes shares currently owned as well as shares which the named
person has the right to acquire beneficial ownership of within 60 days,
including shares which the named person has the right to acquire through the
exercise of any option, warrant or right, or through the conversion of a
security. Accordingly, more than one person may be deemed to be a beneficial
owner of the same securities.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENTAGE OF
COMMON STOCK BENEFICIALLY OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1) COMMON STOCK
- ------------------------------------------------------------------------- ------------------------- ---------------
<S> <C> <C>
Metromedia Company....................................................... 7,989,206 12%
One Meadowlands Plaza
East Rutherford, NJ 07073
John W. Kluge............................................................ 18,326,043(2) 26%
215 East 67th Street
New York, NY 10021
Stuart Subotnick......................................................... 18,557,268(2) 26%
215 East 67th Street
New York, NY 10021
Snyder Capital Management, L.P........................................... 5,896,092(3) 8%
350 California Street, Suite 1460
San Francisco, California 94104-1436
</TABLE>
- ------------------------
(1) Unless otherwise indicated by footnote, the named persons have sole voting
and investment power with respect to the shares of Company common stock
beneficially owned.
(2) Metromedia Company is a Delaware general partnership owned and controlled by
John W. Kluge and Stuart Subotnick, each of whom is a director of the
Company. The amount set forth in the table above includes 12,415,455 shares
beneficially owned by Mr. Kluge and Mr. Subotnick beneficially through
Metromedia Company (7,989,206) and Met Telcell, Inc. (4,426,249), a
corporation owned and controlled by Messrs. Kluge and Subotnick, and
5,270,588 shares of Company common stock owned directly by a trust
affiliated with Mr. Kluge of which Mr. Subotnick is a trustee (the 5,270,548
shares include 200,000 shares of 7.25% cumulative convertible preferred
stock which shares are currently convertible into 666,000 shares of common
stock), and, with respect to Mr. Subotnick, 231,225 shares of common stock
owned directly by Mr. Subotnick. Mr. Subotnick disclaims beneficial
ownership of the shares owned by the trust. The amounts shown for Messrs.
Kluge and Subotnick also include options to acquire 640,000 shares
exercisable within 60 days of the date hereof owned by each of Messrs. Kluge
and Subotnick.
(3) Pursuant to a report on Schedule 13G filed with the Securities and Exchange
Commission on February 5, 1999 by Snyder Capital Management, L.P. Synder
Capital Management, L.P. is wholly owned by Nvest Companies, L.P., a limited
partnership affiliated with Nvest, L.P. a publicly traded limited
partnership. The general partner of Nvest, L.P. and the managing general
partner of Nvest Companies, L.P. is an indirect wholly owned subsidiary of
Metropolitan Life Insurance Company. As of June 30, 1998, Metropolitan Life
Insurance Company beneficially owned all the of the general partner
interests in Nvest Companies and Nvest, L.P. and, in the aggregate, general
partner
110
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
and limited partner interests of Nvest Companies and Nvest, L.P.
representing approximately 47% of the economic interest in the business of
Nvest Companies.
The foregoing information is based on a review as of June 30, 1999 by the
Company of statements filed with the Securities and Exchange Commission under
Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. To the best
knowledge of the Company, except as set forth above, no person beneficially owns
more than 5% of the Company's outstanding common stock.
SECURITIES BENEFICIALLY OWNED BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the beneficial ownership of Company common stock
as of March 31, 1999 with respect to:
- each director and director nominee of the Company,
- each executive officer named in the Summary Compensation Table under
"Executive Compensation" and
- all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OF OF
COMMON STOCK OUTSTANDING
BENEFICIALLY COMMON
NAME OF BENEFICIAL OWNER OWNED (1) STOCK
- --------------------------------------------- -------------- ----------
<S> <C> <C>
John P. Imlay, Jr............................ 56,000(2)(3)(4) *
Clark A. Johnson............................. 136,500(2)(3)(4) *
Silvia Kessel................................ 203,085(5) *
John W. Kluge................................ 18,326,043(2)(6)(7) 26%
Robert A. Maresca............................ 60,000(8) *
Carl E. Sanders.............................. 87,497(2)(3)(4)(9) *
Vincent D. Sasso, Jr......................... 45,000(10) *
Richard J. Sherwin........................... 866,546(11) 1%
Stuart Subotnick............................. 18,557,268(2)(6)(7)(12) 26%
Arnold L. Wadler............................. 215,415(5) *
Leonard White................................ 1,000(4)(13) *
All Directors and Executive Officers as a
group (11 persons)......................... 20,924,271 29%
</TABLE>
- ------------------------
* Holdings do not exceed one percent of the total outstanding shares of
Company common stock.
(1) Unless otherwise indicated by footnote, the named individuals have sole
voting and investment power with respect to the shares of Company common
stock beneficially owned.
(2) Includes options to acquire 40,000 shares of Company common stock issued
under the Metromedia International Group, Inc. 1996 Incentive Stock Plan.
The 1996 Stock Plan was approved by the Company's stockholders at the 1996
Annual Meeting of Stockholders.
(3) Includes options to acquire 15,000 shares of Company common stock under the
1996 Stock Plan.
(4) Includes options to acquire 1,000 shares of Company common stock under the
1996 Stock Plan.
(5) Includes options to acquire 200,000 shares under the 1996 Stock Plan.
(6) Includes 12,415,455 shares of Company common stock beneficially owned
through Metromedia Company of which Mr. Kluge is a general partner
(7,989,206 shares) and Met Telcell (4,426,249
111
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(CONTINUED)
shares), a corporation owned and controlled by Messrs. Kluge and Subotnick,
and 5,270,588 shares of Company common stock owned directly by a trust
affiliated with Mr. Kluge of which Mr. Subotnick is a trustee, which
includes 200,000 shares of 7.25% cumulative convertible preferred stock,
which shares are currently convertible into 666,000 shares of common stock.
Mr. Subotnick disclaims beneficial ownership of the shares owned by the
trust.
(7) Includes options to acquire 600,000 shares of common stock, exercisable
within 60 days of the date hereof.
(8) Includes options to acquire 60,000 shares of common stock under 1996 Stock
Plan.
(9) Includes options to acquire 10,000 shares of common stock under the
Company's 1991 Non-Employee Director Stock Option Plan.
(10) Includes options to acquire 45,000 shares of common stock under the 1996
Stock Plan.
(11) Includes options to acquire 657,908 shares of common stock exercisable
within 60 days of the date hereof.
(12) Includes 231,225 shares owned directly by Mr. Subotnick.
(13) Includes options to acquire 20,000 shares of common stock under the 1996
Stock Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE COMPANY'S RELATIONSHIP WITH METROMEDIA COMPANY
Metromedia Company and its affiliates are collectively the largest single
stockholder of the Company, beneficially owning, as of March 31, 1999,
approximately 27% of the issued and outstanding shares of common stock.
The Company is a party to a number of agreements and arrangements with
Metromedia Company and its affiliates, the material terms of which are
summarized below.
MANAGEMENT AGREEMENT. The Company is a party to a management agreement with
Metromedia Company dated November 1, 1995, as amended, pursuant to which
Metromedia Company provides the Company with management services, including
legal, insurance, payroll and financial accounting systems and cash management,
tax and benefit plans. This management agreement terminates on October 31, 1999,
and is automatically renewed for successive one year terms unless either party
terminates upon 60 days prior written notice. Pursuant to an amendment dated
January 1, 1999, the management fee under this management agreement was
increased to $3.75 million per year, payable monthly at a rate of $312,500 per
month. The Company is also obligated to reimburse Metromedia Company for all its
out-of-pocket costs and expenses incurred and advances paid by Metromedia
Company in connection with the management agreement. Pursuant to the management
agreement, the Company has agreed to indemnify and hold Metromedia Company
harmless from and against any and all damages, liabilities, losses, claims,
actions, suits, proceedings, fees, costs or expenses (including reasonable
attorneys' fees and other costs and expenses incident to any suit, proceeding or
investigation of any kind) imposed on, incurred by or asserted against
Metromedia Company in connection with the management agreement. In fiscal 1998,
Metromedia Company received no money for its out-of-pocket costs and expenses or
for interest on advances extended by it to the Company pursuant to the
management agreement.
TRADEMARK LICENSE AGREEMENT. The Company is party to a license agreement with
Metromedia Company, dated November 1, 1995 as amended on June 13, 1996, pursuant
to which Metromedia Company has granted the Company a non-exclusive,
non-transferable, non-assignable right and license,
112
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
without the right to grant sublicenses, to use the trade name, trademark and
corporate name "Metromedia" in the United States and, with respect to Metromedia
International Telecommunications, Inc., worldwide, royalty-free for a term of 10
years. This license agreement can be terminated by Metromedia Company upon one
month's prior written notice in the event of:
- the expiration or termination of the management agreement;
- a "change in control" of the Company (as defined below); or
- any of the stock or all or substantially all of the assets of any of the
subsidiaries of the Company is sold or transferred, in which case, the
Company license agreement shall terminate with respect to such subsidiary.
A change in control of the Company is defined as:
- a transaction in which a person or "group" (within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934) not in existence at the
time of the execution of the Company license agreement becomes the
beneficial owner of stock entitling such person or group to exercise 50%
or more of the combined voting power of all classes of stock of the
Company;
- a change in the composition of the Company's board of directors whereby a
majority of the members thereof are not directors serving on the board at
the time of the license agreement or any person succeeding such director
who was recommended or elected by such directors;
- a reorganization, merger or consolidation whereby, following the
consummation thereof, Metromedia Company would hold less than 10% of the
combined voting power of all classes of the Company's stock;
- a sale or other disposition of all or substantially all of the assets of
the Company; or
- any transaction the result of which would be that the common stock would
not be required to be registered under the Securities Exchange Act of 1934
and the holders of common stock would not receive common stock of the
survivor of the transaction which is required to be registered under the
Securities Exchange Act of 1934.
In addition, Metromedia Company has reserved the right to terminate the license
agreement in its entirety immediately upon written notice to the Company if, in
Metromedia Company's sole judgment, the Company's continued use of "Metromedia"
as a trade name would jeopardize or be detrimental to the goodwill and
reputation of Metromedia Company.
Pursuant to the Metromedia license agreement, the Company has agreed to
indemnify and hold Metromedia Company harmless against any and all losses,
claims, suits, actions, proceedings, investigations, judgments, deficiencies,
damages, settlements, liabilities and reasonable legal (and other expenses
related thereto) arising in connection with the license agreement.
The Company believes that the terms of each of the transactions described above
were no less favorable to the Company than could have been obtained from
non-affiliated parties.
113
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) Financial Statements and Schedules
The financial statements and schedules listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on Form 10-K.
(a)(3) Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as part of this
Annual Report on Form 10-K.
(b) Current Reports on Form 8-K
None.
114
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METROMEDIA INTERNATIONAL GROUP, INC.
BY: /S/ SILVIA KESSEL
-----------------------------------------
Silvia Kessel
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, TREASURER AND DIRECTOR
Dated: August , 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JOHN W. KLUGE * Chairman of the Board
- ------------------------------ August 31, 1999
John W. Kluge
Vice Chairman of the Board,
/s/ STUART SUBOTNICK * President and Chief
- ------------------------------ Executive Officer August 31, 1999
Stuart Subotnick (Principal Executive
Officer)
Executive Vice President,
/s/ SILVIA KESSEL Chief Financial Officer,
- ------------------------------ Treasurer and Director August 31, 1999
Silvia Kessel (Principal Financial
Officer)
/s/ ARNOLD L. WADLER * Executive Vice President,
- ------------------------------ General Counsel, August 31, 1999
Arnold L. Wadler Secretary and Director
/s/ VINCENT D. SASSO, JR. Vice President (Principal
- ------------------------------ Accounting Officer) August 31, 1999
Vincent D. Sasso, Jr.
/s/ JOHN P. IMLAY, JR. * Director
- ------------------------------ August 31, 1999
John P. Imlay, Jr.
/s/ CLARK A. JOHNSON * Director
- ------------------------------ August 31, 1999
Clark A. Johnson
/s/ RICHARD J. SHERWIN * Director
- ------------------------------ August 31, 1999
Richard J. Sherwin
/s/ LEONARD WHITE * Director
- ------------------------------ August 31, 1999
Leonard White
/s/ CARL E. SANDERS * Director
- ------------------------------ August 31, 1999
Carl E. Sanders
* By Silvia Kessel, attorney-in-fact
115
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996................. F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................. F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996....... F-6
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 1998, 1997 and
1996..................................................................................................... F-7
Notes to Consolidated Financial Statements................................................................. F-8
Consolidated Financial Statement Schedules:
I. Condensed Financial Information of Registrant........................................................ S-1
II. Valuation and Qualifying Accounts.................................................................... S-5
</TABLE>
All other schedules have been omitted either as inapplicable or not required
under the Instructions contained in Regulation S-X or because the information
included in the Consolidated Financial Statements or the Notes thereto listed
above.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Metromedia International Group, Inc.:
We have audited the accompanying consolidated financial statements of Metromedia
International Group, Inc. and subsidiaries as listed in the accompanying index.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Metromedia
International Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
KPMG LLP
New York, New York
March 24, 1999
F-2
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- -----------
Revenues:
Communications Group...................................................... $ 30,208 $ 21,252 $ 14,047
Lawn and garden equipment................................................. 210,084 183,076 22,545
----------- ---------- -----------
240,292 204,328 36,592
Cost and expenses:
Cost of sales and operating expenses--Communications Group................ 8,522 2,549 1,558
Cost of sales--Lawn and garden equipment.................................. 147,394 123,995 20,699
Selling, general and administrative....................................... 153,327 141,125 57,184
Depreciation and amortization............................................. 20,588 16,734 7,677
Nonrecurring charges...................................................... 40,317 -- --
----------- ---------- -----------
Operating loss.............................................................. (129,856) (80,075) (50,526)
Other income (expense):
Interest expense.......................................................... (16,331) (20,922) (19,090)
Interest income........................................................... 12,746 9,840 5,308
Gain on sale of Protocall Ventures, net................................... 5,527 -- --
Equity in losses of and writedown of investment in unconsolidated
investees............................................................... (18,151) (53,150) (7,835)
Foreign currency loss..................................................... (137) (714) (255)
----------- ---------- -----------
(16,346) (64,946) (21,872)
Loss before income tax benefit (expense), minority interest, discontinued
operations and extraordinary items...................................... (146,202) (145,021) (72,398)
Income tax benefit (expense)................................................ 358 5,227 (414)
Minority interest........................................................... 9,858 8,893 666
----------- ---------- -----------
Loss from continuing operations............................................. (135,986) (130,901) (72,146)
Discontinued operations:
Gain on disposal and (loss) on assets held for sale....................... 12,316 266,294 (16,305)
Loss from discontinued operations......................................... -- (32,258) (22,287)
----------- ---------- -----------
(123,670) 103,135 (110,738)
Extraordinary items:
Loss and equity in loss on early extinguishment of debt................... -- (14,692) (4,505)
----------- ---------- -----------
Net income (loss)........................................................... (123,670) 88,443 (115,243)
Cumulative convertible preferred stock dividend requirement................. (15,008) (4,336) --
----------- ---------- -----------
Net income (loss) attributable to common stockholders....................... $ (138,678) $ 84,107 $ (115,243)
----------- ---------- -----------
----------- ---------- -----------
Weighted average number of common shares--Basic............................. 68,955 66,961 54,293
----------- ---------- -----------
----------- ---------- -----------
Income (loss) per common share--Basic:......................................
Continuing operations..................................................... $ (2.19) $ (2.02) $ (1.33)
Discontinued operations................................................... $ 0.18 $ 3.50 $ (0.71)
Extraordinary items....................................................... $ -- $ (0.22) $ (0.08)
Net income (loss)......................................................... $ (2.01) $ 1.26 $ (2.12)
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.......................................................... $ 137,625 $ 129,661
Short-term investments............................................................. -- 100,000
Accounts receivable:...............................................................
Snapper, net..................................................................... 27,055 26,494
Other, net....................................................................... 18,826 5,190
Inventories........................................................................ 62,777 96,436
Other assets....................................................................... 5,441 4,021
------------ ------------
Total current assets........................................................... 251,724 361,802
Investments in and advances to joint ventures:
Eastern Europe and the Republics of the Former Soviet Union........................ 87,163 86,442
China.............................................................................. 71,559 45,851
Net assets of Landmark Theatre Group................................................. -- 48,531
Property, plant and equipment, net of accumulated depreciation....................... 36,067 44,010
Intangible assets, less accumulated amortization..................................... 159,530 200,120
Other assets......................................................................... 3,598 2,516
------------ ------------
Total assets................................................................... $ 609,641 $ 789,272
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................................................... $ 28,779 $ 30,036
Accrued expenses................................................................... 63,329 73,349
Current portion of long-term debt.................................................. 1,723 21,478
------------ ------------
Total current liabilities........................................................ 93,831 124,863
Long-term debt....................................................................... 50,111 57,938
Other long-term liabilities.......................................................... 5,410 8,225
------------ ------------
Total liabilities................................................................ 149,352 191,026
------------ ------------
Minority interest.................................................................... 34,749 37,564
Commitments and contingencies
Stockholders' equity:
7 1/4% Cumulative Convertible Preferred Stock...................................... 207,000 207,000
Common Stock, $1.00 par value, authorized 400,000,000 shares, issued and
outstanding 69,118,841 and 68,390,800 shares at December 31, 1998 and 1997,
respectively..................................................................... 69,119 68,391
Paid-in surplus.................................................................... 1,012,794 1,007,272
Accumulated deficit................................................................ (857,293) (718,615)
Accumulated other comprehensive loss............................................... (6,080) (3,366)
------------ ------------
Total stockholders' equity....................................................... 425,540 560,682
------------ ------------
Total liabilities and stockholders' equity....................................... $ 609,641 $ 789,272
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- -----------
Operating activities:
Net income (loss)......................................................... $ (123,670) $ 88,443 $ (115,243)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
(Gain) on disposal and loss on assets held for sale..................... (12,316) (266,294) 16,305
Loss from discontinued operations....................................... -- 32,258 22,287
Loss and equity in loss on early extinguishment of debt................. -- 14,692 4,505
Equity in losses and write down of investment in unconsolidated
investees............................................................. 18,151 53,150 7,835
Nonrecurring charges.................................................... 40,317 -- --
Gain on sale of Protocall Ventures, net................................. (5,527) -- --
Depreciation and amortization........................................... 20,588 16,734 7,677
Minority interest....................................................... (9,858) (8,893) (666)
Other................................................................... (909) 3,922 2,881
Changes in assets and liabilities, net of effect of acquisitions, dispo-
sitions and consolidation of Snapper:
(Increase) decrease in accounts receivable.............................. (3,838) 10,443 (909)
(Increase) decrease in inventories...................................... 32,475 (41,137) (2,473)
(Increase) decreases in other assets.................................... (4,099) 1,691 (5,700)
Increases (decrease) in accounts payable and accrued expenses........... (10,492) (29,681) 1,335
Other operating activities, net......................................... (2,185) 900 (968)
----------- ---------- -----------
Cash used in operating activities..................................... (61,363) (123,772) (63,134)
----------- ---------- -----------
Investing activities:
Investments in and advances to Joint Ventures............................. (48,171) (64,714) (37,755)
Distributions from Joint Ventures......................................... 5,441 5,630 3,438
Proceeds from sale of Protocall Ventures.................................. 14,533 -- --
Cash paid for acquisitions and additional equity in subsidiaries.......... (10,997) (17,851) (2,545)
Net proceeds from sale of discontinued operations......................... 57,298 276,607 --
Investment in RDM Sports Group, Inc....................................... -- (15,000) --
Purchase of short-term investments........................................ (3,069) (100,000) --
Proceeds from sale of short-term investments.............................. 103,069 -- 5,366
Additions to property, plant and equipment................................ (11,400) (10,451) (5,081)
Other investing activities, net........................................... (134) 1,154 12,988
----------- ---------- -----------
Cash provided by (used in) investing activities....................... 106,570 75,375 (23,589)
----------- ---------- -----------
Financing activities:
Proceeds from issuance of long-term debt.................................. 49,918 30,124 52,594
Payments on notes and subordinated debt................................... (77,500) (156,771) (81,522)
Proceeds from issuance of stock related to public stock offerings......... -- 199,442 190,604
Proceeds from issuance of common stock related to incentive plans......... 5,347 18,153 972
Preferred stock dividends paid............................................ (15,008) (3,709) --
Other financing activities, net........................................... -- 1,419 (7,130)
----------- ---------- -----------
Cash provided by (used in) financing activities....................... (37,243) 88,658 155,518
----------- ---------- -----------
Net increase in cash and cash equivalents................................. 7,964 40,261 68,795
Cash and cash equivalents at beginning of year............................ 129,661 89,400 20,605
----------- ---------- -----------
Cash and cash equivalents at end of year.................................. $ 137,625 $ 129,661 $ 89,400
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
7 1/4% CUMULATIVE
CONVERTIBLE PREFERRED
STOCK COMMON STOCK
---------------------- ------------------------
NUMBER OF NUMBER OF PAID-IN RESTRICTED
SHARES AMOUNT SHARES AMOUNT SURPLUS STOCK
----------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995...................... -- -- 42,613,738 $ 42,614 $ 728,747 $ --
Issuance of stock related to public offering,
net............................................ -- -- 18,400,000 18,400 172,204 --
Issuance of stock related to the acquisitions of
the Samuel Goldwyn and Motion Picture
Corporation of America......................... -- -- 4,715,869 4,716 54,610 --
Issuance of stock related to incentive plans..... -- -- 423,832 423 3,997 (3,174)
Amortization of restricted stock................. -- -- -- -- -- 529
Other comprehensive loss......................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
----------- --------- ----------- ----------- --------- -----------
Balances, December 31, 1996...................... -- -- 66,153,439 66,153 959,558 (2,645)
Issuance of stock related to public offering,
net............................................ 4,140,000 207,000 -- -- (7,558) --
Increase in equity resulting from issuance of
stock by subsidiary............................ -- -- -- -- 35,957 --
Issuance of stock related to the acquisitions of
a minority interest of a subsidiary............ -- -- 250,000 250 2,719 --
Issuance of stock related to incentive plans..... -- -- 1,987,361 1,988 16,596 --
Dividends on 7 1/4% cumulative convertible
preferred stock................................ -- -- -- -- -- --
Amortization of restricted stock................. -- -- -- -- -- 2,645
Other comprehensive loss......................... -- -- -- -- -- --
Net income....................................... -- -- -- -- -- --
----------- --------- ----------- ----------- --------- -----------
Balances, December 31, 1997...................... 4,140,000 207,000 68,390,800 68,391 1,007,272 --
Issuance of stock and stock options related to
incentive plans................................ -- -- 728,041 728 5,522 --
Dividends on 7 1/4% cumulative convertible
preferred stock................................ -- -- -- -- -- --
Other comprehensive loss......................... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
----------- --------- ----------- ----------- --------- -----------
Balances, December 31, 1998...................... 4,140,000 $ 207,000 69,118,841 $ 69,119 $1,012,794 $ --
----------- --------- ----------- ----------- --------- -----------
----------- --------- ----------- ----------- --------- -----------
<CAPTION>
ACCUMULATED OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT INCOME (LOSS) TOTAL
------------ ------------------- ---------
<S> <C> <C> <C>
Balances, December 31, 1995...................... $ (688,106) $ 583 $ 83,838
Issuance of stock related to public offering,
net............................................ -- -- 190,604
Issuance of stock related to the acquisitions of
the Samuel Goldwyn and Motion Picture
Corporation of America......................... -- -- 59,326
Issuance of stock related to incentive plans..... -- -- 1,246
Amortization of restricted stock................. -- -- 529
Other comprehensive loss......................... -- (618) (618)
Net loss......................................... (115,243) -- (115,243)
------------ ------- ---------
Balances, December 31, 1996...................... (803,349) (35) 219,682
Issuance of stock related to public offering,
net............................................ -- -- 199,442
Increase in equity resulting from issuance of
stock by subsidiary............................ -- -- 35,957
Issuance of stock related to the acquisitions of
a minority interest of a subsidiary............ -- -- 2,969
Issuance of stock related to incentive plans..... -- -- 18,584
Dividends on 7 1/4% cumulative convertible
preferred stock................................ (3,709) -- (3,709)
Amortization of restricted stock................. -- -- 2,645
Other comprehensive loss......................... -- (3,331) (3,331)
Net income....................................... 88,443 -- 88,443
------------ ------- ---------
Balances, December 31, 1997...................... (718,615) (3,366) 560,682
Issuance of stock and stock options related to
incentive plans................................ -- -- 6,250
Dividends on 7 1/4% cumulative convertible
preferred stock................................ (15,008) -- (15,008)
Other comprehensive loss......................... -- (2,714) (2,714)
Net loss......................................... (123,670) -- (123,670)
------------ ------- ---------
Balances, December 31, 1998...................... $ (857,293) $ (6,080) $ 425,540
------------ ------- ---------
------------ ------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- --------- -----------
Net income (loss)............................................................ $ (123,670) $ 88,443 $ (115,243)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment.................................... (1,810) (2,526) (618)
Minimum pension liability.................................................. (904) (805) --
----------- --------- -----------
Other comprehensive loss..................................................... (2,714) (3,331) (618)
----------- --------- -----------
Comprehensive income (loss).................................................. $ (126,384) $ 85,112 $ (115,861)
----------- --------- -----------
----------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Metromedia International Group, Inc. ("MMG" or the "Company") and its
wholly-owned subsidiaries, Metromedia International Telecommunications, Inc. and
Snapper, Inc. as of November 1, 1996 (see note 7). All significant intercompany
transactions and accounts have been eliminated.
The Company reports the results of the operations of the Communications Group's
operations in Eastern Europe and the republics of the former Soviet Union, and
the distributable cash flow generated by the telephony systems of China Unicom,
on a three month lag.
For 1998, interest income from unconsolidated investees has been eliminated
against the equity in losses from unconsolidated investees. Amounts reported for
prior years have been reclassified to conform to the 1998 presentation. For
1997, equity in losses and write down in RDM Sports Group, Inc. has been
included in equity in losses and write down of unconsolidated investees.
In July 1997 and April 1998 the Company completed the sales of substantially all
of its entertainment assets and Landmark Theatre Group, Inc., respectively (see
notes 5 and 6). The transactions have been recorded as discontinuances of
business segments. In addition, as of April 1, 1997, for financial statement
reporting purposes, the Company no longer qualified to treat its investment in
RDM as a discontinued operation and the Company has included in its results of
continuing operations the Company's share of the earnings and losses of RDM. On
August 29, 1997, RDM and certain of its affiliates filed a voluntary bankruptcy
petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the Northern District of Georgia (see note 8).
DESCRIPTION OF THE BUSINESS
COMMUNICATIONS GROUP
The Company, through Metromedia International Telecommunications, Inc. and its
majority owned subsidiary Metromedia China Corporation which together is defined
as the "Communications Group", is the owner of various interests in joint
ventures and subsidiaries that are currently in operation or planning to
commence operations in Eastern Europe, the republics of the former Soviet Union,
the People's Republic of China and other selected emerging markets. The
Communications Group consists of two geographic areas, communications and media
businesses in Eastern Europe and the republics of the former Soviet Union, and
in China. The Communications Group's joint ventures in Eastern Europe and the
republics of the former Soviet Union currently offer cellular
telecommunications, fixed telephony, international and long distance telephony,
cable television, paging, and radio broadcasting. The Communications Group's
joint ventures in China provide financing, technical assistance and consulting
services for telecommunications projects. The Communications Group develops
communications businesses in heavily populated areas, primarily in countries
that lack reliable and efficient communications services. The Communications
Group's strategy is to gain early entry into target markets in order to
capitalize on the increasing demand for quality modern communications systems.
F-8
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SNAPPER
Snapper manufacturers Snapper-Registered Trademark- brand premium-priced power
lawnmowers, lawn tractors, garden tillers, snow throwers and related parts and
accessories. The lawnmowers include rear engine riding mowers, front engine
riding mowers or lawn tractors, and self-propelled and push-type walk-behind
mowers. Snapper also manufactures a line of commercial lawn and turf equipment
under the Snapper-Registered Trademark- brand. Snapper provides lawn and garden
products through distribution channels to domestic and foreign retail markets.
A large percentage of the residential and commercial sales of lawn and garden
equipment are made during a 17-week period from early spring to mid-summer.
Although some sales are made to the dealers and distributors prior to and
subsequent to this period, the largest volume of sales to the ultimate consumer
is made during this time. The majority of revenues during the late fall and
winter periods are related to snow thrower shipments.
LIQUIDITY
MMG is a holding company, and accordingly, does not generate cash flows from
operations. The Communications Group is dependent on MMG for significant capital
infusions to fund its operations, its commitments to make capital contributions
and loans to its joint ventures and subsidiaries and any acquisitions. Such
funding requirements are based on the anticipated funding needs of its joint
ventures and subsidiaries and certain acquisitions committed to by the Company.
Future capital requirements of the Communications Group, including future
acquisitions, will depend on available funding from the Company or alternative
sources of financing and on the ability of the Communications Group's joint
ventures and subsidiaries to generate positive cash flows. In addition, Snapper
is restricted under covenants contained in its credit agreement from making
dividend payments or advances to MMG.
In the near-term, the Company intends to satisfy its working capital and capital
commitments with available cash on hand. However, the Communications Group's
businesses in the aggregate are capital intensive and require the investment of
significant amounts of capital in order to construct and develop operational
systems and market its services. As a result, the Company will require
additional financing in order to satisfy its on-going working capital,
acquisition and expansion requirements and to achieve its long-term business
strategies. Such additional capital may be provided through the public or
private sale of equity or debt securities of the Company or by separate equity
or debt financings by the Communications Group or certain companies of the
Communications Group. No assurance can be given that additional financing will
be available to the Company on acceptable terms, if at all. If adequate
additional funds are not available, the Company may be required to curtail
significantly its long term business objectives and the Company's results from
operations may be materially and adversely affected.
Management believes that its long term liquidity needs will be satisfied through
a combination of the Company's successful implementation and execution of its
growth strategy to become a global communications and media company and through
the Communications Group's joint ventures and subsidiaries achieving positive
operating results and cash flows through revenue and subscriber growth and
control of operating expenses.
F-9
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consists of highly liquid instruments with maturities of three
months or less at the time of purchase.
INVESTMENTS
EQUITY METHOD INVESTMENTS
Investments in other companies and joint ventures which are not majority owned,
or which the Company does not control but in which it exercises significant
influence, are accounted for using the equity method. The Company reflects its
net investments in joint ventures under the caption "Investments in and advances
to joint ventures". Generally, under the equity method of accounting, original
investments are recorded at cost and are adjusted by the Company's share of
undistributed earnings or losses of the Joint Venture. Equity in the losses of
the Joint Ventures are recognized according to the percentage ownership in each
Joint Venture until the Company's Joint Venture partner's contributed capital
has been fully depleted. Subsequently, the Company recognizes the full amount of
losses generated by the Joint Venture if it is the principal funding source for
the Joint Venture.
DEBT AND EQUITY SECURITY INVESTMENTS
The Company classifies its investments in debt and equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity. Trading
securities are bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold the securities until maturity. All
other securities not classified as trading or held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in stockholders'
equity. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains and losses, and
declines in value judged to be other-than-temporary on available-for-sale
securities, are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
Management determines the appropriate classification of investments as trading,
held-to-maturity or available-for-sale at the time of purchase and reevaluates
such designation as of each balance sheet date. At December 31, 1998 and 1997,
the Company did not have any debt and equity security investments.
F-10
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Lawn and garden equipment inventories and pager, telephony and cable inventories
are stated at the lower of cost or market. Lawn and garden equipment inventories
are valued utilizing the last-in, first-out (LIFO) method. Pager, telephony and
cable inventories are calculated on the weighted-average method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated over
their expected useful lives. Generally, depreciation is provided on the
straight-line method for financial reporting purposes. Leasehold improvements
are amortized using the straight-line method over the life of the improvements
or the life of the lease, whichever is shorter.
INTANGIBLE ASSETS
Intangible assets are stated at historical cost, net of accumulated
amortization. Intangibles such as broadcasting licenses and frequency rights are
amortized over periods of 20 to 25 years using the straight-line method.
Goodwill has been recognized for the excess of the purchase price over the value
of the identifiable net assets acquired. Such amount is amortized over 25 years
using the straight-line method.
Management continuously monitors and evaluates the realizability of recorded
intangibles to determine whether their carrying values have been impaired. In
evaluating the value and future benefits of intangible assets, their carrying
amount is compared to management's best estimate of undiscounted future cash
flows over the remaining amortization period. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. The
Company believes that the carrying value of recorded intangibles is not impaired
(see note 2).
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangibles are reviewed by the
Company for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount to
undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
F-11
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
COMMUNICATIONS GROUP
The Communications Group and its joint ventures' and subsidiaries' cable, paging
and telephony operations recognize revenues in the period the service is
provided. Installation fees are recognized as revenues upon subscriber hook-up
to the extent installation costs are incurred. Installation fees in excess of
installation costs are deferred and recognized over the length of the related
individual contract. The Communications Group and its joint ventures' and
subsidiaries' radio operations recognize advertising revenue when commercials
are broadcast.
SNAPPER
Sales are recognized when the products are shipped to distributors or dealers. A
provision for estimated warranty costs is recorded at the time of sale and
periodically adjusted to reflect actual experience.
BARTER TRANSACTIONS
In connection with its radio broadcasting business, the Company trades
commercial air time for goods and services used principally for promotional,
sales and other business activities. An asset and a liability are recorded at
the fair market value of the goods or services received. Barter revenue is
recorded and the liability is relieved when commercials are broadcast, and
barter expense is recorded and the assets are relieved when the goods or
services are received or used.
RESEARCH AND DEVELOPMENT AND ADVERTISING COSTS
Research and development and advertising costs are expensed as incurred.
SELF-INSURANCE
The Company is self-insured for workers' compensation, health, automobile,
product and general liability costs for its lawn and garden operation and for
certain former subsidiaries. The self-insurance claim liability is determined
based on claims filed and an estimate of claims incurred but not yet reported.
MINORITY INTERESTS
Recognition of minority interests' share of losses of consolidated subsidiaries
is limited to the amount of such minority interests allocable portion of the
common equity of those consolidated subsidiaries.
INCOME TAXES
The Company accounts for deferred income taxes using the asset and liability
method of accounting. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax
F-12
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Deferred tax assets and
liabilities are measured using rates expected to be in effect when those assets
and liabilities are recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
STOCK OPTION PLANS
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. The Company
discloses the pro forma effect on net income (loss) and earnings per share as
required by Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," of recognizing as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
PENSION AND OTHER POSTRETIREMENT PLANS
Snapper has a defined benefit pension plan covering substantially all of its
collective bargaining unit employees. The benefits are based on years of service
multiplied by a fixed dollar amount and the employee's compensation during the
five years before retirement. The cost of this program is funded currently.
Snapper also sponsors a defined benefit health care plan for substantially all
of its retirees and employees. Snapper measures the costs of its obligation
based on its best estimate. The net periodic costs are recognized as employees
render the services necessary to earn postretirement benefits.
FOREIGN CURRENCY TRANSLATION
The statutory accounts of the Company's consolidated foreign subsidiaries and
joint ventures are maintained in accordance with local accounting regulations
and are stated in local currencies. Local statements are translated into U.S.
generally accepted accounting principles and U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52 ("SFAS 52"), "Accounting for
Foreign Currency Translation."
Under SFAS 52, foreign currency assets and liabilities are generally translated
using the exchange rates in effect at the balance sheet date. Results of
operations are generally translated using the average exchange rates prevailing
throughout the year. The effects of exchange rate fluctuations on translating
foreign currency assets and liabilities into U.S. dollars are accumulated as
part of the foreign currency translation adjustment in stockholders' equity.
Gains and losses from foreign currency transactions are included in net income
in the period in which they occur. Translation differences resulting from the
effect of exchange rate changes on cash and cash equivalents were immaterial and
are not reflected in the Company's consolidated statements of cash flows for
each of the periods presented.
F-13
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Under SFAS 52, the financial statements of foreign entities in highly
inflationary economies are remeasured, in all cases using the U.S. dollar as the
functional currency. U.S. dollar transactions are shown at their historical
value. Monetary assets and liabilities denominated in local currencies are
translated into U.S. dollars at the prevailing period-end exchange rate. All
other assets and liabilities are translated at historical exchange rates.
Results of operations are translated using the monthly average exchange rates.
Transaction differences resulting from the use of these different rates are
included in the accompanying consolidated statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on settlements using present value or other
valuation techniques. These techniques are significantly affected by the
assumptions used, including discount rates and estimates of future cash flows.
In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instruments. Certain financial instruments and all
non-financial instruments are excluded from the disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value to the Company.
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, RECEIVABLES, SHORT-TERM INVESTMENTS, AND ACCOUNTS
PAYABLE
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, short-term investments, current receivables and
accounts payable approximate fair values.
DEBT AND EQUITY SECURITY INVESTMENTS
For debt and equity security investments, fair values are based on quoted
market prices. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities or dealer
quotes.
LONG-TERM DEBT
For long-term debt, fair values are based on quoted market prices, if
available. If the debt is not traded, fair value is estimated based on the
present value of expected cash flows. See note 4 for the fair values of
long-term debt.
F-14
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE OF COMMON STOCK
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
specifies the computation, presentation and disclosure requirements for earnings
per share. Statement 128 requires the presentation of basic earnings per share
and diluted earnings per share.
Basic earnings per share excludes all dilutive securities. It is based upon the
weighted average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that would occur if
securities to issue common stock were exercised or converted into common stock.
In calculating diluted earnings per share, no potential shares of common stock
are to be included in the computation when a loss from continuing operations
available to common stockholders exists. For the years ended December 31, 1998,
1997, and 1996 the Company had losses from continuing operations.
The computation of basic earnings per share for the years ended December 31,
1998, 1997 and 1996 is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
<S> <C> <C> <C>
1998:
Loss from continuing operations.......................................... $ (135,986)
Less: Preferred stock dividend requirement............................... 15,008
------------
Loss from continuing operations attributable to common stockholders...... $ (150,994) 68,955 $ (2.19)
------------ ------ -----------
------------ ------ -----------
1997:
Loss from continuing operations.......................................... $ (130,901)
Less: Preferred stock dividend requirement............................... 4,336
------------
Loss from continuing operations attributable to common stockholders...... $ (135,237) 66,961 $ (2.02)
------------ ------ -----------
------------ ------ -----------
1996:
Loss from continuing operations.......................................... $ (72,146) 54,293 $ (1.33)
------------ ------ -----------
------------ ------ -----------
</TABLE>
The Company had for the years ended December 31, 1998, 1997 and 1996,
potentially dilutive shares of common stock of 19,003,000, 19,673,000, and
6,381,000, respectively (see note 10).
F-15
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS, LIQUIDITY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of the
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Estimates are used when accounting for the allowance for doubtful accounts,
inventory obsolescence, long-lived assets, intangible assets, product warranty
expenses, self-insured workers' compensation and product liability claims,
depreciation and amortization, employee benefit plans, income taxes and
contingencies, among others. The Company reviews all significant estimates
affecting its consolidated financial statements on a recurring basis and records
the effect of any necessary adjustment prior to their publication. Uncertainties
with respect to such estimates and assumptions are inherent in the preparation
of the Company's consolidated financial statements; accordingly, it is possible
that actual results could differ from those estimates and changes to estimates
could occur in the near term.
2. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION
The Communications Group records its investments in other companies and joint
ventures which are less than majority-owned, or which the Company does not
control but in which it exercises significant influence, at cost, net of its
equity in earnings or losses. Advances to the joint ventures under the line of
credit agreements between the Company or one of its subsidiaries and the joint
ventures is reflected based on amounts recoverable under the credit agreement,
plus accrued interest.
Advances are made to joint ventures and subsidiaries in the form of cash, for
working capital purposes and for payment of expenses or capital expenditures, or
in the form of equipment purchased on behalf of the joint ventures. Interest
rates charged to the joint ventures and subsidiaries range from prime rate to
prime rate plus 6%. The credit agreements generally provide for the payment of
principal and interest from 90% of the joint ventures' and subsidiaries'
available cash flow, as defined, prior to any substantial distributions of
dividends to the joint venture partners. The Communications Group has entered
into charter fund and credit agreements with its joint ventures and subsidiaries
to provide up to $212.1 million in funding of which $49.4 million in funding
obligations remain at December 31, 1998. The Communications Group's funding
commitments are contingent on its approval of the joint ventures' and
subsidiaries' business plans.
When the Communications Group entered the paging business, the price for
cellular communication was significantly higher than for its paging services
which were a viable, low cost alternative to GSM cellular telephony. At such
time, customers could receive messages and information via the pager at a
fraction of the cost of GSM cellular service. The paging business is now
operating in an increasingly competitive environment. The most significant
impact has been the accelerated growth of GSM use in those markets in which the
Company has paging operations. In the past two years the number of GSM
subscribers has significantly increased in Europe generally and in many parts of
Central and Eastern Europe in particular.
The Communications Group recognized this competitive risk during 1997 and 1998
and in response rolled out its own programs to reposition its paging services in
a unique fashion. Such programs as calling party pays and "web paging" were
introduced as new applications.
F-16
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
During the fourth quarter of 1998 the Company determined that its marketing
programs had failed to reposition its paging services and that it would not be
able to effectively compete for its traditional paging customers in those
markets where GSM is combined with calling party pays tariffs and prepaid
calling cards. Since its operating and marketing initiatives failed to diminish
the effects of the increased competition, the paging operations continued to
generate operating losses in 1998. In the current environment, the potential for
growth in most of the markets the Communications Group paging operations
competes in is limited. Consistent with the Company's strategy to maximize value
for the capital employed, the Communications Group has developed a revised
operating plan to stabilize its paging operations. Accordingly, the
Communications Group has evaluated each of its paging properties, revised
operating plans and determined that a write down of the carrying value of its
investment is appropriate.
Under the revised plan, the Communications Group intends to manage its paging
business to a cash flow break even level that will not require significant
additional funding for its operations. The Company has determined that the
Communications Group's estimated future undiscounted cash flows from the revised
plan are below the carrying value of the Communications Group's long-lived
assets, and has adjusted the carrying value of these long-lived assets to zero
based on its expectation of break even future cash flows. As a result of the
revised plan, the Company has taken a non-cash, nonrecurring charge on its
paging assets of $49.9 million, which includes a $35.9 million write off of
goodwill and other intangibles. The non-cash, nonrecurring charge adjusted the
carrying value of goodwill and other intangibles, fixed assets of $4.4 million
and investments in and advances to joint ventures of $5.4 million and wrote down
inventory of $4.2 million. The write down relates to both consolidated joint
ventures and subsidiaries and joint ventures recorded under the equity method.
The Company has adjusted its investments in certain paging operations which are
recorded under the equity method to zero and does not intend to provide
significant additional funding to these equity investees, and unless it provides
future funding will no longer record its proportionate share of any future net
losses of these investees.
The Communications Group believes that its paging businesses in Moscow, Ukraine
and Uzbekistan are relatively unaffected by the GSM competition and continue to
be viable business opportunities and have not been written down. Although GSM is
available in those markets, the Company believes that the regulators are
unlikely to allow calling party pays tariffs for the foreseeable future.
In addition, during the fourth quarter of 1998, pager inventory of $1.5 million
and $2.7 million of material relating to a promotional campaign in Romania was
written off which is included in the cost of sales in the Company's consolidated
results of operations for the year ended December 31, 1998.
F-17
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
At December 31, 1998 and 1997, the Communications Group's unconsolidated
investments in the joint ventures in Eastern Europe and the republics of the
former Soviet Union, at cost, net of adjustments for its equity in earnings or
losses, and distributions were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR YEAR
VENTURE OPERATIONS
NAME 1998 1997 OWNERSHIP % FORMED COMMENCED
- ------------------------------------------------------------- --------- --------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
CELLULAR TELECOMMUNICATIONS
Baltcom GSM, Latvia (1)...................................... $ 9,817 $ 11,996 22% 1996 1997
Magticom, Georgia (1)........................................ 13,048 6,951 35% 1996 1997
--------- ---------
22,865 18,947
--------- ---------
FIXED TELEPHONY
Instaphone, Kazakhstan (2)................................... 1,168 684 50% 1998 1998
--------- ---------
INTERNATIONAL AND LONG DISTANCE TELEPHONY
Telecom Georgia, Georgia..................................... 5,922 6,080 30% 1994 1994
--------- ---------
CABLE TELEVISION
Kosmos TV, Moscow, Russia.................................... 1,385 (123) 50% 1991 1992
Baltcom TV, Riga, Latvia..................................... 4,003 6,093 50% 1991 1992
Ayety TV, Tbilisi, Georgia................................... 3,045 3,732 49% 1991 1993
Kamalak TV, Tashkent, Uzbekistan............................. 2,976 2,824 50% 1992 1993
Sun TV, Chisinau, Moldova.................................... 4,731 4,671 50% 1993 1994
Cosmos TV, Minsk, Belarus.................................... 2,934 2,135 50% 1993 1996
Alma TV, Almaty, Kazakhstan.................................. 5,994 2,597 50% 1994 1995
Teleplus, St. Petersburg, Russia (2)......................... 1,941 1,093 45% 1996 1998
--------- ---------
27,009 23,022
--------- ---------
PAGING
Baltcom Plus, Latvia (3)..................................... -- 1,232 50% 1994 1995
Paging One, Georgia (3)...................................... -- 1,037 45% 1993 1994
Raduga Poisk, Nizhny Novgorod, Russia (3).................... -- 549 45% 1993 1994
PT Page, St. Petersburg, Russia (3).......................... -- 1,006 40% 1994 1995
Paging Ajara, Batumi, Georgia (3)............................ -- 277 35% 1996 1997
Kazpage, Kazakhstan (3) (4).................................. -- 864 26-41% 1996 1997
Kamalak Paging, Tashkent, Uzbekistan......................... 2,260 2,243 50% 1992 1993
Alma Page, Almaty, Kazakhstan (3)............................ -- 1,936 50% 1994 1995
Mobile Telecom, Russia (5)................................... 7,405 -- 50% 1998 1998
--------- ---------
9,665 9,144
--------- ---------
</TABLE>
F-18
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
<TABLE>
<CAPTION>
YEAR YEAR
VENTURE OPERATIONS
NAME 1998 1997 OWNERSHIP % FORMED COMMENCED
- ------------------------------------------------------------- --------- --------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
RADIO BROADCASTING
Radio Katusha, St. Petersburg, Russia (6).................... -- 971 75% 1993 1995
Radio Nika, Socci, Russia.................................... 244 337 51% 1995 1995
AS Trio LSL, Estonia......................................... 1,903 1,593 49% 1997 1997
--------- ---------
2,147 2,901
--------- ---------
OTHER
Trunked mobile radio ventures (7)............................ -- 6,150
--------- ---------
PRE-OPERATIONAL (8)
ATK, Archangelsk, Russia (9)................................. 1,746 -- 81% 1998 --
Tyumenruskom, Russia......................................... 2,228 -- 46% 1998 --
Caspian American Telecom, Azerbaijian........................ 5,488 -- 38% 1998 --
Telephony related ventures and equipment..................... 2,612 9,003
Other........................................................ 6,313 10,511
--------- ---------
18,387 19,514
--------- ---------
TOTAL........................................................ $ 87,163 $ 86,442
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) In August 1998, the Communications Group increased its ownership at Baltcom
GSM from 21% to 22% and in Magticom from 34% to 35%.
(2) Included in pre-operational at December 31, 1997.
(3) Investment balance reflects write down of investment.
(4) Kazpage is comprised of a service entity and 10 paging joint ventures. The
Company's interest in the paging joint ventures ranges from 26% to 41% and
its interest in the service entity is 51%.
(5) In January 1998, the Communications Group signed a definitive agreement to
purchase 50% of Mobile Telecom. The purchase closed during June 1998 at a
price of $7.0 million plus two future contingent payments of $2.5 million
each, to be adjusted up or down based on performance of the business.
Simultaneously with the purchase of Mobile Telecom, the Company purchased a
50% interest in a paging distribution company for $500,000. Approximately
$7.0 million of the purchase price was allocated to goodwill.
(6) In November 1997, the Communications Group purchased an additional interest
in Radio Katusha, increasing its ownership to 75%. This joint venture is now
consolidated.
(7) In July 1998, the Communications Group sold its investment in Protocall
Ventures Limited. The Company's interest in Spectrum, a trunked mobile radio
venture in Kazakhstan, was written off during the fourth quarter of 1998.
(8) At December 31, 1998 and 1997, amounts disbursed for proposed joint
ventures, pre-operational joint ventures and amounts expended for equipment
for future wireless local loop projects are included in pre-operational
joint ventures.
(9) The investment in this joint venture was made in the quarter ended December
31, 1998. The joint venture's results of operations will be consolidated
with the Company's financial statements in the quarter ended March 31, 1999.
Summarized combined balance sheet financial information of unconsolidated joint
ventures as of September 30, 1998 and 1997 and combined statement of operations
financial information for the years
F-19
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
ended September 30, 1998, 1997 and 1996 accounted for under the equity method
that have commenced operations as of the dates indicated are as follows (in
thousands):
COMBINED INFORMATION OF UNCONSOLIDATED JOINT VENTURES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Assets:
Current assets.......................................................................... $ 34,617 $ 30,563
Investments in systems and equipment.................................................... 111,114 84,875
Other assets............................................................................ 7,103 9,758
---------- ----------
Total assets........................................................................ $ 152,834 $ 125,196
---------- ----------
---------- ----------
Liabilities and Joint Ventures' Deficit:
Current liabilities..................................................................... $ 31,934 $ 28,280
Amount payable under credit facility.................................................... 66,574 50,692
Other long-term liabilities............................................................. 82,314 49,232
---------- ----------
180,822 128,204
Joint ventures' deficit................................................................. (27,988) (3,008)
---------- ----------
Total liabilities and joint ventures' deficit....................................... $ 152,834 $ 125,196
---------- ----------
---------- ----------
</TABLE>
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues...................................................................... $ 98,709 $ 70,418 $ 44,800
Costs and Expenses:
Cost of sales and operating expenses........................................ 26,697 17,619 15,490
Selling, general and administrative......................................... 50,082 35,860 25,381
Depreciation and amortization............................................... 25,768 14,348 8,039
Other....................................................................... (5) 30 1,674
--------- --------- ---------
Total expenses.......................................................... 102,542 67,857 50,584
--------- --------- ---------
Operating income (loss)..................................................... (3,833) 2,561 (5,784)
Interest expense............................................................ (13,521) (6,339) (3,883)
Other loss.................................................................. (2,384) (2,689) (391)
Foreign currency transactions............................................... (4,055) (2,757) (425)
--------- --------- ---------
Net loss.................................................................... $ (23,793) $ (9,224) $ (10,483)
--------- --------- ---------
--------- --------- ---------
</TABLE>
For the years ended December 31, 1998, 1997 and 1996 the results of operations
presented above are before the elimination of intercompany interest. Financial
information for joint ventures which are not yet operational is not included in
the above summary.
F-20
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
The following tables represent summary financial information for all operating
entities being grouped as indicated as of and for the years ended December 31,
1998, 1997 and 1996. For the years ended December 31, 1998, 1997 and 1996 the
results of operations presented below are before the elimination of intercompany
interest (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL
AND LONG
CELLULAR TELE- FIXED DISTANCE CABLE RADIO
COMMUNICATIONS TELEPHONY TELEPHONY TELEVISION PAGING BROADCASTING OTHER (2) TOTAL
-------------- --------- ------------- ---------- -------- ------------ --------- --------
CONSOLIDATED SUBSIDIARIES
AND JOINT VENTURES (1)
Revenues................. $-- $ -- $-- $ 3,444 $ 4,204 $17,081 $ 3,200 $ 27,929
Depreciation and
amortization........... -- -- -- 1,541 1,591 1,228 481 4,841
Operating income
(loss)................. -- -- -- (1,475) (20,632) 1,171 (186) (21,122)
Interest income.......... -- -- -- -- 13 363 29 405
Interest expense......... -- -- -- 942 1,721 480 106 3,249
Net loss................. -- -- -- (2,720) (22,872) (1,546) (364) (27,502)
Assets................... -- -- -- 7,289 3,629 19,564 12,535 43,017
Capital expenditures..... -- -- -- 760 2,278 1,099 -- 4,137
UNCONSOLIDATED JOINT
VENTURES
Revenues................. $ 22,091 $ 30 $27,187 $ 27,996 $ 16,222 $ 2,134 $ 3,049 $ 98,709
Depreciation and
amortization........... 9,384 13 1,927 12,056 1,570 212 606 25,768
Operating income
(loss)................. (5,665) (403) 7,849 (3,737) 633 (125) (2,385) (3,833)
Interest income.......... 2 -- 14 4 3 -- -- 23
Interest expense......... 6,831 96 375 4,538 851 15 815 13,521
Net income (loss)........ (12,821) (495) 5,333 (8,985) (3,384) (221) (3,220) (23,793)
Assets................... 75,629 1,105 25,599 33,363 13,098 1,320 2,720 152,834
Capital expenditures..... 31,781 652 2,062 12,047 2,204 328 3,278 52,352
Net investment in joint
ventures............... 22,865 1,168 5,922 27,009 9,665 2,147 -- 68,776
Equity in income (losses)
of unconsolidated
investees.............. (5,867) (515) 1,600 (3,877) (7,460) (108) (884) (17,111)
</TABLE>
F-21
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL
AND LONG
CELLULAR TELE- DISTANCE CABLE RADIO
COMMUNICATIONS TELEPHONY TELEVISION PAGING BROADCASTING OTHER (2) TOTAL
--------------- ------------- ----------- --------- ------------- ----------- ---------
CONSOLIDATED SUBSIDIARIES AND JOINT
VENTURES (1)
Revenues........................... $ -- $ -- $ 1,902 $ 3,318 $ 13,549 $ 598 $ 19,367
Depreciation and amortization...... -- -- 791 790 607 89 2,277
Operating income (loss)............ -- -- (1,953) (4,084) 3,935 145 (1,957)
Interest income.................... -- -- 5 66 146 22 239
Interest expense................... -- -- 577 683 387 -- 1,647
Net income (loss).................. -- -- (2,654) (5,198) 1,356 167 (6,329)
Assets............................. -- -- 8,148 8,132 15,073 6,581 37,934
Capital expenditures............... -- -- 1,423 1,895 238 -- 3,556
UNCONSOLIDATED JOINT VENTURES
Revenues........................... $ 2,587 $ 30,866 $ 21,412 $ 9,681 $ 2,466 $ 3,406 $ 70,418
Depreciation and amortization...... 2,380 1,287 8,857 840 92 892 14,348
Operating income (loss)............ (6,761) 17,244 (4,878) 179 247 (3,470) 2,561
Interest income.................... 12 31 4 4 6 -- 57
Interest expense................... 1,046 382 3,569 800 82 460 6,339
Net income (loss).................. (8,129) 14,030 (9,875) (1,318) 121 (4,053) (9,224)
Assets............................. 53,495 27,558 28,470 9,869 1,564 4,240 125,196
Capital expenditures............... 42,276 8,331 8,244 943 501 2,560 62,855
Net investment in joint ventures... 18,947 6,080 23,022 9,144 2,901 6,150 66,244
Equity in income (losses) of
unconsolidated investees......... (2,027) 4,209 (7,212) (761) 159 (1,601) (7,233)
</TABLE>
F-22
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTERNATIONAL
AND LONG
DISTANCE CABLE RADIO
TELEPHONY TELEVISION PAGING BROADCASTING OTHER TOTAL
------------- ----------- --------- ------------- --------- ---------
CONSOLIDATED SUBSIDIARIES AND JOINT VENTURES (1)
Revenues.............................................. $ -- $ 170 $ 2,880 $ 9,363 $ -- $ 12,413
Depreciation and amortization......................... -- 302 461 174 -- 937
Operating income (loss)............................... -- (832) (427) 2,102 -- 843
Interest income....................................... -- -- 81 90 -- 171
Interest expense...................................... -- 116 270 177 -- 563
Net income (loss)..................................... -- (1,216) (1,209) 1,468 -- (957)
Assets................................................ -- 2,017 3,232 3,483 -- 8,732
Capital expenditures.................................. -- 1,813 443 555 -- 2,811
UNCONSOLIDATED JOINT VENTURES
Revenues.............................................. $ 19,177 $ 15,073 $ 7,984 $ 1,536 $ 1,030 $ 44,800
Depreciation and amortization......................... 617 5,662 1,184 83 493 8,039
Operating income (loss)............................... 3,122 (5,158) (516) (1,823) (1,409) (5,784)
Interest income....................................... -- -- 3 -- -- 3
Interest expense...................................... 65 2,569 769 257 223 3,883
Net income (loss)..................................... 2,997 (7,954) (1,687) (2,149) (1,690) (10,483)
Assets................................................ 13,815 25,221 9,597 642 8,345 57,620
Capital expenditures.................................. 2,096 6,131 2,996 234 -- 11,457
Net investment in joint ventures...................... 2,704 23,662 9,869 796 2,049 39,080
Equity in income (losses) of unconsolidated
investees........................................... 899 (5,011) (1,232) (1,896) (595) (7,835)
</TABLE>
- ------------------------------
(1) Does not reflect the Communications Group's and Protocall's headquarters
revenue and selling, general and administrative expenses for the years ended
December 31, 1998, 1997 and 1996, respectively.
(2) Other includes the results of Protocall Ventures, the Communications Group's
trunked mobile radio operations, consolidated and unconsolidated joint
ventures and subsidiaries through the six months ended June 30, 1998 and the
results of Spectrum through the year ended December 31, 1998.
In December 1998, the Communications Group purchased an 81% interest in ATK, a
cable television joint venture in the Archangelsk region of Russia.
F-23
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
In November 1998, the Communications Group announced its investment in a fixed
mobile cellular telephone system in the regions of Tyumen and Tobolsk, Russia.
The Communications Group has agreed to make a $1.7 million equity contribution
to its joint venture, Tyumenruskom, and to lend the joint venture up to $4.0
million for start-up costs and other operating expenses. Tyumenruskom also
intends to provide wireless local loop telephone services.
In August 1998, the Communications Group formed a venture to acquire a 76%
interest in Omni-Metromedia Caspian, Ltd., a company that owns 50% of a joint
venture in Azerbaijan, Caspian American Telecommunications, LLC. Caspian
American has been licensed by the Ministry of Communications of Azerbaijan to
provide high speed wireless local loop services and digital switching throughout
Azerbaijan. Omni-Metromedia has committed to provide up to $40.5 million in
loans to Caspian American for the funding of equipment acquisition and
operational expenses in accordance with Caspian American's business plans.
In July 1998 the Communications Group sold its share of Protocall Ventures
Limited. As part of the transaction, Protocall Ventures repaid the outstanding
amount of its debt to the Communications Group. The Company recorded a gain on
the sale of Protocall Ventures of approximately $7.1 million. The Company has
written down the carrying value of its remaining trunked mobile radio investment
at December 31, 1998. The write off of $1.6 million is offset against the gain
on the sale of Protocall Ventures.
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (SEE NOTE 17)
In February 1997, Metromedia China, a subsidiary of the Company with telephony
interests in China, acquired Asian American Telecommunications Corporation
pursuant to a business combination agreement in which Metromedia China and Asian
American Telecommunications agreed to combine their businesses and operations.
Pursuant to the agreement, each Asian American Telecommunications shareholder
and warrant holder exchanged (i) one share of Asian American Telecommunications
common stock for one share of Metromedia China common stock, par value $.01 per
share, (ii) one warrant to acquire one share of Asian American
Telecommunications common stock at an exercise price of $4.00 per share for one
warrant to acquire one share of Metromedia China common stock at an exercise
price of $4.00 per share and (iii) one warrant to acquire one share of Asian
American Telecommunications common stock at an exercise price of $6.00 per share
for one warrant to acquire one share of Metromedia China common stock at an
exercise price of $6.00 per share. Asian American Telecommunications is engaged
in providing funding, consultation and support services to Chinese operators
undertaking development and construction of communications services in China.
The transaction was accounted for as a purchase, with Metromedia China as the
acquiring entity.
As a condition to the closing of the agreement, Metromedia International
Telecommunications purchased from Metromedia China, for an aggregate purchase
price of $10.0 million, 3,000,000 shares of Metromedia China class A common
stock, par value $.01 per share and warrants to purchase an additional 1,250,000
shares of Metromedia China Class A common stock, at an exercise price of $6.00
per share. Shares of Metromedia China Class A common stock are identical to
shares of Metromedia China common stock except that they are entitled, when
owned by Metromedia International Telecommunications, to three votes per share
on all matters voted upon by Metromedia China's stockholders and to vote as a
separate class to elect six of the ten members to Metromedia China's
F-24
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (SEE NOTE 17)
(CONTINUED)
board of directors. The securities received by the Communications Group are not
registered under the Securities Act, but have certain demand and piggyback
registration rights as provided in the stock purchase agreement. As a result of
the transaction Metromedia International Telecommunications owned 56.5% of
Metromedia China's outstanding common stock with 79.6% voting rights.
Subsequently, additional shares were purchased from a minority shareholder,
increasing the ownership percentage to 58.4% with 80.4% of the voting rights.
The purchase price of the Asian American Telecommunications transaction was
determined to be $86.0 million. The excess of the purchase price over the fair
value of the net tangible assets acquired was $69.0 million. This has been
recorded as goodwill and is being amortized on a straight-line basis over 25
years. The amortization of such goodwill for the year ended December 31, 1997
was approximately $2.3 million. The purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Current assets..................................................... $ 46
Property, plant and equipment...................................... 279
Investments in Joint Ventures...................................... 18,950
Goodwill........................................................... 68,975
Current liabilities................................................ (2,202)
Other liabilities.................................................. (5)
---------
Purchase price..................................................... $ 86,043
---------
---------
</TABLE>
The difference between the Company's investment balance of $18.6 million in
Metromedia China prior to the acquisition of Asian American Telecommunications
and 56.52% of the net equity of Metromedia China subsequent to the acquisition
of Asian American Telecommunications of $53.7 million was recorded as an
increase to paid-in surplus of $35.1 million in the consolidated statements of
stockholders' equity.
At December 31, 1998 and 1997, the Company's investments in the joint ventures
in China, at cost, net of adjustments for its equity in earnings or losses and
distributions, were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR YEAR
VENTURE OPERATIONS
NAME 1998 1997 OWNERSHIP % FORMED COMMENCED
- ------------------------------------------------------ --------- --------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Sichuan Tai Li Feng Telecommunications Co., Ltd.
("Sichuan JV")...................................... $ 19,292 $ 10,946 92% 1996 1999
Chongqing Tai Le Feng Telecommunications Co., Ltd.
("Chongqing JV").................................... 15,504 7,425 92% 1997 1999
Ningbo Ya Mei Telecommunications Co., Ltd. ("Ningbo
JV")................................................ 29,741 27,480 70% 1996 1997
Ningbo Ya Lian Telecommunications Co., Ltd. ("Ningbo
JV II")............................................. 7,022 -- 70% 1998 1998
--------- ---------
$ 71,559 $ 45,851
--------- ---------
--------- ---------
</TABLE>
The joint ventures participate in cooperation contracts with China Unicom that
entitle the joint ventures to certain percentages of the projects' distributable
cash flows. The joint ventures amortize the contributions to these cooperation
contracts over the cooperation periods of benefit (15 to 25 years).
F-25
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (SEE NOTE 17)
(CONTINUED)
(A) SICHUAN JV
On May 21, 1996, Asian American Telecommunications, an indirect majority-owned
subsidiary of the Company, entered into a Joint Venture Agreement with China
Huaneng Technology Development Corp. for the purpose of establishing Sichuan Tai
Li Feng Telecommunications Co., Ltd., known as Sichuan JV. Also on May 21, 1996,
Sichuan JV entered into a network systems cooperation contract with China
Unicom. The contract covers the funding, construction and development of a fixed
line public switched telephone network providing local telephone service in
cities within Sichuan Province and long distance telephone service among those
cities. The initial project covered by the contract includes development of
50,000 local telephone lines in Chengdu and Chongqing cities, and construction
of a fiber optic long distance facility between these two cities. Subsequent
projects covered by the contract and the existing and future joint ventures may
expand services to one million local telephone lines in cities throughout
Sichuan Province, and to construct fiber optic long distance facilities among
these cities. The contract has a cooperation term of twenty-five years.
Under the contract, China Unicom will be responsible for the construction and
operation of the Sichuan network, while Sichuan JV will provide financing and
consulting services for the project. Distributable cash flows, as defined in the
contract, are to be distributed 22% to China Unicom and 78% to Sichuan JV
throughout the term of the contract. Sichuan JV holds non-transferable title to
all assets acquired or constructed with the funds that it provides to China
Unicom, except for any assets used to provide inter-city long distance service,
title to which immediately passes to China Unicom. On the tenth anniversary of
completion of the Sichuan network's initial phase, title to assets held by
Sichuan JV will transfer to China Unicom. Sichuan JV and China Unicom consider
the cost of all assets acquired or constructed with investment funds from
Sichuan JV to be part of Sichuan JV's contribution to the contract, regardless
of whether Sichuan JV holds title to such assets.
The total amount to be invested in Sichuan JV is $29.5 million with equity
contributions from its shareholders amounting to $12.0 million. Asian American
Telecommunications has made capital contributions to Sichuan JV of $11.1 million
of its total $11.4 million contribution and China Huaneng has contributed
$600,000. The remaining investment will be in the form of up to $17.5 million of
loans from Asian American Telecommunications, plus deferred payment credit from
the manufacturers of the equipment used in construction of the Sichuan network.
As of December 31, 1998, Asian American Telecommunications had loans outstanding
to Sichuan JV in the amount of $9.3 million. These loans bear interest at 10%
per annum. Ownership of the Sichuan JV is 92% by Asian American
Telecommunications and 8% by China Huaneng.
Asian American Telecommunications also has a consulting contract with China
Huaneng covering the latter's assistance with operations in China. Under the
contract, Asian American Telecommunications is obligated to pay China Huaneng an
annual consulting fee of RMB 15.0 million (U.S. $1.8 million at December 31,
1998 exchange rates).
(B) CHONGQING JV
In May 1997, Chongqing Municipality was made a separate region from Sichuan
Province administered directly by the Chinese government. In an amendment to the
original network systems cooperation contract, China Unicom agreed to recognize
Chongqing Municipality as being covered by the terms of that contract, thereby
explicitly extending Sichuan JV's rights and obligations under that contract to
include the newly independent Chongqing Municipality, including rights and
obligations for any long
F-26
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (SEE NOTE 17)
(CONTINUED)
distance services developed by China Unicom between cities in Chongqing
Municipality and those of Sichuan Province. On September 9, 1997, Asian American
Telecommunications entered into a Joint Venture Agreement with China Huaneng for
the purpose of establishing Chongqing JV. Sichuan JV and Chongqing JV entered
into an agreement whereby Chongqing JV assumed the rights and obligations of
Sichuan JV under the contract, as amended, that relate to financing of and
consulting services for those portions of the originally contemplated Sichuan
network that would now lie within Chongqing Municipality. Rights and obligations
under the contract, as amended, that relate to financing and consulting services
for those portions of the originally contemplated Sichuan network lying within
the redefined boundaries of Sichuan Province would remain with Sichuan JV.
The total amount to be invested in Chongqing JV is $29.5 million with registered
capital contributions from its shareholders amounting to $14.8 million. Asian
American Telecommunications has made capital contributions of $13.6 million of
its total $14.1 million contribution and China Huaneng has contributed $740,000.
The remaining investment in Chongqing JV will be in the form of up to $14.7
million of loans from Asian American Telecommunications plus deferred payment
credit from the manufacturers of the equipment used in construction of the
Chongqing Network. As of December 31, 1998, Asian American Telecommunications
had loans outstanding to Chongqing JV in the amount of $2.5 million. The loans
bear interest at 10% per annum. Ownership in Chongqing JV is 92% by Asian
American Telecommunications and 8% by China Huaneng.
Commercial operations were launched on the Chongqing network and Sichuan network
in January 1999.
(C) NINGBO JV
Asian American Telecommunications entered into a Joint Venture Agreement with
Ningbo United Telecommunications Investment Co., Ltd. on September 17, 1996 for
the purpose of establishing Ningbo Ya Mei Telecommunications Co., Ltd., known as
Ningbo JV. Previously Ningbo United had entered into a Network System
Cooperation Contract with China Unicom covering development of a GSM
telecommunications project in the City of Ningbo, Zhejiang Province, for China
Unicom. The project entails construction of a mobile communications network with
a total capacity of 50,000 subscribers. China Unicom constructed and operates
the network. Under the Ningbo United contract, Ningbo United is to provide
financing and consulting services to China Unicom. The cooperation period for
the Ningbo United contract is fifteen years.
With the formation of Ningbo JV, Ningbo United assigned all of its rights and
obligations under the Ningbo United contract to Ningbo JV. This assignment of
rights and obligations was explicitly ratified by China Unicom in an amendment
to the Ningbo United contract. Ningbo United also agreed to assign rights of
first refusal on additional telecommunications projects to Ningbo JV in the
event such rights are granted to Ningbo United by China Unicom. Distributable
cash flows, as defined in the amended Ningbo United contract, are to be
distributed 27% to China Unicom and 73% to Ningbo JV throughout the contract's
cooperation period. Under the amended Ningbo United contract, Ningbo JV will
hold non-transferable title to 70% of all assets acquired or constructed by
China Unicom with investment funds provided by Ningbo JV. Ningbo JV's title to
these assets will transfer to China Unicom as Ningbo JV's funding of the assets
is returned by distributions from China Unicom. Ningbo JV and China Unicom
consider the cost of all assets acquired with funding from Ningbo JV to be part
F-27
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (SEE NOTE 17)
(CONTINUED)
of Ningbo JV's contribution to the Ningbo United contract, regardless of whether
Ningbo JV holds title to such assets.
The initial amount to be invested in Ningbo JV was $29.5 million with registered
capital contributions from its investors amounting to $11.9 million. Asian
American Telecommunications has currently provided $8.3 million in capital
contributions, representing 70% of Ningbo JV's registered capital. Ningbo United
provided $3.6 million of registered capital contributions to Ningbo JV,
representing 30% of Ningbo JV's equity. Ningbo JV has arranged loans with Asian
American Telecommunications, manufacturers of the equipment for the project and
banks. As of December 31, 1998, Asian American Telecommunications had long term
loans to Ningbo JV in the amount of $23.0 million. A substantial portion of
these loans was incurred to refinance previous loans from manufacturers. These
loans bear interest at 10% per annum. Ownership in Ningbo JV is 70% by Asian
American Telecommunications and 30% by Ningbo United.
(D) NINGBO JV II
On March 26, 1998, Ningbo JV and China Unicom signed an amendment to the
original Ningbo contract covering expansion of China Unicom's GSM service
throughout Ningbo Municipality. The expansion is being undertaken as a separate
project, and provides capacity for an additional 25,000 GSM subscribers within
Ningbo Municipality. The feasibility study for the expansion project was
completed on March 6, 1998 and forecasts a total budget of approximately $17.0
million. The terms of the Ningbo expansion agreement match those of the
underlying Ningbo United contract, except that the Ningbo expansion agreement
will have its own cooperation period of fifteen years. In the Ningbo expansion
agreement, China Unicom and Ningbo JV explicitly contemplated establishment of a
separate joint venture to provide financing and consulting services to the
expansion project.
Pursuant to the Ningbo expansion agreement, Asian American Telecommunications
and Ningbo United entered into a second Joint Venture Agreement and formed
Ningbo Ya Lian Telecommunications Co., Ltd, known as Ningbo JV II. In an
amendment to the Ningbo expansion agreement dated July 8, 1998, China Unicom and
Ningbo JV agreed to assign all rights and obligations originally held by Ningbo
JV under the Ningbo expansion agreement to Ningbo JV II.
The total amount to be invested in Ningbo JV II is $18.0 million with registered
capital contributions from its investors amounting to $7.2 million. As of
December 31, 1998, Asian American Telecommunications had made its $5.0 million
registered capital contribution, and Ningbo United had made its $2.2 million
registered capital contribution. The remaining investment in Ningbo JV II beyond
planned registered capital contributions from its investors will be in the form
of up to $10.8 million of loans from Asian American Telecommunications plus
deferred payment credit from the manufacturers of the equipment used in
construction of the expansion network. As of December 31, 1998, Asian American
Telecommunications had loans outstanding to Ningbo JV II in the amount of $2.0
million. This loan bears interest at 8% per annum. Ownership in Ningbo JV II is
70% by Asian American Telecommunications and 30% by Ningbo United.
Commercial services commenced on the completed portions of the Ningbo expansion
in November 1998. The network was fully completed and in service in February
1999.
F-28
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (SEE NOTE 17)
(CONTINUED)
The following tables represent summary financial information for the joint
ventures and their related projects in China as of and for the years ended
December 31, 1998 and 1997, respectively (in thousands, except subscribers):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NINGBO SICHUAN CHONGQING
NINGBO JV JV II JV JV TOTAL
----------- ----------- --------- ----------- ---------
Revenues.................................................. $ 3,429 $ -- $ -- $ 54 $ 3,483
Depreciation and amortization............................. 2,418 -- 38 206 2,662
Operating income (loss)................................... 707 (46) (691) (630) (660)
Interest income (expense), net............................ (2,584) (1) (363) 41 (2,907)
Net loss.................................................. (1,877) (47) (1,054) (589) (3,567)
Assets.................................................... 33,864 9,856 20,570 16,885 81,175
Net investment in project 31,332 6,399 17,028 9,491 64,250
Equity in income (losses) of joint ventures 133 (27) (632) (514) (1,040)
Subscribers 44,477 -- -- -- 44,477
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------
<S> <C> <C> <C> <C>
NINGBO SICHUAN CHONGQING
JV JV JV TOTAL
----------- --------- ----------- ---------
Revenues............................................................ $ 1,422 $ -- $ -- $ 1,422
Depreciation and amortization....................................... 1,154 25 -- 1,179
Operating income (loss)............................................. 56 (223) (20) (187)
Interest income (expense), net...................................... (1,870) 70 5 (1,795)
Net loss............................................................ (1,814) (153) (15) (1,982)
Assets.............................................................. 36,605 11,899 7,901 56,405
Net investment in project........................................... 32,669 8,815 3,791 45,275
Equity in losses of joint ventures.................................. (706) (141) (14) (861)
Subscribers......................................................... 11,413 -- -- 11,413
</TABLE>
For the years ended December 31, 1998, 1997 and 1996 the results of operations
presented above are before the elimination of intercompany interest. Ningbo JV
records revenues from the Ningbo China Unicom GSM project based on amounts of
revenues and profits reported to it by China Unicom through the period October
1, 1997 to September 30, 1998 and May 17, 1997 to September 30, 1997. Chongqing
JV records revenues from the lease of space currently unused by China Unicom
within a building that was purchased by Chongqing JV for China Unicom's long
term use as a switching and operations center. As of December 31, 1998,
Chongqing JV directly owned this building, but Chongqing JV plans to eventually
transfer the building to China Unicom as part of its funding and support under
the applicable network systems cooperation contract.
F-29
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (SEE NOTE 17)
(CONTINUED)
(E) GOLDEN CELLULAR JV
In 1998, the Company dissolved Beijing Metromedia-Jinfeng Communications
Technology Development Co. Ltd., a joint venture created in March 1996 with
Golden Cellular Communication Co., Ltd. for the purpose of developing,
manufacturing, assembling and servicing of wireless telecommunications
equipment, central telephone terminals and subscriber telephone terminals
equipment and networks using Airspan Communications Corporation (an equipment
manufacturer) technology in China.
Golden Cellular and Metromedia China Telephony Limited entered into a settlement
contract on March 3, 1998 which provides the terms for dissolution of the Golden
Cellular JV. Metromedia China Telephony has agreed to reimburse Golden Cellular
$876,000 for certain development expenses incurred by Golden Cellular and assign
to Golden Cellular all of Metromedia China Telephony's rights to the assets of
the Beijing Metromedia-Jinfeng, valued at approximately $720,000. Certain
equipment imported to China by Metromedia China Telephony has been transferred
out of China. Metromedia China Telephony was responsible for the costs of
shipping the equipment out of China. The Company recorded $1.5 million as the
cost to dissolve the Beijing Metromedia-Jinfeng, which is included in operating
expenses in the 1997 consolidated statements of operations.
4. LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
MMG.................................................................... $ -- $ 1,410
--------- ----------
SNAPPER
Snapper Term Loan...................................................... 5,000 --
Snapper Revolving Loan................................................. 44,918 --
Snapper Revolver....................................................... -- 75,359
Industrial Development Bonds........................................... 1,000 1,024
--------- ----------
50,918 76,383
--------- ----------
Capital lease obligations, interest rates of 7% to 13% 916 1,623
--------- ----------
Long-term debt....................................................... 51,834 79,416
Current portion...................................................... 1,723 (21,478)
--------- ----------
Long-term debt..................................................... $ 50,111 $ 57,938
--------- ----------
--------- ----------
</TABLE>
Aggregate annual repayments of long-term debt over the next five years and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 1,723
2000............................................................... 1,160
2001............................................................... 2,021
2002............................................................... 1,012
2003............................................................... 45,918
</TABLE>
F-30
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
MMG DEBT
In connection with the entertainment group sale in 1997 (see note 5), the
Company repaid all of its outstanding debentures. During August 1997 the Company
repaid its 9 1/2% subordinated debentures, 10% subordinated debentures and
6 1/2% convertible subordinated debentures. In connection with the repayment of
its outstanding debentures, the Company expensed certain unamortized discounts
associated with the debentures and recognized an extraordinary loss of $13.6
million on the extinguishment of the debt.
SNAPPER
On November 11, 1998, Snapper entered into a Loan and Security Agreement with
Fleet Capital Corporation, as agent and as the initial lender, pursuant to which
the lenders agreed to provide Snapper with a $5.0 million term loan facility and
a $55.0 million revolving credit facility, the proceeds of which were used to
refinance Snapper's obligations under the old Snapper credit agreement and will
also be used for working capital purposes. The Snapper loan will mature in
November 2003 (subject to automatic one year renewals) and is guaranteed by the
Company up to $10.0 million (increasing to $15.0 million on the occurrence of
specified events). Snapper was in compliance with all bank covenants under the
loan agreement at December 31, 1998.
Interest under the Snapper loan agreement is payable at the Company's option at
a rate equal to either (i) the prime rate plus .25% (from November 11, 1998
through March 31, 2000) or at the prime rate, the prime rate plus .25% or .5%
(from April 1, 2000 to the Snapper Loan agreement termination date) depending on
meeting certain leverage ratios or (ii) the London interbank offered or LIBOR
rate (as defined in the Snapper Loan agreement) plus 3.0% (from November 11,
1998 through March 31, 2000) or LIBOR plus 2.50%, 2.75%, 3.00%, 3.25%, (from
April 1, 2000 to the Snapper loan agreement termination date) depending on
meeting certain leverage ratios. The Snapper loan agreement contains customary
covenants, including delivery of certain monthly, quarterly, and annual
financial information; delivery of budgets and other information related to
Snapper; limitations on Snapper's ability to (i) sell, transfer, lease
(including sale-leaseback), or otherwise dispose of all or any portion of its
assets or merge with any person; (ii) acquire an equity interest in another
business; (iii) enter into any contracts, leases, sales, or other transactions
with any division or an affiliate of the Company, without the prior written
consent of Fleet; (iv) declare or pay any dividends or make any distributions
upon any of its stock or directly or indirectly apply any of its assets to the
redemption, retirement, purchase or other acquisition of its stock; (v) make any
payments to the Company on a subordinated promissory note issued by Snapper to
the Company; (vi) make capital expenditures that exceed $5.0 million in any
fiscal year or exceed $2.0 million financed for longer than three years in any
fiscal year; and (vii) make loans, issue additional indebtedness, or make any
guarantees. In addition, Snapper is required to maintain at all times as of the
last day of each month a specified net worth, as well as a quarterly specified
fixed charge coverage ratio. The Snapper loan agreement is secured by a
continuing security interest on all of Snapper's assets and properties.
On November 26, 1996, Snapper entered into a credit agreement with AmSouth Bank
of Alabama, pursuant to which AmSouth had agreed to make available to Snapper a
revolving line of credit up to $55.0 million, upon the terms and subject to
conditions contained in such Snapper credit agreement for a period ending on
January 1, 1999. The Snapper revolver was guaranteed by the Company, and was
repaid. Interest under the Snapper revolver was payable at Snapper's option at a
rate equal to either
F-31
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
(i) prime plus .5% (from November 26, 1996 through May 25, 1997) and prime plus
1.5% (from May 26, 1997 to January 1, 1999) or (ii) LIBOR (as defined in the old
Snapper credit agreement) plus 2.5% (from November 26, 1996 through May 25,
1997) and LIBOR plus 3.5% (from May 26, 1997 to January 1, 1999.
The old Snapper credit agreement contained standard representations and
warranties, covenants and events of default and provided for the grant of a
security interest in substantially all of Snapper's assets. The Snapper revolver
was secured by a first priority security interest in all of Snapper's assets and
properties and was also entitled to the benefit of a replenishable $1.0 million
cash collateral account, which was initially funded by Snapper. Under the old
Snapper credit agreement, AmSouth could draw upon amounts in the cash collateral
account to satisfy any payment defaults by Snapper and Messrs. Kluge and
Subotnick, Chairman of the Board of the Company and Vice Chairman, President and
Chief Executive Officer of the Company, respectively, were obligated to
replenish such account any time amounts were so withdrawn up to the entire
amount of the Snapper revolver.
At December 31, 1996, Snapper was not in compliance with certain of these
covenants. The Company and AmSouth amended the old Snapper credit agreement to
provide for (i) an annual administrative fee to be paid on December 31, 1997,
(ii) an increase in Snapper's borrowing rates as of December 31, 1997 (from
prime rate to prime rate plus 1.50% and from LIBOR plus 2.50% to LIBOR plus
4.00%), and (iii) an increase in Snapper's commitment fee as of December 31,
1997 from .50% per annum to .75% per annum. As part of the amendment to the old
Snapper credit agreement AmSouth waived: (i) the covenant defaults as of
December 31, 1996, (ii) the $250,000 semi-annual administrative fee requirement
which was set to commence on May 26, 1997 and (iii) the mandatory borrowing rate
and commitment fee increase that was to occur on May 26, 1997. Furthermore, the
amendment replaced certain existing financial covenants with covenants on
minimum quarterly cash flow and equity requirements, as defined. In addition,
the Company and AmSouth agreed to a $10.0 million credit facility.
On April 30, 1997, Snapper closed a $10.0 million working capital facility with
AmSouth which amended Snapper's then existing $55.0 million facility. The
working capital facility (i) provided AmSouth with a PARI PASSU collateral
interest in all of Snapper's assets (including rights under a make-whole and
pledge agreement made by Metromedia Company in favor of AmSouth in connection
with the Snapper revolver), (ii) accrued interest on borrowings at AmSouth's
floating prime rate (same borrowing rate as the Snapper revolver), and (iii) was
due and payable on October 1, 1997. On October 1, 1997 the Company repaid the
$10.0 million working capital facility.
On November 12, 1997, Snapper amended and restated the old Snapper credit
agreement to increase the amount of the revolving line of credit from $55.0
million to $80.0 million. The Snapper revolver bore interest at an applicable
margin above the prime rate (up to 1.5%) or a LIBOR rate (up to 4.0%). The
Snapper revolver was to mature on January 1, 2000. The Snapper Revolver was
guaranteed by the Company and Messrs. Kluge and Subotnick agreed to guarantee
$10.0 million of the Snapper Revolver. The old Snapper credit agreement, as
amended and restated, continued to contain certain financial covenants regarding
maintaining minimum tangible net worth and satisfying certain quarterly cash
flow requirements.
At December 31, 1997, Snapper was not in compliance with the financial covenants
under the Snapper revolver. The Company and AmSouth amended the Snapper Credit
Agreement to provide for (i) a reduction in the amount of the line of credit
from $80.0 million to $55.0 million as of July 1, 1998 and
F-32
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
(ii) a reduction in the finished goods advance rate from 80% to 70% as of July
1, 1998 and a further reduction to 50% on December 31, 1998. As a part of the
amendment to the old Snapper credit agreement, AmSouth waived the covenant
defaults as of December 31, 1997. Furthermore, the amendment replaced the
existing 1998 financial covenants with covenants reflecting Snapper's
anticipated cash flow and equity changes based on the seasonality of the
business.
As of June 30, 1998, Snapper was not in compliance with certain financial
covenants under the old Snapper credit agreement. The Company and AmSouth
amended the old Snapper credit agreement which provided for a reduction of the
line of credit from $55.0 million to $51.0 million as of August 13, 1998. As
part of the amendment to the old Snapper credit agreement, AmSouth waived the
covenant defaults as of June 30, 1998. As of September 30, 1998, Snapper was not
in compliance with certain financial covenants under the old Snapper credit
agreement.
It is assumed that the carrying value of Snapper's bank debt approximates its
face value because it is a floating rate instrument.
In addition, Snapper has industrial development bonds with certain
municipalities. The industrial development bonds mature in 1999 and 2001, and
their interest rates range from 62% to 75% of the prime rate.
5. THE ENTERTAINMENT GROUP SALE
On July 10, 1997, the Company sold the stock of Orion Pictures Corporation,
including substantially all of the assets of its entertainment group, consisting
of Orion, Goldwyn Entertainment Company and Motion Picture Corporation of
America (and their respective subsidiaries) which included a feature film and
television library of over 2,200 titles, to P&F Acquisition Corp., the parent
company of Metro-Goldwyn-Mayer Inc. for a gross consideration of $573.0 million
of which $296.4 million of the proceeds from the entertainment group sale was
used to repay amounts outstanding under the entertainment group's credit
facilities and certain other indebtedness of the entertainment group.
The net gain on sale reflected in the consolidated statement of operations for
the year ended December 31, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
Net proceeds...................................................... $ 276,607
Net liabilities of entertainment group at May 2, 1997............. 22,089
Transaction costs................................................. (6,000)
Income taxes...................................................... (26,402)
---------
Gain on entertainment group sale.................................. $ 266,294
---------
---------
</TABLE>
The entertainment group's revenues for the period January 1, 1997 to May 2, 1997
and the year ended December 31, 1996 were $41.7 million and $135.6 million,
respectively. The entertainment group's loss from operations for the period
January 1, 1997 to May 2, 1997 and the year ended December 31, 1996 were $32.2
million and $23.4 million, respectively. Loss from operations for the period
January 1, 1997 to May 2, 1997 and the years ended December 31, 1996 include
income tax expense (benefit) of ($3.2) million and $1.0 million, respectively.
For the year ended December 31, 1998, included in discontinued operations is
$8.7 million which represents a refund of tax payments made by the entertainment
group in prior years.
F-33
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. THE ENTERTAINMENT GROUP SALE (CONTINUED)
In connection with the refinancing of an existing credit facility, the
entertainment group expensed the deferred financing costs associated with the
existing credit facility and recorded an extraordinary loss of approximately
$4.5 million in 1996.
The following unaudited pro forma information illustrates the effect on the
Company's results of operations of (1) the entertainment group sale, (2) the
repayment of MMG's outstanding subordinated debentures (see note 4), (3) the
acquisition of Asian American Telecommunications (see note 3) and (4) the sale
of the Landmark theater group (see note 6) on revenues, loss from continuing
operations and loss from continuing operations per share for the year ended
December 31, 1997. The unaudited pro forma information assumes (1) the
entertainment group sale, (2) the repayment of MMG's outstanding subordinated
debentures, (3) the acquisition of Asian American Telecommunications and (4) the
sale of Landmark occurred at the beginning of the period (in thousands, except
per share amounts).
<TABLE>
<CAPTION>
1997
-----------
<S> <C>
(unaudited)
Revenues......................................................................... $ 204,328
-----------
-----------
Loss from continuing operations.................................................. $ (123,015)
-----------
-----------
Loss from continuing operations per share........................................ $ (1.84)
-----------
-----------
</TABLE>
6. SALE OF LANDMARK THEATRE GROUP
On April 16, 1998, the Company sold to Silver Cinemas, Inc. all of the assets of
the Landmark theatre group, except cash, for an aggregate cash purchase price of
approximately $62.5 million and the assumption of certain Landmark liabilities.
The Landmark sale has been recorded as a discontinuance of a business segment in
the accompanying consolidated financial statements.
F-34
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SALE OF LANDMARK THEATRE GROUP (CONTINUED)
The gain on the Landmark sale reflected in the consolidated statements of
operations is as follows (in thousands):
<TABLE>
<S> <C>
Net proceeds....................................................... $ 57,298
Net assets of Landmark at November 12, 1997........................ (48,531)
Income taxes....................................................... (5,115)
---------
Gain on Landmark sale.......................................... $ 3,652
---------
---------
</TABLE>
The net assets of Landmark at December 31, 1997 and November 12, 1997, the date
the Company adopted a plan to dispose of Landmark, were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 12,
1997 1997
------------ ------------
<S> <C> <C>
Current assets................................................... $ 793 $ 906
Non-current assets............................................... 57,183 57,523
Current liabilities.............................................. (6,286) (4,738)
Non-current liabilities.......................................... (4,922) (5,160)
------------ ------------
Net assets................................................... $ 46,768 $ 48,531
------------ ------------
------------ ------------
</TABLE>
Landmark's revenues and income (loss) from operations for the period January 1,
1997 to November 12, 1997 and for the period July 2, 1996 (date of acquisition
of Landmark) to December 31, 1996 were $48.7 million, ($108,000), $29.6 million
and $1.2 million, respectively. Income (loss) from operations for the period
January 1, 1997 to November 12, 1997 includes income taxes of $408,000.
7. SNAPPER, INC.
In connection with a business combination consummated on November 1, 1995,
Snapper was classified as an asset held for sale and was recorded in an amount
equal to the sum of estimated cash flows from the operations of Snapper plus the
anticipated proceeds from the sale of Snapper which amounted to $79.2 million.
Subsequently, the Company announced its intention not to continue to pursue its
previously adopted plan to dispose of Snapper and to actively manage Snapper.
Snapper has been included in the consolidated financial statements from November
1, 1996.
The following table summarizes the operating results of Snapper for the ten
months ended October 31, 1996:
<TABLE>
<S> <C>
Revenue........................................................... $ 130,623
Operating expenses................................................ 148,556
---------
Operating loss.................................................... (17,933)
Interest expense.................................................. (6,859)
Other income (expenses)........................................... 1,210
---------
Loss before income taxes.......................................... (23,582)
Income taxes...................................................... --
---------
Net loss.......................................................... $ (23,582)
---------
---------
</TABLE>
As part of Snapper's transition to the dealer-direct business, Snapper had from
time to time reacquired the inventories and less frequently had purchased the
accounts receivable of distributors it had
F-35
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SNAPPER, INC. (CONTINUED)
cancelled. The purchase of inventories is recorded by reducing sales for the
amount credited to accounts receivable from the cancelled distributor and
recording the repurchased inventory at the lower of cost or market. During 1997
and 1996, 9 and 18 distributors were cancelled, respectively. Snapper completed
the distributor repurchases in 1997. Inventories purchased (and/or credited to
the account of cancelled distributors) under such arrangements amounted to (in
thousands):
<TABLE>
<CAPTION>
TEN MONTHS
TWO MONTHS ENDED
YEAR ENDED ENDED OCTOBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 1996
----------------- ----------------- ---------------
<S> <C> <C> <C>
Inventories............................................... $ 25,405 $ 3,117 $ 21,376
Decrease in gross profit.................................. 8,383 2,106 5,967
</TABLE>
8. INVESTMENT IN RDM
In connection with a business combination consummated on November 1, 1995, RDM
was classified as an asset held for sale and the Company excluded its equity in
earnings and losses of RDM from its results of operations. At November 1, 1995,
the Company recorded its investment in RDM to reflect the anticipated proceeds
from its sale. During 1996, the Company reduced the carrying value of its
investment in RDM to its then estimated net realizable value of $31.2 million
and the writedown of $16.3 million was reflected as a discontinued operation in
the 1996 consolidated statement of operations.
On April 1, 1997, for financial statement reporting purposes, the Company no
longer qualified to treat its investment in RDM as a discontinued operation.
Since April 1, 1997, the Company recorded in its results of operations in 1997 a
reduction in the carrying value of its investment in RDM of $18.0 million and
its share of the expected net loss of RDM of $8.2 million.
On June 20, 1997, RDM entered into a $100.0 million revolving and term credit
facility. The RDM credit facility was guaranteed by a letter of credit in the
amount of $15.0 million in favor of the lenders thereunder, which was obtained
from Metromedia Company (an affiliate of the Company) and could not be drawn
until five days after a payment default and fifteen days after non-payment
default (as defined under the RDM credit facility). In consideration of
providing the letters of credit, Metromedia Company was granted warrants to
purchase 3 million shares of RDM common stock (approximately 5% of RDM) at an
exercise price of $.50 per share. The RDM warrants had a ten year term and were
exercisable beginning September 19, 1997. In accordance with the terms of the
agreement entered into in connection with the RDM credit facility, Metromedia
Company offered the Company the opportunity to substitute its letter of credit
for Metromedia Company's letter of credit and to receive the RDM warrants. On
July 10, 1997, the Company's board of directors elected to substitute its letter
of credit for Metromedia Company's letter of credit and the RDM warrants were
assigned to the Company.
On August 22, 1997, RDM announced that it had failed to make the August 15, 1997
interest payment due on its subordinated debentures and that it had no present
ability to make such a payment. As a result of the foregoing, on August 22,
1997, RDM's lenders declared an event of default, as defined under the RDM
credit facility, and accelerated all amounts outstanding under such facility. On
August 28, 1997, an involuntary bankruptcy petition was filed against a
subsidiary of RDM in Federal bankruptcy court in Montgomery, Alabama. RDM and
certain of its affiliates each subsequently filed voluntary petitions for relief
under chapter 11 of the Bankruptcy Code. Since the commencement of their
respective chapter 11 cases, RDM and its affiliates have proceeded with the
liquidation of their
F-36
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT IN RDM (CONTINUED)
assets and properties and discontinued ongoing business operations. The Company
does not currently anticipate that it will receive any distributions on account
of its RDM common stock or the RDM warrants. The Company recorded in its results
of operations in 1997 a further reduction in the carrying value of RDM of $4.9
million and a loss of $15.0 million on its letter of credit guarantee.
After the commencement of RDM's and its affiliates' chapter 11 cases, RDM's
lenders drew upon the entire amount of the Company's letter of credit.
Consequently, the Company will become subrogated to the lenders' secured claims
against the Company in an amount equal to the drawing under the letter of credit
following payment in full of the lenders. The Company intends to vigorously
pursue its subrogation claims in the chapter 11 cases. However, it is uncertain
whether the Company will succeed in any such subrogation claims or, if it is
successful in asserting any such subrogation claims, whether RDM's remaining
assets will be sufficient to pay them.
On February 18, 1998 the Office of the United States Trustee filed a motion to
appoint a chapter 11 trustee in the United States Bankruptcy Court for the
Northern Division of Georgia. RDM and its affiliates subsequently filed a motion
to convert the chapter 11 cases to cases under chapter 7 of the Bankruptcy Code.
On February 19, 1998, the bankruptcy court granted the United States Trustee's
motion and ordered that a chapter 11 trustee be appointed. On February 25, 1998,
each of the Company's designees on RDM's board of directors submitted a letter
of resignation.
The Chapter 11 trustee is in the process of selling all of RDM's assets to
satisfy its obligations to its creditors and the Company believes that its
equity interest will not be entitled to receive any distribution. To date, RDM
has not confirmed a chapter 11 plan or made distributions to creditors other
than the lender.
On August 19, 1998, a purported class action lawsuit, THEOHAROUS V. FONG, ET AL,
Civ. No. 1:98CV2366, was filed in United States District Court for the Northern
District of Georgia. The complaint alleges that certain officers, directors and
shareholders of RDM, including the Company, are liable under federal securities
laws for misrepresenting and failing to disclose information regarding RDM's
alleged financial condition during the period between July 19, 1996 and August
22, 1997, on which date RDM disclosed that its management had discussed the
possibility of filing for bankruptcy. The complaint also alleges that the
plaintiffs, including the Company, are secondarily liable as controlling persons
of RDM. On October 19, 1998, a second purported class action lawsuit with
substantially the same allegations, SCHUETTE V. FONG, ET AL., Civ. No.
1:98CV3034, was filed in United States District Court for the Northern District
of Georgia. On December 30, 1998, the chapter 11 trustee of RDM brought an
adversary proceeding in the bankruptcy of RDM, HAYS, ET AL. v. FONG, ET AL.,
Adv. Proc. No. 98-1128, in the United States Bankruptcy Court, Northern District
of Georgia, alleging that former officers or directors of the Company, while
serving as directors on the board of RDM, breached fiduciary duties allegedly
owed to RDM's shareholders and creditors in connection with the bankruptcy of
RDM. On January 25, 1999, the plaintiff filed a first amended complaint. The
official committee of unsecured creditors of RDM has moved to proceed as
co-plaintiff or to intervene in this proceeding, and the official committee of
bondholders of RDM has moved to intervene in or join the proceeding. On February
16, 1999, the RDM creditors' committee brought an adversary proceeding, THE
OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF RDM SPORTS GROUP, INC. AND RELATED
DEBTORS v. METROMEDIA INTERNATIONAL GROUP, INC. Adv. Proc. No. 99-1023, seeking
in the alternative to recharacterize as contributions to equity a secured claim
in the amount of $15 million made by the Company arising out of the Company's
financing of RDM, or to equitably subordinate such claim made by Metromedia
Company against RDM and other debtors in the bankruptcy proceedings. On March 3,
1999, the RDM bondholders' committee brought
F-37
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT IN RDM (CONTINUED)
an adversary proceeding, THE OFFICIAL COMMITTEE OF BONDHOLDERS OF RDM SPORTS
GROUP, INC. v. METROMEDIA INTERNATIONAL GROUP, INC., Adv. Proc. No. 99-1029,
with substantially the same allegations as the above proceedings. The Company
believes it has meritorious defenses and plans to vigorously defend these
actions. Due to the early stage of these proceedings, the Company cannot
evaluate the likelihood of an unfavorable outcome or an estimate of the likely
amount or range of possible loss, if any.
9. ENTERTAINMENT GROUP ACQUISITIONS
On July 2, 1996, the Company consummated the acquisition of the Samuel Goldwyn
Company by merging the Company's newly formed subsidiary, SGC Merger Corp., into
Samuel Goldwyn Company. Upon consummation of the merger, Samuel Goldwyn Company
was renamed Goldwyn Entertainment Company. Holders of Samuel Goldwyn Company
common stock received .3335 shares of the Company's common stock for each share
of Samuel Goldwyn Company common stock in accordance with a formula set forth in
the Agreement and Plan of Merger relating to the merger. Pursuant to the merger,
the Company issued 3,130,277 shares of common stock.
The purchase price, including the value of existing Samuel Goldwyn Company stock
options and transaction costs related to the merger, was approximately $43.8
million.
Also on July 2, 1996, the Company consummated the acquisition of Motion Picture
Corporation of America by merging the Company's recently formed subsidiary, MPCA
Merger Corp., with Motion Picture Corporation of America. In connection with
this merger, the Company (i) issued 1,585,592 shares of common stock to Motion
Picture Corporation of America stockholders, and (ii) paid such stockholders
approximately $1.2 million in additional consideration, consisting of promissory
notes. The purchase price, including transaction costs, related to the
acquisition of Motion Picture Corporation of America was approximately $21.9
million.
The excess of the purchase price over the net fair value of liabilities assumed
in the July 2, 1996 mergers amounted to $125.4 million.
Following the consummation of the July 2, 1996 mergers, the Company contributed
its interests in Samuel Goldwyn Company and Motion Picture Corporation of
America to Orion, with Samuel Goldwyn Company and Motion Picture Corporation of
America becoming wholly-owned subsidiaries of Orion. Orion, Samuel Goldwyn
Company and Motion Picture Corporation of America were collectively referred to
as the Entertainment group (see note 5). The July 2, 1996 mergers were recorded
in accordance with the purchase method of accounting for business combinations.
The purchase price to acquire both Samuel Goldwyn Company and Motion Picture
Corporation of America was allocated to the net assets acquired according to
management's estimate of their respective fair values and the results of those
purchased businesses have been included in the accompanying consolidated
financial statements from July 2, 1996, the date of acquisition (see note 5).
10. STOCKHOLDERS' EQUITY
PREFERRED STOCK
There are 70,000,000 shares of preferred stock authorized and 4,140,000 shares
were outstanding as of December 31, 1998 and 1997.
On September 16, 1997 the Company completed a public offering of 4,140,000
shares of $1.00 par value, 7 1/4% cumulative convertible preferred stock with a
liquidation preference of $50.00 per share,
F-38
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
generating net proceeds of approximately $199.4 million. Dividends on the
preferred stock are cumulative from the date of issuance and payable quarterly,
in arrears, commencing on December 15, 1997. The Company may make any payments
due on the preferred stock, including dividend payments and redemptions (i) in
cash; (ii) issuance of the Company's common stock or (iii) through a combination
thereof. The preferred stock is convertible at the option of the holder at any
time, unless previously redeemed, into the Company's common stock, at a
conversion price of $15.00 per share (equivalent to a conversion rate of 3 1/3
shares of common stock for each share of preferred stock), subject to adjustment
under certain conditions.
The preferred stock is redeemable at any time on or after September 15, 2000, in
whole or in part, at the option of the Company, initially at a price of $52.5375
and thereafter at prices declining to $50.00 per share on or after September 15,
2007, plus in each case all accrued and unpaid dividends to the redemption date.
Upon any change of control (as defined in the certificate of designation of the
preferred stock), each holder of preferred stock shall, in the event that the
market value at such time is less than the conversion price of $15.00, have a
one-time option to convert the preferred stock into the Company's common stock
at a conversion price equal to the greater of (i) the market value, as of the
change of control date (as defined in the certificate of designation) and (ii)
$8.00. In lieu of issuing shares of the Company's common stock, the Company may,
at its option, make a cash payment equal to the market value of the Company's
common stock otherwise issuable.
COMMON STOCK
On July 2, 1996, the Company completed a public offering of 18,400,000 shares of
common stock, generating net proceeds of approximately $190.6 million.
On August 29, 1996, the Company increased the number of authorized shares of
common stock from 110,000,000 to 400,000,000. At December 31, 1998, 1997 and
1996 there were 69,118,841, 68,390,800 and 66,153,439 shares issued and
outstanding, respectively.
As part of the Motion Picture Corporation of America merger, the Company issued
256,504 shares of restricted common stock to certain employees. The common stock
was to vest on a pro-rata basis over a three year period ending in July 1999.
The total market value of the shares at the time of issuance was treated as
unearned compensation and was charged to expense over the vesting period.
Unearned compensation charged to expense for the period ended December 31, 1997
and 1996 was $352,000 and, $529,000, respectively. In connection with the
entertainment group sale, the 256,504 shares of restricted common stock became
fully vested. The cost of $2.3 million associated with the vesting of the
restricted common stock was recorded as a reduction to the entertainment group
sale gain.
At December 31, 1998, the Company has reserved for future issuance shares of
Common Stock in connection with the stock option plans and preferred stock
listed below:
<TABLE>
<S> <C>
Stock option plans................................ 8,154,069
Preferred stock................................... 13,800,000
-----------
21,954,069
-----------
-----------
</TABLE>
F-39
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS
On August 29, 1996, the stockholders of MMG approved the Metromedia
International Group, Inc. 1996 Incentive Stock Option Plan. The aggregate number
of shares of common stock that may be the subject of awards under the plan is
8,000,000. The maximum number of shares which may be the subject of awards to
any one grantee under the plan may not exceed 250,000 in the aggregate. The plan
provides for the issuance of incentive stock options, nonqualified stock options
and stock appreciation rights in tandem with stock options. Incentive stock
options may not be issued at a per share price less than the market value at the
date of grant. Nonqualified stock options may be issued at prices and on terms
determined in the case of each stock option grant. Stock options and stock
appreciation rights may be granted for terms of up to but not exceeding ten
years and vest and become fully exercisable after four years from the date of
grant. At December 31, 1998 there were aproximately 3.0 million additional
shares available for grant under the plan.
Following the Goldwyn merger, the Samuel Goldwyn Company stock option plans were
converted into stock options exercisable for common stock of MMG in accordance
with its respective exchange ratios.
The per share weighted-average fair value of stock options granted during 1998,
1997 and 1996 were $6.99, $4.33 and $7.36, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 77% in 1998, 50% in 1997 and 49% in 1996,
expected dividend yield of zero percent, risk-free interest rate of 5.1% in
1998, 5.5% in 1997 and 5.2% in 1996 and an expected life of 4 years in 1998 and
1997 and 7 years in 1996.
The Company applies APB 25 in recording the value of stock options granted
pursuant to its plans. No compensation cost has been recognized for stock
options granted under the plan for the years ended December 31, 1997 and 1996.
For the year ended December 31, 1998, compensation expense of $626,000 was
recorded under the plan, and for the year ended December 31, 1996, compensation
expense of $153,000 has been recorded under a predecessor plan in the
consolidated statements of operations. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
123, the Company's net income (loss) would have (decreased) increased to the pro
forma amounts indicated below (in thousands, except per share amount):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) attributable to common stockholders:
As reported.............................................................. $ (138,678) $ 84,107 $ (115,243)
Pro forma................................................................ $ (144,778) $ 75,925 $ (118,966)
Income (loss) per common share--Basic:
As reported.............................................................. $ (2.01) $ 1.26 $ (2.12)
Pro forma................................................................ $ (2.10) $ 1.13 $ (2.19)
</TABLE>
Pro forma net income reflects only options granted in 1998, 1997 and 1996. In
addition, the Samuel Goldwyn Company stock options granted prior to the Goldwyn
merger were recorded at fair value and included in the Samuel Goldwyn Company
purchase price.
F-40
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
Stock option activity during the periods indicated is as follows (in thousands):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
----------- -------------
<S> <C> <C>
Balance at December 31, 1996................................................. 4,579 $ 10.09
Options granted.............................................................. 6,629 $ 8.75
Options exercised............................................................ (2,333) $ 9.23
Options forfeited............................................................ (234) $ 10.22
Options cancelled............................................................ (2,768) $ 12.75
-----------
Balance at December 31, 1997................................................. 5,873 $ 7.66
Options granted.............................................................. 327 $ 11.17
Options exercised............................................................ (728) $ 7.72
Options forfeited............................................................ (269) $ 16.00
-----------
Balance at December 31, 1998................................................. 5,203 $ 7.44
-----------
-----------
</TABLE>
At December 31, 1998 the range of exercise prices and the weighted-average
remaining contractual lives of outstanding options was $1.08--$11.88 and 7.9
years, respectively.
At December 31, 1998 and 1997, the number of stock options exercisable was
2,831,000 and 2,573,000 respectively, and the weighted-average exercise price of
these options was $6.63 and $6.99, respectively.
On April 18, 1997, two officers of the Company were granted stock options, not
pursuant to any plan, to purchase 1,000,000 shares each of Common Stock at a
purchase price of $7.44 per share, the fair market value of the Common Stock at
such date. The stock options vest and become fully exercisable four years from
the date of grant.
On March 26, 1997 the Board of Directors approved the cancellation and
reissuance of all stock options previously granted pursuant to the plan at an
exercise price of $9.31, the fair market value of MMG common stock at such date.
In addition, on March 26, 1997, the board of directors authorized the grant of
approximately 1,900,000 stock options at an exercise price of $9.31 under the
plan.
11. INCOME TAXES
The Company files a consolidated Federal income tax return with all of its 80%
or greater owned subsidiaries. A consolidated subsidiary group in which the
Company owns less than 80% files a separate Federal income tax return. The
Company and such subsidiary group calculate their respective tax liabilities on
a separate return basis.
F-41
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996, consists of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Federal......................................................................... $ (1,615) $ (9,935) $ --
State and local................................................................. -- 1,982 --
Foreign......................................................................... 1,257 914 414
--------- --------- ---------
Current......................................................................... (358) (7,039) 414
Deferred........................................................................ -- 1,812 --
--------- --------- ---------
$ (358) $ (5,227) $ 414
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes for the years ended December 31, 1998, 1997 and
1996 applies to continuing operations.
The federal income tax portion of the provision for income taxes includes the
benefit of state income taxes provided.
The Company had pre-tax losses from foreign operations of $38.4 million, $23.2
million and $4.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Pre-tax losses from domestic operations were $97.9 million, $112.9
million, and $67.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
State and local income tax expense for the years ended December 31, 1998, 1997
and 1996 includes an estimate for franchise and other state tax levies required
in jurisdictions which do not permit the utilization of the Company's net
operating loss carryforwards to mitigate such taxes. Foreign tax expense for the
years ended December 31, 1998, 1997 and 1996 reflects estimates of withholding
and remittance taxes.
The temporary differences and carryforwards which give rise to deferred tax
assets and (liabilities) at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforward......................................................... $ 67,887 $ 65,261
Allowance for doubtful accounts......................................................... 2,912 3,842
Reserves for self-insurance............................................................. 8,512 10,464
Investment in equity investee........................................................... 28,425 28,425
Purchase of safe harbor lease investment................................................ (6,216) (6,628)
Minimum tax credit (AMT) carryforward................................................... 13,036 13,036
Other reserves.......................................................................... 11,422 10,604
Other................................................................................... (2,432) (117)
----------- -----------
Subtotal before valuation allowance..................................................... 123,546 124,887
Valuation allowance..................................................................... (123,546) (124,887)
----------- -----------
Deferred taxes.......................................................................... $ -- $ --
----------- -----------
----------- -----------
</TABLE>
F-42
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The net change in the total valuation allowance for the years ended December 31,
1998, 1997 and 1996 was a decrease of $1.3 million and increases of $23.4
million and $18.3 million, respectively.
The Company's income tax expense (benefit) for the years ended December 31,
1998, 1997 and 1996, differs from the expense (benefit) that would have resulted
from applying the federal statutory rates during those periods to income (loss)
before the income tax expense (benefit). The reasons for these differences are
explained in the following table (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Benefit based upon federal statutory rate of 35%.............................. $ (47,720) $ (47,645) $ (25,106)
Foreign taxes in excess of federal credit..................................... 1,257 914 414
Amortization of goodwill...................................................... 6,340 1,729 1,492
Foreign operations............................................................ 13,458 8,126 1,548
Change in valuation allowance................................................. 10,572 17,370 11,330
Equity in losses of joint ventures............................................ 9,036 7,616 10,690
Minority interest of consolidated subsidiaries................................ (3,450) (3,112) (233)
Impact of alternative minimum tax............................................. 1,211 7,452 --
Other, net.................................................................... 8,938 2,323 279
---------- ---------- ----------
Income tax expense (benefit).................................................. $ (358) $ (5,227) $ 414
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At December 31, 1998 the Company had available net operating loss carryforwards
and unused minimum tax credits of approximately $193.9 million and $13.0
million, respectively, which can reduce future federal income taxes. These
carryforwards and credits begin to expire in 2008. The minimum tax credit may be
carried forward indefinitely to offset regular tax in certain circumstances.
The use by the Company of the pre-November 1, 1995 net operating loss
carryforwards from the business combination consumated on November 1, 1995
reported by The Actava Group, Inc. and Metromedia International
Telecommunications (and the subsidiaries included in their respective affiliated
groups of corporations which filed consolidated Federal income tax returns with
Actava and Metromedia International Telecommunications as the parent
corporations) are subject to certain limitations as a result of the business
combination, respectively.
Under Section 382 of the Internal Revenue Code, annual limitations generally
apply to the use of the pre-November 1, 1995 losses by the Company. The annual
limitations on the use of the pre-November 1, 1995 losses of Actava and
Metromedia International Telecommunications by the Company approximate $18.3
million and $10.0 million per year, respectively. To the extent pre-November 1,
1995 losses equal to the annual limitation with respect to Actava and Metromedia
International Telecommunications are not used in any year, the unused amount is
generally available to be carried forward and used to increase the applicable
limitation in the succeeding year.
The use of pre-November 1, 1995 losses of Metromedia International
Telecommunications is also separately limited by the income and gains recognized
by the corporations that were members of the Metromedia International
Telecommunications affiliated groups. Under proposed Treasury regulations, such
pre-November 1, 1995 losses of any such former members of such group, are usable
on an aggregate basis to the extent of the income and gains of such former
members of such group.
F-43
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
As a result of the November 1, 1995 business combination, the Company succeeded
to approximately $92.2 million of pre-November 1, 1995 losses of the Actava.
SFAS 109 requires assets acquired and liabilities assumed to be recorded at
their "gross" fair value. Differences between the assigned values and tax bases
of assets acquired and liabilities assumed in purchase business combinations are
temporary differences under the provisions of SFAS 109. To the extent all of the
Actava intangibles are eliminated, when the pre-November 1, 1995 losses are
utilized they will reduce income tax expense.
12. EMPLOYEE BENEFIT PLANS
The Communications Group and Snapper have defined contribution plans which
provide for discretionary annual contributions covering substantially all of
their employees. Participating employees can defer receipt of up to 15% of their
compensation, subject to certain limitations. The Communications Group matches
50% of the amounts contributed by plan participants up to 6% of their
compensation. Snapper's employer match is determined each year, and was 50% of
the first 6% of compensation contributed by each participant for the years ended
December 31, 1998 and 1997 and the period November 1, 1996 to December 31, 1996.
Snapper has committed in 1999 to implement a defined contribution plan for all
bargaining unit employees. This plan is similar to the non-bargaining defined
contribution plan described above. The Company's contribution expense for the
years ended December 31, 1998, 1997 and 1996 was $517,000, $527,000 and
$375,000, respectively.
In addition, Snapper has a profit sharing plan covering substantially all
non-bargaining unit employees. Contributions are made at the discretion of
management. No profit sharing amounts were approved by management for the years
ended December 31, 1998, 1997 and 1996.
Snapper sponsors a defined benefit pension plan which covers substantially all
bargaining unit employees. Benefits are based upon the employee's years of
service multiplied by fixed dollar amounts. Snapper's funding policy is to
contribute annually such amounts as are necessary to provide assets sufficient
to meet the benefits to be paid to the plan's members and keep the plan
actuarially sound.
In addition, Snapper provides a group medical plan and life insurance coverage
for certain employees subsequent to retirement. The plans have been funded on a
pay-as-you-go (cash) basis. The plans are contributory, with retiree
contributions adjusted annually, and contain other cost-sharing features such as
deductibles, coinsurance, and life-time maximums. The plan accounting
anticipates future cost-sharing changes that are consistent with Snapper's
expressed intent to increase the retiree contribution rate annually for the
expected medical trend rate for that year. The coordination of benefits with
Medicare uses a supplemental, or exclusion of benefits approach. Snapper funds
the excess of the cost of benefits under the plans over the participants'
contributions as the costs are incurred.
The net periodic pension cost and net periodic post-retirement benefit income
for the years ended December 31, 1998 and 1997 amounts to $110,000 and $21,000
and $61,000 and $90,000, respectively. Snapper's defined benefit plan's
projected benefit obligation and fair value of plan assets at December 31, 1998
and 1997 were $7.5 million and $7.7 million and $6.7 million and $7.2 million,
respectively. Accrued post-retirement benefit cost at December 31, 1998 and 1997
was $3.0 million and $3.0 million, respectively. Disclosures regarding the
reconciliation of benefit obligations, fair value of plan assets and the funded
status of the plan have not been included herein because they are not material
to the Company's consolidated financial statements at December 31, 1998 and
1997.
F-44
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT DATA
The Communications Group's joint ventures in Eastern Europe and the republics of
the former Soviet Union currently offer cellular telecommunications, fixed
telephony, international and long distance telephony, cable television, paging
and radio broadcasting. The Communications Group's joint ventures in China
provide financing, technical assistance and consulting service for
telecommunication projects. The revenues, operating results and assets by the
Communications Group's operations in Eastern Europe and the republics of the
former Soviet Union are disclosed in note 2 and the Communications Group's
operations in China are disclosed in note 3. Snapper manufactures
Snapper-Registered Trademark- brand premium priced power lawnmowers, lawn
tractors, garden tillers, snow throwers and related parts and accessories. The
Company evaluates the performance of its operating segments based on earnings
before interest, taxes, depreciation and amortization.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS
OF THE FORMER SOVIET UNION:
Revenues................................................................... $ 30,208 $ 21,252 $ 14,047
Direct operating costs..................................................... (87,907) (55,466) (36,724)
Nonrecurring charges....................................................... (40,317) -- --
----------- ----------- -----------
Earnings before interest, taxes, depreciation, and amortization............ (98,016) (34,214) (22,677)
Depreciation and amortization.............................................. (10,625) (7,183) (6,382)
----------- ----------- -----------
Operating loss........................................................... (108,641) (41,397) (29,059)
----------- ----------- -----------
----------- ----------- -----------
Equity in losses of unconsolidated investees............................... (17,111) (7,233) (7,835)
Gain on sale of Protocall Ventures......................................... 5,527 -- --
Foreign currency loss...................................................... (137) (770) (255)
Minority interest.......................................................... 1,527 561 666
----------- ----------- -----------
----------- ----------- -----------
Assets at year end......................................................... 194,864 227,679 189,979
Capital expenditures....................................................... $ 7,338 $ 4,429 $ 3,767
----------- ----------- -----------
----------- ----------- -----------
COMMUNICATIONS GROUP--CHINA:
Revenues................................................................... $ -- $ -- $ --
Direct operating costs..................................................... (11,278) (15,305) (2,708)
----------- ----------- -----------
Earnings before interest, taxes, depreciation, and amortization............ (11,278) (15,305) (2,708)
Depreciation and amortization.............................................. (3,226) (2,566) (21)
----------- ----------- -----------
Operating loss........................................................... (14,504) (17,871) (2,729)
----------- ----------- -----------
----------- ----------- -----------
Equity in losses of unconsolidated investees............................... (1,040) (861) --
Foreign currency gain...................................................... -- 56 --
Minority interest.......................................................... 8,331 8,332 --
----------- ----------- -----------
----------- ----------- -----------
Assets at year end......................................................... 139,726 118,758 5,026
Capital expenditures....................................................... $ 155 $ 403 $ 62
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-45
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT DATA (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
SNAPPER (1):
Revenues................................................................... $ 210,084 $ 183,076 $ 22,545
Direct operating costs..................................................... (210,963) (191,349) (30,654)
----------- ----------- -----------
Earnings before interest, taxes, depreciation, and amortization............ (879) (8,273) (8,109)
Depreciation and amortization.............................................. (6,728) (6,973) (1,256)
----------- ----------- -----------
Operating loss........................................................... (7,607) (15,246) (9,365)
----------- ----------- -----------
----------- ----------- -----------
Assets at year end......................................................... 134,460 167,858 140,327
Capital expenditures....................................................... $ 3,907 $ 5,619 $ 1,252
----------- ----------- -----------
----------- ----------- -----------
OTHER:
Revenues................................................................... $ -- $ -- $ --
Direct operating costs..................................................... 905 (5,549) (9,355)
----------- ----------- -----------
Earnings before interest, taxes, depreciation, and amortization............ 905 (5,549) (9,355)
Depreciation and amortization.............................................. (9) (12) (18)
----------- ----------- -----------
Operating income (loss).................................................. 896 (5,561) (9,373)
----------- ----------- -----------
----------- ----------- -----------
Assets at year end including discontinued operations and eliminations...... $ 140,591 $ 274,977 $ 177,786
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-46
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT DATA (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED:
Revenues................................................................... $ 240,292 $ 204,328 $ 36,592
Direct operating costs..................................................... (309,243) (267,669) (79,441)
----------- ----------- -----------
Earnings before interest, taxes, depreciation, and amortization............ (109,268) (63,341) (42,849)
Nonrecurring charges....................................................... (40,317) -- --
Depreciation and amortization.............................................. (20,588) (16,734) (7,677)
----------- ----------- -----------
Operating loss........................................................... (129,856) (80,075) (50,526)
Interest expense........................................................... (16,331) (20,922) (19,090)
Interest income............................................................ 12,746 9,840 5,308
Gain on sale of Protocall Ventures, net.................................... 5,527 -- --
Equity in losses and writedown of unconsolidated investees................. (18,151) (53,150) (7,835)
Foreign currency loss...................................................... (137) (714) (255)
Minority interest.......................................................... 9,858 8,893 666
----------- ----------- -----------
Loss before income tax benefit (expense)................................. (136,344) (136,128) (71,732)
Income tax benefit (expense)............................................... 358 5,227 (414)
----------- ----------- -----------
Loss from continuing operations.......................................... (135,986) (130,901) (72,146)
Discontinued operations.................................................... 12,316 234,036 (38,592)
Extraordinary items........................................................ -- (14,692) (4,505)
----------- ----------- -----------
Net income (loss)........................................................ $ (123,670) $ 88,443 $ (115,243)
----------- ----------- -----------
----------- ----------- -----------
Assets at year end......................................................... 609,641 789,272 513,118
Capital expenditures....................................................... $ 11,400 $ 10,451 $ 5,081
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(1) Represents Snapper's operations from November 1, 1996 to December 31, 1996
and for the years ended December 31, 1998 and 1997.
F-47
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. BUSINESS SEGMENT DATA (CONTINUED)
Information about the Communications Group's operations in different geographic
locations for 1998, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
COUNTRY ASSETS REVENUES ASSETS REVENUES ASSETS REVENUES
- ----------------------------------------------------- ---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Austria.............................................. $ 1,049 $ 802 $ 6,710 $ 179 $ 1,696 $ --
Azerbaijan........................................... 5,172 -- -- -- -- --
Belarus.............................................. 2,934 -- 2,135 -- 1,981 --
Czech Republic....................................... 3,527 912 2,986 220 283 --
Estonia.............................................. 2,026 1,008 4,943 667 3,154 --
Georgia.............................................. 24,412 180 18,911 -- 11,043 --
Germany.............................................. 4,941 114 5,038 36 -- --
Hungary.............................................. 6,288 6,799 8,154 8,477 10,251 9,214
Indonesia............................................ -- -- 20 -- 235 --
Kazakhstan........................................... 7,162 -- 6,840 -- 3,274 --
Latvia............................................... 14,219 668 19,786 -- 18,558 --
Lithuania............................................ 2,141 610 2,375 296 1,557 69
Moldova.............................................. 4,896 -- 4,673 -- 3,590 --
People's Republic of China........................... 139,726 -- 118,758 -- 5,026 --
Portugal............................................. -- -- 6,581 598 -- --
Romania.............................................. 6,115 4,534 9,412 4,079 4,791 2,981
Russia............................................... 17,676 7,905 4,601 3,406 4,742 60
Ukraine.............................................. 3,640 87 -- -- -- --
United Kingdom....................................... 1,568 3,492 11,463 543 9,435 52
United States (1).................................... 81,862 3,097 107,883 2,751 109,257 1,671
Uzbekistan........................................... 5,236 -- 5,168 -- 6,132 --
---------- --------- ---------- --------- ---------- ---------
$ 334,590 $ 30,208 $ 346,437 $ 21,252 $ 195,005 $ 14,047
---------- --------- ---------- --------- ---------- ---------
---------- --------- ---------- --------- ---------- ---------
</TABLE>
- ------------------------
(1) Includes goodwill of $54.5 million, $89.0 million and $87.0 million at
December 31, 1998, 1997 and 1996, respectively.
All remaining assets and substantially all remaining revenue relate to
operations in the United States.
14. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION
SHORT-TERM INVESTMENTS
Short-term investments consist of repurchase agreements, which have maturities
of less than six months.
ACCOUNTS RECEIVABLE
The total allowance for doubtful accounts at December 31, 1998 and 1997 was $2.2
million and $2.6 million, respectively.
F-48
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
INVENTORIES
Inventories consist of the following as of December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Lawn and garden equipment:
Raw materials............................................... $ 8,388 $ 11,031
Finished goods.............................................. 55,488 84,523
--------- ---------
63,876 95,554
Less: LIFO reserve............................................ 1,660 1,306
--------- ---------
62,216 94,248
--------- ---------
Telecommunications:
Pagers...................................................... -- 1,083
Telephony................................................... -- 425
Cable....................................................... 561 680
--------- ---------
561 2,188
--------- ---------
$ 62,777 $ 96,436
--------- ---------
--------- ---------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1997 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Land......................................................... $ 1,224 $ 871
Buildings and improvements................................... 7,274 6,565
Machinery and equipment...................................... 41,263 46,259
Leasehold improvements....................................... 967 840
---------- ---------
50,728 54,535
Less: Accumulated depreciation and amortization.............. 14,661 10,525
---------- ---------
$ 36,067 $ 44,010
---------- ---------
---------- ---------
</TABLE>
INTANGIBLE ASSETS
Accumulated amortization at December 31, 1998 and 1997 was $22.4 million and
$13.8 million, respectively.
F-49
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1997 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Accrued salaries and wages.................................... $ 4,812 $ 4,737
Accrued taxes................................................. 3,309 2,842
Accrued interest.............................................. 1,696 1,727
Self-insurance claims payable................................. 23,311 29,507
Accrued warranty costs........................................ 4,420 4,293
Other......................................................... 25,781 30,243
--------- ---------
$ 63,329 $ 73,349
--------- ---------
--------- ---------
</TABLE>
SELF-INSURANCE CLAIMS PAYABLE
For the year ended December 31, 1998, the Company revised the estimated value of
its self-insured workers' compensation and product liability claims based on its
claims experience, which resulted in a reduction in the liability of $6.6
million at December 31, 1998.
RESEARCH AND DEVELOPMENT AND ADVERTISING COSTS
Research and development costs for the years ended December 31, 1998 and 1997
and the period November 1, 1996 to December 31, 1996 were $3.0 million, $3.8
million and $930,000, respectively. The Company's advertising costs for the
years ended December 31, 1998, 1997, and 1996 were $24.9 million, $19.8 million
and $4.5 million, respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The accumulated other comprehensive income (loss) at December 31, 1998, 1997 and
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
FOREIGN ACCUMULATED
CURRENCY MINIMUM OTHER
TRANSLATION PENSION COMPREHENSIVE
ADJUSTMENTS LIABILITY INCOME (LOSS)
----------- ----------- --------------
<S> <C> <C> <C>
Balances, December 31, 1995................ $ 583 $ -- $ 583
Current-period change...................... (618) -- (618)
----------- ----------- -------
Balances, December 31, 1996................ (35) -- (35)
Current-period change...................... (2,526) (805) (3,331)
----------- ----------- -------
Balances, December 31, 1997................ (2,561) (805) (3,366)
Current-period change...................... (1,810) (904) (2,714)
----------- ----------- -------
Balances, December 31, 1998................ $ (4,371) $ (1,709) $ (6,080)
----------- ----------- -------
----------- ----------- -------
</TABLE>
F-50
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
TAX EFFECTS ALLOCATED TO EACH COMPONENT OF OTHER COMPREHENSIVE INCOME (LOSS)
The tax effects allocated to each component of other comprehensive income (loss)
for the years ended December 31, 1998, 1997, and 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
PRE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
--------- ------------- -----------
<S> <C> <C> <C>
Year ended December 31, 1998:
Foreign currency translation adjustments...... $ (1,810) $ -- $ (1,810)
Minimum pension liability..................... (904) -- (904)
--------- ------ -----------
Other comprehensive income.................... $ (2,714) $ -- $ (2,714)
--------- ------ -----------
--------- ------ -----------
Year ended December 31, 1997:
Foreign currency translation adjustments...... $ (3,939) $ 1,378 $ (2,561)
Minimum pension liability..................... (1,238) 433 (805)
--------- ------ -----------
Other comprehensive loss...................... $ (5,177) $ 1,811 $ (3,366)
--------- ------ -----------
--------- ------ -----------
Year ended December 31, 1996:
Foreign currency translation adjustments...... $ (951) $ 333 $ (618)
--------- ------ -----------
Other comprehensive income.................... $ (951) $ 333 $ (618)
--------- ------ -----------
--------- ------ -----------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended December
31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.................................................. $ 16,482 $ 22,434 $ 15,545
--------- --------- ---------
--------- --------- ---------
Taxes..................................................... $ 2,091 $ 26,200 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
In connection with acquisition of Motion Picture Corporation of America in 1996,
the Company issued debt of $1.2 million and restricted common stock valued at
$3.2 million.
See note 7 regarding the consolidation of Snapper.
See note 3 regarding the acquisition of Asian American Telecommunications.
Interest expense includes amortization of debt discount of $1.7 million and $2.6
million for the years ended December 31, 1997 and 1996, respectively.
15. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company is obligated under various operating and capital leases. Total rent
expense amounted to $5.8 million, $4.7 million and $1.3 million for the years
ended December 31, 1998, 1997 and 1996,
F-51
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
respectively. Plant, property and equipment included capital leases of $2.4
million and related accumulated amortization of $873,000 and $548,000 at
December 31, 1998 and 1997, respectively.
Minimum rental commitments under non-cancellable leases are set forth in the
following table (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1999..................................................................... $ 773 $ 4,547
2000..................................................................... 166 3,655
2001..................................................................... 23 2,409
2002..................................................................... 12 1,389
2003..................................................................... -- 766
Thereafter............................................................... -- 166
----- -----------
Total.................................................................... 974 $ 12,932
-----------
-----------
Less: amount representing interest....................................... 58
-----
Present value of future minimum lease payments........................... $ 916
-----
-----
</TABLE>
Certain of the Company's subsidiaries have employment contracts with various
officers, with remaining terms of up to 3 years, at amounts approximating their
current levels of compensation. The Company's remaining aggregate commitment at
December 31, 1998 under such contracts is approximately $7.0 million.
The Company pays a management fee to Metromedia for certain general and
administrative services provided by Metromedia personnel. Such management fee
amounted to $3.5 million, $3.3 million and $1.5 million for the years ended
December 31, 1998, 1997 and 1996, respectively. The management fee commitment
for the year ended December 31, 1999 is $3.8 million.
Snapper has entered into various long-term manufacturing and purchase agreements
with certain vendors for the purchase of manufactured products and raw
materials. As of December 31, 1998, non-cancellable commitments under these
agreements amounted to approximately $14.7 million.
Snapper has an agreement with a financial institution which makes available
floor-plan financing to dealers of Snapper products. This agreement provides
financing for dealer inventories and accelerates Snapper's cash flow. Under the
terms of the agreement, a default in payment by a dealer is non-recourse to
Snapper. However, Snapper is obligated to repurchase any new and unused
equipment recovered from the dealer. At December 31, 1998, there was
approximately $96.4 million outstanding under this floor-plan financing
arrangement. The Company guarantees the payment obligation of Snapper under this
agreement.
CONTINGENCIES
RISKS ASSOCIATED WITH THE COMMUNICATIONS GROUP'S INVESTMENTS
The ability of the Communications Group and its joint ventures and subsidiaries
to establish profitable operations is subject to significant political, economic
and social risks inherent in doing business in emerging markets such as Eastern
Europe, the former Soviet Union and China. These include matters
F-52
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
arising out of government policies, economic conditions, imposition of or
changes in government regulations and policies, imposition of or changes to
taxes or other similar charges by governmental bodies, exchange rate
fluctuations and controls, civil disturbances, deprivation or unenforceability
of contractual rights, and taking of property without fair compensation.
In 1998, a number of emerging market economies suffered significant economic and
financial difficulties resulting in liquidity crises, devaluation of currencies,
higher interest rates and reduced opportunities for financing. At this time, the
prospects for recovery by the economies of the Russian Federation and other
republics of the former Soviet Union and Eastern Europe negatively affected by
the economic crisis remain unclear. The economic crisis has resulted in a number
of defaults by borrowers in Russia and other countries and a reduced level of
financing available to investors in these countries. The devaluation of many of
the currencies in the region has also negatively affected the U.S. dollar value
of the revenues generated by certain of the Company's joint ventures and may
lead to certain additional restrictions on the convertibility of certain local
currencies. The Company expects that these problems will negatively affect
certain of its cable television, telephony, radio broadcasting and paging
ventures.
The Communications Group's strategy is to minimize its foreign currency risk. To
the extent possible, in countries that have experienced high rates of inflation,
the Communications Group bills and collects all revenues in U.S. dollars or an
equivalent local currency amount adjusted on a monthly basis for exchange rate
fluctuations. The Communications Group's joint ventures and subsidiaries are
generally permitted to maintain U.S. dollar accounts to serve their U.S. dollar
obligations, thereby reducing foreign currency risk. As the Communications Group
and its joint ventures and subsidiaries expand their operations and become more
dependent on local currency based transactions, the Communications Group expects
that its foreign currency exposure will increase. The Communications Group does
not hedge against foreign exchange rate risks at the current time and,
therefore, could be subject in the future to any declines in exchange rates
between the time a joint venture and subsidiaries receives its funds in local
currencies and the time it distributes such funds in U.S. dollars to the
Communications Group.
The Communications Group may also be materially and adversely affected by laws
restricting foreign investment in the field of communications. Some countries,
including China, have extensive restrictions on foreign investment in the
communications field and the Communications Group attempts to structure its
prospective projects in order to comply with such laws. However, there can be no
assurance that such legal and regulatory restrictions will not increase in the
future or, as currently promulgated, will not be interpreted in a manner giving
rise to tighter restrictions, and thus may have a material adverse effect on the
Communications Group's existing and prospective projects in the country. Russia
has periodically proposed legislation that would limit the ownership percentage
that foreign companies can have in radio and television businesses and more
recently has proposed legislation that would limit the number of radio and
television businesses that any company could own in a single market. While such
proposed legislation has not been enacted, it is possible that such legislation
could be enacted in Russia and that other countries in Eastern Europe and the
republics of the former Soviet Union may enact similar legislation which could
have a material adverse effect on the business operations, financial condition
or prospects of the Communications Group. The proposed foreign investment
legislation could be similar to United States Federal law which limits foreign
ownership in entities owning broadcasting licenses. There is no way of
predicting whether additional ownership limitations will be enacted in any of
the Communications Group's markets, or whether any
F-53
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
such law, if enacted, will force the Communications Group to reduce or
restructure its ownership interest in any of the ventures in which the
Communications Group currently has an ownership interest. If additional
ownership limitations are enacted in any of the Communications Group's markets
and the Communications Group is required to reduce or restructure its ownership
interests in any ventures, it is unclear how such reduction or restructuring
would be implemented, or what impact such reduction or restructuring would have
on the Communications Group.
The Communications Group's investments in joint ventures in China have been made
through a structure known as the sino-sino-foreign joint venture, an arrangement
in which the foreign invested sino-sino-foreign joint venture is a provider of
telephony equipment, financing and technical services to telecommunications
operators and not a direct provider of telephone service. Since mid-1998,
positions unofficially taken by some departments of the Chinese government have
raised uncertainty regarding the continued viability of the sino-sino-foreign
structure and, as a result, the Communications Group's associated financing,
service and consulting arrangements with China Unicom. No formal decisions or
regulations on the resolution of sino-sino-foreign issues have yet been
announced by the Chinese government. There is a risk that the Communications
Group along with other telecommunication participants in China, may be required
to substantially restructure the terms of its current Sino-Sino-Foreign joint
ventures arrangements with China Unicom to meet new Chinese government
regulations. It cannot be determined at this time what effects, if any, such
actions would have on the future value of the Communications Group's
Sino-Sino-Foreign joint ventures and the joint ventures' ability to generate
revenue, cash flow or net income.
The foregoing factors relating to economic and financial conditions in the
Russian Federation and other emerging markets, and to Chinese law and regulation
relating to foreign investment in the telecommunications industry, have not had
an effect on the Company's financial condition or results of operations as of
and for the year ended December 31, 1998. As is noted above, the Company cannot
yet predict the impact that such factors may have on its financial condition or
results of operations. In addition, the Company reports the results of the
operations of the Communications Group's operations in Eastern Europe and the
republics of the former Soviet Union and the distributable cash flow generated
by the telephony networks of China Unicom on a three month lag and therefore the
impact of such factors, if any, are not yet fully reflected in the Company's
results of operations.
The licenses pursuant to which the Communications Group's businesses operate are
issued for limited periods, including certain licenses which are renewable
annually. Certain of these licenses expire over the next several years. Two of
the licenses held by the Communications Group have expired, although the
Communications Group has been permitted to continue operations while the
decision on reissuance is pending. One of these licenses is for the Company's
radio joint venture in Hungary. The Company has been informed that its bid in a
competitive tender has been accepted and expects to receive a new license
shortly. The Communications Group expects the license fee to be approximately
$8.0 million payable over 8 years in Hungarian forints adjusted for inflation.
Certain other licenses held or used by the Communications Group will expire
during 1999. The failure of such licenses to be renewed may have a material
adverse effect on the Company's results of operations. Additionally, certain of
the licenses pursuant to which the Communications Group's businesses operate
contain network build-out milestone clauses. The failure to satisfy such
milestones could result in the loss of such licenses which may have a material
adverse effect on the Communications Group.
F-54
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
The Company's joint ventures and subsidiaries will apply for renewals of their
licenses. While there can be no assurance that these licenses will be renewed,
based on past experience, the Communications Group expects to obtain such
renewals.
The Communications Group has sold a 17.1% participation in the $36.5 million
loan to AIG Silk Road Fund, Ltd., which requires AIG Silk Road to provide the
Communications Group 17.1% of the funds to be provided under the loan agreement
and entitles AIG Silk Road to 17.1% of the repayments to the Communications
Group. The Communications Group has agreed to repurchase such loan participation
from AIG Silk Road in August 2005 on terms and conditions agreed by the parties.
In addition, the Communications Group has provided AIG Silk Road the right to
put its 15.7% ownership interest in Omni-Metromedia to the Communications Group
starting in February 2001 for a price equal to seven times the EBITDA of Caspian
American minus debt, as defined, multiplied by AIG Silk Road's percentage
ownership interest.
CREDIT CONCENTRATIONS
The Communications Group's trade receivables do not represent significant
concentrations of credit risk at December 31, 1998, due to the wide variety of
customers/subscribers and markets into which the Company's services are sold and
their dispersion across many geographic areas.
No single customer represents a significant concentration of credit risk for
Snapper at December 31, 1998 and 1997.
FINANCIAL GUARANTEES
In connection with Metromedia China's investments in the Sichuan JV and the
Chongqing JV, the joint ventures entered into a loan for the initial phase with
Nortel for $20.0 million to finance the purchase of Nortel equipment for the
Sichuan Province and City of Chongqing initial phase project with China Unicom.
The Company secured this phase 1 loan repayment with a $20.0 million letter of
credit. Pursuant to an agreement executed among Nortel, Sichuan JV, Chongqing JV
and China Unicom in December 1998, other than outstanding equipment and interest
of $3.3 million, payable in September 1999, all outstanding deferred amounts
owed to Nortel were paid. The loan agreement between Nortel and the joint
ventures was terminated. The $20.0 million letter of credit associated with the
loan agreement was reduced to $3.3 million and Nortel has the right to draw on
the $3.3 million in September 1999.
In addition, the Company has guaranteed certain indebtness of one of the
Company's cellular telecommunications joint ventures. The total guarantee is for
$25.0 million of which $19.8 million has been borrowed at December 31, 1998.
As part of the financing of a joint venture, the Company and its joint venture
partner provided a 5% equity interest to the lender. The lender can put back the
equity interest to the Company and its joint venture partner at certain dates in
the future at an amount not to exceed $6.0 million. In addition, in connection
with the financing, Metromedia International Telecommunications and its joint
venture partner agreed to provide an additional $7.0 million in funding to the
joint venture.
In January 1998, the Communications Group entered into a loan agreement with DSC
Finance Corporation pursuant to which DSC agreed to finance 50% of the equipment
it provides to the
F-55
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Communications Group up to $35.0 million. In June 1998, the Company agreed to
guarantee the Communications Group's obligation to repay DSC under such loan
agreement.
SELF-INSURANCE LIABILITIES
At December 31, 1998 the Company had $17.8 million of outstanding letters of
credit which principally collateralize certain liabilities under the Company's
self-insurance program.
LITIGATION
The Company is involved in various legal and regulatory proceedings and while
the results of any litigation or regulatory issue contain an element of
uncertainty, management believes that the outcome of any known, pending or
threatened legal proceedings, except as disclosed in note 8, will not have a
material effect on the Company's consolidated financial position and results of
operations.
ENVIRONMENTAL PROTECTION
Snapper's manufacturing plant is subject to federal, state and local
environmental laws and regulations. Compliance with such laws and regulations
has not, and is not expected to, materially affect Snapper's competitive
position. Snapper's capital expenditures for environmental control facilities,
its incremental operating costs in connection therewith and Snapper's
environmental compliance costs were not material in 1998 and are not expected to
be material in future years.
The Company has agreed to indemnify a former subsidiary of the Company for
certain obligations, liabilities and costs incurred by the subsidiary arising
out of environmental conditions existing on or prior to the date on which the
subsidiary was sold by the Company in 1987. Since that time, the Company has
been involved in various environmental matters involving property owned and
operated by the subsidiary, including clean-up efforts at landfill sites and the
remediation of groundwater contamination. The costs incurred by the Company with
respect to these matters have not been material during any year through and
including the year ended December 31, 1998. As of December 31, 1998, the Company
had a remaining reserve of approximately $2.2 million to cover its obligations
to its former subsidiary. During 1996, the Company was notified by certain
potentially responsible parties at a superfund site in Michigan that the former
subsidiary may also be a potentially responsible party at the superfund site.
The former subsidiary has agreed to participate in remediation in a global
settlement that is subject to court approval, but the amount of the liability
has not been finally determined. The Company believes that such liability will
not exceed the reserve.
The Company, through a wholly-owned subsidiary, owns approximately 17 acres of
real property located in Opelika, Alabama. The Opelika Property was formerly
owned by Diversified Products Corporation, a former subsidiary of the Company,
and was transferred to a wholly-owned subsidiary of the Company in connection
with the sale of the Company's former sporting goods business to RDM.
Diversified Products previously used the Opelika property as a storage area for
stockpiling cement, sand, and mill scale materials needed for or resulting from
the manufacture of exercise weights. In June 1994, Diversified Products
discontinued the manufacture of exercise weights and no longer needed to use the
Opelika property as a storage area. In connection with the sale to RDM, RDM and
the Company agreed that the Company, through a wholly-owned subsidiary, would
acquire the Opelika property, together with any related permits, licenses, and
other authorizations under federal, state and local laws governing pollution or
protection of the environment. In connection with the closing of the
F-56
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
sale, the Company and RDM entered into an Environmental Indemnity Agreement
under which the Company agreed to indemnify RDM for costs and liabilities
resulting from the presence on or migration of regulated materials from the
Opelika property. The Company's obligations under the indemnity agreement with
respect to the Opelika property are not limited. The indemnity agreement does
not cover environmental liabilities relating to any property now or previously
owned by Diversified Products except for the Opelika property. On January 22,
1996, the Alabama Department of Environmental Management advised the Company
that the Opelika property contains an "unauthorized dump" in violation of
Alabama environmental regulations. The letter from the Department of
Environmental Management required the Company to present for the Department's
approval a written environmental remediation plan for the Opelika property. The
Company retained an environmental consulting firm to develop an environmental
remediation plan for the Opelika property. In 1997, the Company received the
consulting firm's report. The Company has conducted a grading and capping in
accordance with the remediation plan and has reported to the Department of
Environmental Management that the work was successfully completed. The Company
has proposed to the Department an accelerated ground water monitoring schedule.
If the Department responds favorably, the Company anticipates closure of this
site in 1999. The Company believes its reserve of $100,000 will be adequate to
cover any further costs.
F-57
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods in 1998 and 1997 is
presented below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST QUARTER OF SECOND QUARTER OF
------------------------ -----------------------
1998 1997(a)(b) 1998 1997(b)
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 60,219 $ 58,975 $ 74,239 $ 52,000
Operating loss.............................................. (17,143) (10,078) (23,193) (16,914)
Equity in losses of unconsolidated investees................ (5,500) (740) (2,145) (24,364)(f)
Loss from continuing operations attributable to common
stockholders.............................................. (26,715)(e) (13,505) (25,941)(e) (45,958)
Income (loss) from discontinued operations.................. -- (8,753)(c)(d) 5,267(d) (25,914)(c)(d)
Loss from extraordinary items............................... -- -- -- (1,094)(f)
Net loss attributable to common stockholders................ (26,715) (22,258) (20,674) (72,966)
Income (loss) per common share--Basic:......................
Continuing operations..................................... $ (0.39) $ (0.21) $ (0.38) $ (0.69)
Discontinued operations................................... $ -- $ (0.13) $ 0.08 $ (0.39)
Extraordinary items....................................... $ -- $ -- $ -- $ (0.02)
Net loss.................................................. $ (0.39) $ (0.34) $ (0.30) $ (1.10)
</TABLE>
<TABLE>
<CAPTION>
THIRD QUARTER OF FOURTH QUARTER OF
------------------------ -----------------------
1998 1997 1998 1997
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Revenues.................................................... $ 55,052 $ 36,545 $ 50,782 $ 56,808
Operating loss.............................................. (26,004) (20,830) (63,516)(i) (32,253)
Equity in losses of unconsolidated investees................ (1,293) (23,959)(g) (9,213)(i) (4,087)
Loss from continuing operations attributable to common
stockholders.............................................. (23,101)(e) (31,863)(e) (75,237)(e) (43,911)(e)
Income (loss) from discontinued operations.................. -- 269,072(c)(d) 7,049(c) (369)(d)
Loss from extraordinary items............................... -- (13,598)(h) -- --
Net income (loss) attributable to common stockholders....... (23,101) 223,611 (68,188) (44,280)
Income (loss) per common share--Basic:
Continuing operations..................................... $ (0.33) $ (0.48) $ (1.09) $ (0.64)
Discontinued operations................................... $ -- $ 4.01 $ 0.10 $ (0.01)
Extraordinary items....................................... $ -- $ (0.20) $ -- $ --
Net income (loss)......................................... $ (0.33) $ 3.33 $ (0.99) $ (0.65)
</TABLE>
- ------------------------------
(a) Revenues, operating loss and interest income (expense), net, have been
restated to reflect the entertainment group sale.
(b) Revenues, operating loss and interest income (expense), net, have been
restated to reflect Landmark as a discontinued operation.
(c) On July 10, 1997, the Company consummated the entertainment group sale
resulting in a gain of $266.3 million, net of taxes. The transaction has
been treated as a discontinuance of a business segment and, accordingly, the
consolidated financial statements reflect the results of operations of the
entertainment group as a discontinued segment. In 1998, the Company received
refunds of tax payments of $8.7 million made by the entertainment group in
prior years.
(d) The Company completed the Landmark sale on April 16, 1998, resulting in a
gain of $5.3 million, net of taxes. The transaction has been treated as a
discontinuance of a business segment and, accordingly, the consolidated
financial statements reflect the results of operations of Landmark as a
discontinued segment.
(e) Loss from continuing operations has been adjusted to reflect the dividend
requirements on the Company's 7 1/4% cumulative convertible preferred stock
issued on September 16, 1997.
(f) Includes the equity in losses of and writedown of investment in RDM of $25.1
million and the equity in early extinguishment of debt of RDM.
(g) Includes equity in losses of RDM of $19.9 million.
(h) In connection with the entertainment group sale, the Company repaid all of
its outstanding debentures and expensed the unamortized discounts associated
with the debentures.
(i) The Company adjusted the carrying value of goodwill and other intangibles,
fixed assets, investments in and advances to joint ventures and wrote down
paging inventory. The total non-cash, nonrecurring charge and write down was
$49.9 million.
F-58
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. EVENTS SUBSEQUENT TO DATE OF ACCOUNTANT'S REPORT (UNAUDITED)
Subsequent to June 30, 1999, Ningbo JV received a letter from China Unicom
stating that the Chinese government had requested that China Unicom terminate
the project with Ningbo JV. China Unicom has since informed Metromedia China
that the letter also applies to Ningbo JV II. China Unicom suggested immediately
beginning negotiations with the Ningbo joint ventures. The content of the
negotiation includes determining the investment principal of the Ningbo joint
ventures, appropriate compensation and other matters related to termination of
contracts. The letter further stated that due to unspecified technical reasons,
the cash distribution plan for the first half of 1999 had not been decided, and
that China Unicom expected to discuss this with Ningbo JV. As a result, the
Company cannot yet determine the amount of compensation the Ningbo joint
ventures will receive.
While there can be no assurance that China Unicom will provide similar letters
to the Company's other two sino-sino-foreign telephony-related joint ventures,
the Company expects that these joint ventures will also be the subject of
project termination negotiations. The Company cannot yet predict the effect on
it of the Ningbo joint venture negotiation and the other expected negotiations,
but the Company believes such negotiations, if adversely concluded, could have a
material adverse effect on its financial position and results of operations.
Depending on the amount of compensation it receives, the Company will record a
non cash charge equal to the difference between the sum of the carrying values
of its investment and advances made to joint ventures plus goodwill less the
cash compensation it receives from the joint ventures which China Unicom has
paid. The Company's investment in and advances to joint ventures and goodwill
balance at June 30, 1999 were approximately $71 million and $67 million,
respectively.
F-59
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
METROMEDIA INTERNATIONAL GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
Revenues................................................................... $ -- $ -- $ --
Cost and expenses:
Selling, general and administrative...................................... (905) 5,549 9,355
Depreciation and amortization............................................ 9 12 18
----------- ----------- -----------
Operating income (loss).................................................... 896 (5,561) (9,373)
Interest income (expense), net............................................. 14,926 2,156 (13,313)
Equity in losses of subsidiaries........................................... (153,423) (88,581) (49,460)
Equity in losses of and writedown of investment in RDM Sports Group,
Inc...................................................................... -- (45,056) --
Income tax benefit......................................................... 1,615 6,141 --
----------- ----------- -----------
Loss from continuing operations............................................ (135,986) (130,901) (72,146)
Discontinued operations:
Gain on disposal and (loss) on asset held for sale....................... 12,316 266,294 (16,305)
Equity in losses of discontinued operations.............................. -- (32,258) (22,287)
----------- ----------- -----------
Income (loss) before extraordinary items................................... (123,670) 103,135 (110,738)
Extraordinary item:
Loss and equity in on early extinguishment of debt....................... -- (14,692) (4,505)
----------- ----------- -----------
Net income (loss).......................................................... (123,670) 88,443 (115,243)
Cumulative convertible preferred stock dividend requirement................ (15,008) (4,336) --
----------- ----------- -----------
Net income (loss) attributable to common stockholders...................... $ (138,678) $ 84,107 $ (115,243)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of common shares--Basic............................ 68,955 66,961 54,293
----------- ----------- -----------
----------- ----------- -----------
Income (loss) per common share--Basic:
Continuing operations.................................................... $ (2.19) $ (2.02) $ (1.33)
Discontinued operations.................................................. $ 0.18 $ 3.50 $ (0.71)
Extraordinary items...................................................... $ -- $ (0.22) $ (0.08)
Net income (loss)........................................................ $ (2.01) $ 1.26 $ (2.12)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the condensed financial
information.
See notes to Condensed Financial Information on page S-4.
S-1
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--CONTINUED
METROMEDIA INTERNATIONAL GROUP, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 128,219 $ 121,892
Short-term investments -- 100,000
Other assets 11,384 2,631
------------ ------------
Total current assets 139,603 224,523
Net assets of discontinued operations -- 48,531
Investment in and receivables from subsidiaries 325,719 338,846
Other assets 989 1,923
------------ ------------
Total assets $ 466,311 $ 613,823
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 2,728 $ 2,039
Accrued expenses 37,804 49,443
Current portion of long term-debt -- 420
------------ ------------
Total current liabilities 40,532 51,902
Long-term debt -- 990
Other long term liabilities 239 249
------------ ------------
Total liabilities 40,771 53,141
------------ ------------
Stockholders' equity
Preferred stock 207,000 207,000
Common stock 69,119 68,391
Paid-in surplus 1,012,794 1,007,272
Accumulated deficit (857,293) (718,615)
Accumulated other comprehensive loss (6,080) (3,366)
------------ ------------
Total stockholders' equity 425,540 560,682
------------ ------------
Total liabilities and stockholder equity $ 466,311 $ 613,823
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the condensed financial
information.
See Notes to Condensed Financial Information on page S-4.
S-2
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--CONTINUED
METROMEDIA INTERNATIONAL GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- -----------
Operating activities:
Net income (loss)......................................................... $ (123,670) $ 88,443 $ (115,243)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
(Gain) on disposal and loss on assets held for sale..................... (12,316) (266,294) 16,305
Equity in losses from discontinued operations........................... -- 32,258 22,287
Loss and equity in loss on early extinguishment of debt................. -- 14,692 4,505
Equity in losses and writedown of investment in RDM Sports Group,
Inc................................................................... -- 45,056 --
Equity in losses of subsidiaries........................................ 153,423 88,581 49,460
Changes in cumulative translation adjustment of subsidiaries............ (1,810) (2,526) (618)
Other................................................................... (6,556) 1,711 2,607
Changes in operating assets and liabilities:
(Increase) decreases in other current assets............................ (89) 134 245
Decrease in other assets................................................ 934 619 1,983
Increase (decrease) in accounts payable, accrued expenses and other
liabilities........................................................... (10,423) (41,804) (7,651)
----------- ---------- -----------
Cash used in operating activities..................................... (507) (39,130) (26,120)
----------- ---------- -----------
Investing activities:
Net proceeds from sale of discontinued operations....................... 57,298 276,607 --
Investment in RDM Sports Group, Inc..................................... -- (15,000) --
Distributions from subsidiaries......................................... 14,533 -- 5,400
Purchase of short-term investments...................................... -- (100,000) --
Proceeds from sale of short-term investments............................ 100,000 -- 5,366
Other investing activities, net......................................... -- -- 819
----------- ---------- -----------
Cash provided by investing activities................................. 171,831 161,607 11,585
----------- ---------- -----------
Financing activities:
Payment of revolving term loan.......................................... -- -- (28,754)
Payments on notes and subordinated debt................................. (1,410) (156,524) (7,656)
Proceeds from issuance of stock......................................... 5,347 217,595 191,576
Preferred stock dividends paid.......................................... (15,008) (3,709) --
Due from subsidiary..................................................... (153,926) (143,221) (66,128)
Due to (from) discontinued operations................................... -- 1,419 (7,130)
----------- ---------- -----------
Cash provided by (used in) financing activities....................... (164,997) (84,440) 81,908
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents.................... 6,327 38,037 67,373
Cash and cash equivalents at beginning of year.......................... 121,892 83,855 16,482
----------- ---------- -----------
Cash and cash equivalents at end of year................................ $ 128,219 $ 121,892 $ 83,855
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of the condensed financial
information.
See Notes to Condensed Financial Information on page S-4.
S-3
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--CONTINUED
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1998, 1997, AND 1996
(A) The accompanying parent company financial statements reflect only the
operations of MMG for the years ended December 31, 1998, 1997 and 1996 and
the equity in losses of subsidiaries and discountinued operations for the
years ended December 31, 1998, 1997, and 1996.
(B) There are no principal repayments of the Registrant's borrowings under debt
agreements and other debt outstanding at December 31, 1998.
For additional information regarding the Registrant's and subsidiaries'
borrowings under debt agreements and other debt, see note 4 to the "Notes to
Consolidated Financial Statements."
S-4
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
METROMEDIA INTERNATIONAL GROUP, INC.
ALLOWANCES FOR DOUBTFUL ACCOUNTS, ETC. (DEDUCTED FROM CURRENT RECEIVABLES)
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND OTHER DEDUCTION/ BALANCE AT
OF PERIOD EXPENSES CHARGES WRITE-OFFS END OF PERIOD
----------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998........................ $ 2,576 $ 2,300 $ -- $ (2,685) $ 2,191
----------- ----------- --------- ----------- ------
----------- ----------- --------- ----------- ------
Year ended December 31, 1997........................ $ 1,691 $ 1,675 $ -- $ (790) $ 2,576
----------- ----------- --------- ----------- ------
----------- ----------- --------- ----------- ------
Year ended December 31, 1996........................ $ 313 $ 1,378 $ -- $ -- $ 1,691
----------- ----------- --------- ----------- ------
----------- ----------- --------- ----------- ------
</TABLE>
S-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
DESIGNATION EXHIBITS INCORPORATED HEREIN BY REFERENCE
OF ------------------------------------------------
EXHIBIT IN DOCUMENT WITH WHICH EXHIBIT
THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- ------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
2.2 Agreement and Plan of Reorganization dated as of Quarterly Report on Form 10-Q for the three
July 20, 1994 by and among, The Actava Group months ended June 30, 1994, Exhibit 99.1
Inc., Diversified Products Corporation, Hutch
Sports USA Inc., Nelson/Weather-Rite, Inc.,
Willow Hosiery Company, Inc. and Roadmaster
Industries, Inc.
2.3 Amended and Restated Agreement and Plan of Current Report on Form 8-K for event occurring
Merger dated as of September 27, 1995 by and on September 27, 1995, Exhibit 99(a)
among The Actava Group Inc., Orion Pictures
Corporation, MCEG Sterling Incorporated,
Metromedia International Telecommunications,
Inc., OPG Merger Corp. and MITI Merger Corp. and
exhibits thereto. The Registrant agrees to
furnish copies of the schedules supplementally
to the Commission on request.
2.5 Agreement and Plan of Merger dated as of January Current Report on Form 8-K dated January 31,
31, 1996 by and among Metromedia International 1996, Exhibit 99.1
Group, Inc., The Samuel Goldwyn Company and SGC
Merger Corp. and exhibits thereto. The
registrant agrees to furnish copies of the
schedules to the Commission upon request.
3.1 Restated Certificate of Incorporation of Registration Statement on Form S-3 (Registration
Metromedia International Group, Inc. No. 33-63853), Exhibit 3.1
3.2 Restated By-laws of Metromedia International Registration Statement on Form S-3 (Registration
Group, Inc. No. 33-6353), Exhibit 3.2
4.1 Indenture dated as of August 1, 1973, with Application of Form T-3 for Qualification of
respect to 9 1/2% Subordinated Debentures due Indenture under the Trust Indenture Act of 1939
August 1, 1998, between The Actava Group Inc. (File No. 22-7615), Exhibit 4.1
and Chemical Bank, as Trustee.
4.2 Agreement among The Actava Group, Inc., Chemical Registration Statement on Form S-14
Bank and Manufacturers Hanover Trust Company, (Registration No. 2-81094), Exhibit 4.2
dated as of September 26, 1980, with respect to
successor trusteeship of the 9 1/2% Subordinated
Debentures due August 1, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DESIGNATION EXHIBITS INCORPORATED HEREIN BY REFERENCE
OF ------------------------------------------------
EXHIBIT IN DOCUMENT WITH WHICH EXHIBIT
THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- ------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
4.3 Instrument of registration, appointment and Annual Report on Form 10-K for the year ended
acceptance dated as of June 9, 1986 among The December 31, 1986, Exhibit 4.3
Actava Group Inc., Manufacturers Hanover Trust
Company and Irving Trust Company, with respect
to successor trusteeship of the 9 1/2%
Subordinated Debentures due August 1, 1998.
4.4 Indenture dated as of March 15, 1977, with Registration Statement on Form S-7 (Registration
respect to 9 7/8% Senior Subordinated Debentures No. 2-58317), Exhibit 4.4
due March 15, 1997, between The Actava Group
Inc. and The Chase Manhattan Bank, N.A., as
Trustee.
4.5 Agreement among The Actava Group Inc., The Chase Registration Statement on Form S-14
Manhattan Bank, N.A. and United States Trust (Registration No. 2-281094), Exhibit 4.5
Company of New York, dated as of June 14, 1982,
with respect to successor trusteeship of the
9 7/8% Senior Subordinated Debentures due March
15, 1997.
4.6 Indenture between National Industries, Inc. and Post-Effective Amendment No. 1 to Application on
First National City Bank, dated October 1, 1974, Form T-3 for Qualification of Indenture Under
with respect to the 10% Subordinated Debentures, The Trust Indenture Act of 1939 (File No.
due October 1, 1999. 22-8076), Exhibit 4.6
4.7 Agreement among National Industries, Inc., The Registration Statement on Form S-14
Actava Group Inc., Citibank, N.A., and Marine (Registration No. 2-81094), Exhibit 4.7
Midland Bank, dated as of December 20, 1977,
with respect to successor trusteeship of the 10%
Subordinated Debentures due October 1, 1999.
4.8 First Supplemental Indenture among The Actava Registration Statement on Form S-7 (Registration
Group Inc., National Industries, Inc. and Marine No. 2-60566), Exhibit 4.8
Midland Bank, dated January 3, 1978,
supplemental to the Indenture dated October 1,
1974 between National and First National City
Bank for the 10% Subordinated Debentures due
October 1, 1999.
4.9 Indenture dated as of August 1, 1987 with Annual Report on Form 10-K for the year ended
respect to 6 1/2% Convertible Subordinated December 31, 1987, Exhibit 4.9
Debentures due August 4, 2002, between The
Actava Group Inc. and Chemical Bank, as Trustee.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DESIGNATION EXHIBITS INCORPORATED HEREIN BY REFERENCE
OF ------------------------------------------------
EXHIBIT IN DOCUMENT WITH WHICH EXHIBIT
THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- ------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
10.1 1982 Stock Option Plan of The Actava Group Inc. Proxy Statement dated March 31, 1982, Exhibit A
10.2 1989 Stock Option Plan of The Actava Group Inc. Proxy Statement dated March 31, 1989, Exhibit A
10.3 1969 Restricted Stock Plan of The Actava Group Annual Report on Form 10-K for the year ended
Inc. December 31, 1990, Exhibit 10.3
10.4 1991 Non-Employee Director Stock Option Plan. Annual Report on Form 10-K for the year ended
December 31, 1991, Exhibit 10.4
10.5 Amendment to 1991 Non-Employee Director Stock Annual Report on Form 10-K for the year ended
Option Plan. December 31, 1992, Exhibit 10.5
10.6 Snapper Power Equipment Profit Sharing Plan. Annual Report on Form 10-K for the year ended
December 31, 1987, Exhibit 10.6
10.7 Retirement Plan executed November 1, 1990, as Annual Report on Form 10-K for the year ended
amended effective January 1, 1989. December 31, 1990, Exhibit 10.7
10.8 Supplemental Retirement Plan of The Actava Group Annual Report on Form 10-K for the year ended
Inc. December 31, 1983, Exhibit 10.8
10.9 Supplemental Executive Medical Reimbursement Annual Report on Form 10-K for the year ended
Plan. December 31, 1990, Exhibit 10.9
10.10 Amendment to Supplemental Retirement Plan of The Annual Report on Form 10-K for the year ended
Actava Group Inc., effective April 1, 1992. December 31, 1991, Exhibit 10.10
10.11 1992 Officer and Director Stock Purchase Plan. Annual Report on Form 10-K for the year ended
December 31, 1991, Exhibit 10.11
10.12 Form of Restricted Purchase Agreement between Annual Report on Form 10-K for the year ended
certain officers of The Actava Group Inc. and December 31, 1991, Exhibit 10.12
The Actava Group Inc.
10.12 Form of Restricted Purchase Agreement between Annual Report on Form 10-K for the year ended
certain officers of The Actava Group Inc. and December 31, 1991, Exhibit 10.12
The Actava Group Inc.
10.14 Form of Indemnification Agreement between Actava Annual Report on Form 10-K for the year ended
and certain of its directors and executive December 31, 1993, Exhibit 10.14
officers.
10.12 Form of Restricted Purchase Agreement between Annual Report on Form 10-K for the year ended
certain officers of The Actava Group Inc. and December 31, 1991, Exhibit 10.12
The Actava Group Inc.
10.14 Form of Indemnification Agreement between Actava Annual Report on Form 10-K for the year ended
and certain of its directors and executive December 31, 1993, Exhibit 10.14
officers.
10.15 Employment Agreement between The Actava Group Current Report on Form 8-K dated April 19, 1994,
Inc. and John D. Phillips dated April 19, 1994. Exhibit 10.15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DESIGNATION EXHIBITS INCORPORATED HEREIN BY REFERENCE
OF ------------------------------------------------
EXHIBIT IN DOCUMENT WITH WHICH EXHIBIT
THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- ------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
10.16 First Amendment to Employment Agreement dated Annual Report on Form 10-K for the year ended
November 1, 1995 between Metromedia December 31, 1995, Exhibit 10.16
International Group and John D. Phillips.
10.17 Option Agreement between The Actava Group Inc. Current Report on Form 8-K dated April 19, 1994,
and John D. Phillips dated April 19, 1994. Exhibit 10.17
10.18 Registration Rights Agreement among The Actava Current Report on Form 8-K dated April 19, 1994,
Group Inc., Renaissance Partners and John D. Exhibit 10.18
Phillips dated April 19, 1994.
10.19 Shareholders Agreement dated as of December 6, Annual Report on Form 10-K for the year ended
1994 among The Actava Group Inc., Roadmaster, December 31, 1994, Exhibit 10.19
Henry Fong and Edward Shake.
10.20 Registration Rights Agreement dated as of Annual Report on Form 10-K for the year ended
December 6, 1994 between The Actava Group Inc. December 31, 1994, Exhibit 10.20
and Roadmaster.
10.21 Environmental Indemnity Agreement dated as of Annual Report on Form 10-K for the year ended
December 6, 1994 between The Actava Group Inc. December 31, 1994, Exhibit 10.21
and Roadmaster.
10.22 Lease Agreement dated October 21, 1994 between Annual Report on Form 10-K for the year ended
JDP Aircraft II, Inc. and The Actava Group Inc. December 31, 1994, Exhibit 10.22
10.23 Lease Agreement dated as of October 4, 1995 Quarterly Report on Form 10-Q for the quarter
between JDP Aircraft II, Inc. and The Actava ended September 30, 1995, Exhibit 10.23
Group Inc.
10.37 Management Agreement dated November 1, 1995 Annual Report on Form 10-K for the year ended
between Metromedia Company and Metromedia December 31, 1995, Exhibit 10.37
International Group, Inc.
10.38 The Metromedia International Group, Inc. 1996 Proxy Statement dated August 6, 1996, Exhibit B
Incentive Stock Plan.
10.39 License Agreement dated November 1, 1995 between Annual Report on Form 10-K for the year ended
Metromedia Company and Metromedia International December 31, 1995, Exhibit 10.39
Group, Inc.
10.40 MITI Bridge Loan Agreement dated February 29, Annual Report on Form 10-K for the year ended
1996, among Metromedia Company and MITI December 31, 1995, Exhibit 10.40
10.41 Metromedia International Telecommunications, Quarterly Report on Form 10-Q for the quarter
Inc. 1994 Stock Plan ended March 31, 1996, Exhibit 10.41
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DESIGNATION EXHIBITS INCORPORATED HEREIN BY REFERENCE
OF ------------------------------------------------
EXHIBIT IN DOCUMENT WITH WHICH EXHIBIT
THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- ------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
10.42 Amended and Restated Credit Security and Quarterly Report on Form 10-Q for the quarter
Guaranty Agreement dated as of November 1, 1995, ended June 30, 1996, Exhibit 10.42
by and among Orion Pictures Corporation, the
Corporate Guarantors' referred to herein, and
Chemical Bank, as Agent for the Lenders.
10.43 Metromedia International Group/Motion Picture Quarterly Report or Form 10-Q for the quarter
Corporation of America Restricted Stock Plan ended June 30, 1996, Exhibit 10.43
10.44 The Samuel Goldwyn Company Stock Awards Plan, as Registration Statement on Form S-8 (Registration
amended No. 333-6453), Exhibit 10.44
10.45 Loan and Security Agreement, dated November 11, Quarterly Report on Form 10-Q for the quarter
1998 among Snapper, Inc. the lenders named ended September 30, 1998, Exhibit 10
therein and Fleet Capital Corporation, as agent.
10.46 Limited Guaranty Agreement dated November 11, Annual Report on Form 10-K for the year ended
1998 by Metromedia International Group, Inc. in December 31, 1998, Exhibit 10.46
favor of Fleet Capital Corporation.
10.47 Amendment No. 1 to License Agreement dated June Annual Report on Form 10-K for the year ended
13, 1996 between Metromedia Company and December 31, 1996, Exhibit 10.46
Metromedia International Group, Inc.
10.48 Amendment No. 1 to Management Agreement dated as Annual Report on Form 10-K for the year ended
of January 1, 1997 between Metromedia Company December 31, 1996, Exhibit 10.47
and Metromedia International Group, Inc.
10.49 Amended and Restated Agreement and Plan of Annual Report on Form 10-K for the year ended
Merger, dated as of May 17, 1996 between December 31, 1996, Exhibit 10.48
Metromedia International Group, Inc., MPCA
Merger Corp. and Bradley Krevoy and Steven
Stabler and Motion Picture Corporation of
America
10.50 Asset Purchase Agreement dated as of December Annual Report on Form 10-K for the year ended
17, 1997 December 31, 1997, Exhibit 10.51
11* Statement of computation of earnings per share.
12* Ratio of earnings to fixed charges
16 Letter from Ernst & Young to the Securities and Current Report on Form 8-K dated November 1,
Exchange Commission. 1995
21 List of subsidiaries of Metromedia International Annual Report on Form 10-K for the year ended
Group, Inc. December 31, 1996, Exhibit 21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DESIGNATION EXHIBITS INCORPORATED HEREIN BY REFERENCE
OF ------------------------------------------------
EXHIBIT IN DOCUMENT WITH WHICH EXHIBIT
THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- ------------- ------------------------------------------------ ------------------------------------------------
<C> <S> <C>
23* Consent of KPMG regarding Metromedia
International Group, Inc.
27* Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith
<PAGE>
EXHIBIT 11
METROMEDIA INTERNATIONAL GROUP, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
Income (loss) per common share--Basic (A):
Continuing operations.................................................... $ (135,986) $ (130,901) $ (72,146)
Cumulative convertible preferred stock dividend requirement.............. (15,008) (4,336) --
----------- ----------- -----------
Continuing operations attributable to common stock shareholders.......... (150,994) (135,237) (72,146)
Discontinued operations.................................................. 12,316 234,036 (38,592)
Extraordinary items...................................................... -- (14,692) (4,505)
----------- ----------- -----------
Net income (loss) attributable to common stock shareholders.............. $ (138,678) $ 84,107 $ (115,243)
----------- ----------- -----------
----------- ----------- -----------
Weighted average common stock shares outstanding during the period......... 68,955 66,961 54,293
----------- ----------- -----------
----------- ----------- -----------
Income (loss) per common share--Basic:
Continuing operations.................................................... $ (2.19) $ (2.02) $ (1.33)
Discontinued operations.................................................. 0.18 3.50 (0.71)
Extraordinary items...................................................... -- (0.22) (0.08)
----------- ----------- -----------
Net income (loss)........................................................ $ (2.01) $ 1.26 $ (2.12)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------
(A) In calculating diluted earnings per share, no potential shares of common
stock are to be included in the computation when a loss from continuing
operations available to common stock shareholders exists. For the years
ended December 31, 1998, 1997 and 1996, the Company had a loss from
continuing operations.
<PAGE>
EXHIBIT 12
METROMEDIA INTERNATIONAL GROUP, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
YEARS ENDED DECEMBER 31, FEBRUARY 28,
------------------------------------------------ ------------
1998 1997 1996 1995 1995
----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
EARNINGS:
Pretax loss from continuing operations before
minority interests and equity in losses of
unconsolidated investees attributable to common
stockholders.................................... $ (143,059) $ (96,207) $ (64,563) $ (30,086) $ (17,356)
Income distributions from less than fifty-
percent-owned joint ventures.................... 1,964 940 300 -- --
----------- ----------- ---------- ---------- ------------
Adjusted loss................................. $ (141,095) $ (95,267) $ (64,263) $ (30,086) $ (17,356)
----------- ----------- ---------- ---------- ------------
----------- ----------- ---------- ---------- ------------
FIXED CHARGES:
Interest expense, including amortization of debt
discount........................................ $ 16,331 $ 20,922 $ 19,090 $ 5,935 $ 1,109
Portion of rent expense representative of the
interest factor................................. 1,934 1,572 435 303 205
Preferred stock divided requirement............... 15,008 4,336 -- -- --
----------- ----------- ---------- ---------- ------------
Total fixed charges........................... $ 33,273 $ 26,830 $ 19,525 $ 6,238 $ 1,314
----------- ----------- ---------- ---------- ------------
----------- ----------- ---------- ---------- ------------
Ratio of earnings to fixed charges................ (A) (A) (A) (A) (A)
----------- ----------- ---------- ---------- ------------
----------- ----------- ---------- ---------- ------------
</TABLE>
- ------------------------
(A) For purposes of this computation, earnings are defined as pre-tax earnings
or loss from continuing operations of the Company before adjustment for
minority interests in consolidated subsidiaries or income or loss from
equity investees attributable to common stockholders plus (i) fixed charges
and (ii) distributed income of equity investees. Fixed charges are the sum
of (i) interest expensed and capitalized, (ii) amortization of deferred
financing costs, premium and debt discounts, (iii) the portion of operating
lease rental expense that is representative of the interest factor (deemed
to be one-third) and (iv) dividends on preferred stock. The ratio of
earnings to fixed charges of the Company was less than 1.00 for each of the
years ended December 31, 1998, 1997, 1996 and 1995 and for the year ended
February 28, 1995; thus, earnings available for fixed charges were
inadequate to cover fixed charges for such periods. The deficiency in
earnings to fixed charges for each of the years ended December 31, 1998,
1997, 1996 and 1995 and for the year ended February 28, 1995 were $141.1
million, $95.3 million, $64.3 million, $30.1 million and $17.4 million,
respectively.
In addition, the Company has guaranteed the debt of certain of its Joint
Ventures. The interest expense associated with the debt that has been
guaranteed by the Company was $367,000 and $76,000 for the years ended
December 31, 1998 and 1997.
<PAGE>
EXHIBIT 23
The Board of Directors
Metromedia International Group, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-02301, 333-07387, 333-13763 and 033-61321) on Form S-8 of Metromedia
International Group, Inc. of our report dated March 24, 1999, relating to the
consolidated balance sheets of Metromedia International Group, Inc. and
subsidiaries as of December 31, 1998, and 1997, and the related consolidated
statements of operations, stockholders' equity, comprehensive income (loss) and
cash flows for each of the years in the three-year period ended December 31,
1998, and all related financial statement schedules, which report appears in the
December 31, 1998, annual report on Form 10-K of Metromedia International Group,
Inc.
KPMG LLP
New York, New York
August 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FILED AS PART OF THE ANNUAL REPORT ON
FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 137,625
<SECURITIES> 0
<RECEIVABLES> 48,072
<ALLOWANCES> (2,191)
<INVENTORY> 62,777
<CURRENT-ASSETS> 251,724
<PP&E> 60,728
<DEPRECIATION> (14,661)
<TOTAL-ASSETS> 609,641
<CURRENT-LIABILITIES> 93,831
<BONDS> 50,111
0
207,000
<COMMON> 69,119
<OTHER-SE> 149,421
<TOTAL-LIABILITY-AND-EQUITY> 609,641
<SALES> 240,292
<TOTAL-REVENUES> 240,292
<CGS> 155,916
<TOTAL-COSTS> 370,148
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,331
<INCOME-PRETAX> (136,344)
<INCOME-TAX> 358
<INCOME-CONTINUING> (135,986)
<DISCONTINUED> 12,316
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (123,670)
<EPS-BASIC> (2.01)
<EPS-DILUTED> (2.01)
</TABLE>
