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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-5706
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METROMEDIA INTERNATIONAL GROUP, INC.
(Exact name of registrant, as specified in its charter)
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DELAWARE 58-0971455
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
- --------------------------------------------- REGISTERED
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Common Stock, $1.00 par value American Stock Exchange
Pacific Stock Exchange
7 1/4% Cumulative Convertible Preferred Stock American Stock Exchange
Pacific Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
10 1/2% Senior Discount Notes due 2007
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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 March 17, 2000 computed by reference to the
last reported sale price of the Common Stock on the composite tape on such date
was $591,875,909.
The number of shares of Common Stock outstanding as of March 17, 2000 was
94,024,298.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be used in connection with the
Registrant's 2000 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Annual Report on Form 10-K
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PART I
ITEM 1. BUSINESS
OVERVIEW
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 in Eastern Europe, the republics of the former Soviet
Union and other selected emerging markets, through its subsidiaries Metromedia
International Telecommunications, Inc. ("MITI"), Metromedia China Corporation
and as of September 30, 1999, PLD Telekom Inc., collectively referred to as the
"Communications Group."
On September 30, 1999, the Company consummated the acquisition of PLD
Telekom Inc., which held interests in fixed and wireless telephony operations in
Russia, Kazakhstan and Belarus. Following the consummation of the acquisition,
PLD Telekom became a part of the Communications Group.
The Communications Group's principal areas of operation currently include:
- wireless telecommunications, including GSM operators in Georgia and Latvia
and an AMPS operator in Kazakhstan
- fixed telephony, including PeterStar in St. Petersburg and Teleport-TP
based in Moscow
- cable television and broadband networks, including systems in Moscow,
Romania, Kazakhstan and Latvia
- radio broadcasting, including the established brands Radio 7 in Moscow,
Radio Juventus in Hungary and Country Radio in the Czech Republic
Until recently, the Company also held interests in several telecommunications
joint ventures in China. Those ventures were terminated in late 1999 and the
Company reached agreement with China Unicom, its Chinese partner in the
ventures, for the distribution of approximately $90.1 million (based on the
December 31, 1999 exchange rate) in settlement of all claims under the joint
venture agreements, of which $29.3 million has been received.
The Company also owns Snapper, Inc., which is a wholly-owned subsidiary. Snapper
manufactures Snapper-Registered Trademark- brand premium-priced power
lawnmowers, lawn tractors, garden tillers, snowthrowers and related parts and
accessories. The Company owned Snapper prior to the November 1, 1995 merger
described below under "Corporate History" 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.
COMPANY STRATEGY
The Company's strategy is to focus and develop its position as a leading
provider of communications services in the republics of the former Soviet Union,
Eastern Europe and other emerging markets, by pursuing the following principal
objectives:
- Pursue a convergence strategy to develop delivery for voice and data
services over its existing cable and telephony infrastructure
- Geographically focus the Communications Group's efforts on several key
countries where the Communications Group already has a significant
presence, including Russia, Georgia, Romania, Latvia and Kazakhstan
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ITEM 1. BUSINESS (CONTINUED)
- Work towards obtaining consolidatable positions in certain of the
Communications Group's principal assets
- Develop Internet capability in the Communications Group's existing
businesses and explore expansion of Internet-related businesses in Central
and Eastern Europe
- Develop e-commerce business opportunities in China
- Leverage the Communications Group's existing radio brands in their
markets, with a view to using them in developing its other businesses,
including the development of Internet-based businesses
- Continue to focus on cost control and reduction in corporate overhead
costs
Set forth below is a chart of the Company's operational structure and business
segments:
[FLOW CHART]
SUMMARY OF 1999 BUSINESS PERFORMANCE
RESULTS OF OPERATIONS. In 1999, the Company reported revenue of $48.7 million
from the Communications Group's operations in Eastern Europe and the republics
of the former Soviet Union and $216.1 million from Snapper. Its Communications
Group's consolidated revenues will increase with the acquisition of PLD Telekom
and should increase further as the Communications Group's joint ventures grow
their businesses, thereby generating a greater share of the Company's total
consolidated revenues.
CONSOLIDATION OF OPERATIONS AND REDUCTION IN OVERHEAD. Following the
acquisition of PLD Telekom in September 1999, the Communications Group undertook
a review of the overhead expenses of the combined entity. Following this review,
the Communications Group determined to make significant reductions in its
projected overhead costs for 2000 by closing its offices in Stamford,
Connecticut and London, England, consolidating its executive offices in New
York, New York, consolidating its operational headquarters in Vienna, Austria
and by consolidating its two Moscow offices into one. In
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ITEM 1. BUSINESS (CONTINUED)
connection with this, the Communications Group reduced the headcount among its
U.S. domestic and expatriate employees by approximately 60 individuals. In
connection with these moves, the Company recorded a restructuring charge of
$8.4 million for the year ended December 31, 1999.
SUBSCRIBER GROWTH. During 1999, the Company's Communications Group continued to
experience significant subscriber growth. Aggregate subscribers to the
Communications Group's joint ventures' various services as of the 1999 fiscal
year end was 874,133, an increase of approximately 71% over the 1998 fiscal year
end total of 511,459 subscribers. The 1999 subscriber numbers include the
subscriber numbers of the PLD Telekom businesses as of December 31, 1999. As
described below with respect to the financial results, the year-end subscriber
numbers of almost all of the Communications Group's businesses other than the
businesses of PLD Telekom are reported on a three-month lag, so that the
subscriber numbers for such businesses are as of September 30 of each year.
MARKET AND POLITICAL ENVIRONMENT. 1999 was another year of significant change
and challenges in the business environment in which the Company operates,
involving significant competitive, political and economic challenges.
The Company continuously monitors and reviews the performance of its operations
to maximize value to its shareholders. During 1999, the Company continued to
focus its growth on opportunities in communications businesses, an important
aspect of which was the September 30 acquisition of PLD Telekom. The increasing
convergence of cable television and telephony and the relationship of each
business to Internet access has provided the Company with new opportunities.
However, the quick pace of technological, regulatory and political change has
limited the opportunities for the Company in some of the businesses in which it
operates.
During 1998 and continuing into 1999, a number of the countries in which the
Communications Group operates experienced economic and financial difficulties.
For example, adverse economic conditions in Russia in 1998 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 address structural
weaknesses in the Russian economy and financial sector, it is unclear if such
policies will improve the economic situation. The financial difficulties in
Russia also had adverse impacts on certain of the other markets in which the
Communications Group operates.
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 for investments in these markets could have a material adverse
effect on the Communications Group's telephony, cable television and radio
broadcasting businesses in Russia, Kazakhstan, Belarus and other emerging
countries. The Company cannot yet predict the impact that such factors may have
on its future financial condition or results of operations.
CORPORATE HISTORY
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
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ITEM 1. BUSINESS (CONTINUED)
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.
Following on from this, 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. These transactions provided significant funds for the Company's
expansion in its communications businesses.
With the sale of these assets the Company is focusing on its core business of
providing modern digital voice, data and multimedia communications capabilities.
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.
PRINCIPAL SHAREHOLDERS
Metromedia Company, a Delaware general partnership, and related entities hold
16,401,228 shares of the Company's common stock, representing approximately
17.6% of the Company's outstanding common stock at December 31, 1999. 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. News PLD LLC, a subsidiary of The News Corporation, holds 9,136,744
shares of the Company's common stock, representing approximately 9.8% of the
Company's outstanding common stock.
* * * * *
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 95.
DESCRIPTION OF BUSINESS GROUPS
COMMUNICATIONS GROUP
The Communications Group invests in communications businesses principally in
Eastern Europe and the republics of the former Soviet Union. Until the end of
1999, the Communications Group also held interests in several telecommunications
joint ventures in China. The percentage of consolidated revenues from operations
in Eastern Europe and the republics of the former Soviet Union for 1999, 1998
and 1997 were 18%, 13%, and 10%, respectively.
At December 31, 1999, the Communications Group owned interests in and
participated with partners in the management of joint ventures that had 55
operational systems, consisting of 12 cable television systems, 3 GSM wireless
telephone systems (the Communications Group's interest in one of which is in the
process of being sold), 2 analog wireless telephone systems, 7 fixed and other
telephony networks (which include local, international and long distance
telephony providers and satellite-based telephony and wireless local loop
operators), 17 radio broadcasting stations, 12 paging systems and 2 other
telephony-related businesses.
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ITEM 1. BUSINESS (CONTINUED)
The Company's Communications Group's joint ventures experienced significant
growth in 1999. Aggregate subscribers to the Communications Group's joint
ventures' various services as of the 1999 fiscal year end was 874,133, an
increase of approximately 71% over the 1998 fiscal year end total of 511,459
subscribers. The 1999 subscriber numbers include the subscriber numbers of the
PLD Telekom businesses as of December 31, 1999. As described below with respect
to the financial results, the year-end subscriber numbers of almost all of the
Communications Group's businesses other than the businesses of PLD Telekom are
reported on a three-month lag, so that the subscriber numbers for such
businesses are as of September 30 of each year. Total combined revenues reported
by the Communications Group's consolidated and unconsolidated joint ventures for
the years ended December 31, 1999, 1998, and 1997 were $163.8 million, $128.9
million and $91.7 million, respectively, including the results of PLD Telekom's
operating businesses for the three months ended December 31, 1999.
Almost all of the Communications Group's joint ventures other than the
businesses of PLD Telekom report their financial results on a three-month lag.
Therefore, the Communications Group's financial results for December 31 include
the financial results for those joint ventures for the 12 months ending
September 30. The Company is currently evaluating the financial reporting of
these ventures and the possibility of reducing or eliminating the three-month
reporting lag for certain of its principal businesses during 2000.
JOINT VENTURE OWNERSHIP STRUCTURES
The following table summarizes the Communications Group's joint ventures and
subsidiaries at December 31, 1999 and the Communications Group's ownership in
each company:
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COMPANY
JOINT VENTURE (1) OWNERSHIP %
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WIRELESS TELECOMMUNICATIONS
Baltcom GSM (Latvia)........................................ 22%
Magticom (Tbilisi, Georgia)................................. 35%
ALTEL (Kazakhstan) (2)...................................... 50%
BELCEL (Belarus)............................................ 50%
Tyumenruskom (Tyumen, Russia) (3)........................... 46%
Gorizont-RT (Sakha) (4)..................................... 25%
Ningbo Ya Mei Telecommunications Co., Ltd.
(Ningbo City, China) (5).................................... 41%
Ningbo Ya Lian Telecommunications Co., Ltd.
(Ningbo Municipality, China) (5)............................ 41%
FIXED AND OTHER TELEPHONY
PeterStar (St. Petersburg, Russia) (2)...................... 71%
Baltic Communications Limited (St. Petersburg, Russia)
(2)....................................................... 100%
Teleport-TP (Moscow, Russia) (2) (6)........................ 56%
Telecom Georgia (Tbilisi, Georgia).......................... 30%
MTR-Sviaz (Moscow, Russia) (6).............................. 49%
Instaphone (Kazakhstan)..................................... 50%
Caspian American Telecommunications (Azerbaijan) (7)........ 37%
CPY Yellow Pages (St. Petersburg, Russia) (2) (8)........... 100%
Cardlink ZAO (Moscow, Russia) (2) (3) (9)................... 84.5%
Spectrum (Kazakhstan) (10).................................. 33%
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ITEM 1. BUSINESS (CONTINUED)
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COMPANY
JOINT VENTURE (1) OWNERSHIP %
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Sichuan Tai Li Feng Telecommunications Co., Ltd.
(Sichuan Province, China) (11).............................. 54%
Chongqing Tai Le Feng Telecommunications Co., Ltd.
(Chongqing Municipality, China) (11)...................... 54%
INTERNET SERVICES
Huaxia Metromedia Information Technology Co., Ltd. (China)
(3) (12).................................................. 49%
CABLE TELEVISION
Romsat Cable TV (Bucharest, Romania) (2).................... 100%
Viginta (Vilnius, Lithuania) (2)............................ 55%
ATK (Archangelsk, Russia) (2)............................... 81%
Kosmos TV (Moscow, Russia).................................. 50%
Baltcom TV (Riga, Latvia)................................... 50%
Ayety TV (Tbilisi, Georgia)................................. 49%
Kamalak TV (Tashkent, Uzbekistan)........................... 50%
Sun TV (Chisinau, Moldova).................................. 50%
Alma TV (Almaty, Kazakhstan)................................ 50%
Cosmos TV (Minsk, Belarus).................................. 50%
Teleplus (St. Petersburg, Russia)........................... 45%
Ala TV (Bishkek, Kyrghizstan) (13).......................... 53%
RADIO BROADCASTING
Radio Juventus (Budapest, Hungary) (2)...................... 100%
SAC (Moscow, Russia) (2).................................... 83%
Radio Skonto (Riga, Latvia) (2)............................. 55%
Radio One (Prague, Czech Republic) (2)...................... 80%
NewsTalk Radio (Berlin, Germany) (2)........................ 85%
Radio Vladivostok, (Vladivostok, Russia) (2)................ 51%
Country Radio (Prague, Czech Republic) (2).................. 85%
Radio Georgia (Tbilisi, Georgia) (2) (14)................... 51%
Radio Katusha (St. Petersburg, Russia) (2) (14)............. 75%
Radio Nika (Sochi, Russia).................................. 51%
AS Trio LSL (Estonia) (14).................................. 49%
PAGING
Baltcom Paging (Estonia) (2)................................ 85%
CNM (Romania) (2)........................................... 54%
Eurodevelopment (Ukraine) (2)............................... 51%
Baltcom Plus (Latvia)....................................... 50%
Paging One (Tbilisi, Georgia)............................... 45%
Raduga Poisk (Nizhny Novgorod, Russia)...................... 45%
PT Page (St. Petersburg, Russia)............................ 40%
Kazpage (Kazakhstan) (15)................................... 26-41%
Kamalak Paging (Tashkent, Samarkand, Bukhara and Andijan,
Uzbekistan)............................................... 50%
Alma Page (Almaty and Ust-Kamenogorsk, Kazakhstan).......... 50%
Paging Ajara (Batumi, Georgia).............................. 35%
</TABLE>
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ITEM 1. BUSINESS (CONTINUED)
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COMPANY
JOINT VENTURE (1) OWNERSHIP %
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Mobile Telecom (Russia) (16)................................ 50%
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(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) Results of operations are consolidated with the Company's financial
statements.
(3) Pre-operational system as of December 31, 1999.
(4) The Communications Group is selling its 25% interest to one of the other
partners in the venture and the sale is expected to close in the first half
of 2000.
(5) Ningbo Ya Mei Telecommunications supported development by China Unicom, a
Chinese telecommunications operator, of a GSM mobile telephone system in
Ningbo City, China. Ningbo Ya Lian Telecommunications similarly supported
development by China Unicom of expansion of GSM services throughout Ningbo
Municipality, China. Both joint ventures provided financing, technical
assistance and consulting services to the Chinese operator. The operations
of these joint ventures have been terminated at the direction of the Chinese
government and settlement payments have been received from China Unicom in
consideration of this termination. The joint ventures are currently being
dissolved and the Company anticipates full recovery of its investments in
and advances to the joint ventures. See "--Telecommunications Joint Ventures
in China" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
(6) The Company's interests in Teleport-TP and MTR-Sviaz are held through its
wholly owned subsidiary Technocom Limited.
(7) 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 subject to its concurrence 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%.
During the fourth quarter of 1999, the Company determined that there was a
decline in value of its investment in Caspian American that was other than
temporary and has recorded the decline of $9.9 million as an impairment
charge.
(8) CPY Yellow Pages is the publisher of a yellow pages directory in St.
Petersburg.
(9) Cardlink ZAO is utilizing proprietary wireless technology for the processing
and management of wireless electronic transactions, initially in Moscow.
(10) 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.
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ITEM 1. BUSINESS (CONTINUED)
(11) Sichuan Tai Li Feng Telecommunications supported development by China
Unicom, a Chinese telecommunications operator, of a fixed line public
switched telephone network in Sichuan Province, China. Chongqing Tai Le Feng
Telecommunications supported development by China Unicom of a fixed line
telephone network in Chongqing City, China. Both joint ventures provided
financing, technical assistance and consulting services to the Chinese
operator. The operations of these joint ventures have been terminated at the
direction of the Chinese government and settlement payments have been
received from China Unicom in consideration of this termination. The joint
ventures are currently being dissolved and the Company anticipates full
recovery of investments in and advances to the joint ventures. See
"--Telecommunications Joint Ventures in China" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(12) The Communications Group owns 49% of a pre-operational joint venture in
China licensed to provide e-commerce trading support systems to the Chinese
partner in the joint venture. The partner is a domestic trading company
pursuing internet-based commerce among Chinese state-owned enterprises.
(13) Launched service in June 1999.
(14) 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.
(15) 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%.
(16) 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 in 2000 and 2001. Each of the two
earnout payments is to be equal to $2.5 million, adjusted up or down based
upon performance in 1999 and 2000, respectively, as compared to certain
financial targets. The Company does not believe that any payment will be due
with respect to 1999. Simultaneously with the purchase of Mobile Telecom,
the Company purchased 50% of a related pager distribution company for
$500,000.
COMMUNICATIONS GROUP STRATEGY
OVERVIEW
The Communications Group's objective is to develop its core business of
providing high-quality modern digital voice, data, multimedia and Internet-based
communications capabilities at the lowest possible capital cost in order to
generate the highest possible return on investment.
In 1999, the Communications Group greatly enhanced its telecommunications
portfolio with the acquisition of PLD Telekom, which had a number of
telecommunications businesses in Russia, Kazakhstan and Belarus. Following this
merger, the Communications Group has continued to explore the opportunities for
convergence between the infrastructure already in place within its cable
television businesses and its expanded telecommunications portfolio.
The Communications Group has also expanded its strategy to include development
of services based on the use of the Internet, in connection with its existing
businesses, possible expansion into new markets in Central and Eastern Europe
and with the development of an e-commerce business in China. Such services
represent a new form of communications and provide a basis for various forms of
electronic
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ITEM 1. BUSINESS (CONTINUED)
commerce among enterprises and with the consuming public. The Internet provides
an extremely economical means for multi-media communications and e-commerce.
MARKET BACKGROUND
The Communications Group's markets generally have large populations, but lack
reliable and efficient communications service. The Communications Group believes
that many 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 believes it will be able to capitalize on opportunities to provide
additional communications services in its markets.
The Communications Group continually explores new investment opportunities for
communications systems in Eastern Europe, republics of the former Soviet Union,
China and other emerging markets. In China, the Communications Group's recently
formed e-commerce joint venture is developing Internet trading software usable
for a wide variety of commercial trade applications, while the Communications
Group is developing services based on the Internet in connection with its
existing businesses and possible new markets in Central and Eastern Europe. The
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.
SPECIFIC OBJECTIVES
The Communications Group intends to achieve its objectives and expand its
subscriber and customer bases, as well as its revenues and cash flow, by
pursuing the following strategies to build on the developments of 1999:
PURSUE A CONVERGENCE STRATEGY TO DEVELOP DELIVERY FOR VOICE AND DATA SERVICES
OVER ITS EXISTING CABLE AND TELEPHONY INFRASTRUCTURE. The Communications Group
is pursuing a convergence strategy to develop multi-services delivery capability
for voice and data services over its existing infrastructures of cable
television, wireless telecommunications and fixed telephony networks using the
inherent attributes of the Internet Protocol ("IP"). This will allow the use of
the networks currently dedicated to the delivery of specific services to become
multi-purpose delivery mechanisms capable of carrying a range of services. This
would maximize the use of the Group's existing infrastructure and provide
additional revenue streams through new product developments not previously
possible.
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ITEM 1. BUSINESS (CONTINUED)
GEOGRAPHICALLY FOCUS THE COMMUNICATIONS GROUP'S ACTIVITIES. Following the
acquisition of PLD Telekom, the Company has been working to identify those
countries and geographic regions in which the combined communications portfolio
has a significant presence. It has concluded that these include Russia, Georgia,
Romania, Latvia and Kazakhstan. The Company intends to focus its efforts on
developing its businesses in those countries by aggressively growing the
customer and advertiser bases, and by cross-selling services in conjunction with
the convergence strategy described above. 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.
OBTAIN CONSOLIDATABLE POSITIONS IN THE GROUP'S PRINCIPAL ASSETS. Currently, the
Communications Group accounts for a number of its principal assets (including
the GSM operators in Latvia and Georgia) on the equity method due to the size of
its shareholding in those ventures. The Communications Group is exploring the
possibility of obtaining control of certain of its principal ventures in order
to consolidate their financial results with those of the Company.
DEVELOP INTERNET CAPABILITY IN ITS EXISTING BUSINESSES AND EXPANSION INTO NEW
AREAS. The Communications Group is actively developing Internet capabilities in
a number of its key businesses. These developments are designed to maximize the
Group's existing telephony and cable infrastructure to provide a range of
Internet-related services including Internet Service Provider ("ISP") gateway
services to Internet exchange complexes and the development of portals and other
services for its existing customer base. In addition to working with its
existing businesses and markets, the Communications Group is also working to
identify other Internet-related market opportunities in Central and Eastern
Europe.
DEVELOP E-COMMERCE BUSINESS OPPORTUNITIES IN CHINA. The Communications Group
has begun investment in Chinese enterprises engaged in development of
Internet-based e-commerce services. In its first such venture, the Company owns
49% of Huaxia Metromedia Information Technology Co., Ltd., a sino-foreign joint
venture formed with a domestic trading company. The joint venture develops and
operates the Internet-based information systems that the Chinese partner uses in
its electronic trading activities. The Company is actively in negotiation for
formation of several similar ventures operating in other regions and commercial
sectors of China.
LEVERAGE THE GROUP'S EXISTING BRAND NAMES IN RADIO BROADCASTING. Several of the
Communications Group's radio businesses have established strong brand names in
their markets, including in Moscow, Hungary and the Czech Republic. The
Communications Group is seeking to leverage those brands in connection with its
Internet strategy, including the possible branding of Internet providers using
those brand names and using the radio stations as an advertising medium for
those new businesses.
CONTINUE TO FOCUS ON COST CONTROL AND REDUCTION IN CORPORATE OVERHEAD
COSTS. Following the acquisition of PLD Telekom, the Communications Group
consolidated its operations and reviewed the overhead costs of the combined
businesses. The Communications Group made significant reductions in these costs
following the merger but intends to continually review its cost structure in
light of the Group's operations and business focus.
TELEPHONY
The Communication Group's telephony lines of business consist of wireless
telecommunications operators and fixed and other telephony networks (including
local, international and long distance telephony providers and satellite-based
telephony and wireless local loop operators).
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WIRELESS TELECOMMUNICATIONS
The Communications Group has interests in joint ventures and other investments
in wireless operators in Georgia and Latvia (both using the digital GSM
standard) and in Kazakhstan, Belarus and Tyumen, Russia (using analog
standards). As of December 31, 1999, these businesses had a total of 152,891
active subscribers, a 208% increase over the 49,607 active subscribers as of
December 31, 1998. The 1999 subscriber numbers include the subscriber numbers of
the PLD Telekom wireless telephony businesses as of December 31, 1999, as well
as Baltcom GSM, and the other non-PLD Telekom wireless telephony businesses as
of September 30, 1999. The Communications Group also has an interest in a GSM
operator in the Republic of Sakha which is in the process of being sold.
GSM VENTURES--GEORGIA, LATVIA AND SAKHA
BALTCOM GSM/LATVIA. The Communications Group owns 50% of Latcom, a joint
venture with Western Wireless, which owns 44% of Baltcom GSM. Baltcom GSM
operates and markets mobile voice and data communication services to private and
commercial users nationwide in Latvia.
In 1999, Baltcom extended its product offering to include SMS (messaging
services sent via the handset), prepaid services and wireless data capabilities.
Demand for these services was high and resulted in net year on year subscriber
growth of 120% to 72,510 active subscribers at fiscal year-end 1999, from 32,934
active subscribers at fiscal-year end 1998. Baltcom also secured a license to
operate and began to offer services in the 1800 mhz range (in addition to the
900 mhz range in which it began operations) as part of its continued effort to
increase capacity and coverage required for facilitating growth.
Mobile penetration in Latvia remained below 8% in 1999. Management believes this
comparatively low penetration level, a teledensity figure below 25% and an
improved economic situation in Latvia, will contribute to Baltcom's ability to
continue its subscriber growth.
MAGTICOM GSM/GEORGIA. The Communications Group owns a 70% interest in Telcell
Wireless LLC (with Western Wireless holding the balance), which in turn is a 49%
shareholder of Magticom GSM. Magticom GSM operates and markets mobile voice
communication services to private and commercial users nationwide in Georgia.
In 1999, Magticom extended its service coverage area from urban areas into
surrounding areas, resulting in a competitive advantage and increased demand for
its services. In 1999, subscriber growth was 147 %, to 41,181 active subscribers
at fiscal year-end 1999, from 16,673 active subscribers at fiscal year-end 1998
and resulted in a year-end market share exceeding 70% according to Magticom
estimates. In addition, Magticom secured a license to operate and offer services
in the 1800 mhz range (in addition to the 900 mhz range in which it began
operations). Magticom plans to offer service in 1800 mhz in 2000 to provide
additional capacity.
Mobile penetration in Georgia remained below 2% at year end in 1999. Management
believes this comparatively low mobile penetration level, a teledensity figure
below 5% and competitive advantages in coverage and distribution will continue
to support Magticom's subscriber growth.
TECHNOLOGY. The Communications Group's wireless telephone networks in Latvia
and Georgia operate using the GSM standard. GSM is the leading standard for
wireless service throughout Western Europe and Asia, which allows the
Communications Group's customers to roam throughout the region. The
establishment of GSM as the leading standard in terms of number of networks and
subscribers in Asia and Europe, as well as facilities such as automatic global
roaming between networks, provides a
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comparative advantage over competing digital wireless systems or analog systems
(such as AMPS) which cannot readily offer international roaming service.
MARKETING. The Communications Group markets its GSM telephony services through
a combination of tariffing, distribution, entry cost and bundled service
strategies oriented towards targeted individuals, corporations and
organizations. The Communications Group sells wireless phones at a small mark-up
to cost. This pass-through strategy encourages quick market penetration and
early acceptance of wireless telephony as a desirable alternative or addition to
existing fixed telephony service.
Management believes that its GSM systems will benefit from several competitive
advantages in each of its markets. As it pursues a strategy of convergence, the
Communications Group intends to market its GSM telephony service to customers of
its existing cable television in both Latvia and Georgia. The Communications
Group believes that its ability to cross market and bundle services to target
customers will position it in both markets with a market advantage which
competitors will find difficult to match. In addition, the Communications Group
will continue to develop higher levels of quality, customer care and retention
programs than their competitors, thereby positioning these systems to compete
effectively for new mobile customers as well as to seize a portion of the
competing operators' customer base.
COMPETITION. The Company's GSM 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. It
operates a GSM system and a second system using an older, less efficient
technology that the Communications Group believes will pose less of a
competitive threat than Latvia Mobile Telecom's GSM system. 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 wireless market.
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 wireless telephony services which uses the AMPS
technology in its network, both of which commenced service prior to Magticom. In
Georgia, competition between operators has been on the basis of coverage but is
transitioning to a combination of pricing, services and brand recognition.
Magticom has captured approximately seventy percent of the Georgian wireless
market.
The Company's GSM joint ventures are the second entrants in most of their
markets and therefore have the disadvantage of facing the established initial
wireless providers in those markets. However, barriers to entry in wireless
telecommunications markets are very high, as the number of licenses for a
particular market is typically limited and initiation of a wireless system
requires substantial capital expenditures. Therefore, although the Company's GSM
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.
GORIZONT. The Communications Group also holds a 25% interest in Gorizont-RT, a
joint venture which operates a GSM wireless system in the Republic of Sakha.
This interest is currently being sold to one of the other partners in the
venture and the sale is expected to close in the first half of 2000.
D-AMPS--KAZAKHSTAN AND TYUMEN
ALTEL
OVERVIEW. ALTEL, in which the Communications Group owns a 50% interest,
currently operates a nationwide AMPS wireless network in Kazakhstan. The other
50% interest in ALTEL is held by
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Kazakhtelekom, the national telephone operator. ALTEL offers traditional
wireless service, as well as TUMAR, a prepaid wireless service. Wireless service
has provided a rapid and relatively inexpensive way to overcome the deficiencies
of the wireline telecommunications infrastructure in Kazakhstan. As of
December 31, 1999, ALTEL's wireless telecommunications network covered a
geographic area of approximately 4,150,000 people, representing 28% of the total
population, in 12 cities. As of December 31, 1999, ALTEL had 23,378 active
subscribers (of which 11,837 were customers of the prepaid service), compared
with 20,768 active subscribers (of which 6,337 were customers of the prepaid
service) as of December 31, 1998.
The Company believes the continuing development of a market economy in
Kazakhstan is likely to increase demand for modern telecommunications services,
including wireless communications, and that has been demonstrated by the
subscriber growth experienced to date by ALTEL. However, with the entry in
February 1999 of two competing wireless operators, each of which has built up
respectable subscriber bases of their own, ALTEL saw its subscriber base grow
more slowly during 1999. In order to maintain its subscriber base in the face of
severe competition from the GSM operators, ALTEL reduced its tariffs several
times during 1999 and marketed its TUMAR service more heavily as a low-cost
alternative.
TECHNOLOGY AND FACILITIES. ALTEL provides service using the analog AMPS/NAMPS
standard. All ALTEL systems are connected to the local PSTN and the regional
international/intercity digital switches (5ESS or S12) in the cities where they
are located via E1 trunks (MFC-R2 signaling protocol). The system is also linked
to an international trunk exchange with long distance and international calls
completed using the national and international network of Kazakhtelekom.
MARKETING. ALTEL markets its wireless services through its own direct sales
force, operating from customer service centers, as well as third party
independent dealers. Although ALTEL's standard service includes corporate and
government accounts, 60% of ALTEL's customers are high-volume individual users.
TUMAR prepaid services are targeted almost exclusively at middle and lower
income domestic individuals.
COMPETITION. Until 1998, ALTEL was the only licensed national wireless operator
in Kazakhstan. In 1998, two licenses were awarded for the development of a
national GSM network in Kazakhstan. One license was issued to Kcell, a joint
venture of TurkCell and Kazakhtelekom, and the other license was issued to
Kmobile, a joint venture of Telsim, a Turkish company, and local Kazakh
interests, each of which began operations in February 1999. ALTEL responded to
the competition through a series of tariff reductions in 1999 and aggressive
marketing of its prepaid service. The tariff competition exerted downward
pressure on ALTEL's revenues in 1999 and continued competition in 2000 is likely
to have a continued adverse effect on ALTEL's results.
TYUMEN
In 1998, the Communications Group acquired a 46% interest in a pre-operational
joint venture to provide DAMPS service in the Tyumen region of Russia. The
Communications Group was in the process of final commercial and technical
testing of the network in 1999 and expects such joint venture to commence full
commercial operations in 2000. The Communications Group's primary competition in
the Tyumen region will be from a GSM provider.
During the fourth quarter of 1999, the Company determined that, in view of the
venture's low profitability and limited scope for improvement, there was a
decline in value of its investment in Tyumen that was other than temporary and
has recorded the decline of $3.8 million as an impairment charge.
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ITEM 1. BUSINESS (CONTINUED)
NMT-450--BELARUS
OVERVIEW. BELCEL, in which the Communications Group holds a 50% interest,
operates a national wireless network in Belarus. The other 50% of BELCEL is held
by the Minsk City Telephone Network (45%) and the Minsk Regional Telephone
Network (5%). As of December 31, 1999, BELCEL's wireless telecommunications
network covered a geographic area of approximately 5.8 million people,
representing 57% of the total population, in 17 centers of population and
covering many major trunk roads. As of December 31, 1999, BELCEL had 15,429
active subscribers, a 22% increase from the 12,683 active subscribers as of
December 31, 1998.
TECHNOLOGY AND FACILITIES. BELCEL provides service using the analog NMT-450
standard. BELCEL's wireless telecommunications network in Belarus currently
consists of one switch in Minsk and 69 base stations. The BELCEL network has
full interconnect for local, long distance and international services. Calls to
fixed line phones and international calls are completed using the national and
international network of Beltelecom. International calls are switched through a
digital exchange in Minsk.
COMPETITION. Prior to 1999, BELCEL was the only licensed national wireless
operator in Belarus. In April 1999, Velcom, a GSM operator, commenced commercial
service, with a license that gives it a three-year exclusivity period for
digital wireless services. As of December 31, 1999, Velcom provided service in
Minsk and 3 regional centers.
FIXED AND OTHER TELEPHONY
OVERVIEW
The Communications Group has a number of joint ventures in fixed telephony
operators in Russia and Georgia, some of which offer local telephony services
and others which provide national and long distance telephony to a variety of
telecommunications operators and business and individual customers. The Company
also holds interests in businesses involved in the provision of satellite-based
telecommunications services and in wireless local loop telephony.
PETERSTAR
OVERVIEW. PeterStar, in which the Communications Group owns a 71% interest (and
which was acquired by the Company in connection with the September 1999
acquisition of PLD Telekom), operates a fully digital, city-wide fiber optic
telecommunications network in St. Petersburg that is interconnected with the
network of Petersburg Telephone Network ("PTN"), the local telephone company, as
well as the Russian national and international long distance systems.
PeterStar provides integrated, high quality, digital telecommunications services
with modern transmission equipment, including local, national and international
long distance and value-added services, to businesses in St. Petersburg. The
PeterStar network provides an alternative to the network of PTN, which to date
has been characterized by significant capacity constraints.
PeterStar is able to provide integrated telecommunications services to business
customers, including users of high bandwidth voice, data and video
communications services. PeterStar's network is designed to support a wide range
of telecommunications products and services with a high degree of reliability.
Additionally, the three wireless operators in St. Petersburg currently utilize
the PeterStar network to deliver high quality services to their customers and
provide reliable access to the local, long distance and international networks.
PeterStar's digital infrastructure enhances the ability of the wireless
operators to consistently receive and deliver their customer's traffic, a
benefit that is not achievable by using the outdated PTN transmission network.
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ITEM 1. BUSINESS (CONTINUED)
As of December 31, 1999, PeterStar had a total of 183,062 active lines, of which
109,317 were provided to wireless operators, an approximate 9% increase from the
168,166 active lines as of December 31, 1998 (of which 108,278 were provided to
wireless operators).
PeterStar also provides a number of value-added voice and data services to
complement the basic fixed network services it currently provides. PeterStar
believes that the ability to provide such services on the PeterStar digital
network is a key competitive advantage in the St. Petersburg marketplace.
Current services include (i) data services; (ii) frame relay; (iii) ATM;
(iv) operator services; and (v) ISDN.
MARKETING. PeterStar's customer base currently consists of three general
categories: (i) business customers; (ii) wireless and other network operators;
and (iii) residential customers. PeterStar's primary focus is the provision of
voice and data services to business customers, focusing on those which generate
large amounts of outgoing long distance and international traffic. PeterStar
continues to experience a shift in its customer base, from foreign companies
(which tend to use the higher priced international services) to predominantly
Russian businesses and, to a lesser extent, residential customers (for whom
local calling is the principal usage).
PeterStar's strategy is to continue to meet the growing demands of business
customers and other network operators in St. Petersburg. PeterStar has recently
added incremental transmission capacity and upgraded its transmission network,
as well as introducing new service features such as ISDN capability, which
allows simultaneous transmission of voice, data, video and still images. In
addition, as part of its strategic relationship with PTN, PeterStar intends to
continue to provide targeted support to PTN in its efforts to upgrade and
modernize its network. PeterStar has placed increased emphasis on small to
mid-sized Russian and foreign businesses in order to capitalize on what it
considers to be a significant market opportunity.
TECHNOLOGY. PeterStar's network and facilities give it the ability to provide
advanced digital services to the telecommunications market in St. Petersburg,
services that the Company believes PTN, with its primarily analog network, will
be unable to provide in the near term due to internal funding constraints. The
PeterStar network consists of digital exchanges which are connected by fiber
optic cables, advanced transmission systems and remote switching units and
concentrators. The fiber optic network forms twelve rings, permitting traffic to
be re-routed in the event that a cable is cut or damaged. The network is fully
interconnected with the PTN network, with direct and indirect connections via
approximately 680 kilometers of fiber optic cable to all thirty-four PTN transit
exchanges distributed throughout St. Petersburg. The fiber optic cables also
provide direct links to the national and international switch, providing
PeterStar customers with high quality long distance and international access.
PeterStar expects that it will continue to incrementally add switching,
transmission capacity and local loop infrastructure to its core network in order
to address its target market in St. Petersburg and regional points of presence.
COMPETITION. PeterStar is building and operating its business in a highly
competitive environment. PeterStar does not have an exclusive license to provide
telecommunications services in St. Petersburg, and a number of other entities,
including Russian companies and international joint ventures, are competing with
PeterStar for a share of the St. Petersburg telecommunications market. A number
of such companies (or their joint venture partners) are larger than PeterStar
and have greater access to capital or resources.
Although PTN has historically supported the development of PeterStar, PTN and
PeterStar must be regarded as competitors in the telephony segment. PTN can
offer its customers the same core services as PeterStar, notwithstanding the
lower transmission quality and call completion rates of the PTN network.
Furthermore, PTN has recently completed the installation of a modern fiber optic
loop in St.
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ITEM 1. BUSINESS (CONTINUED)
Petersburg which, when fully operational, will significantly enhance its ability
to carry traffic and could therefore enhance its capacity to compete with
PeterStar.
OAO Telecominvest, the other shareholder in PeterStar, has recently raised over
$50 million in net proceeds in a private placement of securities, a substantial
part of which is dedicated to the completion of a transit network in St.
Petersburg which could provide further significant competition to PeterStar's
network. In addition, the three mobile operators in St. Petersburg may be
required as a result of new regulations to move their traffic starting in 2000
from the PeterStar network to the network being constructed by Telecominvest and
other federal networks, which will adversely impact PeterStar's revenues in 2000
and beyond.
The other competitors to PeterStar are: (i) Sovintel, a joint venture between
Rostelecom and Golden Telecom, which is currently based in Moscow, and
(ii) Global One, the international joint venture between France Telecom and its
Russian partner, the telegraph office, which provides national and international
voice and data services to certain destinations, both of which have been
expanding their operations in St. Petersburg. Since they have generally been
unable to compete effectively with PeterStar based on quality, these competitors
have principally competed on the basis of price, thereby exerting price pressure
on PeterStar.
BALTIC COMMUNICATIONS LIMITED
OVERVIEW. Baltic Communications Limited ("BCL"), in which the Communications
Group holds a 100% equity interest, provides international direct dial,
international payphone, Internet, data and leased line services for Russian and
foreign businesses in St. Petersburg and the Leningrad Oblast. BCL also offers a
number of advanced broadband services, as well as "carrier's carrier" services
to other telecommunications operators.
As of December 31, 1999, BCL had approximately 1,400 lines connected to a total
of 469 clients, compared to approximately 1,200 lines connected to a total of
424 clients as of December 31, 1998.
TECHNOLOGY. BCL has its own switching and international transmission facilities
in St. Petersburg, which acts as a gateway for corporate customers in both
Moscow and St. Petersburg. The BCL network consists of an international and
local switch and capacity on the international fiber optic cable via Finland to
Sweden and the United Kingdom. BCL's primary international carrier relationships
are with Sonera of Finland, Telia of Sweden and Cable & Wireless Communications
of the United Kingdom. BCL has its own fiber optic and microwave radio transport
network in St Petersburg and in addition rents local access from PeterStar and
PTN to connect its customers in the city.
MARKETING. The Company endeavors to cross-sell the distinct service offerings
provided by PeterStar and BCL to their respective customer bases. For example,
PeterStar's marketing representatives are now also able to market BCL's
international private line services to PeterStar's and other corporate
customers. In addition, control of both PeterStar and BCL provides the Company
with the opportunity to introduce new services to targeted markets in a more
efficient manner. In addition, PeterStar and BCL are exploring the possibilities
of closer cooperation in connection with the expansion of their respective core
businesses in St. Petersburg and the implementation of their strategies in
Northwest Russia.
COMPETITION. BCL is operating its business in a highly competitive environment.
BCL does not have exclusive licenses to provide telecommunications services in
St Petersburg and a number of other entities, including both Russian & foreign
operators, are competing with BCL for a share of the St Petersburg corporate
telecommunications market.
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ITEM 1. BUSINESS (CONTINUED)
The major competitors to BCL are: (i) GlobalOne, the France Telecom wholly owned
global carrier, which provides national and international voice and data
services; and (ii) Sovintel, a joint venture between Rostelecom and Golden
Telecom, both of which have been expanding their network and commercial
operations in St Petersburg.
TELECOM GEORGIA
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 more than 1,100 international channels
and has direct interconnect arrangements with major international long distance
carriers including ATT, Sprint, MCI Worldcom, British Telecom, Deutsche Telecom,
France Telecom and Telecom Italia. Since Telecom Georgia commenced operations,
long distance traffic in and out of Georgia has increased significantly as
Telecom Georgia has expanded the number of available international telephone
lines.
The government of Georgia has announced its intention to privatize its 51% stake
in Telecom Georgia during 2000, with an investment bank being chosen to advise
the government during the second quarter. The actual privatization of the stake
in Telecom Georgia is currently expected to occur at the end of 2000. Management
of Telecom Georgia is not yet in a position to determine what, if any, impact
the privatization of the government's stake in Telecom Georgia will have on its
business.
TECHNOLOGY. Telecom Georgia's long distance telecommunications network splits
Georgia into eastern and western zones, with digital transit switches in each
zone which are connected via SDH microwave. In turn, they are linked in Tbilisi
with an Intelsat and Turksat earth stations. Telecom Georgia has expansion plans
to expand its microwave capability to Foti (where it can be connected with
submarine cables, thereby reducing dependency on satellite connections) and
further into eastern Georgia (which would permit a digital connection with
neighboring Azerbaijan).
MARKETING. Telecom Georgia markets its services on the basis of a strong
advertising campaign, competitive tariffs and high quality service, focused
equally on corporate and residential subscribers. In addition, Telecom Georgia,
based on its internal marketing analyses, has made significant efforts to
introduce new services such as ISDN and a prepaid card system.
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 has increased significantly since the opening of the
market in 1998. Currently there are several new entrants offering international
telephone service, including Egrisi, Goodwillcom, and Global Erty. The
Communications Group believes that Telecom Georgia competes primarily on the
basis of tariffs and contractual relationships and aggressive marketing
strategy. Although Telecom Georgia has maintained a significant market share in
international and long distance telephony services in Georgia, its revenues have
come under increasing pressure due to competition and downward pressure on
termination rates.
TELEPORT-TP
OVERVIEW. Through its wholly owned subsidiary Technocom Limited, the
Communications Group holds a 49.33% equity interest (56% voting interest) in
Teleport-TP, a Moscow-based long distance and international operator targeting
the commercial sector and other telecommunications operators with its
satellite-based telecommunications services. Rostelecom, the primary national
and international carrier in the Russian Federation, is the holder of a 44%
ownership interest in Teleport-TP
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Since 1994, Teleport-TP has operated an international telecommunications network
providing dedicated voice, data and video services, as well as bandwidth, to
Russian and foreign businesses and private telecommunications networks. As of
December 31, 1999, Teleport-TP provided access to approximately 1,000
international digital circuits.
Teleport-TP has also developed a long distance network in order to expand its
customer base beyond Moscow and to meet growing demand for reliable
telecommunications links. In particular, Teleport-TP is seeking to address the
market for inter-regional communications where call completion rates are
understood to be low, primarily due to the underdeveloped nature of the
Rostelecom infrastructure. The long distance network is being targeted to high
volume customers requiring high quality, reliable long distance service across
the Russian Federation. As of December 31, 1999, Teleport-TP had a total of 34
clients for the long distance service, of which 23 were regional telephone
network operators and the balance were corporate clients.
Teleport-TP has developed from being a provider of international
telecommunications services from a single point of presence in Moscow to a
company able to provide high-quality domestic and international long distance
services in multiple locations across the Russian Federation and certain other
republics of the former Soviet Union. Teleport-TP utilizes Western satellite
capacity and technology and the Company believes that there is a largely
untapped market for satellite-based services between various regions of the
Russian Federation due to the current poor quality, or total absence, of
terrestrial digital long distance lines in many areas.
MARKETING. Rostelecom is Teleport-TP's principal customer for dedicated
international network services. Rostelecom utilizes Teleport-TP on traffic
routes where it does not yet have a direct terrestrial connection and where the
cost of a terrestrial connection would be prohibitive. On such routes,
Teleport-TP provides Rostelecom with a means of accessing high quality digital
international circuits that are not available via other Russian satellite or
terrestrial means. Teleport-TP also has relationships with a number of business
centers and private network operators.
Teleport-TP's long distance services are being targeted to high volume customers
requiring high quality, reliable long distance service across the Russian
Federation. Targeted customers include: (i) regional and local public telephone
companies (Electrosviaz); (ii) private wireless, wireline, data and other
network operators; and (iii) corporate users. Teleport-TP acts as a "carrier's
carrier" to public telephone companies and wireless, wireline and other
operators. Teleport-TP provides these operators with long distance and, in many
cases, international access via its dedicated network so that these operators
can provide high quality access to their own subscribers.
TECHNOLOGY. Teleport-TP's dedicated international telecommunications network
consists of an earth station, an international gateway switch and fiber optic
cable. These network facilities are owned by Technocom and leased to
Teleport-TP. The earth station consists of two Standard-A 18.3 meter antennas
linked to two Intelsat satellites and one 13 meter Hughes Networks dish linked
to a Eutelsat satellite. Fiber optic cable links Teleport-TP's switch with its
principal customers, including the national network of Rostelecom, the national
television switching center, and a number of business parks, overlay network
operators, and state-owned utilities located in Moscow and the Moscow region.
Customers on Teleport-TP's long distance network--public and private
telecommunications companies--have the choice of taking permanent leased
circuits or switched circuits, depending on their requirements. In addition,
corporate customers now have the ability to create their own private networks
throughout the Russian Federation using this combination of permanent and
switched circuits. The system is designed to be flexible, allowing for timely
installation of antennas in regional sites without changing the existing network
configuration. Additional channel units can be quickly installed
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ITEM 1. BUSINESS (CONTINUED)
at existing sites should demand increase. The network has full mesh topology
allowing customers in remote sites to connect with other remote sites without
going through a central hub station, thus avoiding a "double-hop" on the
satellite. This offers considerable improvement over traditional "star"
configuration satellite-based systems.
COMPETITION. In providing international circuits and direct dial services in
Moscow, Teleport-TP faces competition from a number of operators offering
similar services. Such operators, including Comstar, Combellga, Telmos and
Sovintel, are primarily targeting Russian and foreign businesses in the city,
replicating the services that PeterStar is providing in St. Petersburg. In terms
of providing international circuits, Teleport-TP faces direct competition from
the Russian Space Communications Corporation, the state owned operator which
uses both Intelsat and Russian satellites, and indirectly from Rostelecom, which
owns capacity in and operates the international cable facilities connecting the
Russian Federation to the telecommunications networks of the major global
carriers.
In providing long distance services, Teleport-TP faces competition from a number
of sources, both on a national and regional basis. Teleport-TP faces competition
from Rostelecom in the provision of long distance access to the local telephone
companies. Rostelecom currently appears to support the continued development of
Teleport-TP and Rostelecom stands to gain from its relationship with
Teleport-TP, not only as a Teleport-TP shareholder but also to the extent that
expansion of the Teleport-TP network facilitates the modernization of the
Rostelecom network on a targeted basis. There are no other commercial national
networks of the same scale as the Rostelecom network, but there are a number of
private networks, including those of the Ministries of Defense and Railways,
that could, if funding were made available, provide further competition to
Teleport-TP.
Teleport-TP also faces competition from other Western-financed entities seeking
to provide various forms of higher bandwidth voice and data communications
services throughout Russia, including: (i) TeleRoss, a subsidiary of Golden
Telecom, which is offering service in 12-15 cities using the Russian domestic
satellite systems; (ii) Rosnet, principally a provider of data network services;
(iii) Aerocom, a satellite and fiber optic-based carrier's carrier based in
Moscow, which provides international circuits via the Russian Express satellite
network; (iv) Belcom, a private carrier providing international point-to-point
leased circuits to the oil and gas companies in remote locations, and secondly
closed user group services to communities of interest; and (v) Moscow Teleport,
a satellite based provider of services targeted at the corporate user.
MTR-SVIAZ
Through Technocom, the Communications Group holds a 49% interest in MTR-Sviaz, a
venture to modernize and commercialize a portion of the internal
telecommunications network of Mosenergo, the Moscow city power utility.
MTR-Sviaz provides local, national and international services to both corporate
customers and the Internet market. MTR-Sviaz uses leased circuits from a number
of providers, access to the Teleport-TP fiber cable facilities and the Mosenergo
internal communications network to terminate its calls. Teleport-TP uses the
MTR-Sviaz facilities to house its Internet gateway, from which links to ISPs are
provided via leased and dial-up lines on the public network.
MTR-Sviaz commenced operations in the third quarter of 1996 with the initial
network program encompassing the installation of a 10,000 line Siemens exchange
as a central switching node on the existing Mosenergo telecommunications
network. The switch is connected to Teleport-TP via fiber optic cable, giving
customers on the Mosenergo network direct access to the digital long distance
facilities of Teleport-TP's network. In addition to the Mosenergo organization
itself, other entities connected to the Mosenergo network include commercial
enterprises located at business centers on Mosenergo premises.
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CASPIAN AMERICAN TELECOMMUNICATIONS
The Communications Group holds a 37% interest in Caspian American
Telecommunications ("CAT"), a joint venture licensed to provide wireless local
loop telephone services in the Republic of Azerbaijan. To date, the venture has
only succeeded in capturing an insignificant (approximately 1.5%) share of the
market in Azerbaijan and has incurred substantial losses. The Company, in
conjunction with the other shareholders, has recently taken action to change the
management of the venture and to commence a major cost reduction program. In
light of CAT's poorer than expected performance in 1999 and the limited
potential to develop its wireless local loop network without significant sources
of financing, the venture has developed a revised operating plan to stabilize
its operations and minimize future funding requirements until potential
restructuring options have been fully explored. During the fourth quarter of
1999, the Company determined that there was a decline in value of its investment
in CAT that was other than temporary and has recorded the decline of
$9.9 million as an impairment charge.
INTERNET-BASED SERVICES
In 1999, the Communications Group expanded its strategy to include development
of services based on use of the Internet, both in connection with its existing
businesses and with the development of an e-commerce business in China. Such
services represent a new form of communications and provide a basis for various
forms of electronic commerce among enterprises and with the consuming public.
The Internet provides an extremely economical means for multi-media
communications and e-commerce.
RUSSIA AND CENTRAL AND EASTERN EUROPE
The Communications Group is actively developing Internet capabilities in a
number of its key existing businesses. These developments are designed to
maximize the Group's existing infrastructure to provide a range of
Internet-related services including ISP gateway services to Internet exchange
complexes and the development of portals and other services to its existing
customer base.
As an example of the Communications Group's activities in the Internet area,
Yellow Pages in St. Petersburg, as described below, has created a full on-line
directory, integrated with detailed city maps, and is currently developing a
portal for the St. Petersburg region. In addition to the development of the St.
Petersburg portal, Yellow Pages is extending its database capability to include
Moscow, the northwest region of Russia and other significant industrial centers
across republics of the former Soviet Union. As part of its shift to an
Internet-based business model, Yellow Pages has begun to provide its customers
with direct support in web design, programming/software consulting and search
engine development.
In addition to working with its existing businesses and markets, the
Communications Group is also working to identify other Internet-related market
opportunities in Central and Eastern Europe.
CHINA
The Communications Group has begun investment in Chinese enterprises engaged in
development of Internet-based e-commerce services. In its first such venture,
the Company owns 49% of Huaxia Metromedia Information Technology Co., Ltd., a
sino-foreign joint venture formed with a domestic trading company. The joint
venture develops and operates the Internet-based information systems that the
Chinese partner uses in its electronic trading activities. This form of
outsourcing arrangement is allowed under current Chinese regulation. The Company
is actively in negotiation for formation of
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several similar ventures operating in other regions and commercial sectors of
China. Trade agreements executed between China and several World Trade
Organization member companies during 1999 call for rapid opening of China's
Internet sector to foreign participation, including foreign direct majority
ownership of Chinese Internet and e-commerce companies.
The rate of Internet service development in China is very substantial and is
accompanied by a strong demand for foreign capital and expertise. Presently, the
Chinese government estimates there are approximately 10 million Internet users
in the country, but the annual growth rate is expected to be 100-200% for the
next several years. This is a realistic projection given the size of the Chinese
population and the infant state of Internet development in China. The Company is
targeting ventures that principally address e-commerce--both
business-to-business and business-to-consumer. The e-commerce format is well
suited to exploit China's rapidly expanding consumer demand and the country's
privatization of most industry. The Company is also targeting investment in
enterprises developing basic e-commerce infrastructure such as payment
processing, sales fulfillment coordination and Internet software development.
The team previously assembled by the Communications Group in China to pursue
investment in the country's domestic telephony business is well positioned to
create and manage ventures with Chinese enterprises undertaking Internet and
e-commerce service development. The Communications Group is assembling
additional resources within China to support the information technology
requirements of these ventures.
COMPETITION
The Internet and e-commerce business opportunities being explored by the
Communications Group are being developed in a highly competitive environment,
with a large number of new market entrants. At the same time, the market for
such services is highly diversified and is expected to remain so for the
foreseeable future.
The Company must demonstrate aggressive business development and financing
capabilities, solid technical support and effective relationship management to
compete effectively for position in the initial stages of market development.
Invested ventures will face a wide range of competitors before consolidations
reduce numbers to a fewer, long term surviving companies. To effectively meet
this competitive situation, the Company is targeting ventures with specific
niche market focus and with partners that already have established trade
positions in these niche markets. After individual ventures have established
e-commerce dominance in their niche, their subscriber base can be combined with
those of the Company's other ventures to create a large and general market
presence. For example, in its existing markets in Russia and Eastern Europe, the
Group is exploring ways to use its existing businesses and brand names to
distinguish itself from its competitors, both on a technical level and in terms
of reaching consumers and advertisers.
OTHER TELEPHONY-RELATED BUSINESS
YELLOW PAGES. Yellow Pages, in which the Communications Group holds a 100%
interest, is the owner of one of the most comprehensive databases of Russian and
foreign businesses in St. Petersburg and publisher of what is primarily a
business to business directory. Yellow Pages' full-time employees handle all of
the graphic design and database management. Yellow Pages hires part-time workers
for the periodic update of the directory. The Communications Group utilizes the
database of Yellow Pages to the benefit of PeterStar and BCL, particularly in
achieving more effective target marketing and in operator services. Yellow Pages
has also created a full on-line directory, integrated with detailed city maps,
and is currently developing a portal for the St. Petersburg region.
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CARDLINK. Cardlink is a business being developed utilizing proprietary wireless
technology owned by the Communications Group, targeted initially at the
processing and management of wireless electronic payment transactions. Cardlink
ZAO, in which the Communications Group has a 84.5% interest, is introducing this
technology in Moscow on a test basis, but it has potential application in Russia
and Eastern and Central Europe. Cardlink has entered into agreements with
several Russian banks for the processing of card transactions, and the project
is in the test phase with full implementation expected during the second quarter
of 2000. Although initially targeted at wireless card verification transactions
with banks and credit card issuers, the Cardlink technology can be applied to
developing and implementing other wireless data communication network
infrastructures where conventional telephone networks are either non-existent or
poor in terms of coverage and availability.
CABLE TELEVISION AND BROADBAND NETWORKS
OVERVIEW. The Communications Group commenced offering cable television services
in 1992 through its joint ventures Kosmos TV in Moscow and Baltcom TV in Riga,
Latvia. The Communications Group currently has interests in 12 cable television
networks in Eastern Europe and the republics of the former Soviet Union that
reported 421,102 subscribers at fiscal year-end 1999, an increase of
approximately 33% from 315,864 subscribers at fiscal year-end 1998. This follows
on a 40% increase in subscribers in 1998 from fiscal year-end 1997. In 1999, the
Communications Group's cable ventures focused on growing their wired cable
business through acquisition and network construction and finished the year with
1,089,924 homes passed by a fixed wireline network service. Of the 12 markets in
which the Communications Group currently operates, nine offer both fixed
wireline and wireless cable television services. Almost 80% of the cable group's
subscribers are now serviced by fixed wireline cable television services.
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 both wired and wireless
cable television services in Bishkek, Kyrgyzstan. In December 1999, the
Communications Group purchased 100% of a wired cable television network in Deva,
Romania thus increasing its Romania cable business by 23%. 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 believes that there are additional acquisition
opportunities in several of its markets and will pursue the acquisition of
select competitors.
The Communications Group also believes that there is a growing demand for
multi-channel television services in each of the markets where its joint
ventures are operating. This growing demand is fueled by the lack of quality
local television and alternative entertainment options in these markets combined
with an increasingly sophisticated level of viewer demand for thematic cable
programming in the local language. This growing appetite for multi-channel
television has been recognized by some of the world's premier broadcasters who
revolutionized the Eastern European market in recent years by launching
localized versions of their internationally recognized programming. These
channels include Eurosport, Nickelodeon, The Discovery Channel, The Hallmark
Entertainment Network, MTV and Fox Kids, with which the Communications Group has
programming arrangements.
APPLICATION OF NEW BROADBAND COMMUNICATION TECHNOLOGIES. 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.
The Communications Group believes that bundled video, data and voice services
will prove an attractive offering compared to traditional network services. The
Communications Group is currently upgrading its wired cable networks to hybrid
fiber coaxial ("HFC") networks in
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order to prepare its businesses to offer advance services. These advanced
services are expected to provide significant new revenue streams to supplement
the normal television services. In addition, the Communications Group is
currently evaluating the introduction of digital television services in key
markets utilizing the existing microwave multipoint distribution systems
("MMDS") already in place. Digital television services will allow a venture to
offer more channels with vastly improved picture and sound quality, impulse
pay-per view services, digital music services with CD quality sound, and both
high speed and dial-up Internet services through the web browsers that are built
into the digital set top boxes.
As part of its convergence strategy, the Communications Group is currently
examining opportunities to utilize the new telecommunications assets garnered
from the acquisition of PLD Telekom in conjunction with the Communication
Group's cable television broadband networks that are already in place in key
markets in Eastern Europe.
INTERNET SERVICES. The Communications Groups cable television joint ventures
currently offer high speed Internet access in Romania and Latvia and expects
these services to grow as modem prices continue to decrease and the number of
cable networks are upgraded. The group is planning to roll out Internet services
on its wired cable networks throughout the year in a number of its existing
markets. In addition, the Communications Group is working with equipment
manufacturers to introduce high speed Internet access through its existing
microwave multipoint distribution systems. This form of wireless Internet
provides great advantages in reaching business customers not reached by high
speed cable or DSL services and providing them with one data service in multiple
locations.
Since computer penetration in the region is lower than that of the west, the
Communications Group believes that there is significant potential for a set top
box that allows for Internet usage directly on a television set without the need
of a computer. The Communications Group is currently working with equipment
vendors to implement this technology on its networks which will allow it to
increase penetration of the potential residential Internet market.
TECHNOLOGY. The Communications Group's cable television joint ventures utilize
three possible distribution technologies: wireline cable, microwave multipoint
distribution, 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. All three distribution technologies allow for the introduction of
broadband services.
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 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 and (iv) in
a hybrid network area the wide geographic reach of the microwave signal covers
those areas not covered by the wired network.
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
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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.
One of the Communications Group's joint ventures offers pay-per-view movies 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 set top boxes 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 telesales,
door to door sales, direct marketing 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 republics of 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. Each of the Communications Group's cable television systems currently
compete with a number of entities in their markets, including other cable
television operators, direct to home satellite providers and over the air
broadcast television.
In addition, as the Internet gains popularity in the countries of Eastern Europe
and the republics of the 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.
The Company's cable television ventures endeavor to compete in their markets on
the following bases:
- Quality of programming line-ups: The Company offers quality programming
and has established key relationships with many international-programming
providers.
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ITEM 1. BUSINESS (CONTINUED)
- 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 that allow the business to generate a much higher average revenue
per subscriber than its competition. Most joint ventures have a basic
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 and by installing
modern western subscriber management software and customer care centers
into its businesses.
- Barriers to entry: The Company pre-wires certain geographic areas to
create a barrier to entry in locations where it perceives a competitive
threat.
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 republics of the former Soviet Union and owns and operates, through joint
ventures, 17 radio stations. The Communications Group plans either to dispose of
or discontinue the operations of NewsTalk Radio in Berlin during 2000.
The Communications Group's radio broadcasting strategy has been 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.
The Communications Group is also exploring ways in which it can leverage the
existing brands established by the radio businesses in connection with its
convergence strategy and the development of Internet-related businesses. Options
which the Communications Group is investigating include the possible branding of
Internet providers using those brand names and using the radio stations as an
advertising medium for those new businesses.
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 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
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ITEM 1. BUSINESS (CONTINUED)
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 republics of 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 the Internet will
also attract a significant portion of advertising expenditures in each
respective market.
PAGING
The Communications Group's paging businesses have to date provided traditional
paging services. The underlying premise for the paging business had 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 wireless communication was
significantly higher than for its paging services which were then a viable, low
cost alternative to GSM wireless telephony. At such time, customers could
receive messages and information via the pager at a fraction of the cost of GSM
wireless service.
However, the Communications Group's paging businesses have experienced
increasing competition from wireless telephony in the markets in which it
operates, and this competition has called into question the viability of many of
the paging operations. Consistent with the Company's strategy to maximize its
greatest value for the capital employed, in 1998 the Communications Group
developed a revised operating plan to stabilize the operations of its paging
ventures. Under the revised plan, the Communications Group managed its paging
business to a level that would not require significant additional funding for
its 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 1999. In 1999,
the Company has taken an additional non-cash charge on its paging assets of
$1.9 million. In the current environment, the potential for growth in most of
the markets the Communications Group's paging operations compete appears very
limited. The Company is continuing to manage its paging businesses to levels not
requiring significant additional funding, and is developing a strategy to
maximize the value of its paging investments.
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ITEM 1. BUSINESS (CONTINUED)
The Company currently believes the remaining value of its investments in and
advances to joint ventures related to paging businesses is recoverable due to
the location of the businesses and the ability to cross market services to the
customer base.
TELECOMMUNICATIONS JOINT VENTURES IN CHINA
In 1997 and 1998, the Company invested in several telecommunications joint
ventures in China through its majority-owned subsidiary, Asian American
Telecommunications Corporation. These joint ventures supported the construction
and development of telephony networks by China United Telecommunications
Incorporated, a Chinese telecommunications operator known as China Unicom.
Because legal restrictions in China prohibit direct foreign investment and
operating participation in domestic telephone companies, the company's joint
ventures were limited to providing financing and consulting services to China
Unicom under contracts. By the terms of these contracts and in return for
services rendered, the joint ventures were to receive payments from China Unicom
based on the cash flows generated by China Unicom's network businesses. This
arrangement, known as sino-sino-foreign joint venture cooperation, was commonly
accepted at the time the Company's joint ventures were formed and was applied in
numerous other foreign-invested relationships with China Unicom. Since the
arrangement specifically limited the joint ventures' participation in and
control over China Unicom's actual business operations, Asian American
Telecommunications accounted for its sino-sino-foreign joint venture investments
under the equity method. The Company invested in four Chinese telecommunications
joint ventures in this fashion--two in Ningbo Municipality, one in Sichuan
Province and one in Chongqing City.
Beginning in mid-1998, the Chinese government unofficially began reconsidering
the advisability of continuing the sino-sino-foreign joint venture cooperation
arrangements undertaken by China Unicom. At that time, more than forty such
cooperation contracts had been established with foreign-invested joint ventures
covering China Unicom's operations in various parts of China. By mid-1999, the
government reached the conclusion that China Unicom's sino-sino-foreign
cooperation framework was in conflict with China's basic telecommunications
regulatory policies and should henceforth cease. China Unicom was instructed to
terminate or very substantially restructure all of its sino-sino-foreign joint
venture cooperation contracts.
In July 1999, Ningbo Ya Mei Telecommunications, Ltd., one of the Company's two
telecommunications joint ventures in Ningbo Municipality, China, received notice
from China Unicom stating that the Chinese government had directed China Unicom
to terminate further cooperation with Ningbo Ya Mei. China Unicom subsequently
informed the Company that the notification also applied to the Company's other
telecommunications joint venture in Ningbo Municipality. In subsequent
notifications from China Unicom to the Company's joint ventures, China Unicom
stated its intention to terminate all cooperation contracts with
sino-sino-foreign joint ventures in China pursuant to an August 30, 1999 mandate
from the Chinese Ministry of Information Industry. In its notifications, China
Unicom requested that negotiations begin regarding a suitable settlement of all
matters related to the winding up of the Company's joint ventures cooperation
agreements with China Unicom as a result of the Ministry of Information Industry
notice. With the issuance of these notifications, China Unicom ceased further
performance under its cooperation contracts with the Company's joint ventures.
However, China Unicom did make distribution of amounts owed to the Company's
Ningbo Ya Mei joint venture for the first half of 1999 according to the terms of
the cooperation contract. The Company, through its four joint ventures, entered
into negotiations with China Unicom in September 1999 to reach suitable terms
for termination of the cooperation contracts.
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ITEM 1. BUSINESS (CONTINUED)
On November 6, 1999, the Company's four Chinese joint ventures engaged in
projects with China Unicom each entered into non-binding letters of intent with
China Unicom which set forth certain terms for termination of their cooperation
arrangements with China Unicom. On December 3, 1999, legally binding settlement
contracts incorporating substantially the terms set forth in the November
letters of intent were executed between China Unicom and the four joint
ventures, thereby terminating the joint ventures' further cooperation with China
Unicom. Under the terms of the settlement contracts, the four joint ventures
will each receive cash amounts in reminbi, the Chinese currency ("RMB") from
China Unicom in full and final payment for the termination of their cooperation
contracts with China Unicom. Upon receipt of this payment, China Unicom and the
joint ventures will waive all of their respective relevant rights against the
other party with respect to the cooperative arrangements. In addition, all
assets pertinent to China Unicom's networks that are currently held by the joint
ventures will be unconditionally transferred to China Unicom. China Unicom
effected payment to the joint ventures of the amounts prescribed in the
settlement contracts on December 10, 1999. Subsequently and prior to the end of
1999, the boards of directors of the four joint ventures each passed formal
resolutions to commence dissolution of the joint ventures. The Company expects
such dissolution to be completed for all four joint ventures by mid-2000.
The Company will receive substantial portions of the China Unicom settlement
payments to the joint ventures via repayment of advances and distribution of
joint venture assets on dissolution. China Unicom's settlement payments to the
joint ventures were made in RMB. The joint ventures' formation contracts and
loan agreements with Asian American Telecommunications had been registered with
Chinese authorities so as to assure the joint ventures' ability to convert RMB
deposits into foreign exchange for payment to the Company. Over time, the
Company anticipates that it will fully recover its investments in and advances
to the four affected joint ventures, but no assurances can be made as to the
exact timing or amount of such repayments. As of December 31, 1999, investments
in and advances to these four joint ventures, exclusive of goodwill, were
approximately $40.0 million. As of December 31, 1999, the joint ventures had
conveyed to Asian American Telecommunications in the form of repayment of
advances approximately $29.3 million in US Dollars from the China Unicom
settlement.
The Company's current estimate of the total amount it will ultimately receive
from the four terminated joint ventures is $90.1 million (at the December 31,
1999 exchange rate) of which $29.3 million has been received. Full distribution
of all expected funds must await the Chinese government's recognition and
approval of the completion of formal dissolution proceedings for the four joint
ventures. This is expected by mid-2000 and the Company anticipates no problems
in ultimately dissolving the joint ventures. However, some variance from the
Company's current estimates of the amounts finally distributed to Asian American
Telecommunications may arise due to settlement of the joint ventures' tax
obligations in China and exchange rate fluctuations. The Company cannot assure
at this time that this variance will not be material.
The currently estimated $90.1 million in total payments from the Company's four
joint ventures that had cooperated with China Unicom is insufficient to fully
recover the goodwill recorded in connection with the Company's investment in
these joint ventures. As a result, the Company has recorded a non-cash
impairment charge of $45.7 million in 1999 for the write-off of goodwill.
Further adjustments may be required after receipt of final distributions from
the four terminated joint ventures.
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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, 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, 1999, several 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. Certain other licenses
held or used by the Communications Group's joint ventures will expire during
2000. The Company's joint ventures will apply for renewals of their licenses.
However, there can be no assurance that these licenses will be renewed.
Additionally, a number of joint ventures are in violation of one or more of the
conditions of their licenses. While these violations are largely technical there
can be no assurance that the relevant licensing authorities will not attempt to
use these violations as a basis to terminate or renegotiate these licenses. See
"--Risks Associated with the Company--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."
LIQUIDITY ARRANGEMENTS
While in a number of cases the Communications Group owns less than 50% of the
equity in a joint venture, in general the objective of the Communications Group
is to hold a greater than 50% interest in the joint ventures in which it
invests. The balance of the equity in its joint ventures is usually owned by one
or more local entities, often a government-owned enterprise or a formerly
government-owned enterprise which has been privatized. 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. In almost every case the
Communications Group designates one or more of its personnel to work with the
joint venture, in some instances actually seconding the individual to a specific
joint venture. 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 some 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 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 republics of
the former Soviet Union are limited liability entities which are permitted to
enter into contracts, acquire property and
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ITEM 1. BUSINESS (CONTINUED)
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
contributions to the joint venture in cash. In such cases the Company
establishes 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, 1999, the Company had obligations to fund up to an additional $48.5
million with respect to funding the various credit lines the Company has
extended to its joint ventures in Eastern Europe and the republics of 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.
A number of the Communications Group's joint ventures, notably PeterStar, ALTEL
and almost all the radio stations, have become self-financing and have ceased to
require financial support from the Group.
In addition to repayments under its credit agreements, the Company may also
receive distributions from the joint venture. Where these distributions are of
profits, they will be made on a pro rata basis to the Company and its local
partners in accordance with their respective ownership interests.
In addition to loaning funds to the joint ventures, the Communications Group
often provides certain services of the joint ventures for a fee. The
Communications Group does not usually 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 (including payments of fees)
are subject to taxation. The laws in the Communications Group's markets vary
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.
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ITEM 1. BUSINESS (CONTINUED)
The Communications Group's China joint ventures in Ningbo, Sichuan and Chongqing
are currently in the process of dissolution subsequent to the forced termination
of their cooperative contracts with China Unicom. Dissolution is regulated by
the Chinese government and requires the joint ventures to submit to certain
audits and tests of financial liability. The dissolving joint ventures have no
material financial obligations outstanding as of February 2000 other than for
1999 taxes in China. Repayment of the principal balance of loans is permitted
prior to final dissolution, and $29.3 million in such loan payments have already
been made to the Company's Asian American Telecommunications subsidiary.
Distribution of owners' equity, however, is not permitted until final
dissolution is approved. The joint ventures' tax liabilities are currently being
negotiated with the Chinese tax authorities in view of the unusual circumstances
surrounding payments received from China Unicom during 1999. The Company expects
to settle the joint ventures' tax liabilities and complete dissolution by
mid-2000.
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 the
Company's consolidated revenues from Snapper's operations for 1999, 1998 and
1997 were 82%, 87%, and 90%, 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.
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 available floor plan financing for dealers of Snapper's products.
This agreement provides financing for inventories and accelerates Snapper's cash
flow. Under the terms of this agreement, a default in payment by a dealer is
non-recourse to Snapper. However, the third-party financial institution can
require Snapper to repurchase new and unused equipment, if the dealer defaults
and the inventory is not able to be sold
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ITEM 1. BUSINESS (CONTINUED)
to another dealer. At December 31, 1999 there was approximately $95.0 million
outstanding under this floor-plan financing arrangement. The Company has
guaranteed Snapper's payment obligations under this arrangement.
Snapper also makes available, primarily 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 portion of the component parts for its
products. Most of the parts and materials for Snapper's products are
commercially available from a number of sources.
During the three years ended December 31, 1999, Snapper spent an average of
$3.3 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.
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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
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.,
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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 alleged 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, were 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 disclosed that its
management had discussed the possibility of filing for bankruptcy. The amended
complaints also alleged that the defendants, including the Company and current
and former officers of the Company who served as directors of RDM, were
secondarily liable as controlling persons of RDM. In an opinion dated March 10,
2000, the court dismissed these actions in their entirety.
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 or directors of the Company,
while serving as directors 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. 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 financing
of RDM, or to equitably subordinate such claim made by the Company against RDM
and other debtors in the bankruptcy proceeding. On March 3, 1999, the
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. 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.
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 1999 and are not
expected to be material in future years.
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ITEM 1. BUSINESS (CONTINUED)
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, 1999. As of December 31, 1999, the Company
had a remaining reserve of approximately $2.1 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
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 ("ADEM")
advised the Company that the Opelika property contains an "unauthorized dump" in
violation of Alabama environmental regulations. The letter from ADEM required
the Company to present for of ADEM'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 the grading and capping in accordance with the remediation
plan and has reported to the Department of Environmental Management that the
work was successfully completed. In 1999, the Company proposed to the Department
of Environmental Management an accelerated groundwater monitoring schedule. That
monitoring is complete and ADEM has stated that the "groundwater monitoring
requirements for this site are terminated." Pending the recording of the
appropriate deed notation, this site will be fully closed in accordance with
Alabama regulations. The Company believes that its reserve of approximately
$59,000 will be adequate to cover any further costs.
EMPLOYEES
As of March 6, 2000, 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.
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ITEM 1. BUSINESS (CONTINUED)
SEGMENT AND GEOGRAPHIC DATA
Business segment data and information regarding the Company's foreign revenues
by country area are included in notes 3, 4 and 12 to the Notes to Consolidated
Financial Statements included in Item 8 hereof.
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 years ended December 31, 1999, 1998 and 1997, it
reported a loss from continuing operations of approximately $129.2 million,
$136.0 million, and $130.9 million, respectively, and a net loss of
$142.0 million, $123.7 million, and net income of $88.4 million, respectively.
The Company expects that it will report significant operating losses for the
fiscal year ended December 31, 2000. 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 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.
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 its 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 principally 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.
THE COMPANY HAS SUBSTANTIAL DEBT WHICH MAY LIMIT ITS ABILITY TO BORROW, RESTRICT
THE USE OF ITS CASH FLOWS AND CONSTRAIN ITS BUSINESS STRATEGY AND THE COMPANY
MAY NOT BE ABLE TO MEET ITS DEBT OBLIGATIONS.
The Company has substantial debt and debt service requirements. The Company's
substantial debt has important consequences, including:
- the Company's ability to borrow additional amounts for working capital,
capital expenditures or other purposes is limited,
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ITEM 1. BUSINESS (CONTINUED)
- a substantial portion of the Company's cash flow from operations is
required to make debt service payments, and
- the Company's leverage could limit its ability to capitalize on
significant business opportunities and its flexibility to react to changes
in general economic conditions, competitive pressures and adverse changes
in government regulation.
The Company cannot assure you that its cash flow and capital resources will be
sufficient to repay any outstanding indebtedness or any indebtedness the Company
may incur in the future, or that the Company will be successful in obtaining
alternative financing. If the Company is unable to repay its debts, it may be
forced to reduce or delay the completion or expansion of its networks, sell some
of its assets, obtain additional equity capital or refinance or restructure its
debt. If the Company is unable to meet its debt service obligations or comply
with its covenants, the Company will default under its existing debt agreements.
To avoid a default, the Company may need waivers from third parties, which might
not be granted.
RESTRICTIONS IMPOSED BY THE COMPANY'S PRINCIPAL DEBT AGREEMENT MAY SIGNIFICANTLY
LIMIT ITS BUSINESS STRATEGY AND INCREASE THE RISK OF DEFAULT UNDER THE
COMPANY'S DEBT OBLIGATIONS.
The indenture for the Company's outstanding 10 1/2% senior discount notes
contains a number of significant covenants. These covenants limit the Company's
ability to, among other things:
- borrow additional money,
- make capital expenditures and other investments,
- repurchase its own common stock,
- pay dividends,
- merge, consolidate, or dispose of its assets, and
- enter into transactions with related entities.
If the Company fails to comply with these covenants, the Company would default
under the indenture. A default, if not waived, could result in acceleration of
the Company's indebtedness, in which case the debt would become immediately due
and payable. If this occurs, the Company may not be able to repay its debt or
borrow sufficient funds to refinance it. Even if new financing is available, it
may not be on terms that are acceptable to the Company. Complying with these
covenants may cause the Company to take actions that it otherwise would not
take, or not take actions that it otherwise would take.
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 Communications Group'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
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ITEM 1. BUSINESS (CONTINUED)
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's businesses are in highly competitive markets and
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 than the Company's operating
businesses.
The Communications Group also faces potential competition from competing
technologies which could 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's paging businesses
have found it difficult to effectively compete for traditional paging customers
in markets where GSM technology is combined with calling party pays and prepaid
calling card service.
Similarly, the Company cannot assure that its wireless networks in Kazakhstan
and Belarus, and its new network in Tyumen, Russia will be able to compete with
the development of the newly-introduced GSM technology in these markets.
In addition, the principal partners in certain joint ventures and operating
businesses have interests that may conflict with those of the Communications
Group and in certain instances could compete directly with the Communications
Group and its businesses. This competition could seriously undermine the local
support for the Communications Group's businesses, affect the results of
operations in these countries and jeopardize the Company's ability to fully
realize the value of its economic investments in these countries.
For example, Telecominvest, the other shareholder in PeterStar, has recently
raised over $50 million in net proceeds from a private placement of securities,
a substantial part of which is dedicated to the completion of a transit network
in St. Petersburg which could provide significant competition to the Group's
network in this area. The Communications Group's wireless operator in Kazakhstan
directly competes with the public switched telephone network of Kazakhtelekom,
its partner in this operating business, as well as a recently established GSM
mobile phone service joint venture in which Kazakhtelekom has an interest. The
Group's long distance network in Moscow is in direct competition with the long
distance national network operated by Rostelecom, its partner in its
Moscow-based telephony business.
In addition, while the Communications Group at one time held a number of
exclusive licenses to operate its communications businesses, all such periods of
exclusivity have expired and the Communications Group does not expect to be
granted further exclusive licenses 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 telephony, cable and paging systems and
the sale of commercial advertising time on
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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.
Many of the Communications Group's joint ventures require substantial
construction of new systems and additions to the physical plants of existing
systems. The Communications Group cannot assure you that this construction will
be completed on time or within budget. Construction projects may be 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 failure to complete construction of a
communications system on a timely basis could jeopardize the franchise or
license for such system or provide opportunities to the Communication Group's
competitors. Cost overruns may obligate us to incur additional debt.
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.
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.
Many of 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 our
operations. For most of the licenses held or used by the Communications Group's
joint ventures, no
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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 meet these milestones could result in the loss of these
licenses, which may have a material adverse effect on its operations.
Additionally, a number of joint ventures are in violation of one or more of the
conditions of their licenses. For example, PeterStar has exceeded the number of
lines which the main license of its operating business in St. Petersburg allows
it to operate in St. Petersburg and the surrounding region. While the Company
believes that these violations are largely technical, the Company cannot assure
you that the relevant licensing authorities will not attempt to terminate or
renegotiate a license whose conditions have been violated or otherwise force the
Communications Group to take action contrary to its business interests. For
example, in the case of the PeterStar license, the Russian licensing authorities
may force PeterStar to reduce its number of lines or impose other penalties on
it.
Finally, the Communications Group cannot assure you that its joint ventures will
obtain the necessary approvals to operate new or additional fixed or wireless
telephony, cable television or broadcasting systems in any of the markets in
which it is seeking to establish its business.
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.
Additionally, the Communication 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 currency licenses could result in the imposition of
fines and penalties, significant delays in delivering equipment to its operating
businesses and resulting difficulties in generating cash flows from its
operating businesses. The documentary requirements for obtaining the currency
licenses are burdensome and the Company 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.
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. In certain cases, 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.
In addition, in certain cases, the Communications Group may be 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
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ITEM 1. BUSINESS (CONTINUED)
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.
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 significant portion of its telephony operations. The Company cannot assure
you that its operating businesses will continue to have access to these
operators' networks or that the Communications Group will be able to have access
to these networks upon favorable tariffs. The loss of access to these networks
or increases in tariffs could have a material adverse effect upon the Company.
For example, the Communications Group's wireless operator in Kazakhstan is
entitled to interconnection free of charge to networks operated by
Kazakhtelekom, the Kazakhstan public switched telephone network operator, for
the completion of its local, long distance and international calls. The loss of,
or any significant limitation on, its access to this network could have a
material adverse effect on its operations. Additionally, Kazakhtelekom may try
to use its authority to endeavor to assess interconnection charges on this
operating business in Kazakhstan, which may materially impact this operating
business' profitability. Other operating businesses, such as PeterStar and
Teleport-TP, face similar issues.
The Communications Group is also dependent on local operators or interconnect
parties' facilities for certain of its operations. For example, PeterStar's
business in St. Petersburg is dependent on Russian operators' buildings, ducts
and tunnels in order to house its exchanges and to reach its customers. The loss
of access to these facilities or the availability of access only on unfavorable
terms could have a material adverse effect upon PeterStar. Similarly,
Teleport-TP's business in Moscow is also dependent upon the facilities of local
operators for the operation of its existing network in Moscow and to terminate
certain traffic to users. The loss of the right to use these facilities could
have a material adverse effect on Teleport-TP.
Certain customers account for a significant portion of the total revenues of
certain of the Communications Group's telephony operations and the loss of these
customers would materially and adversely affect their results of operations.
In addition, several of the Communications Group's customers, interconnect
parties or local operators experience liquidity problems from time to time. The
Communications Group's dependence on these parties may make it vulnerable to
their liquidity problems, both in terms of pressure for financial
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ITEM 1. BUSINESS (CONTINUED)
support for the expansion of their operations, and in its ability to achieve
prompt settlement of accounts.
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 operations or proposed operations are
dependent upon approval of its 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
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.
As an example, the Communications Group has seen its paging operations
negatively affected by subscribers switching to more advanced wireless
technology to send and receive messages. 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.
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 and the
republics of the former Soviet Union, 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,
- 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,
- 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
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ITEM 1. BUSINESS (CONTINUED)
governments and international organizations which helps to support their
economic development,
- the 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.
THE COMPANY FACES ENHANCED ECONOMIC, LEGAL AND PHYSICAL RISKS BY OPERATING
ABROAD.
The Communications Group has invested 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,
- increases in taxes and governmental royalties and involuntary changes to
its licenses issued by, or contracts with, foreign governments or their
affiliated commercial enterprises,
- changes in foreign and domestic laws and policies that govern operations
of overseas-based companies,
- 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 and subsidiaries,
- 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,
- 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, and
- 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.
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ITEM 1. BUSINESS (CONTINUED)
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 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.
As an example, 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 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.
As a further example, in 1999 the Chinese government requested termination of
all of the telecommunications joint ventures then operating in China, on the
basis that the legal structure used for these ventures would no longer be
permitted. As a result, China Unicom, the Communications Group's partner in four
such ventures, terminated all of the Communications Group's ventures in China.
See "Telecommunications Joint Ventures in China."
As a further example, changes in Russian regulation may force the three mobile
operators which currently provide significant traffic for the PeterStar network
to use other Russian networks.
RECENT ECONOMIC DIFFICULTIES IN RUSSIA AND OTHER EMERGING MARKETS COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE COMMUNICATIONS GROUP'S OPERATIONS IN THESE
COUNTRIES.
During 1998, and continuing in 1999, 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, the most notable being the August 1998 financial
crisis in Russia. 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 continue to negatively affect the financial performance
of certain of its cable television, telephony, radio broadcasting and paging
ventures in 2000.
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
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ITEM 1. BUSINESS (CONTINUED)
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 hyperinflationary levels for some years and as a result,
the currency has essentially lost all intrinsic value.
The Communications Group's operating results will be adversely impacted if it is
unable to increase its prices enough to offset any increase in the rate of
inflation, or if anti-inflationary legislation holding down prices is enacted.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES IN THE COUNTRIES IN WHICH THE COMPANY
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 1999, the value of the Russian Rouble was under considerable economic and
political pressure and has suffered significant declines against the U.S. dollar
and other currencies. In addition, in 1999 local currency devaluations in
Uzbekistan, Kazakhstan and Georgia, in addition to weakening of local currencies
in Austria and Germany, had an adverse effect on the Communications Group's
ventures in these countries. 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 TAX RISKS OF INVESTING IN THE MARKETS IN WHICH THE COMPANY OPERATES CAN BE
SUBSTANTIAL AND CAN MAKE EFFECTIVE TAX PLANNING DIFFICULT, WHICH WOULD
MATERIALLY AFFECT ITS FINANCIAL CONDITION.
Taxes payable by the Company's joint ventures are substantial and the Company
may be unable to obtain the benefits of tax treaties due to:
- the documentary and other requirements imposed by the government
authorities,
- the unfamiliarity of those administering the tax system with the
international tax treaty system of their country, or their unwillingness
to recognize the treaty system, and
- the absence of applicable tax treaties in many of the countries in which
the Company operates.
The Company's tax planning initiatives to reduce its overall tax obligations may
be negated or impaired by the need to deal with these issues. Furthermore, the
taxation systems in the countries in which the Company operates is at an early
stage of development and is subject to varying interpretations, frequent changes
and inconsistent and arbitrary enforcement at the federal, regional and local
levels. In certain instances, new taxes and tax regulations have been given
retroactive effect, which further complicates effective tax planning.
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 the countries in which the Company operates are
significantly less developed or clear than comparable laws in the United States
and the 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 the 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
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ITEM 1. BUSINESS (CONTINUED)
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.
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.
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 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.
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 18% 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. Since the charter of the Company and Delaware law
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ITEM 1. BUSINESS (CONTINUED)
provide that the majority of the members of the board of directors will nominate
the directors for election to the board of directors, 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 the Company.
THE COMPANY MAY DEFAULT UNDER ITS SNAPPER CREDIT FACILITY, WHICH COULD
MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS STRATEGY AND RESULTS OF
OPERATIONS.
Recently Snapper was not in compliance with certain financial covenants under
its credit facilities and, although these defaults have been waived, the Company
cannot assure you that Snapper will not default again under its credit facility.
Any such default could materially and adversely affect Snapper, could result in
a cross-default under the indenture governing our senior notes, and could
materially and adversely affect the Company's results of operations.
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 other than Snapper. However, in the course of these divestitures, it
has retained certain indemnification obligations for environmental cleanup
matters. In one case, the Company has undertaken specific clean up activities at
a contaminated parcel. It could incur additional cleanup obligations with
respect to environmental problems which so far have remained undetected.
Furthermore, its obligation to clean up could arise as a result of changes in
legal requirements since the original divestitures. Even though these
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 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. 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
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ITEM 1. BUSINESS (CONTINUED)
use of words or phrases like "believes," "expects," "may," "will," "should" or
"anticipates" or the 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, republics of 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, republics of 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, republics of 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, republics of 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.
48
<PAGE>
ITEM 2. PROPERTIES
The following table contains a list of the Company's principal properties as of
March 17, 2000.
<TABLE>
<CAPTION>
NUMBER OF
-------------------
DESCRIPTION OWNED LEASED LOCATION
- ----------- -------- -------- --------------------------------------
<S> <C> <C> <C>
COMMUNICATIONS GROUP:
Office space.......................... -- 2* Moscow, Russia
Office space.......................... -- 1 Vienna, Austria
Office space.......................... -- 2* New York, New York
Office space.......................... -- 1 Beijing, People's Republic of China
Office space.......................... -- 1* Stamford, Connecticut
Office space.......................... -- 1* London, England
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 Communications Group's offices in Stamford and London and one office in
each of Moscow and New York are being closed as part of the Communications
Group's operational restructuring.
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 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
49
<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.
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 tortuously 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.
50
<PAGE>
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, 1999.
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
---------------------------------------------------
1999 1998
----------------------- -------------------------
QUARTERS ENDED HIGH LOW HIGH LOW
- -------------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
March 31............................................ $8 1/2 $4 7/8 $15 3/16 $ 9 5/8
June 30............................................. 8 5/16 4 1/8 17 7/8 11 1/16
September 30........................................ 8 1/16 4 1/16 13 9/16 3 3/4
December 31......................................... 5 1/8 3 6 1/4 2 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
including the Company's 10 1/2% senior discount notes. 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 March 17, 2000, there were approximately 6,943 record holders of common
stock. The last reported sales price for the common stock on such date was
$7 5/8 per share as reported by the American Stock Exchange.
51
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 (1) 1995 (2)
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (3).......................... $ 264,789 $ 240,292 $ 204,328 $ 36,592 $ 5,158
Equity in losses of unconsolidated
investees (4) (5)................... (22,299) (18,151) (53,150) (7,835) (6,367)
Loss from continuing operations (3)
(4) (5) (6)......................... (129,207) (135,986) (130,901) (72,146) (36,265)
Income (loss) from discontinued
operations (3)...................... (12,776) 12,316 234,036 (38,592) (344,329)
Loss from extraordinary items (7)..... -- -- (14,692) (4,505) (32,382)
Net income (loss)..................... $(141,983) $(123,670) $ 88,443 $(115,243) $(412,976)
Income (loss) per common share--Basic:
Continuing operations............... $ (1.92) $ (2.19) $ (2.02) $ (1.33) $ (1.48)
Discontinued operations............. (0.17) .18 3.50 (0.71) (14.03)
Extraordinary items................. -- -- (0.22) (0.08) (1.32)
Net income (loss)................... $ (2.09) $ (2.01) $ 1.26 $ (2.12) $ (16.83)
Ratio of earnings to fixed charges
(8)................................. n/a n/a n/a n/a n/a
Weighted average common shares
outstanding......................... 75,232 68,955 66,961 54,293 24,541
Dividends per common share............ -- -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets (9)...................... $ 776,854 $ 609,641 $ 789,272 $ 513,118 $ 328,600
Notes and subordinated debt........... 223,952 51,834 79,416 190,754 171,004
</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 years ended December 31, 1999 and 1998, in connection with the
Communications Group's 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 charge and
write down was $68.9 million and $49.9 million, respectively.
(6) For the year ended December 31, 1999, the Communications Group recorded a
restructuring charge of $8.4 million.
52
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
(7) 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.
(8) 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, 1999, 1998, 1997, 1996 and 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, 1999, 1998, 1997, 1996 and 1995 were: $146.9 million,
$141.1 million, $95.3 million, $64.3 million, and $30.1 million,
respectively.
(9) 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 were $11.0 million and $12.1 million, respectively. The revenues of
the entertainment group for the years ended December 31, 1996 and 1995 were
$135.6 million and $133.8 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.
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 consist of two operating groups, the
Communications Group and Snapper.
COMMUNICATIONS GROUP
OVERVIEW
The Communications Group has operations in Eastern Europe and the republics of
the former Soviet Union and a pre-operational business in China. Operations in
Eastern Europe and the republics of the former Soviet Union provide the
following services: (i) wireless telephony; (ii) fixed telephony; (iii) cable
television; (iv) radio broadcasting; and (v) paging. The Company also holds
interests in several telecommunications joint ventures in China. These ventures
were terminated in late 1999 and the Company reached agreement for the
distribution of approximately $90.1 million (based on the December 31, 1999
exchange rate) in settlement of all claims under the joint venture agreements of
which $29.3 million has been received. The Communications Group is now
developing e-commerce business opportunities in China.
During 1999 the Company continued to focus its growth strategy on opportunities
in communications businesses. The convergence of cable television and telephony,
and the relationship of each business to Internet access, provides the Company
with new opportunities.
53
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On September 30, 1999, the Company consummated the acquisition of PLD Telekom, a
provider of high quality long distance and international telecommunications
services in the republics of the former Soviet Union. As a result of the
acquisition, PLD Telekom became a wholly owned subsidiary of the Company.
PLD Telekom's 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; Technocom, which through
Teleport-TP and MTR Sviaz provides international telecommunications services
from Moscow and operates satellite-based and fiber optic networks; Baltic
Communications Limited ("BCL"), which provides dedicated international
telecommunications services in St. Petersburg; ALTEL, which is a provider of
wireless service in Kazakhstan; and BELCEL, which provides national wireless
service in Belarus.
The acquisition of the PLD Telekom businesses by the Company on September 30,
1999, adds further to the strong presence of the Communications Group in the
republics of the former Soviet Union, and has provided a platform for the
Company to implement its strategy for convergence of existing communications
services and development of new Internet related services. The strengthened
portfolio of communications assets is also expected to bring cost saving and
revenue generating synergies to the Company.
The Communications Group's consolidated revenues represented approximately 18%,
13% and 10% of the Company's total revenues for the years ended December 31,
1999, 1998 and 1997, respectively. The Company expects this proportion to
increase as the Communications Group's joint ventures develop their businesses
and with the acquisition of PLD Telekom. Consolidated revenues of the Company
for the year ended December 31, 1999 include $22.9 million attributable to PLD
Telekom for the three months ended December 31, 1999.
Following the acquisition of PLD Telekom in September 1999, the Communications
Group undertook a review of the operations of the combined entity. Following
this review, the Communications Group determined to make significant reductions
in its projected overhead costs for 2000 by closing its offices in Stamford,
Connecticut and London, England, consolidating its executive offices in New
York, New York, consolidating its operational headquarters in Vienna, Austria
and by consolidating its two Moscow offices into one. In connection with this,
the Communications Group reduced the headcount among its U.S. domestic and
expatriate employees by approximately 60 individuals. In connection with these
moves, the Company recorded a restructuring charge of $8.4 million for the year
ended December 31, 1999.
In 1999 the Company also recorded a non-cash impairment charge of $23.2 million
on certain paging, telephony and radio businesses pursuant to a change of
strategic plan implemented by the Communications Group in the last quarter of
1999.
In addition, the Company has reviewed the amortization periods for its goodwill
and intangibles associated with licenses for its operations in Eastern Europe
and the republics of the former Soviet Union and has revised these amortization
periods commencing in the quarter ending September 30, 1999. This change in
estimate has been accounted for prospectively and will result in additional
annual amortization expenses of approximately $4.4 million.
54
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
BASIS OF PRESENTATION
In 1999 the Company consummated the acquisition of PLD Telekom, which exercises
control over the majority of businesses in which it has interests. The Company
therefore consolidates the revenues and results of PLD Telekom operations. The
consolidated financial results of the Company for the year ended December 31,
1999 include those of PLD Telekom for the three months subsequent from the date
of its acquisition on September 30, 1999.
The Communications Group accounts for the majority of its other joint ventures
(i.e. with the exception of the PLD Telekom businesses) under the equity method
of accounting since it generally does not exercise control over such ventures.
Under the equity method of accounting, the Communications Group reflects the
investments in and advances to joint ventures, adjusted for distributions
received and its share of the income or losses of the joint ventures, on its
balance sheet. The income (losses) recorded in the years ended 1999, 1998 and
1997 represent the Communications Group's equity in the income (losses) of the
joint ventures in Eastern Europe and the republics of the former Soviet Union,
and China. Equity in the income (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. Subsequently, 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. See
Notes 3 and 4 of the "Notes to Consolidated Financial Statements" of the
Company, for those joint ventures recorded under the equity method and their
summary financial information.
Investments over which significant influence is not exercised are carried under
the cost method.
Almost all of the Communications Group's joint ventures other than the PLD
Telekom businesses report their financial results on a three-month lag.
Therefore, the Communications Group's financial results for December 31 include
the financial results for those joint ventures for the 12 months ending
September 30. The Company is currently evaluating the financial reporting of
these ventures and the possibility of reducing or eliminating the three-month
reporting lag for certain of its principal businesses during 2000.
1999 RESTRUCTURING AND IMPAIRMENT CHARGES
Shortly after completing its September 30, 1999 acquisition of PLD Telekom, the
Company began identifying synergies and redundancies between Metromedia
International Telecommunications, Inc. and PLD Telekom. The Company's efforts
were directed toward streamlining its operations. Following the review of its
operations, the Communications Group determined to make significant reductions
in its projected overhead costs for 2000 by closing its offices in Stamford,
Connecticut and London, England, consolidating its executive offices in New
York, New York, consolidating its operational headquarters in Vienna, Austria
and by consolidating its two Moscow offices into one. As part of this
streamlining of its operations, the Company announced an employee headcount
reduction. Employees impacted by the restructuring were notified in
December 1999 and in almost all cases were terminated effective December 31,
1999. Employees received a detailed description of their separation package
which was generally based on length of service. The total number of U.S.
domestic and expatriate employees separated was approximately 60. In addition,
there were reductions in locally hired staff. In 1999 the Company recorded a
charge of $8.4 million in connection with the restructuring.
Concurrent with the review of its existing operations and the change in
management as the result of the acquisition of PLD Telekom, the Communications
Group completed a strategic review of its
55
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
telephony, cable television, radio broadcasting and paging assets. The results
of the Communications Group's strategic review was as follows:
- Continue to pursue a convergence strategy to develop delivery for voice
and data services over its existing cable and telephony infrastructure
- Geographically focus the Communications Group's efforts on several key
countries where the Communications Group already has a significant
presence, including Russia, Georgia, Romania, Latvia and Kazakhstan
- Work towards obtaining consolidatable positions in certain of the
Communications Group's principal assets
- Develop Internet capability in the Communications Group's existing
businesses and explore expansion of Internet-related businesses in Central
and Eastern Europe
- Develop e-commerce business opportunities in China
- Leverage the Communications Group's existing radio brands in their
markets, with a view to using them in developing its other businesses,
including the development of Internet-based businesses
- Continue to focus on cost control and reduction in corporate overhead
costs
As a result of the Company's strategic review, the Company determined that
certain businesses (including pre-operational businesses) in its portfolio did
not meet certain of its objectives of the strategic review, such as the ability
to obtain control of the venture, geographic focus or convergence. The long
lived assets or the investments in these businesses were evaluated to determine
whether any impairment in their recoverability existed at the determination
date. As a result, the Company assessed whether the estimated cash flows of the
businesses over the estimated lives of the related assets were sufficient to
recover their costs. Where such cash flows were insufficient, the Company
utilized a discounted cash flow model to estimate the fair value of assets or
investments and recorded an impairment charge to adjust the carrying values to
estimated fair value. As a result of this evaluation, the Company recorded a
non-cash impairment charge on certain of its paging, cable television and
telephony businesses of $23.2 million.
For those equity method investments whose fair value is equal to zero, the
Company will no longer record its proportionate share of any future net losses
of these investees, unless the Company provides future funding. The
Communications Group will continue to manage its paging businesses to levels not
requiring significant additional funding and is developing a strategy to
maximize the value of its paging investments. In 2000, it is expected that the
paging operations will continue to generate losses.
1998 IMPAIRMENT CHARGE
In 1998, the Communications Group's paging business continued to incur operating
losses. Accordingly, the Communications Group developed a revised operating plan
to stabilize its paging operation. Under the revised plan, the Communications
Group managed its paging business to a level that did not require significant
additional funding for its operations. As a result of the revised plan, in 1998
the Company recorded a non-cash charge on its paging assets of $49.9 million,
which included a $35.9 million write off of goodwill and other intangibles. The
non-cash charge adjusted the carrying value of goodwill and other intangibles,
fixed assets and investments in and advances to joint ventures
56
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
and wrote down inventory. Under the revised plan, the paging business's
operating losses have decreased significantly.
The non-cash 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 related to both consolidated joint ventures and subsidiaries and
joint ventures recorded under the equity method. The Company adjusted its
investments in certain paging operations which were recorded under the equity
method to zero and since then has not provided significant additional funding to
these equity investees, and unless it provides future funding will continue to
no longer record its proportionate share of any future net losses in these
investees.
The following table displays a rollforward of the activity and balances of the
restructuring reserve account from inception to December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
RESTRUCTURING 1999
TYPE OF COST COST PAYMENTS BALANCE
- ------------ ------------- -------- ------------
<S> <C> <C> <C>
Employee separations....................... $6,175 $ 303 $5,872
Facility closings.......................... 1,456 -- 1,456
------ ------ ------
7,631 $ 303 $7,328
====== ======
Write off of fixed assets.................. 800
------
$8,431
======
</TABLE>
The following table displays the components of the asset impairment charges
recorded by the Company in the years ended December 31, 1999 and 1998 as follows
(in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Goodwill and other intangibles............................ $ 844 $35,867
Property and equipment.................................... 1,959 4,450
Equipment payment guarantee............................... 4,250 --
Investments in and advances to joint ventures............. 16,136 5,446
Inventory................................................. -- 4,174
------- -------
$23,189 $49,937
======= =======
</TABLE>
CHINA TELECOMMUNICATIONS JOINT VENTURES
Until recently, the Company also held interests in several telecommunications
joint ventures in China. Those ventures were terminated in late 1999 and the
Company reached agreement with China Unicom, its Chinese partner in the
ventures, for the distribution of approximately $90.1 million (based on the
December 31, 1999 exchange rate) in settlement of all claims under the joint
venture agreements, of which $29.3 million has been received. Over time, the
Company anticipates that it will fully recover its investments in and advances
to the four affected joint ventures, but no assurances can be made as to the
exact timing or amount of such repayments. As of December 31, 1999, investments
in and advances to these four joint ventures, exclusive of goodwill, were
approximately $40.0 million.
Full distribution of all expected funds must await the Chinese government's
recognition and approval of the completion of formal dissolution proceedings for
the four joint ventures. This is expected by mid-2000 and the Company
anticipates no problems in ultimately dissolving the joint ventures.
57
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
However, some variance from the Company's current estimates of the amounts
finally distributed to Asian American Telecommunications may arise due to
settlement of the joint ventures' tax obligations in China and exchange rate
fluctuations. The Company cannot assure at this time that this variance will not
be material.
The currently estimated $90.1 million in total payments from the Company's four
joint ventures that had cooperated with China Unicom is insufficient to fully
recover the goodwill recorded in connection with the Company's investment in
these joint ventures. As a result, the Company has recorded a non-cash
impairment charge of $45.7 million in 1999 for the write-off of goodwill.
Further adjustments may be required after receipt of final distributions from
the four terminated joint ventures.
Huaxia JV was established as a sino-foreign equity joint venture between the
Communications Group and All Warehouse Commodity Electronic Commerce Information
Development Co. Ltd., a Chinese trading company. Under this structure, Huaxia JV
will develop and operate electronic commerce computer information systems for
use by its Chinese partner, its affiliates and customers in return for
transaction fees under a fee-for-services arrangement.
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.
CERTAIN DISPOSITIONS OF ASSETS AND OTHER COMPANY INFORMATION
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.
On July 10, 1997, the Company sold substantially all of the assets of its now
discontinued 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. The sale
was to P&F, the parent company of Metro-Goldwyn-Mayer, for a gross consideration
of $573.0 million, of which $296.4 million was used to repay credit line
liabilities and other indebtedness of the entertainment group.
On November 1, 1995, as a result of the merger of Orion Pictures Corporation and
Metromedia International Telecommunications, Inc. 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." As part of the November 1, 1995
merger, the Company acquired approximately 39% of RDM Sports Group, Inc. On
August 29, 1997, RDM and certain of its affiliates filed voluntary bankruptcy
petitions under chapter 11. The Company believes that it is unlikely to recover
any distribution on account of its equity interest in RDM.
58
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
FORWARD LOOKING STATEMENTS. Certain statements set forth below under this
caption 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 95.
SEGMENT INFORMATION
The following tables set forth operating results for the years ended
December 31, 1999, 1998, and 1997, for the Company's Communications Group and
Snapper.
59
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
SEGMENT INFORMATION
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
SEE NOTE 1
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE
FORMER SOVIET UNION
----------------------------------------------------------------------------------
SEGMENT
WIRELESS FIXED CABLE RADIO HEAD-
TELEPHONY TELEPHONY TELEVISION BROADCASTING PAGING QUARTERS TOTAL
--------- --------- ---------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues.......................... $ 53,704 $ 43,409 $33,171 $16,910 $14,143 $ 2,490 $163,827
Restructuring and asset impairment
charge.......................... -- -- -- 251 1,926 13,825 16,002
Depreciation and amortization..... 19,620 7,290 11,233 4,244 1,028 12,600 56,015
Operating income (loss)........... 1,229 (6,305) 147 (5,823) (4,160) (53,265) (68,177)
CONSOLIDATED
Revenues.......................... $ 4,532 $ 18,397 $ 5,555 $14,715 $ 3,050 $ 2,490 $ 48,739
Gross profit......................
Restructuring and asset impairment
charge.......................... -- -- -- 251 1,926 13,825 16,002
Depreciation and amortization..... 1,616 4,026 2,001 4,000 447 12,600 24,690
Operating income (loss)........... (798) (4,558) (550) (5,704) (3,675) (53,265) (68,550)
UNCONSOLIDATED JOINT VENTURES
Revenues.......................... $ 49,172 $ 25,012 $27,616 $ 2,195 $11,093 $ -- $115,088
Depreciation and amortization..... 18,004 3,264 9,232 244 581 -- 31,325
Operating income (loss)........... 2,027 (1,747) 697 (119) (485) -- 373
Net income (loss)................. (9,540) (8,701) (3,369) (145) (1,026) -- (22,781)
Equity in income (losses) of
unconsolidated investees (note
2).............................. (6,128) (15,021) 329 (153) (478) -- (21,451)
Loss on disposition of business... (243)
Foreign currency loss............. (4,126)
Minority interest................. 712
Interest expense..................
Interest income...................
Income tax expense................
Discontinued operations...........
Net loss..........................
<CAPTION>
COMMUNICATIONS
GROUP- CORPORATE
CHINA SNAPPER HEADQUARTERS CONSOLIDATED
--------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
COMBINED
Revenues..........................
Restructuring and asset impairment
charge..........................
Depreciation and amortization.....
Operating income (loss)...........
CONSOLIDATED
Revenues.......................... $ -- $216,050 $ -- $ 264,789
Gross profit...................... 72,373
Restructuring and asset impairment
charge.......................... 45,682 -- -- 61,684
Depreciation and amortization..... 1,724 6,173 21 32,608
Operating income (loss)........... (55,861) 12,443 (6,333) (118,301)
UNCONSOLIDATED JOINT VENTURES
Revenues.......................... $ 2,553
Depreciation and amortization..... 1,980
Operating income (loss)........... (217)
Net income (loss)................. 24,282
Equity in income (losses) of
unconsolidated investees (note
2).............................. (848) -- -- (22,299)
Loss on disposition of business... -- -- -- (243)
Foreign currency loss............. -- -- -- (4,126)
Minority interest................. 26,226 -- -- 26,938
Interest expense.................. (17,265)
Interest income................... 7,304
Income tax expense................ (1,215)
Discontinued operations........... (12,776)
---------
Net loss.......................... $(141,983)
=========
</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, in part, 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 terminated operations of its joint ventures
formerly engaged in cooperation with China Unicom pursuant to a Chinese
government ruling that demanded the termination. These joint ventures executed
settlement contracts with China Unicom on December 3, 1999, the terms of which
include substantial payments to the joint ventures from China Unicom.
Note 2: Equity in income (losses) of unconsolidated investees reflects
elimination of intercompany interest expense.
60
<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)
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE
FORMER SOVIET UNION
-----------------------------------------------------------------------------------
SEGMENT
WIRELESS FIXED CABLE RADIO HEAD-
TELEPHONY TELEPHONY TELEVISION BROADCASTING PAGING QUARTERS TOTAL
--------- --------- ---------- ------------ -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues............................. $ 22,091 $33,466 $31,440 $19,215 $ 20,426 $ 2,279 $ 128,917
Depreciation and amortization........ 9,384 3,027 13,597 1,440 3,161 5,784 36,393
Operating income (loss).............. (5,665) 4,875 (5,212) 1,046 (19,999) (87,519) (112,474)
CONSOLIDATED
Revenues............................. $ -- $ 3,200 $ 3,444 $17,081 $ 4,204 $ 2,279 $ 30,208
Gross profit.........................
Asset impairment charge.............. -- -- -- -- 6,280 34,037 40,317
Depreciation and amortization........ -- 481 1,541 1,228 1,591 5,784 10,625
Operating income (loss).............. -- (186) (1,475) 1,171 (20,632) (87,519) (108,641)
UNCONSOLIDATED JOINT VENTURES
Revenues............................. $ 22,091 $30,266 $27,996 $ 2,134 $ 16,222 $ -- $ 98,709
Depreciation and amortization........ 9,384 2,546 12,056 212 1,570 -- 25,768
Operating income (loss).............. (5,665) 5,061 (3,737) (125) 633 -- (3,833)
Net income (loss).................... (12,821) 1,618 (8,985) (221) (3,384) -- (23,793)
Equity in income (losses) of
unconsolidated investees (note
2)................................. (5,867) 201 (3,877) (108) (7,460) -- (17,111)
Gain on disposition of business,
net................................ 5,527
Foreign currency loss................ (137)
Minority interest.................... 1,527
Interest expense.....................
Interest income......................
Income tax benefit...................
Discontinued operations..............
Net loss.............................
<CAPTION>
COMMUNICATIONS
GROUP- CORPORATE
CHINA SNAPPER HEADQUARTERS CONSOLIDATED
--------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
COMBINED
Revenues.............................
Depreciation and amortization........
Operating income (loss)..............
CONSOLIDATED
Revenues............................. $ -- $210,084 $ -- $ 240,292
Gross profit......................... 62,690
Asset impairment charge.............. -- -- -- 40,317
Depreciation and amortization........ 3,226 6,728 9 20,588
Operating income (loss).............. (14,504) (7,607) 896 (129,856)
UNCONSOLIDATED JOINT VENTURES
Revenues............................. $ 3,483
Depreciation and amortization........ 2,662
Operating income (loss).............. (660)
Net income (loss).................... (3,567)
Equity in income (losses) of
unconsolidated investees (note
2)................................. (1,040) -- -- (18,151)
Gain on disposition of business,
net................................ -- -- -- 5,527
Foreign currency loss................ -- -- -- (137)
Minority interest.................... 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>
61
<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
----------------------------------------------------------------------------------
SEGMENT
WIRELESS FIXED CABLE RADIO HEAD-
TELEPHONY TELEPHONY TELEVISION BROADCASTING PAGING QUARTERS TOTAL
--------- --------- ---------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues............................... $ 2,587 $34,870 $23,314 $16,015 $12,999 $ 1,885 $ 91,670
Depreciation and amortization.......... 2,380 2,268 9,648 699 1,630 4,906 21,531
Operating income (loss)................ (6,761) 13,919 (6,831) 4,182 (3,905) (39,440) (38,836)
CONSOLIDATED
Revenues............................... $ -- $ 598 $ 1,902 $13,549 $ 3,318 $ 1,885 $ 21,252
Gross profit...........................
Depreciation and amortization.......... -- 89 791 607 790 4,906 7,183
Operating income (loss)................ -- 145 (1,953) 3,935 (4,084) (39,440) (41,397)
UNCONSOLIDATED JOINT VENTURES
Revenues............................... $ 2,587 $34,272 $21,412 $ 2,466 $ 9,681 $ -- $ 70,418
Depreciation and amortization.......... 2,380 2,179 8,857 92 840 -- 14,348
Operating income (loss)................ (6,761) 13,774 (4,878) 247 179 -- 2,561
Net income (loss)...................... (8,129) 9,977 (9,875) 121 (1,318) -- (9,224)
Equity in income (losses) of
unconsolidated investees (note 2).... (2,027) 2,608 (7,212) 159 (761) -- (7,233)
Foreign currency gain (loss)........... (770)
Minority interest...................... 561
Interest expense.......................
Interest income........................
Income tax benefit.....................
Discontinued operations................
Extraordinary items....................
Net income.............................
<CAPTION>
COMMUNICATIONS
GROUP- CORPORATE
CHINA SNAPPER HEADQUARTERS CONSOLIDATED
--------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
COMBINED
Revenues...............................
Depreciation and amortization..........
Operating income (loss)................
CONSOLIDATED
Revenues............................... $ -- $183,076 $ -- $204,328
Gross profit........................... 59,080
Depreciation and amortization.......... 2,566 6,973 12 16,734
Operating income (loss)................ (17,871) (15,246) (5,561) (80,075)
UNCONSOLIDATED JOINT VENTURES
Revenues............................... $ 1,422
Depreciation and amortization.......... 1,179
Operating income (loss)................ (187)
Net income (loss)...................... (1,982)
Equity in income (losses) of
unconsolidated investees (note 2).... (861) -- (45,056) (53,150)
Foreign currency gain (loss)........... 56 -- -- (714)
Minority interest...................... 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>
62
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED
DECEMBER 31, 1998, AND YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997
LEGEND
C = Consolidated
D = Dissolution
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
Operations in Eastern Europe and the republics of the former Soviet Union
provide the following services: (i) wireless telephony; (ii) fixed telephony;
(iii) cable television; (iv) radio broadcasting; and (v) paging.
WIRELESS TELEPHONY
The following sets forth the names, ownership percentage and accounting
treatment of the Communications Group's wireless telephony ventures for the
years ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
VENTURE OWNERSHIP % 1999 1998 1997
- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
ALTEL* (Almaty, Kazakhstan)................................. 50% C N/A N/A
Baltcom GSM (Latvia)........................................ 22% E E E
Magticom (Tbilisi, Georgia)................................. 35% E E E
Tyumenruskom (Tyumen, Russia)............................... 46% E P N/A
BELCEL* (Minsk, Belarus).................................... 50% E N/A N/A
</TABLE>
- ------------------------
*--Acquired in connection with the Company's acquisition of PLD Telekom on
September 30, 1999
The following table sets forth the revenues and operating loss for consolidated
wireless telephony ventures (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
WIRELESS TELEPHONY--CONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- ------------------------------------------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues........................................ $4,532 $ -- $ -- N/A N/A
Operating loss.................................. $ (798) $ -- $ -- N/A N/A
</TABLE>
REVENUES. Wireless telephony consolidated revenues for 1999 amounted to
$4.5 million. They were generated in the last quarter of 1999 and were primarily
attributable to ALTEL, the Kazakhstan D-AMPS operator acquired in connection
with the Company's acquisition of PLD Telekom Inc. in September 1999. ALTEL's
revenues for the last quarter of 1998 amounted to $9.9 million. ALTEL's revenues
in 1999 were lower than those in 1998 due to increased competition from GSM
operators entering the Kazakhstan market in early 1999.
OPERATING LOSS. As a result of severe competition from two recently formed GSM
operators which entered the Kazakh market in 1999 aggressively with low tariffs,
ALTEL experienced downward
63
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
pressure on its tariffs and revenues. Due to reductions in margins, the venture
recorded an operating loss of $1.0 million for the final quarter of 1999 as
compared to operating income of $3.6 million for the same period in 1998.
ALTEL's operating profit for the year ended December 31, 1999 was $1.5 million
compared to $15.4 million in 1998. Continued competition in 2000 is likely to
have further adverse effects on the venture's operating results.
The following table sets forth the revenues, operating loss, net loss and equity
in losses of the unconsolidated wireless telephony joint ventures recorded under
the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
WIRELESS TELEPHONY--UNCONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- ------------------------------------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $49,172 $ 22,091 $ 2,587 123% 754%
Operating income (loss)................... $ 2,027 $ (5,665) $(6,761) N/M (16)%
Net loss.................................. $(9,540) $(12,821) $(8,129) (26)% 58%
Equity in losses of joint ventures........ $(6,128) $ (5,867) $(2,027) 4% 189%
</TABLE>
EQUITY IN LOSSES OF JOINT VENTURES. The Communications Group's share in losses
from investments in wireless telephony ventures for 1999 was $6.1 million
compared to $5.9 million in 1998. These results were attributable mainly to GSM
wireless operations in Latvia and Georgia and the Communications Group's D-AMPS
operation in Tyumen, Russia.
In Latvia, Baltcom GSM's 1999 revenues increased by 142% to $31.7 million from
$13.1 million in 1998. During 1999, the Company eliminated the three month
reporting lag for Baltcom GSM and accordingly its 1999 results related to the
fifteen months ended December 31, 1999. Reported 1999 revenues increased by
$7.8 million due to the fifteen month reporting period and also because of
strong subscriber growth, wider service area coverage and higher subscriber air
time. Increased revenues were offset by costs associated with the venture's new
customer care center and substantial marketing, selling and advertising
expenditures. Baltcom GSM generated a net loss of $5.7 million in 1999 as
compared with $7.7 million in 1998.
In Georgia, Magticom's 1999 revenues were $16.0 million, representing a
$7.0 million increase on 1998 revenues of $9.0 million due to significant growth
in subscriber and traffic levels. The venture's net loss was reduced from
$5.2 million in 1998 to $900,000 in 1999.
Other group ventures in this category include BELCEL, which operates an NMT 450
wireless license in Belarus and was acquired pursuant to the Company's
acquisition of PLD Telekom Inc. in September 1999, and Tyumenruscom, which
operates a start-up D-AMPS network in Tyumen, Russia. These ventures jointly
generated 1999 revenues of $1.5 million and net losses of $3.0 million, which
included a charge of $3.8 million relating to the write down of the
Communications Group's investment in Tyumenruscom following a reevaluation of
the venture's operations as part of the Communications Group's ongoing strategic
review.
1997 wireless telephony revenues amounted to only $2.6 million because the
Company's GSM operations in Latvia and Georgia commenced operations in that year
and were active for six months and one month, respectively. Wireless telephony
revenues grew to $22.1 million in 1998 as a result of increased subscriber
numbers and a full twelve months of operations.
Wireless telephony net losses increased from $8.1 million in 1997 to
$12.8 million in 1998 primarily as a result of increased interest expense on
borrowings used to fund expansion of operations.
64
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
FIXED TELEPHONY
The following sets forth the names, ownership percentage and accounting
treatment of the Communications Group's fixed telephony ventures for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
VENTURE OWNERSHIP % 1999 1998 1997
- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
Technocom* (Moscow, Russia)................................ 100% C N/A N/A
PeterStar* (St Petersburg, Russia)......................... 71% C N/A N/A
Baltic Communications* (St Petersburg, Russia)............. 100% C N/A N/A
Instaphone (Kazakhstan).................................... 50% E E P
MTR Sviaz*................................................. 49% E N/A N/A
Caspian American Telecommunications (Azerbaijan)........... 38% E P N/A
Telecom Georgia (Tbilisi, Georgia)......................... 30% E E E
Spectrum (Kazakhstan)...................................... 33% N/A E E
Protocall Ventures Ltd..................................... 24-56% N/A N/A C/E
</TABLE>
- ------------------------
* Acquired in connection with the Company's acquisition of PLD Telekom on
September 30, 1999.
The following table sets forth the revenues and operating income (loss) for the
consolidated fixed telephony ventures (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
FIXED TELEPHONY--CONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- ---------------------------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues...................................... $18,397 $3,200 $598 475% 435%
Operating income (loss)....................... $(4,558) $ (186) $145 2,351% N/M
</TABLE>
REVENUES. Fixed telephony consolidated revenues for 1999 amounted to
$18.4 million, compared to $3.2 million in 1998. 1998 revenues were attributable
mainly to Protocall Ventures, a trunked mobile radio operation which was sold by
the Company in 1998. All 1999 consolidated fixed telephony revenues were
generated in the last three months ended December 31, 1999 and were attributable
to subsidiaries acquired in connection with the Company's acquisition of PLD on
September 30, 1999. The most significant ventures acquired were PeterStar, which
operates a fully digital, city-wide fiber optic telecommunications network in St
Petersburg, Russia, and Technocom, which through Teleport-TP and MTR Sviaz
operates Moscow-based long distance and international telephony networks using
satellite and fiber optic technology. The Company also acquired BCL, which
provides international direct dial, payphone and leased line services for
Russian and international businesses in St Petersburg, Russia.
In the last three months of 1999 PeterStar generated lower revenues of
$10.4 million as compared to $15.5 million in the same period in 1998 primarily
as a result of purchase accounting adjustments relating to deferred revenue.
Reductions in business from PeterStar's wireless operators are expected in 2000.
In the last three months of 1999 Technocom generated revenues of $4.7 million
compared to $5.2 million in the same period in 1998. Lower international and
long distance traffic volumes in 1999 caused Technocom's revenues to decrease
compared to those in 1998. Technocom's traffic levels in 2000 are expected to
improve.
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
65
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 was primarily
attributable to the purchase of an additional interest in the Portugal
operations 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 as unconsolidated operations under the
equity method of accounting.
OPERATING INCOME (LOSS). During the last three months of 1999 fixed telephony
consolidated ventures generated operating losses of $4.6 million. PeterStar's
operating loss for the last three months of 1999 was $2.0 million compared to
$4.0 million of income for the last three months of 1998. PeterStar's 1999
profitability was adversely affected by the above mentioned decrease in
revenues. Technocom generated an operating loss of $939,000 during the last
quarter of 1999 compared to $7.7 million in the last quarter of 1998.
Technocom's profitability improved due to a restructuring of operations in early
1999 and a resultant reduction in overhead expense.
In 1998 fixed telephony operating losses amounted to $186,000 and were
attributable primarily to Protocall Ventures before its disposal by the Company.
For the year ended December 31, 1997, Protocall Ventures had operating income of
$145,000. 1998 results were adversely affected by higher administrative costs
than in 1997.
The following table sets forth the revenues, operating income (loss), net income
(loss) and equity in income (losses) of the unconsolidated fixed telephony joint
ventures recorded under the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
FIXED TELEPHONY--UNCONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- ------------------------------------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 25,012 $30,266 $34,272 (17)% (12)%
Operating income (loss)................... $ (1,747) $ 5,061 $13,774 N/M (63)%
Net income (loss)......................... $ (8,701) $ 1,618 $ 9,977 N/M (84)%
Equity in income (losses) joint
ventures................................ $(15,021) $ 201 $ 2,608 N/M (92)%
</TABLE>
EQUITY IN LOSSES OF JOINT VENTURES. The Communications Group's share in losses
from investments in fixed telephony ventures for 1999 was $15.0 million compared
to income from joint ventures of $201,000 in 1998. These results were
attributable mainly to the operations of Telecom Georgia and Caspian American
Telephone ("CAT").
In 1999, Telecom Georgia generated revenues of $23.7 million, a decrease of
$3.5 million compared to revenues of $27.2 million in 1998. The decrease was due
to the emergence of local competition in the long distance and international
market, together with downward pressure on termination rates. Telecom Georgia's
operating results were also adversely affected by disadvantageous interconnect
costs leading to a reduction in 1999 operating income to $783,000 from
$7.8 million in 1998 and resulted in a net loss of $4.1 million in 1999 compared
to $5.3 million of net income in 1998. In 2000 limited improvement is expected
in the venture's revenues.
CAT generated revenues of $693,000 in 1999, its first year of operations, and
recorded 1999 operating losses and net losses of $2.3 million and $2.8 million
respectively. High start up costs coupled with CAT's inability to develop an
adequate customer base resulted in the operating and net loss. As a result of
the strategic review performed subsequent to the acquisition of PLD Telekom,
CAT's inability to generate an adequate customer base to support its current
operations and the region's limited potential for growth required the Company to
assess the recoverability of its investment in the joint venture. Based on the
most likely scenario under which CAT could continue to be operated, together
66
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
with the reduced capital the Company is willing to invest as compared to its
initial commitment, the estimated cash flows of the joint venture available to
the Company were determined to be less than the carrying value of its
investment. Utilizing the estimated cash flows, the Company estimated the fair
value of its investment in CAT. Due to the long term economic prospects of the
region, the Company determined that the decline in the value of the investment
is other than temporary and has recorded the decline of $9.9 million as an
impairment charge.
1998 fixed telephony revenues of $30.3 million were $4.0 million lower than 1997
revenues of $34.3 million mainly due to contractual reductions in termination
accounting rates in Telecom Georgia's international settlement agreements for
traffic with its overseas carriers.
1998 fixed telephony operating and net income were lower than in 1997 primarily
due to the reduction in Telecom Georgia revenues mentioned above and because
1997 results included a favorable settlement by Telecom Georgia with
international carriers of approximately $2.0 million.
Revenues and operating loss from Protocall Ventures prior to its sale in
July 1998 were $3.0 million and $884,000 as compared to $3.4 million and
$1.6 million in 1997. Also included in equity in losses of joint ventures in
1998 were the operations of Instaphone of $515,000. Instaphone is the
Communications Group's wireless local loop telephony operator in Kazakhstan.
Operations were delayed by the inability to secure an interconnection agreement
with the local ministry.
CABLE TELEVISION
The following sets forth the names, ownership percentage and accounting
treatment of the Communications Group's cable television ventures for the years
ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
VENTURE OWNERSHIP % 1999 1998 1997
- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
Romsat Cable TV (Bucharest, Romania)........................ 100% C C C
Ala TV (Bishkek, Kyrgyzstan)................................ 53% C N/A N/A
Viginta (Vilnius, Lithuania)................................ 55% C C C
ATK (Archangelsk, Russia)................................... 81% C P 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 E P
</TABLE>
The following table sets forth the revenues and operating loss for consolidated
cable television ventures (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
CABLE TELEVISION--CONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- -------------------------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $5,555 $ 3,444 $ 1,902 61% 81%
Operating loss.............................. $ (550) $(1,475) $(1,953) (63)% (24)%
</TABLE>
67
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
REVENUES. Cable television operations generated consolidated revenues of
$5.6 million in 1999, representing a 61% increase on 1998 consolidated revenues
of $3.4 million. The majority of 1999 consolidated revenues were attributable to
Romsat, Viginta, and ATK.
In Romania, Romsat reported revenues of $3.8 million in 1999, an increase of
$1.0 million compared to 1998 due to strong growth in subscriber numbers
following successful sales initiatives, particularly in the Targu Mures region
of the country. In Lithuania, Viginta generated revenues of $1.1 million in
1999, representing an increase of 61% on 1998 revenues of $700,000 and
attributable to better programming. ATK, which recently commenced operations in
Arkhangelsk, Russia, reported first year revenues of $700,000 in 1999.
In 2000 consolidated revenues arising from cable operations are expected to
continue to grow as a result of further acquisitions, improved programming,
network expansion and tariff increases.
1998 cable television revenues increased 61% to $3.4 million from 1997 revenues
of $1.9 million as a result of expansion of customer base by acquisition and
build out of cable television networks.
OPERATING LOSS. Cable television reported consolidated operating losses for
1999 of $550,000, a 63% decrease on 1998 operating losses of $1.5 million. The
reduction in losses was driven by subscriber growth resulting in increased
revenues and by effective control of costs. Romsat reported 1999 operating
income of $200,000 compared to a $600,000 loss in 1998, and Viginta reduced its
1999 operating losses to $600,000 from $800,000 in 1998. ATK reported first year
operating losses of $100,000 in 1999.
1998 cable television operating losses were 24% lower than in 1997 as a result
of improved profitability arising from growth in subscriber numbers.
The following table sets forth the revenues, operating loss, net loss and equity
in income (losses) of unconsolidated cable television joint ventures recorded
under the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
CABLE TELEVISION--UNCONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- ------------------------------------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $27,616 $27,996 $21,412 (1)% 31%
Operating loss............................ $ 697 $(3,737) $(4,878) N/M (23)%
Net loss.................................. $(3,369) $(8,985) $(9,875) (63)% (9)%
Equity in income (losses) of joint
ventures................................ $ 329 $(3,877) $(7,212) N/M (46)%
</TABLE>
EQUITY IN INCOME (LOSSES) OF JOINT VENTURES. The Communications Group's share
in income from equity investments in cable television ventures in 1999 was
$329,000, compared to a $3.9 million loss in 1998. The operating results for
unconsolidated cable television ventures were mainly attributable to Baltcom TV
in Latvia, Kosmos TV in Moscow, and Alma TV in Kazakhstan. Included in equity in
income of joint ventures is a charge of $1.8 million relating to the write off
of the Communications Group's investment in Teleplus, following a reevaluation
of the venture's operations as part of the Communications Group's ongoing
strategic review.
Baltcom TV reported revenues of $6.4 million in 1999 compared to $6.1 million in
1998 with operating income of $2.2 million compared to a $1.2 million operating
loss and net income of $1.3 million compared to a $2.5 million net loss in 1998.
1999 profitability of Baltcom TV improved compared to 1998 due to a reconciling
adjustment decreasing depreciation expense by $1.7 million.
Kosmos TV revenues decreased by $900,000 in 1999 to $6.2 million from
$7.1 million in 1998 due to a combination of the after effects of the Russian
economic crisis in late 1998 and increased competition in Moscow. The venture
generated operating income of $300,000 in 1999 compared to an $800,000
68
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
operating loss in 1998 and net income of $600,000 compared to a $1.6 million net
loss in 1998, due primarily to a reduction in reported costs resulting from
adjustments to prior year over-accruals of $2.4 million.
Alma TV's revenues in 1999 increased from $3.5 million in 1998 to $5.1 million
in 1999 due to aggressive marketing and advertising, together with successful
implementation of tiered subscriber pricing policies. However, because of strong
competition exerting pressure on margins, and higher costs due to the increased
scale of operational activity, the venture reported reduced operating income of
$500,000 in 1999 compared to $600,000 in 1998, and a net loss of $100,000 in
1999 compared to net income of $400,000 in 1998. Alma TV expects to return to
profitability in 2000 as a result of the continued build out of its networks to
three further cities, and improved subscriber management.
Compared to 1997 revenues of $21.4 million, cable television revenues for 1998
increased by 31% to $28.0 million, primarily due to growth in subscriber numbers
in Kazakhstan, Moldova, Belarus and Uzbekistan. This led to 1998 operating
losses being reduced to $3.7 million from $4.9 million in 1997.
RADIO BROADCASTING
The following sets forth the names, ownership percentage and accounting
treatment of the Communications Group's radio broadcasting ventures for the
years ended December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
VENTURE OWNERSHIP % 1999 1998 1997
- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
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 C
Radio Vladivostok, (Vladivostok, Russia).................... 51% C C P
Country Radio (Prague, Czech Republic)...................... 85% C C P
Radio Georgia (Tbilisi, Georgia)............................ 51% C C P
Radio Katusha (St. Petersburg, Russia)...................... 75% C C E
Radio Nika (Socci, Russia).................................. 51% E E E
AS Trio LSL (Tallinn, Estonia).............................. 49% E E E
</TABLE>
The following table sets forth the revenues and operating income (loss) for
consolidated radio broadcasting ventures (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
RADIO--CONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- ------------------------------------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $14,715 $17,081 $13,549 (14)% 26%
Operating income (loss)................... $(5,704) $ 1,171 $ 3,935 N/M (70)%
</TABLE>
REVENUES. Radio operations generated consolidated revenues of $14.7 million in
1999, representing a 14% decrease on 1998 revenues of $17.1 million. Radio
Juventus in 1999 had revenues of $6.7 million, representing a 19% decrease on
1998 revenues of $8.2 million. The decrease was due to the continued effect of
competition from television and the new national Hungarian radio network. In
Russia, SAC and Radio Katusha's revenues fell from $4.6 million and
$2.4 million in 1998 to $3.8 million and
69
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
$1.6 million in 1999 respectively, as the after effects of the Russian economic
crisis in late 1998 continued to have effect.
1998 revenues increased by 26% to $17.1 million from $13.5 million in 1997 due
to increases in advertising sales volumes and prices, and because of incremental
revenues generated in 1998 by three radio stations acquired in 1997.
OPERATING INCOME (LOSS). In 1999, radio operations generated operating losses
of $5.7 million, compared to $1.2 million operating income in 1998. 1999
profitability was adversely affected by falling revenues at Radio Juventus, SAC
and Radio Katusha, as mentioned above. Together these ventures generated
operating income of $1.3 million in 1999 compared to $6.2 million in 1998. In
addition, News Talk Radio recorded a 1999 operating loss of $7.1 million,
representing a 39% increase in its 1998 operating loss of $5.0 million. 1999
operating losses included a non-cash charge of $251,000 to write off other
assets of News Talk Radio. The Communications Group plans either to dispose of
or discontinue the operations of NewsTalk Radio during 2000. In 2000 the results
of the Company's consolidated radio ventures are expected to improve.
1998 operating income of $1.2 million was 70% lower than in 1997, due primarily
to losses generated by NewsTalk Radio, which was acquired by the Company in late
1997.
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 radio joint ventures, which are recorded under the equity method
(in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
RADIO--UNCONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- --------------------------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $2,195 $2,134 $2,466 3% (13)%
Operating income (loss)...................... $ (119) $ (125) $ 247 (6)% N/M
Net income (loss)............................ $ (145) $ (221) $ 121 (35)% N/M
Equity in income (losses) of joint
ventures................................... $ (153) $ (108) $ 159 42% N/M
</TABLE>
EQUITY IN INCOME (LOSSES) OF JOINT VENTURES. The Communications Group's share
in losses from equity investments in radio ventures increased by 42% from
$108,000 in 1998 to $153,000 in 1999. The 1999 share of losses was mainly
attributable to Radio Trio, Tallinn, Estonia which generated revenues of
$2.1 million compared to $1.9 million in 1998, and net losses of $200,000
compared to $100,000 in 1998. The marginal decrease in profitability in 1999
compared to 1998 was due to higher administrative expenses.
1998 revenues of $2.1 million were $400,000 lower than 1997 revenues of
$2.5 million due to the reclassification of Radio Katusha in 1998 as a
consolidated venture as compared to equity accounting following the purchase of
an additional interest in the venture. Because of this, 1998 equity in the
results of radio joint ventures decreased to a $108,000 loss from income of
$159,000 in 1997.
In 2000 the revenues and profitability of equity radio ventures are expected to
improve.
PAGING
OVERVIEW. In 1998 the Communications Group stopped funding most paging
operations and it continues to manage almost all of its paging ventures on a
cash break even basis. The Communications Group will continue to manage its
paging businesses to levels not requiring significant additional funding and is
developing a strategy to maximize the value of its paging investments. In 2000,
it is expected that the paging operations will continue to generate losses.
70
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following sets forth the names, ownership percentage and accounting
treatment of the Communications Group's paging ventures for the years ended
December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
VENTURE OWNERSHIP % 1999 1998 1997
- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
Baltcom Paging (Tallinn, Estonia)........................... 85% C C C
CNM (Romania)............................................... 54% C C C
Paging One Services (Austria)............................... 100% N/A C C
Eurodevelopment (Ukraine)................................... 51% C C 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 E
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 E N/A
</TABLE>
The following table sets forth the revenues and operating loss for consolidated
paging ventures (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
PAGING--CONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- ------------------------------------------ -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 3,050 $ 4,204 $ 3,318 (27)% 27%
Operating loss............................ $(3,675) $(20,632) $(4,084) (82)% 405%
</TABLE>
REVENUES. The Communications Group's paging ventures generated consolidated
revenues of $3.1 million in 1999, representing a 27% decrease on 1998 revenues
of $4.2 million. The decrease was due to continued competition from the wireless
telephony market. The majority of 1999 revenues were attributable to CNM,
Romania, which had 1999 revenues of $1.1 million compared to $1.8 million in
1998, and to Baltcom Estonia, which had revenues of $700,000 in 1999 as compared
with $1.1 million in 1998.
Revenues increased by 27% from $3.3 million in 1997 to $4.2 million in 1998 due
to incremental sales generated by Paging One in Austria, and revenues
attributable to Eurodevelopment which was acquired in 1998.
OPERATING LOSS. Consolidated operating losses arising from paging operations
amounted to $3.7 million in 1999, compared to $20.6 million in 1998, and
included a charge of $1.9 million to write down assets in Eurodevelopment,
following reevaluation of the venture's operations as part of the Company's
ongoing strategic review. In 1998 operating losses increased due to impairment
charges taken by the Communications Group in respect of CNM, Baltcom, Estonia
and Paging One.
During 1999, the Company disposed of Paging One's operations which resulted in a
loss of $243,000.
1998 operating losses of $20.6 million, were $16.5 million higher than 1997
operating losses of $4.1 million mainly because of a 1998 inventory write off of
$4.2 million, and a $6.2 million impairment charge in 1998 relating to fixed and
intangible assets.
71
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth the revenues, operating income (loss), net loss
and equity in losses of unconsolidated paging joint ventures, which are recorded
under the equity method (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
PAGING--UNCONSOLIDATED 1999 1998 1997 1999 TO 1998 1998 TO 1997
- ------------------------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $11,093 $16,222 $ 9,681 (32)% 68%
Operating income (loss).................... $ (485) $ 633 $ 179 N/M 254%
Net loss................................... $(1,026) $(3,384) $(1,318) (70)% 157%
Equity in losses of joint ventures......... $ (478) $(7,460) $ (761) (94)% 880%
</TABLE>
EQUITY IN LOSSES OF JOINT VENTURES. The Communications Group's share of losses
from equity investments in paging ventures decreased from $7.5 million in 1998
to $480,000 in 1999. During 1998 the majority of the Communications Group's
equity investments in paging ventures were written off due to the factors
mentioned above. The results of these ventures are no longer reported by the
Communications Group, partially contributing to the 32% decrease in 1999
reported revenues compared to 1998. Revenues in 1999 also continued to be
adversely affected by continued competition from wireless operators.
Revenues in 1998 increased by 68% from $9.7 million in 1997 to $16.2 million in
1998, partly as a result of the acquisition of Mobile Telecom. However, the
Company's equity in the losses of paging ventures increased from $761,000 in
1997 to $7.5 million in 1998 as a result of a $5.4 million write down of certain
paging investments in 1998.
SEGMENT HEADQUARTERS
Segment headquarters operations relate to executive, administrative, logistical
and joint venture support activities. The following table sets forth the
consolidated revenues and operating losses for the segment headquarters (in
thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1999 1998 1997 1999 TO 1998 1998 TO 1997
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 2,490 $ 2,279 $ 1,885 9% 21%
Restructuring and asset impairment
charges............................... $(13,825) $(34,037) -- (59)% N/M
Operating loss.......................... $(53,265) $(87,519) $(39,440) (39)% 122%
</TABLE>
REVENUES. Increased revenues in 1999 and 1998 compared to respective previous
years reflected growth in programming and management fee revenues from the
Communications Group's unconsolidated businesses.
72
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. In connection with the Company's
September 1999 acquisition of PLD and the subsequent restructuring of its
operations, the Communications Group recorded a restructuring charge of
$8.4 million relating to the closure of its Stamford, Connecticut office, and
severance costs arising from reduction in staff levels at its Vienna and Moscow
offices. A further asset impairment charge of $1.3 million was taken in 1999 to
write off interests in certain pre-operational ventures the Communications Group
determined not to pursue.
In 1998 the Communications Group recorded a non-cash, write off of
$34.0 million of goodwill, also in connection with a revision of its operating
plan in respect of paging joint ventures. The goodwill was originally recorded
in connection with the November 1, 1995 merger of the Company, Orion, Metromedia
International Telecommunications and MCEG Sterling.
OPERATING LOSS. Operating losses for 1999, 1998 and 1997 included depreciation
and amortization charges of $12.4 million, $5.8 million and $4.9 million,
respectively. Increased 1999 depreciation and amortization charges related to
goodwill arising from, and telephony licenses acquired pursuant to, the
Company's acquisition of PLD Telekom in September 1999, and to the revision of
the amortization life of goodwill in July 1999 from 25 years to 10 years. 1999
operating losses also included a $2.5 million write off of goodwill of NewsTalk
Radio. The 1998 operating loss of the segment headquarters was significantly
higher than in 1999 due to the charge relating to paging described above.
The operating loss in 1998 increased compared to 1997 due to the write off of
goodwill referred to above, and due to higher overhead expenditures as a result
of a significant increase in the number of joint ventures in 1998.
FOREIGN CURRENCY LOSS, MINORITY INTEREST AND GAIN (LOSS) ON DISPOSITION OF
ASSETS
The following table sets forth minority interest, foreign currency loss and gain
(loss) on disposition of assets for the consolidated operations of the
Communications Group--Eastern Europe and the republics of the former Soviet
Union.
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1999 1998 1997 1999 TO 1998 1998 TO 1997
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Foreign currency loss......................... (4,126) $ (137) $(770) 2,912% (82)%
Minority interest............................. 712 $1,527 $ 561 (53)% 172%
Gain (loss) on disposition of businesses,
net......................................... (243) $5,527 $ -- N/M N/M
</TABLE>
For the years ended December 31, 1999, 1998 and 1997 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 also relates to the
transaction differences resulting from the use of these different rates. The
1999 foreign currency loss of $4.1 million as compared to $137,000 in 1998 was
due primarily to the adverse effect of the weakening of local currencies in
Germany and Austria.
Minority interest represents the allocation of losses by the Communications
Group's majority owned subsidiaries and joint ventures to its minority ownership
interest.
The 1999 loss of $243,000 on disposition of assets relates to the disposal of
Paging One. The 1998 gain on disposition of assets arose pursuant to the
Company's sale of Protocall Ventures.
73
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
COMMUNICATIONS GROUP--CHINA
The following sets forth the names, ownership percentage and accounting
treatment of the Communications Group's ventures for the years ended
December 31, 1999, 1998, and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
JOINT VENTURE/SUBSIDIARY OWNERSHIP % 1999 1998 1997
- ------------------------ ----------- -------- -------- --------
<S> <C> <C> <C> <C>
WIRELESS TELECOMMUNICATIONS
Ningbo Ya Mei Telecommunications Co., Ltd.................. 70% D E E
(Ningbo City, China)
Ningbo Ya Lian Telecommunications Co., Ltd................. 70% D P N/A
(Ningbo Municipality, China)
FIXED TELEPHONY
Sichuan Tai Li Feng Telecommunications Co., Ltd............ 92% D P P
(Sichuan Province, China)
Chongqing Tai Le Feng Telecommunications Co., Ltd.......... 92% D P P
(Chongqing Municipality, China)
Beijing Metromedia-Jinfeng Communications.................. 60% N/A N/A P
Technology Development Co., Ltd.
INTERNET SERVICES--E-COMMERCE
Huaxia Metromedia Information Technology Co., Ltd.......... 49% P N/A N/A
</TABLE>
CHINA TELECOMMUNICATIONS JOINT VENTURE INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------
NINGBO NINGBO SICHUAN CHONGQING
JV JV II JV JV TOTAL
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues...................................... $ 1,995 $ 504 $ -- $ 54 $ 2,553
Depreciation and amortization................. $(1,231) $ (144) $ (264) $ (341) $(1,980)
Operating income (loss)....................... $ 479 $ 307 $ (482) $ (521) $ (217)
Net income (loss)............................. $ 8,419 $ 9,198 $ 3,344 $ 3,321 $24,282
Equity in income (losses) of joint ventures
through December 3, 1999.................... $ 14 $ 117 $ (508) $ (471) $ (848)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------
NINGBO NINGBO SICHUAN CHONGQING
JV JV II JV JV TOTAL
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
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>
74
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------
NINGBO SICHUAN CHONGQING
JV JV JV TOTAL
-------- -------- --------- --------
<S> <C> <C> <C> <C>
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>
OVERVIEW. The Company's investments in telecommunications joint ventures in
China were made through its majority-owned subsidiary, Asian American
Telecommunications Corporation. These joint ventures supported the construction
and development of telephony networks by China United Telecommunications
Incorporated, a Chinese telecommunications operator known as China Unicom.
Because legal restrictions in China prohibit direct foreign investment and
operating participation in domestic telephone companies, the company's joint
ventures were limited to providing financing and consulting services to China
Unicom under contracts. By the terms of these contracts and in return for
services rendered, the joint ventures were to receive payments from China Unicom
based on the cash flows generated by China Unicom's network businesses. This
arrangement, known as a sino-sino-foreign joint venture cooperation, was
commonly accepted at the time the Company's joint ventures were formed and was
applied in numerous other foreign-invested relationships with China Unicom.
Since the arrangement specifically limited the joint ventures' participation in
and control over China Unicom's actual business operations, Asian American
Telecommunications accounted for its sino-sino-foreign joint venture investments
under the equity method. The Company invested in four Chinese telecommunications
joint ventures in this fashion--two in Ningbo Municipality, one in Sichuan
Province and one in Chongqing City.
Beginning in mid-1998, the Chinese government unofficially began reconsidering
the advisability of continuing the sino-sino-foreign joint venture cooperation
arrangements undertaken by China Unicom. At that time, more than forty such
cooperation contracts had been established with foreign-invested joint ventures
covering China Unicom's operations in various parts of China. By mid-1999, the
government reached the conclusion that China Unicom's sino-sino-foreign
cooperation framework was in conflict with China's basic telecommunications
regulatory policies and should henceforth cease. China Unicom was instructed to
terminate or very substantially restructure all of its sino-sino-foreign joint
venture cooperation contracts.
In July 1999, Ningbo Ya Mei Telecommunications, Ltd., one of the Company's two
telecommunications joint ventures in Ningbo Municipality, China, received a
written notice from China Unicom stating that the Chinese government had
directed China Unicom to terminate further cooperation with Ningbo Ya Mei. China
Unicom subsequently informed the Company that the notification also applies to
the Company's other telecommunications joint venture in Ningbo Municipality. In
subsequent notifications from China Unicom to the Company's joint ventures,
China Unicom stated its intention to terminate all cooperation contracts with
sino-sino-foreign joint ventures in China, pursuant to an August 30, 1999
mandate from the Chinese Ministry of Information Industry. In its notifications,
China Unicom requested that negotiations begin regarding a suitable settlement
of the matter and other matters related to the winding up of the Company's joint
ventures cooperation agreements with China Unicom as a result of the Ministry of
Information Industry notice. With the issuance of these notifications, China
Unicom ceased further performance under its cooperation contracts with the
Company's joint ventures. However, China Unicom did make distribution of amounts
owed to the Company's Ningbo Ya Mei joint venture for the first half of 1999
according to the terms of the cooperation contract. The
75
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Company, through its four joint ventures, entered into negotiations with China
Unicom in September 1999 to reach suitable terms for termination of the
cooperation contracts.
On November 6, 1999, the Company's four Chinese joint ventures engaged in
projects with China Unicom each entered into non-binding letters of intent with
China Unicom which set forth certain terms for termination of their cooperation
arrangements with China Unicom. On December 3, 1999, legally binding settlement
contracts incorporating substantially the terms set forth in the November
letters of intent were executed between China Unicom and the four joint
ventures, thereby terminating the joint ventures' further cooperation with China
Unicom. Under the terms of the settlement contracts, the four joint ventures
will each receive cash amounts in RMB from China Unicom in full and final
payment for the termination of their cooperation contracts with China Unicom.
Upon receipt of this payment, China Unicom and the joint ventures will waive all
of their respective relevant rights against the other party with respect to the
cooperative arrangements. In addition, all assets pertinent to China Unicom's
networks that are currently held by the joint ventures will be unconditionally
transferred to China Unicom. China Unicom effected payment to the joint ventures
of the amounts prescribed in the settlement contracts on December 10, 1999.
Subsequently and prior to the end of 1999, the boards of directors of the four
joint ventures each passed formal resolutions to commence dissolution of the
joint ventures. The Company expects such dissolution to be completed for all
four joint ventures by mid-2000.
Each of the Company's China telecommunications joint ventures has stopped its
accounting for its share of the net distributable cash flows under the
cooperation agreements with China Unicom and the amortization of the investment
in the China Unicom projects effective July 1, 1999 based on the termination
notices received from China Unicom.
For the period ended December 31, 1999, the four China telecommunications joint
ventures have performed impairment analyses of their investments in projects
with China Unicom. These analyses were based on the terms of settlement
contracts the joint ventures executed with China Unicom on December 3, 1999. The
joint ventures each received sufficient amounts in their settlements with China
Unicom so as to recover their recorded investment balances as of December 31,
1999. Accordingly, no impairment writedowns were taken by the joint ventures
during 1999.
Through December 3, 1999, the date on which settlement contracts terminated the
joint ventures further cooperation with China Unicom, the Company continued to
account for its investments in its China telecommunications joint ventures under
the equity method of accounting. The Company has performed an impairment
analysis of its investments in and advances to joint ventures and related
goodwill to determine the amount that these assets have been impaired. The
Company reviewed its investment in these joint ventures for other than temporary
decline. The Company has determined the related goodwill should be considered an
asset to be disposed of and has estimated the fair value less costs to dispose
of its investment and has stopped amortizing the balance. The Company believes
that the termination of the four joint ventures' cooperation agreements with
China Unicom is an event that gives rise to an accounting loss which is
probable. The amount of the non-cash impairment charge is the difference between
the sum of the carrying values of its investments and advances made to joint
ventures plus goodwill less the Company's estimate of the total amount of
compensation it will receive from the four joint ventures through the
dissolution.
The Company will receive substantial portions of the China Unicom settlement
payments to the joint ventures via repayment of advances and distribution of
joint venture assets on dissolution. China Unicom's settlement payments to the
joint ventures were made in RMB. However, the joint ventures' formation
contracts and loan agreements with Asian American Telecommunications had been
registered
76
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
with Chinese authorities so as to assure the joint ventures' ability to convert
RMB deposits into foreign exchange for payment to the Company. Over time, the
Company anticipates that it will fully recover its investments in and advances
to the four affected joint ventures, but no assurances can be made as to the
exact timing or amount of such repayments. As of December 31, 1999, the joint
ventures had conveyed to Asian American Telecommunications in the form of
repayment of advances approximately $29.3 million in U.S. Dollars from the China
Unicom settlement. As of December 31, 1999, investments in and advances to these
four joint ventures, exclusive of goodwill, were approximately $40.0 million.
The Company's current estimate of the total amount it will ultimately receive
from the four terminated joint ventures is $90.1 million (at the December 31,
1999 exchange rates) of which $29.3 million has been received. Full distribution
of all expected funds must await the Chinese government's recognition and
approval of the completion of formal dissolution proceedings for the four joint
ventures. This is expected by mid-2000 and the Company anticipates no problems
in ultimately dissolving the joint ventures. However, some variance from the
Company's current estimates of the amounts finally distributed to Asian American
Telecommunications may arise due to settlement of the joint ventures' tax
obligations in China and exchange rate fluctuations. The Company cannot assure
at this time that this variance will not be material.
The currently estimated $90.1 million in total payments from the Company's four
joint ventures that had cooperated with China Unicom is insufficient to fully
recover the goodwill recorded in connection with the Company's investment in
these joint ventures. As a result, the Company has recorded a non-cash
impairment charge of $45.7 million in 1999 for the write-off of goodwill.
Further adjustments may be required after receipt of final distributions from
the four terminated 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
1999 1998 1997 1999 TO 1998 1998 TO 1997
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating loss.......................... $(55,861) $(14,504) $(17,871) 285% (19)%
Equity in losses of joint ventures...... $ (848) $ (1,040) $ (861) (18)% 21%
Minority interests...................... $ 26,226 $ 8,331 $ 8,332 215% --
</TABLE>
OPERATING LOSS. Operating losses for the year ended December 31, 1999 increased
$41.4 million to $55.9 million. The increase in operating loss is due
principally to the $45.7 million writedown of goodwill taken in consideration of
the termination of the Company's joint venture cooperation with China Unicom.
Overall operating losses were partially offset by the operating expenses
actually decreasing during 1999 by $2.9 million due to a reduction in personnel
and other overhead costs in China.
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
77
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 telecommunications joint ventures in China amounted to $848,000 for 1999
as compared to a loss of $1.0 million in 1998. This 1999 equity in joint
ventures reflects the operations up to December 3, 1999 when the joint ventures
signed the settlement agreement with China Unicom.
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, 1999, 1998 and 1997,
minority interests represents the allocation of losses to Metromedia China
Corporation's minority ownership.
INFLATION AND FOREIGN CURRENCY
During 1998, and continuing in 1999, 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.
Some of the Communications Group's subsidiaries and joint ventures operate in
countries where the inflation rate is extremely high. 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 hyperinflationary levels for some years and as a result, the currency
has essentially lost all intrinsic value.
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 Company itself is generally negatively impacted by
78
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
inflationary increases in salaries, wages, benefits and other administrative
costs, the effects of which to date have not been material to the Company.
The value of the currencies in the countries in which the Communications Group
operates tends to fluctuate, sometimes significantly. For example, during 1998
and 1999, the value of the Russian Rouble was under considerable economic and
political pressure and has suffered significant declines against the U.S. dollar
and other currencies. In addition, in 1999 local currency devaluations in
Uzbekistan, Kaszkhstan and Georgia, in addition to weakening of local currencies
in Austria and Germany, had an adverse effect on the Communications Group's
ventures in these countries. 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 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.
SNAPPER
The following table sets forth Snapper's results of operations for the years
ended December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1999 1998 1997 1999 TO 1998 1998 TO 1997
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $216,050 $210,084 $183,076 3% 15%
Gross profit........................... $ 72,373 $ 62,690 $ 59,080 15% 6%
Operating income (loss)................ $ 12,443 $ (7,607) $(15,246) N/M (50)%
</TABLE>
REVENUES. In 1999, Snapper's sales were $216.1 million compared to
$210.1 million in 1998. Sales of lawn and garden equipment contributed the
majority of the revenues during both periods. The increase in sales of snow
throwers of $11.2 million and commercial ride-on equipment of $2.9 million was
partially offset by sales shortfalls attributable to garden tractors, rear
engine riding lawnmowers and walk behind lawnmowers of $8.4 million.
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 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. In 1997, Snapper
completed the implementation of its program to sell products directly to its
dealers. 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.
GROSS PROFIT. Gross profit for 1999 was $72.4 million compared to
$62.7 million in 1998. Snapper's gross profit margins improved to 33.5% in 1999
compared to 29.8% in 1998. Gross profit margins
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<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
increased due to improved operating efficiencies from a full year of production.
In 1998, production levels were reduced considerably to lower equipment
inventory levels. In addition, in 1998, Snapper recorded $2.7 million for an
inventory write down of excess parts, which was a one-time adjustment.
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.
OPERATING INCOME (LOSS). Operating income was $12.4 million in 1999 compared to
an operating loss of $7.6 million in 1998. Selling, general and administrative
expenses decreased by $10.0 million in 1999 as compared to 1998, principally due
to $8.6 million in lower advertising expenditures. Depreciation and amortization
charges were $6.2 million and $6.7 million in 1999 and 1998, 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 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.
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. The following table
sets forth the operating income (loss) for Corporate Headquarters (in
thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1999 1998 1997 1999 TO 1998 1998 TO 1997
-------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating income (loss)...................... $(6,333) $896 $(5,561) N/M N/M
</TABLE>
OPERATING INCOME (LOSS). For the year ended December 31, 1999, corporate
general and administrative expenses were $6.3 million. 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.
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<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
COMPANY CONSOLIDATED
The following table sets forth on a consolidated basis the following items for
the years ended December 31, 1999, 1998, and 1997 (in thousands):
<TABLE>
<CAPTION>
% CHANGE % CHANGE
1999 1998 1997 1999 TO 1998 1998 TO 1997
--------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Interest expense...................... $ (17,265) $ (16,331) $(20,922) 6% (22)%
Interest income....................... $ 7,304 $ 12,746 $ 9,840 (43)% 30%
Income tax benefit (expense).......... $ (1,215) $ 358 $ 5,227 N/M N/M
Equity in losses of and writedown of
RDM................................. $ -- $ -- $(45,056) -- N/M
Discontinued operations............... $ (12,776) $ 12,316 $234,036 N/M N/M
Extraordinary item.................... $ -- $ -- $(14,692) -- N/M
Net income (loss)..................... $(141,983) $(123,670) $ 88,443 15% N/M
</TABLE>
INTEREST EXPENSE. In 1999, interest expense increased $934,000 to
$17.3 million principally due to the $4.3 million of amortization of interest on
the Company's 10 1/2% senior discount notes which were issued in connection with
the September 30 acquisition of PLD Telekom, partially offset by decreased
borrowings by Snapper which resulted in lower interest expense of $2.7 million
compared to the prior year. 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 INCOME. Interest income decreased $5.4 million to $7.3 million in 1999
due principally to the reduction of funds at Corporate Headquarters which have
been utilized in the operations of the Company. 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.
INCOME TAX BENEFIT (EXPENSE). For the year ended December 31, 1999, the income
tax benefit that would have resulted from applying the federal statutory rate of
35% was $49.3 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. 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 year ended December 31, 1997, the
income tax benefit that would have resulted from applying the federal statutory
rate of 35% was $47.6 million. The income tax benefit in 1997 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.
NET INCOME (LOSS), INCLUDING EQUITY IN LOSSES OF AND WRITEDOWN OF INVESTMENT IN
UNCONSOLIDATED INVESTEES, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEMS. Net
loss increased to $142.0 million for the year ended
81
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
December 31, 1999, from $123.7 million for the year ended December 31, 1998. The
net loss of 1998 includes a gain from discontinued operations from the sale of
the Landmark theatre group of $5.3 million. The increase in operating loss and
net loss in 1999 is primarily from the write-off of the goodwill relating to the
Communications Group's operations in China of $45.7 million and restructuring
and asset impairment charge of the Communications Group Eastern Europe and
former republics of the Soviet Union of $31.6 million partially offset by an
improvement in Snapper's operating results of $20.1 million. The net loss for
1999 includes from discontinued operations the settlement of a lawsuit in
connection with the sale of the Entertainment Group. 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 republics of the former Soviet Union and the impact of
the non-cash charge in connection with the Communications Group's revised
operating plan for its paging operations of $40.3 million.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
OVERVIEW. 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. 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
their services. To date, such financing requirements have been funded from cash
on hand. Future capital requirements of the Communications Group, including
future acquisitions, will depend on available funding from the Company, receipt
of funds from Metromedia China and on the ability of the Communications Group's
joint ventures to generate positive cash flows. PLD Telekom and Snapper are
restricted under covenants contained in their credit agreements from making
dividend payments or advances, other than certain permitted debt repayments, to
the Company. In addition to funding the cash requirements of the Communications
Group, the Company has periodically funded the short-term working capital needs
of Snapper. The Company believes that its cash on hand and the receipt of funds
from Metromedia China will be sufficient to fund the Company's working capital
requirements for the near-term.
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In addition to financing its communications businesses, the Company will also be
required to pay interest on the 10 1/2% senior discount notes issued in
connection with the acquisition of PLD Telekom commencing September 30, 2002. As
a result, the Company will require in addition to its cash on hand, additional
financing in order to satisfy its on-going working capital requirements, debt
service 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. The indenture for the senior discount notes permits the Company to
finance the development of its communications operations. 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.
Management believes that its long-term liquidity needs (including debt service)
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
and subsidiaries achieving positive operating results and cash flows through
revenue and subscriber growth and control of operating expenses.
The Company expects to generate consolidated net losses for the foreseeable
future as the Communications Group continues to build out and market its
services.
CONVERTIBLE PREFERRED STOCK. 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. Since its
initial dividend payment on December 15, 1997 through March 15, 2000, the
Company has paid its 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 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.
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
SENIOR DISCOUNT NOTES. In connection with the acquisition of PLD Telekom, the
Company issued $210.6 million in aggregate principal amount at maturity of its
10 1/2% Senior Discount Notes due 2007 (the "Senior Discount Notes") to the
holders of the PLD Telekom's then outstanding 14% senior discount notes due 2004
and 9% convertible subordinated notes due 2006 pursuant to an agreement to
exchange and consent, dated as of May 18, 1999, by and among the Company, PLD
Telekom and such holders.
The terms of the Senior Discount Notes are set forth in an Indenture, dated as
of September 30, 1999, between the Company and U.S. Bank Trust National
Association as Trustee. The Senior Discount Notes will mature on September 30,
2007. The Senior Discount Notes were issued at a discount to their aggregate
principal amount at maturity and will accrete in value until March 30, 2002 at
the rate of 10 1/2% per year, compounded semi-annually to an aggregate principal
amount at maturity of $210.6 million. The Senior Discount Notes will not accrue
cash interest before March 30, 2002. After this date, the Senior Discount Notes
will pay interest at the rate of 10 1/2% per year, payable semi-annually in cash
and in arrears to the holders of record on March 15 or September 15 immediately
preceding the interest payment date on March 30 and September 30 of each year,
commencing September 30, 2002. The interest on the Senior Discount Notes will be
computed on the basis of a 360-day year comprised of twelve months.
The Senior Discount Notes are general senior unsecured obligations of the
Company, rank senior in right of payment to all existing and future subordinated
indebtedness of the Company, rank equal in right of payment to all existing and
future senior indebtedness of the Company and will be effectively subordinated
to all existing and future secured indebtedness of the Company to the extent of
the assets securing such indebtedness and to all existing and future
indebtedness of the Company's subsidiaries, whether or not secured.
The Senior Discount Notes will be redeemable at the sole option of the Company
on and after March 30, 2002 only at a redemption price equal to their principal
amount plus accrued and unpaid interest, if any, up to but excluding the date of
redemption.
Upon the occurrence of a change of control of the Company (as such term is
defined in the Indenture), the holders of the Senior Discount Notes will be
entitled to require the Company to repurchase such holders' notes at a purchase
price equal to 101% of the accreted value of the Senior Discount Notes (if such
repurchase is before March 30, 2002) or 101% of the principal amount of such
notes plus accrued and unpaid interest to the date of repurchase (if such
repurchase is after March 30, 2002).
The Indenture for the Senior Discount Notes limits the ability of the Company
and certain of its subsidiaries to, among other things, incur additional
indebtedness or issue capital stock or preferred stock, pay dividends on, and
repurchase or redeem their capital stock or subordinated obligations, invest in
and sell assets and subsidiary stock, engage in transactions with affiliates and
incur additional liens. The Indenture for the Senior Discount Notes also limits
the ability of the Company to engage in consolidations, mergers and transfers of
substantially all of its assets and also contains limitations on restrictions on
distributions from its subsidiaries.
TRAVELERS. Also at completion of the Company's acquisition of PLD Telekom, PLD
Telekom repaid The Travelers Insurance Company and The Travelers Indemnity
Company (together, "Travelers") approximately $8.7 million of amounts due under
the revolving credit and warrant agreement dated November 26, 1997 between PLD
Telekom and Travelers (the "Old Travelers Agreement"). PLD Telekom and Travelers
also entered into an amended and restated revolving credit note agreement (the
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
"New Travelers Agreement") pursuant to which PLD Telekom has agreed to repay
Travelers the remaining $4.9 million due under the Old Travelers Agreement on
August 30, 2000 and to pay interest on the outstanding amount at a rate of
10 1/2%. In addition, Travelers received at the closing of the merger 100,000
shares of PLD Telekom common stock (which were converted in the merger into
shares of common stock of the Company at the .6353 exchange ratio) and 10-year
warrants to purchase 700,000 shares of common stock of the Company at an
exercise price to be determined in December 2000 that will be between $10.00 and
$15.00 per share. However, if the amount outstanding under the New Travelers
Agreement has not been fully repaid by August 30, 2000, the exercise price of
the warrants will be reset to $.01 per share. Travelers retained its existing
security interests in certain of PLD Telekom's assets. The performance by PLD
Telekom of its obligations under the New Travelers Agreement is guaranteed by
the Company and certain subsidiaries of PLD Telekom.
TELECOMINVEST. In September and October 1999, PLD Telekom entered into certain
option agreements (subsequently assigned to the Company) with Commerzbank AG and
First National Holding S.A. which owns the majority of the ordinary shares of
OAO Telecominvest, a Russian company with interests in a wide range of
telecommunications companies in St. Petersburg and Northwestern Russia and PLD
Telekom's joint venture partner in its subsidiary PeterStar. The aggregate
consideration for the options was $8.5 million and they gave the Company the
right to participate in a planned private placement by First National Holding by
acquiring, for nominal value, that number of shares equal to $8.5 million
divided by 80% of the issuance price in the placement or, if the placement was
not completed on or before December 31, 1999 (extended by amendment to
January 31, 2000), to acquire up to 16% of First National Holding for additional
consideration of approximately $8.5 million. In resolution of disputes regarding
the parties' rights under those agreements, on March 30, 2000, First National
Holding paid the Company $11.0 million in full settlement of the Company's and
PLD Telekom's rights under the option agreements.
COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION
OVERVIEW. 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. The Communications
Group's primary source of funds has been 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, 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 may continue to depend upon the Company for its financing
needs.
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Credit agreements between certain of 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, 1999, the Communications Group was
committed to provide funding under various charter fund agreements and credit
lines in an aggregate amount of approximately $234.0 million, of which $48.5
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.
It is anticipated that as a consequence of the merger, the overall corporate
overhead of the Communications Group will be significantly reduced, with the
resulting more limited corporate function being funded as described elsewhere in
this section.
FORMER PLD BUSINESSES. PLD Telekom's operating businesses have become largely
self-sustaining, and while they continue to have on-going capital requirements
associated with the development of their businesses, they have been able to pay
for capital expenditures and operational expenses out of internally generated
cash flows from operations and/or have been able to arrange their own financing,
including supplier financing. In no case is PLD Telekom specifically obligated
to provide capital to its operating businesses; it was so obligated in the past,
but all such obligations have been met.
As a result of the acquisition of PLD Telekom by the Company, the majority of
PLD Telekom's commitments at the holding company level have been satisfied or
assumed by the Company, such that the $4.9 million due to Travelers on
August 30, 2000, as described above is the only material commitment upcoming
during 2000.
BALTCOM GSM. 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
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 Nortel. As part of such amendment, the
Communications Group and Western Wireless agreed to provide Baltcom GSM the
funds needed to repay Nortel, if necessary, and to provide Baltcom GSM debt
service support for the loan agreement with the European Bank for Reconstruction
Development in an amount not to exceed the greater of $3.5 million or the
aggregate of the additional equipment purchased from Nortel 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.
MAGTICOM. 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 $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 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%. Under such amendment, the
Company guaranteed Magticom's repayment obligation 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.
AZERBAIJAN. 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 subject to concurrence
with Caspian American's business plans. The Communications Group was obligated
to contribute approximately $5.0 million in equity to Omni-Metromedia and to
lend up to $36.5 million subject to concurrence with Caspian American's business
plan.
As part of the original transaction, the Communications Group has sold a 17.1%
participation in the $36.5 million loan commitment 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
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Communications Group 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 provided AIG Silk Road Fund 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 Fund's percentage
ownership interest.
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%. In addition, the Communications
Group sold a 2.4% participation in the $36.5 million loan to Verbena Servicos e
Investimentos, which requires Verbena Servicos e Investimentos to provide the
Communications Group 2.4% of the funds to be provided under the loan agreement
and entitles Verbena Servicos e Investimentos to 2.4% 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 2.2% 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, which was called and paid during 1999.
As part of its ongoing strategic review, in late 1999 the Company reevaluated
the operations of CAT in order to ascertain the requirement to account for
impairment losses. In view of the low quantity of potential customers in the
region in which the business operate and limited scope for growth, it was
determined that an impairment loss of $9.9 million was required in 1999 relating
to the Company's investment in CAT. The venture has developed a revised
operating plan to stabilize its operations and minimize future funding
requirements until potential restructuring options have been fully explored.
TYUMENRUSKOM. As part of its investment in Tyumenruskom announced in
November 1998, the Company 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 has purchased a digital
advanced mobile phone or DAMPS system cellular system from Ericsson in order to
provide fixed and mobile cellular telephone in the regions of Tyumen and
Tobolsk, Russian Federation. The Communications Group has made a $1.7 million
equity contribution to Tyumenruskom and has agreed 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.
Following a reevaluation of the venture's operations as part of the Company's
ongoing strategic reviews, in 1999, $3.8 million of the Company's investment in
this venture was recorded as an impairment charge in view of its low
profitability and limited scope for improvement.
COMMUNICATIONS GROUP--CHINA
During 1997 and 1998, the Company made several investments in telecommunications
joint ventures in China through its majority-owned subsidiary, Asian American
Telecommunications Corporation. These
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
ventures were terminated in late 1999 and agreements were entered into in
December 1999 terminating the joint ventures' further cooperation with China
Unicom. Under the terms of the settlement contracts, the four joint ventures
will each receive cash amounts in RMB from China Unicom in full and final
payment for the termination of their cooperation contracts with China Unicom.
See "Item 1: Business--Telecommunications Joint Ventures in China"
The Company anticipates that it will fully recover its investments in and
advances to the four affected joint ventures. As of December 31, 1999, the joint
ventures had conveyed to Asian American Telecommunications in the form of
repayment of advances approximately $29.3 million in US Dollars from the China
Unicom settlement. As of December 31, 1999, investments in and advances to these
four joint ventures, exclusive of goodwill, were approximately $40.0 million.
The Company's current estimate of the total amount it will ultimately receive
from the four terminated joint ventures is $90.1 million (at the December 31,
1999 exchange rates) of which $29.3 million has been received. Full distribution
of all expected funds must await the Chinese government's recognition and
approval of the completion of formal dissolution proceedings for the four joint
ventures. This is expected by mid-2000 and the Company anticipates no problems
in ultimately dissolving the joint ventures. However, some variance from the
Company's current estimates of the amounts finally distributed to Asian American
Telecommunications may arise due to settlement of the joint ventures' tax
obligations in China. The Company cannot assure at this time that this variance
will not be material or that the RMB to U.S. Dollar exchange rate will not
change.
The currently estimated $90.1 million in total payments from the Company's four
joint ventures that had cooperated with China Unicom is insufficient to fully
recover the goodwill recorded in connection with the Company's investment in
these joint ventures. As a result, the Company has recorded a non-cash
impairment charge of $45.7 million in 1999 for the write-off of goodwill.
Further adjustments may be required after receipt of final distributions from
the four terminated joint ventures.
Metromedia International Group and Metromedia International
Telecommunications, Inc. have made intercompany loans to Metromedia China under
a credit agreement, and Metromedia China has used the proceeds of these loans to
fund its investments in these joint ventures in China. At December 31, 1999,
Metromedia China owed $63.9 million under this credit agreement (including
accrued interest).
On May 7, 1999, Asian American Telecommunications entered into a joint venture
agreement with All Warehouse Commodity Electronic Commerce Information
Development Co., Ltd., a Chinese trading company, for the purpose of
establishing Huaxia Metromedia Information Technology Co., Ltd., known as Huaxia
JV. Also on May 7, 1999, Huaxia JV entered into a computer information system
and services contract with All Warehouse and its parent company, China Product
Firm Corporation. The Huaxia JV will develop and operate electronic commerce
computer information systems for use by All Warehouse and China Product Firm and
its affiliates and customers. The contract has a term of thirty years and grants
Huaxia JV exclusive rights to manage all of All Warehouse and China Product
Firm's electronic trading systems during that period.
The total amount to be invested in Huaxia JV is $25.0 million with registered
capital contributions from its shareholders amounting to $10.0 million. Asian
American Telecommunications will make registered capital contributions of
$4.9 million and All Warehouse will contribute $5.1 million. The remaining
investment in Huaxia JV will be in the form of up to $15.0 million of loans from
Asian American Telecommunications. As of December 31, 1999, AAT has made
$980,000 of its scheduled registered capital investment. Huaxia JV received its
operating license on July 5, 1999. Ownership in Huaxia JV is 49% by Asian
American Telecommunications and 51% by All Warehouse.
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Huaxia JV is established as a sino-foreign equity joint venture between Asian
American Telecommunications and All Warehouse Commodity Electronic Commerce
Information Development Co., Ltd. The Huaxia JV does not have any contractual
relationship with China Unicom and is engaged in business fundamentally
different from that of the Communications Group's joint ventures cooperating
with China Unicom. Computer and software services such as offered by the Huaxia
JV are subject to regulations different from those applied to telecommunications
in China. The Communications Group believes that the fee-for-services
arrangement of Huaxia JV and the lines of business undertaken by the joint
venture do not constitute foreign involvement in telecommunications activities,
which are at the center of certain Chinese authorities' actions against the
Communication Group's joint telecommunications projects with China Unicom.
The Communications Group is currently evaluating other investment opportunities
in China's information industry sector. The Communications Group is actively
negotiating e-commerce and Internet ventures with other Chinese enterprises
similar to the Huaxia JV. Chinese regulatory policy currently permits limited
foreign participation in such ventures and trade agreements executed in 1999
between China and World Trade Organization member countries provide for
considerable opening of this sector over the coming two years.
SNAPPER
Snapper's liquidity is generated from operations and borrowings. On
November 11, 1998, Snapper entered into a loan and security agreement with the
Lenders named therein and Fleet Capital Corporation, as agent and as the initial
lender, pursuant to which the lenders have 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 then outstanding
obligations under its prior revolving 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). Interest on the Snapper loan is payable at Snapper's option at a rate
equal to prime plus up to 0.5% or the London interbank offered rate or LIBOR
plus between 2.5% and 3.25%, in each case depending on Snapper's leverage ratio
under the Snapper loan agreement. The agreements governing the Snapper loan
contain standard representations and warranties, covenants, conditions precedent
and events of default, and provide for the grant of a security interest in
substantially all of Snapper's assets other than real property. At March 31,
1999, Snapper was not in compliance with all financial covenants required under
the loan agreement; the lenders have waived any event of default arising from
such noncompliance. At September 30, 1999, Snapper was not in compliance with
all financial covenants under the loan agreement and security agreement; the
lenders have waived any event of default arising from such noncompliance. At
December 31, 1999, Snapper was in compliance with all covenants under the loan
and security agreement.
Snapper's capital expenditures during 1999, 1998, and 1997 were $2.5 million,
$3.9 million, and $5.6 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, 1999, noncancelable commitments under these
agreements amounted to approximately $7.9 million.
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ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Snapper has an agreement with a financial institution which makes available
floor plan financing to dealers of Snapper products. This agreement provides
financing for 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, the third-party financial institution can require Snapper to repurchase
new and unused equipment, if the dealer defaults and the inventory is not able
to be sold to another dealer. At December 31, 1999, there was approximately
$95.0 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.
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,
republics of the former Soviet Union and China. These include matters arising
out of government policies, economic conditions, imposition of or changes in
government regulations or policies, imposition of or changes to taxes or other
similar charges by governmental bodies, exchange rate fluctuations and controls,
civil disturbances, deprivation or unenforceablility of contractual rights, and
taking of property without fair compensation.
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.
During 1997 and 1998, the Company made several investments in telecommunications
joint ventures in China through its majority-owned subsidiary, Asian American
Telecommunications Corporation. These ventures were terminated in late 1999 and
agreements were entered into in December 1999 terminating the joint ventures'
further cooperation with China Unicom. Under the terms of the settlement
contracts, the four ventures will each receive cash amounts in RMB from China
Unicom in full and final payment for the termination of their cooperation
contracts with China Unicom. See "Item 1: Business--Telecommunications Joint
Ventures in China."
The Company's current estimate of the total amount it will ultimately receive
from the four terminated China joint ventures is $90.1 million (at the
December 31, 1999 exchange rates) of which $29.3 million has been received. Full
distribution of all expected funds must await the Chinese government's
recognition and approval of the completion of formal dissolution proceedings for
the four joint ventures. This is expected by mid-2000 and the Company
anticipates no problems in ultimately dissolving the joint ventures. However,
some variance from the Company's current estimates of the
91
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
amounts finally distributed to Asian American Telecommunications may arise due
to settlement of the joint ventures' tax obligations in China and exchange rate
fluctuations. The Company cannot assure that this variance will not be material.
The currently estimated $90.1 million in total payments from the Company's four
joint ventures that had cooperated with China Unicom is insufficient to fully
recover the goodwill recorded in connection with the Company's investment in
these joint ventures. As a result, the Company has recorded a non-cash
impairment charge of $45.7 million in 1999 for the write-off of goodwill.
Further adjustments may be required after receipt of final distributions from
the four terminated joint ventures.
MMG CONSOLIDATED
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operating activities for the year ended December 31, 1999 was
$39.2 million, a decrease in cash used in operating activities of $22.1 million
from the same period in the prior year.
Losses from operating activities include significant non-cash items such as
discontinued operations, disposition of businesses, depreciation, amortization,
equity in losses of joint ventures and investees, and losses allocable to
minority interests. Excluding discontinued operations and disposition of
businesses, non-cash items increased $26.9 million from $68.3 million to
$95.2 million for the years ended December 31, 1998 and 1999, respectively. The
increase relates principally to the write off of goodwill related to the
Communication Group's operations in China and increased amortization expense
relating to the Company's decision to reduce the period that it will amortize
the goodwill related to the Communications Group's operations in Eastern Europe
and the republics of the former Soviet Union. Changes in operating assets and
liabilities, net of the effect of acquisitions and dispositions, decreased cash
flows for the year ended December 31, 1999 by $5.4 million and increased cash
flows for the year ended December 31, 1998 by $11.8 million.
The increase in cash flows for the year ended December 31, 1999 resulted
principally from the improved operating results of Snapper.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities was $13.2 million for the year ended
December 31, 1999 as compared to cash provided by investing activities of
$106.6 million for the year ended December 31, 1998. The principal uses of funds
for the year ended December 31, 1999 were investments in and advances to joint
ventures of $20.8 million, funds utilized in the acquisition of PLD Telekom of
$19.6 million, acquisitions by the Communications Group of $1.6 million and
additions to property, plant and equipment of $5.8 million. The principal source
of funds was distributions from joint ventures of $43.1 million of which
$33.6 million was from the Company's China joint ventures. 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 Landmark and proceeds of $14.5 million form the sale of
Protocall Ventures. 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.
92
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash used in financing activities was $34.2 million and $37.2 million, for the
years ended December 31, 1999 and 1998, respectively. Funds used in financing
activities in 1999 were for the preferred stock dividend of $15.0 million and
payments of Snapper's debt of $19.3 million. Funds used in financing activities
in 1998 were for the preferred stock dividend of $15.0 million and the repayment
of debt of $17.5 million, principally the 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.
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 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
93
<PAGE>
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 2000 ISSUES
Neither the Company nor any of its operating businesses experienced any
significant problems in operations due to the rollover to year 2000. In
addition, neither the Company nor any of its operating businesses have been
informed by any other companies or other entities on which they rely or with
which they do business that any such parties experienced any material year
2000-related problems.
Based on its experience with the January 1, 2000 roll-over, the Company does not
expect to experience any material problems relating to the year 2000 issue in
the future, however, the Company and its operating businesses will continue to
monitor the issue during 2000. The Company cannot guarantee that it or the other
companies or other entities on which it relies will not experience any year
2000-related problems in the future.
As of December 31, 1999, aggregate expenses incurred by the Company and its
operating businesses in connection with year 2000 compliance and upgrades
amounted to approximately $600,000.
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. Given the complexity of SFAS 133 and the
uncertainty surrounding its implementation, which has led to a Derivatives
Implementation Group, the Company has not completed its evaluation of the impact
of SFAS 133 on its 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, republics of the former Soviet Union and China.
With the exception of Snapper and prior to the acquisition of PLD Telekom at
September 30, 1999, the Company did not have any significant long term
obligations. 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
94
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
$36,000. In addition, a 100 basis point increase in interest rates on Snapper's
floor plan financing and dealers would have resulted in an increase in interest
expense of $82,000.
With the exception of certain vendor financing at the operating business level
(approximately $9.0 million in the aggregate), the Company's debt obligations
and those of its operating businesses are fixed rate obligations, and are
therefore not exposed to market risk from changes in interest rates. The Company
does not believe that it is exposed to a material market risk from changes in
interest rates. Furthermore, with the exception of the approximately
$9.0 million in vendor financing which is denominated in Euros, Deutsche Marks
and Dutch Guilders, the Company's long-term debt and that of its operating
businesses are denominated in U.S. dollars. The Company does not believe that
the Communications Group's debt not denominated in U.S. dollars exposes the
Company to a material market risk from changes in foreign exchange rates.
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 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 republics of 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
republics of 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 republics of 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 republics of the former
Soviet Union, China and other selected emerging markets, which may affect the
Company's results of
95
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS (CONTINUED)
operations; exchange rate fluctuations; license renewals for the Company's
communications investments in Eastern Europe and the republics of 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
96
<PAGE>
PART III
The information called for by this PART III (Items 10, 11, 12 and 13) is not set
forth herein because the Company intends to file with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
ended December 31, 1999, the Proxy Statement for the 2000 Annual Meeting of
Stockholders. Such information to be included in the Proxy Statement is hereby
incorporated into these Items 10, 11, 12 and 13 by this reference.
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
(i) On October 13, 1999, a Form 8-K was filed to report the completion of the
Company's merger with PLD Telekom Inc.
(ii) On December 14, 1999, a Form 8-K was filed to report the execution of
definitive agreements setting forth the terms for the termination of the
Company's joint ventures with China United Telecommunications Incorporated.
97
<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.
<TABLE>
<S> <C> <C>
METROMEDIA INTERNATIONAL GROUP, INC.
By: /s/ SILVIA KESSEL
-----------------------------------------
Silvia Kessel
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, TREASURER AND DIRECTOR
</TABLE>
Dated: March 30, 2000
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN W. KLUGE Chairman of the Board
------------------------------------------- March 30, 2000
John W. Kluge
Vice Chairman of the Board,
/s/ STUART SUBOTNICK President and Chief
------------------------------------------- Executive Officer (Principal March 30, 2000
Stuart Subotnick Executive Officer)
Executive Vice President,
/s/ SILVIA KESSEL Chief Financial Officer,
------------------------------------------- Treasurer and Director March 30, 2000
Silvia Kessel (Principal Financial
Officer)
/s/ ARNOLD L. WADLER Executive Vice President,
------------------------------------------- General Counsel, Secretary March 30, 2000
Arnold L. Wadler and Director
/s/ VINCENT D. SASSO, JR. Vice President (Principal
------------------------------------------- Accounting Officer) March 30, 2000
Vincent D. Sasso, Jr.
/s/ JAMES R. S. HATT Director
------------------------------------------- March 30, 2000
James R. S. Hatt
</TABLE>
98
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN P. IMLAY, JR. Director
------------------------------------------- March 30, 2000
John P. Imlay, Jr.
/s/ CLARK A. JOHNSON Director
------------------------------------------- March 30, 2000
Clark A. Johnson
/s/ I. MARTIN POMPADUR Director
------------------------------------------- March 30, 2000
I. Martin Pompadur
/s/ LEONARD WHITE Director
------------------------------------------- March 30, 2000
Leonard White
</TABLE>
99
<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, 1999, 1998 and 1997.......................... F-3
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.............. F-6
Notes to Consolidated Financial Statements.................. F-7
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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999, 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 29, 2000
F-2
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Communications Group...................................... $ 48,739 $ 30,208 $ 21,252
Snapper................................................... 216,050 210,084 183,076
--------- --------- ---------
264,789 240,292 204,328
Cost and expenses:
Cost of sales and operating expenses--Communications
Group................................................... 11,513 8,522 2,549
Cost of sales--Snapper.................................... 143,677 147,394 123,995
Selling, general and administrative....................... 133,608 153,327 141,125
Depreciation and amortization............................. 32,608 20,588 16,734
Restructuring and asset impairment charges................ 61,684 40,317 --
--------- --------- ---------
Operating loss.............................................. (118,301) (129,856) (80,075)
Other income (expense):
Interest expense.......................................... (17,265) (16,331) (20,922)
Interest income........................................... 7,304 12,746 9,840
Equity in income (losses) of and writedown of investment
in unconsolidated investees............................. (22,299) (18,151) (53,150)
Gain (loss) on disposition of business, net............... (243) 5,527 --
Foreign currency loss..................................... (4,126) (137) (714)
--------- --------- ---------
(36,629) (16,346) (64,946)
--------- --------- ---------
Loss before income tax benefit (expense), minority interest,
discontinued operations and extraordinary item............ (154,930) (146,202) (145,021)
Income tax benefit (expense)................................ (1,215) 358 5,227
Minority interest........................................... 26,938 9,858 8,893
--------- --------- ---------
Loss from continuing operations............................. (129,207) (135,986) (130,901)
Discontinued operations:
Gain (loss) on disposal................................... (12,776) 12,316 266,294
Loss from discontinued operations......................... -- -- (32,258)
--------- --------- ---------
(141,983) (123,670) 103,135
Extraordinary item:
Loss and equity in loss on early extinguishment of debt... -- -- (14,692)
--------- --------- ---------
Net income (loss)........................................... (141,983) (123,670) 88,443
Cumulative convertible preferred stock dividend
requirement............................................... (15,008) (15,008) (4,336)
--------- --------- ---------
Net income (loss) attributable to common stockholders....... $(156,991) $(138,678) $ 84,107
========= ========= =========
Weighted average number of common shares--Basic............. 75,232 68,955 66,961
========= ========= =========
Income (loss) per common share--Basic:
Continuing operations..................................... $ (1.92) $ (2.19) $ (2.02)
Discontinued operations................................... $ (0.17) $ 0.18 $ 3.50
Extraordinary items....................................... $ -- $ -- $ (0.22)
Net income (loss)......................................... $ (2.09) $ (2.01) $ 1.26
========= ========= =========
</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,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 50,985 $ 137,625
Accounts receivable:
Snapper, net............................................ 26,898 27,055
Communications Group, net............................... 20,682 9,097
Other................................................... 265 9,729
Inventories............................................... 55,209 62,777
Other assets.............................................. 20,650 5,441
----------- ----------
Total current assets.................................. 174,689 251,724
Investments in and advances to joint ventures:
Eastern Europe and the republics of the former Soviet
Union................................................... 78,067 87,163
China..................................................... 40,982 71,559
Property, plant and equipment, net of accumulated
depreciation.............................................. 191,018 36,067
Intangible assets, less accumulated amortization............ 274,025 159,530
Other assets................................................ 18,073 3,598
----------- ----------
Total assets.......................................... $ 776,854 $ 609,641
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 38,808 $ 28,779
Accrued expenses.......................................... 85,527 63,329
Current portion of long-term debt......................... 11,383 1,723
----------- ----------
Total current liabilities............................. 135,718 93,831
Long-term debt.............................................. 212,569 50,111
Other long-term liabilities................................. 13,758 5,410
----------- ----------
Total liabilities..................................... 362,045 149,352
----------- ----------
Minority interest........................................... 29,874 34,749
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 93,284,589 and 69,118,841
shares at December 31, 1999 and 1998, respectively...... 93,285 69,119
Paid-in surplus........................................... 1,102,308 1,012,794
Accumulated deficit....................................... (1,014,284) (857,293)
Accumulated other comprehensive loss...................... (3,374) (6,080)
----------- ----------
Total stockholders' equity............................ 384,935 425,540
----------- ----------
Total liabilities and stockholders' equity............ $ 776,854 $ 609,641
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $(141,983) $(123,670) $ 88,443
Items not requiring cash outlays:
(Gain) loss on disposal and loss on assets held for
sale.................................................... 12,776 (12,316) (266,294)
Loss from discontinued operations......................... -- -- 32,258
Loss and equity in loss on early extinguishment of debt... -- -- 14,692
Equity in losses and writedown of investment in
unconsolidated investees................................ 22,299 18,151 53,150
Restructuring and asset impairment charges................ 61,684 40,317 --
(Gain) loss on disposition of business, net............... 243 (5,527) --
Depreciation and amortization............................. 32,608 20,588 16,734
Minority interest......................................... (26,938) (9,858) (8,893)
Other..................................................... 5,512 (909) 3,922
Changes in:
Accounts receivable....................................... 10,914 (3,838) 10,443
Inventories............................................... 10,910 32,475 (41,137)
Other assets.............................................. (2,136) (4,099) 1,691
Accounts payable and accrued expenses..................... (27,682) (10,492) (29,681)
Other operating activities, net........................... 2,558 (2,185) 900
--------- --------- ---------
Cash used in operating activities....................... (39,235) (61,363) (123,772)
--------- --------- ---------
Investing activities:
Investments in and advances to joint ventures............. (20,792) (48,171) (64,714)
Distributions from joint ventures......................... 43,058 5,441 5,630
Cash paid in acquisition of PLD Telekom, net.............. (19,622) -- --
Cash paid for acquisitions and additional equity in
subsidiaries............................................ (1,544) (10,997) (17,851)
Additions to property, plant and equipment................ (5,793) (11,400) (10,451)
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 --
Proceeds from sale of business............................ -- 14,533 --
Other investing activities, net........................... (8,500) (134) 1,154
--------- --------- ---------
Cash provided by (used in) investing activities......... (13,193) 106,570 75,375
--------- --------- ---------
Financing activities:
Proceeds from issuance of long-term debt.................. -- 49,918 30,124
Payments on notes and subordinated debt................... (19,303) (77,500) (156,771)
Proceeds from issuance of stock related to public stock
offerings............................................... -- -- 199,442
Proceeds from issuance of common stock related to
incentive plans......................................... 99 5,347 18,153
Preferred stock dividends paid............................ (15,008) (15,008) (3,709)
Other financing activities, net........................... -- -- 1,419
--------- --------- ---------
Cash provided by (used in) financing activities......... (34,212) (37,243) 88,658
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (86,640) 7,964 40,261
Cash and cash equivalents at beginning of year............ 137,625 129,661 89,400
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 50,985 $ 137,625 $ 129,661
========= ========= =========
</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 ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SURPLUS STOCK DEFICIT
--------- -------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996........ -- $ -- 66,153,439 $66,153 $ 959,558 $(2,645) $ (803,349)
Net income......................... -- -- -- -- -- -- 88,443
Other comprehensive income, net of
tax:
Foreign currency translation
adjustments.................... -- -- -- -- -- -- --
Minimum pension liability........ -- -- -- -- -- -- --
Total comprehensive income.........
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...... -- -- -- -- -- -- (3,709)
Amortization of restricted stock... -- -- -- -- -- 2,645 --
--------- -------- ---------- ------- ---------- ------- -----------
Balances, December 31, 1997........ 4,140,000 207,000 68,390,800 68,391 1,007,272 -- (718,615)
Net loss........................... -- -- -- -- -- -- (123,670)
Other comprehensive loss, net of
tax:
Foreign currency translation
adjustments.................... -- -- -- -- -- -- --
Minimum pension liability........ -- -- -- -- -- -- --
Total comprehensive loss...........
Issuance of stock and stock options
related to incentive plans....... -- -- 728,041 728 5,522 -- --
Dividends on 7 1/4% cumulative
convertible preferred stock...... -- -- -- -- -- -- (15,008)
--------- -------- ---------- ------- ---------- ------- -----------
Balances, December 31, 1998........ 4,140,000 207,000 69,118,841 69,119 1,012,794 -- (857,293)
Net loss........................... -- -- -- -- -- -- (141,983)
Other comprehensive loss, net of
tax:
Foreign currency translation
adjustments.................... -- -- -- -- -- -- --
Minimum pension liability........ -- -- -- -- -- -- --
Total comprehensive loss...........
Issuance of stock and valuation of
stock
options and warrants related to
the
acquisition of PLD Telekom
Inc.............................. -- -- 24,107,449 24,107 89,254 -- --
Issuance of stock and stock options
related to incentive plans....... -- -- 58,299 59 260 -- --
Dividends on 7 1/4% cumulative
convertible preferred stock...... -- -- -- -- -- -- (15,008)
--------- -------- ---------- ------- ---------- ------- -----------
Balances, December 31, 1999........ 4,140,000 $207,000 93,284,589 $93,285 $1,102,308 $ -- $(1,014,284)
========= ======== ========== ======= ========== ======= ===========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE
INCOME (LOSS) INCOME
------------- -------------
<S> <C> <C>
Balances, December 31, 1996........ $ (35) $ --
Net income......................... -- 88,443
Other comprehensive income, net of
tax:
Foreign currency translation
adjustments.................... (2,526) (2,526)
Minimum pension liability........ (805) (805)
---------
Total comprehensive income......... 85,112
=========
Issuance of stock related to public
offering, net.................... --
Increase in equity resulting from
issuance of stock by
subsidiary....................... --
Issuance of stock related to the
acquisitions of a minority
interest of a subsidiary......... --
Issuance of stock related to
incentive plans.................. --
Dividends on 7 1/4% cumulative
convertible preferred stock...... --
Amortization of restricted stock... --
-------
Balances, December 31, 1997........ (3,366)
Net loss........................... -- (123,670)
Other comprehensive loss, net of
tax:
Foreign currency translation
adjustments.................... (1,810) (1,810)
Minimum pension liability........ (904) (904)
---------
Total comprehensive loss........... (126,384)
=========
Issuance of stock and stock options
related to incentive plans....... --
Dividends on 7 1/4% cumulative
convertible preferred stock...... --
-------
Balances, December 31, 1998........ (6,080)
Net loss........................... -- (141,983)
Other comprehensive loss, net of
tax:
Foreign currency translation
adjustments.................... 2,098 2,098
Minimum pension liability........ 608 608
---------
Total comprehensive loss........... $(139,277)
=========
Issuance of stock and valuation of
stock
options and warrants related to
the
acquisition of PLD Telekom
Inc.............................. --
Issuance of stock and stock options
related to incentive plans....... --
Dividends on 7 1/4% cumulative
convertible preferred stock...... --
-------
Balances, December 31, 1999........ $(3,374)
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<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.,
Snapper Inc. and as of September 30, 1999, PLD Telekom Inc. (see note 2). PLD
Telekom, Metromedia International Telecommunications and its majority owned
subsidiary, Metromedia China Corporation, are together known as the
"Communications Group". PLD Telekom has been included in the Company's results
of operations since September 30, 1999. All significant intercompany
transactions and accounts have been eliminated.
Almost all of the Communications Group's joint ventures other than the
businesses of PLD Telekom report their financial results on a three-month lag.
Therefore, the Communications Group's financial results for December 31 include
the financial results for those joint ventures for the 12 months ending
September 30. The Company is currently evaluating the financial reporting of
these ventures and the possibility of reducing or eliminating the three-month
reporting lag for certain of its principal businesses during 2000 (see note 3).
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 6 and 7). The transactions have been recorded as discontinuances of
business segments. In addition, as of April 1, 1997, for financial statement
reporting purposes, the Company was no longer qualified to treat its investment
in RDM Sports Group, Inc. ("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 voluntary bankruptcy petitions 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 Communications Group invests in communications businesses principally in
Eastern Europe and the republics of the former Soviet Union. The Communications
Group holds interests in several telecommunications joint ventures in China.
These ventures were terminated in late 1999 and the Company reached agreement
for the distribution of approximately $90.1 million (based on the December 31,
1999 exchange rate) in settlement of all claims under the joint venture
agreements of which $29.3 million has been received. The Communications Group is
now developing e-commerce business opportunities in China.
During 1999 the Company continued to focus its growth strategy on opportunities
in communications businesses. The convergence of cable television and telephony,
and the relationship of each business to Internet access, provides the Company
with new opportunities.
At December 31, 1999, the Communications Group owned interests in and
participated with partners in the management of joint ventures that had 55
operational systems, consisting of 12 cable television systems, 3 GSM wireless
telephone systems (the Communications Group's interest in one of which is in the
process of being sold), 2 analog wireless telephone systems, 7 fixed and other
telephony networks (which include local, international and long distance
telephony providers and satellite-based telephony
F-7
<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)
and wireless local loop operators), 17 radio broadcasting stations, 12 paging
systems and 2 other telephony-related businesses.
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 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. In connection with the acquisition of PLD Telekom, the Company
issued 10 1/2% senior discount notes. The Communications Group is dependent on
MMG for significant capital infusions to fund its operations, its commitments to
make capital contributions, 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 by the
Company. The ability to meet the 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
requirements and capital commitments with available cash on hand and other
alternative sources of funds, including receipt of funds from Metromedia China.
However, the Communications Group's businesses are capital intensive and require
the investment of significant amounts of capital in order to construct and
develop operational systems and market services. In addition, the Company will
be required to pay interest on the 10 1/2% senior discount notes commencing
September 30, 2002. As a result, the Company will likely require additional
financing in order to satisfy its on-going working capital, debt service,
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 companies of the
Communications Group. The indenture for the Senior Notes described below permits
the Company to finance the development of its communications operations. 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
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)
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 (including debt service)
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.
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. A loss in value of an investment, which is deemed to be other
than a temporary decline, is recognized as a charge to income and included in
equity in losses of unconsolidated subsidiaries on the statement of operations.
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.
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)
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, 1999 and 1998,
the Company did not have any debt and equity security investments.
INVENTORIES
Lawn and garden equipment, 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 which range from 3 to 40 years. 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, frequency rights,
customer lists and workforce in place are amortized over periods of four to
ten 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 periods of 10 (Communications Group) and
25 (Snapper) 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 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 at
December 31, 1999 (see notes 3 and 4).
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 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-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)
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 of finished equipment are recognized when the products are shipped to
dealers. Sales of parts 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 businesses, 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 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
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)
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," 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.
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
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)
average exchange rates. Transaction differences resulting from the use of these
different rates are included in the accompanying consolidated statements of
operations as foreign currency loss.
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 necessarily
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, SHORT-TERM INVESTMENTS, RECEIVABLES, 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 5 for the fair values of
long-term debt.
EARNINGS PER SHARE OF COMMON STOCK
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 included in the computation when a loss from continuing operations available
to common stockholders exists. For the years ended December 31, 1999, 1998, and
1997 the Company had losses from continuing operations.
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)
The computation of basic earnings per share for loss from continuing operations
attributable to common stockholders for the years ended December 31, 1999, 1998
and 1997 includes the Company's preferred stock dividend requirement.
The Company had for the years ended December 31, 1999, 1998 and 1997,
potentially dilutive shares of common stock of 22,717,000, 19,003,000 and
19,673,000, respectively (see note 9).
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 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. ACQUISITION OF PLD TELEKOM INC.
On September 30, 1999, the Company consummated the acquisition of PLD Telekom
pursuant to which a wholly owned subsidiary of the Company was merged with and
into PLD Telekom, with PLD Telekom as the surviving corporation. Following the
consummation of the merger, PLD Telekom became a wholly owned subsidiary of the
Company.
PLD Telekom is a provider of local, long distance and international
telecommunications services in the republics of 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 a provider of wireless service in Kazakhstan; and BELCEL, which
provides national wireless service in Belarus.
Holders of PLD Telekom common stock received .6353 shares of the Company's
common stock for each share of PLD Telekom common stock in accordance with a
formula set forth in the agreement and plan of merger. Pursuant to the agreement
and plan of merger, the Company issued 24,107,449 shares of its common stock
valued at $4.3125 per share.
In the agreement and plan of merger, the Company agreed to increase the size of
its board of directors in connection with the consummation of the merger from 9
members to 11 members and to cause the designation of two persons as directors
specified by PLD Telekom, one of whom will be nominated by
F-14
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF PLD TELEKOM INC. (CONTINUED)
News America Incorporated ("News"), which was a 38% shareholder of PLD Telekom
prior to the consummation of the merger and, following the merger is a 9.8%
shareholder of the Company.
In connection with the merger, holders of all of PLD Telekom's 14% Senior
Discount Notes due 2004 ($123.0 million in aggregate principal amount) and of
$25.0 million in aggregate principal amount of its 9.0% Convertible Subordinated
Notes due 2006 (together, the "PLD Notes") exchanged their PLD Notes and all
accrued but unpaid interest on these notes through the date of the merger for
$210.6 million in aggregate principal amount at maturity of 10 1/2% Senior
Discount Notes due 2007 from the Company. At September 30, 1999, the carrying
value of these 10 1/2% Senior Discount Notes due 2007 was $163.0 million. The
Company also purchased $1.5 million in aggregate principal amount of PLD
Telekom's 9.0% Convertible Subordinated Notes at a purchase price of 101% of the
principal amount of such notes plus accrued but unpaid interest on such notes
through the date of the merger.
Also at completion of the merger, PLD Telekom repaid The Travelers Insurance
Company and The Travelers Indemnity Company (together, "Travelers")
approximately $8.7 million of amounts due under the revolving credit and warrant
agreement dated November 26, 1997 between PLD Telekom and Travelers (the "Old
Travelers Agreement"). PLD Telekom and Travelers also entered into an amended
and restated revolving credit note agreement (the "New Travelers Agreement")
pursuant to which PLD Telekom has agreed to repay Travelers the remaining
$4.9 million due under the Old Travelers Agreement on August 30, 2000 (see
note 5). In addition, Travelers received at the closing of the merger 100,000
shares of PLD Telekom common stock (which were converted in the merger into
shares of common stock of the Company at the .6353 exchange ratio) and 10-year
warrants to purchase 700,000 shares of common stock of the Company at an
exercise price to be determined in December 2000 that will be between $10.00 and
$15.00 per share. However, if the amount outstanding under the New Travelers
Agreement has not been fully repaid by August 30, 2000, the exercise price of
the warrants will be reset to $.01 per share. Travelers retained its existing
security interests in certain of PLD Telekom's assets. The performance by PLD
Telekom of its obligations under the New Travelers Agreement is guaranteed by
the Company and certain subsidiaries of PLD Telekom.
Also in connection with the consummation of the merger, PLD Telekom repaid
approximately $6.9 million of outstanding loans and interest under a revolving
credit agreement to News.
PLD Telekom also purchased the remaining shares of its subsidiary, Technocom
Limited, that it did not already own from Technocom's existing minority
shareholders for an aggregate purchase price of approximately $12.6 million.
Technocom is now a wholly owned subsidiary of PLD Telekom.
PLD Telekom used funds held in a cash collateral account, working capital and
borrowings from the Company under a revolving intercompany note to make all the
payments described above.
The Company has determined that the purchase price for PLD Telekom was
$305.8 million. The purchase price of $305.8 million includes the issuance of
common stock, the value of existing PLD Telekom options and warrants exchanged,
warrants issued to Travelers, funds advanced to PLD Telekom that were utilized
in the repayment of the News credit agreement and related interest, the purchase
of Technocom's minority interests, partial repayment of the Travelers debt,
payment for the PLD Telekom preferred stock and working capital, issuance of
10 1/2% senior discount notes and transaction costs. The acquisition has been
accounted for under the purchase method of accounting. The purchase price has
been allocated based on estimated fair values at the date of acquisition. This
allocation has resulted in intangible assets and goodwill of $96.3 million and
$80.3 million, respectively,
F-15
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITION OF PLD TELEKOM INC. (CONTINUED)
which are being amortized on a straight-line basis over four to ten years and
ten years, respectively. In addition, approximately $1.0 million in severance
and lease termination costs have been recorded in purchase accounting. The
results of operations of PLD Telekom are included in the consolidated financial
statements from September 30, 1999.
The allocation of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 9,703
Accounts receivable......................................... 12,737
Inventories................................................. 3,333
Property, plant and equipment............................... 167,586
Other investments........................................... 7,121
Intangible assets........................................... 96,272
Other assets................................................ 14,018
Accounts payable and accrued expenses....................... (38,553)
Debt........................................................ (24,056)
Minority interests.......................................... (22,677)
-------
Fair value of net assets acquired........................... 225,484
Purchase price.............................................. 305,771
-------
Goodwill.................................................... $80,287
=======
</TABLE>
The following unaudited pro forma information illustrates the effect of the
acquisition of PLD Telekom on revenue, loss from continuing operations and loss
per share from continuing operations attributable to common stockholders for the
years ended December 31, 1999 and 1998, and assumes that the acquisition of PLD
Telekom occurred at the beginning of each period presented (in thousands, except
per share amounts) (unaudited):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenues.................................................... $ 349,083 $ 385,652
========= =========
Loss from continuing operations............................. $(173,130) $(183,884)
========= =========
Loss per share from continuing operations attributable to
common stockholders....................................... $ (1.86) $ (1.98)
========= =========
</TABLE>
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments, such as additional amortization expense as
a result of goodwill and increased interest expense on acquisition debt. They do
not purport to be indicative of the results of operations that actually would
have resulted had the acquisition occurred at the beginning of each period, or
of future results of operations of the consolidated entity.
3. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION
GENERAL
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
F-16
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
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 are 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, 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 $234.0 million in funding of which $48.5 million in funding
obligations remain at December 31, 1999. The Communications Group's funding
commitments are contingent on its approval of the joint ventures' and
subsidiaries' business plans.
1999 RESTRUCTURING AND IMPAIRMENT CHARGES
Shortly after completing its September 30, 1999 acquisition of PLD Telekom, the
Company began identifying synergies and redundancies between Metromedia
International Telecommunications, Inc. and PLD Telekom. The Company's efforts
were directed toward streamlining its operations. Following the review of its
operations, the Communications Group determined to make significant reductions
in its projected overhead costs for 2000 by closing its offices in Stamford,
Connecticut and London, England, consolidating its executive offices in New
York, New York, consolidating its operational headquarters in Vienna, Austria
and by consolidating its two Moscow offices into one. As part of this
streamlining of its operations, the Company announced an employee headcount
reduction. Employees impacted by the restructuring were notified in
December 1999 and in almost all cases were terminated effective December 31,
1999. Employees received a detailed description of their separation package
which was generally based on length of service. The total number of U.S.
domestic and expatriate employees separated was approximately 60. In addition,
there were reductions in locally hired staff. In 1999 the Company recorded a
charge of $8.4 million in connection with the restructuring.
Concurrent with the review of its existing operations and the change in
management as the result of the acquisition of PLD Telekom, the Communications
Group completed a strategic review of its telephony, cable television, radio
broadcasting and paging assets. The results of the Communications Group's
strategic review was as follows:
- Continue to pursue a convergence strategy to develop delivery for voice
and data services over its existing cable and telephony infrastructure
- Geographically focus the Communications Group's efforts on several key
countries where the Communications Group already has a significant
presence, including Russia, Georgia, Romania, Latvia and Kazakhstan
- Work towards obtaining consolidatable positions in certain of the
Communications Group's principal assets
- Develop Internet capability in the Communications Group's existing
businesses and explore expansion of Internet-related businesses in Central
and Eastern Europe
F-17
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
- Develop e-commerce business opportunities in China
- Leverage the Communications Group's existing radio brands in their
markets, with a view to using them in developing its other businesses,
including the development of Internet-based businesses
- Continue to focus on cost control and reduction in corporate overhead
costs
As a result of the Company's strategic review, the Company determined that
certain businesses (including pre-operational businesses) in its portfolio did
not meet certain of its objectives of its strategic review, such as the ability
to obtain control of the venture, geographic focus or convergence. The long
lived assets or the investments in these business were evaluated to determine
whether any impairment in their recoverability existed at the determination
date. As a result, the Company assessed whether the estimated cash flows of the
businesses over the estimated lives of the related assets were sufficient to
recover their costs. Where such cash flows were insufficient, the Company
utilized a discounted cash flow model to estimate the fair value of assets or
investments and recorded an impairment charge to adjust the carrying values to
estimated fair value. As a result of this evaluation, the Company recorded a
non-cash impairment charge on certain of its paging, cable television and
telephony businesses of $23.2 million.
For those equity method investments whose fair value is equal to zero, the
Company will no longer record its proportionate share of any future net losses
of these investees, unless the Company provides future funding. The
Communications Group will continue to manage its paging businesses to levels not
requiring significant additional funding and is developing a strategy to
maximize the value of its paging investments. In 2000, it is expected that the
paging operations will continue to generate losses.
1998 IMPAIRMENT CHARGES
In 1998, the Communications Group's paging business continued to incur operating
losses. Accordingly, the Communications Group developed a revised operating plan
to stabilize its paging operations. Under the revised plan, the Communications
Group is managing its paging business to a level that should not require
significant additional funding for its operations. As a result of the revised
plan, in 1998 the Company took a non-cash, nonrecurring charge on its paging
assets of $49.9 million, which included 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 write down relates to
both consolidated joint ventures 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 unless it provides
future funding will no longer record its proportionate share of any future net
losses of these investees.
In addition, in 1998, pager inventory of $1.5 million, and $2.7 million of
material relating to a promotional campaign in Romania, were written off which
is included in the cost of sales in the Company's consolidated results of
operations.
F-18
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
The following table displays a rollforward of the activity and balances of the
restructuring reserve account from inception to December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
RESTRUCTURING 1999
TYPE OF COST COST PAYMENTS BALANCE
- ------------ ------------- -------- ------------
<S> <C> <C> <C>
Employee separations.......................... $6,175 $ 303 $5,872
Facility closings............................. 1,456 -- 1,456
------ ------ ------
7,631 $ 303 $7,328
====== ======
Write off of fixed assets..................... 800
------
$8,431
======
</TABLE>
The following table displays the components of the asset impairment charges
recorded by the Company in the years ended December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Goodwill and other intangibles............................ $ 844 $35,867
Property and equipment.................................... 1,959 4,450
Equipment payment guarantee............................... 4,250 --
Investments in and advances to joint ventures............. 16,136 5,446
Inventory................................................. -- 4,174
------- -------
$23,189 $49,937
======= =======
</TABLE>
F-19
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
EQUITY METHOD INVESTMENT INFORMATION
At December 31, 1999 and 1998, the Communications Group's unconsolidated
investments in and advances to 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, impairment charges and distributions were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR
OPERATIONS
NAME 1999 1998 OWNERSHIP % COMMENCED (1)
- ---- -------- -------- ----------- -------------
<S> <C> <C> <C> <C>
WIRELESS TELEPHONY
Baltcom GSM, Latvia(2)(3).......................... $ 8,348 $ 9,817 22% 1997
Magticom, Georgia(2)............................... 11,110 13,048 35% 1997
Tyumenruskom, Russia (4) (5)....................... 575 2,228 46% 1999
BELCEL, Belarus.................................... 1,088 -- 50% 1999
------- -------
21,121 25,093
------- -------
FIXED TELEPHONY
Instaphone, Kazakhstan............................. (68) 1,168 50% 1998
Caspian American Telecom, Azerbaijan (5) (6)....... 3,206 5,488 37% 1999
MTR-Sviaz, Russia.................................. 5,620 -- 49% 1999
Telecom Georgia, Georgia........................... 4,018 5,922 30% 1994
------- -------
12,776 12,578
------- -------
CABLE TELEVISION
Kosmos TV, Moscow, Russia.......................... 1,547 1,385 50% 1992
Baltcom TV, Riga, Latvia........................... 5,285 4,003 50% 1992
Ayety TV, Tbilisi, Georgia......................... 2,194 3,045 49% 1993
Kamalak TV, Tashkent, Uzbekistan................... 3,329 2,976 50% 1993
Sun TV, Chisinau, Moldova.......................... 3,941 4,731 50% 1994
Cosmos TV, Minsk, Belarus.......................... 2,783 2,934 50% 1996
Alma TV, Almaty, Kazakhstan........................ 7,549 5,994 50% 1995
Teleplus, St. Petersburg, Russia (4)............... -- 1,941 45% 1998
------- -------
26,628 27,009
------- -------
PAGING
Baltcom Plus, Latvia (4)........................... -- -- 50% 1995
Paging One, Georgia (4)............................ -- -- 45% 1994
Raduga Poisk, Nizhny Novgorod, Russia (4).......... -- -- 45% 1994
PT Page, St. Petersburg, Russia (4)................ -- -- 40% 1995
Paging Ajara, Batumi, Georgia (4).................. -- -- 35% 1997
Kazpage, Kazakhstan (4)............................ -- -- 26-41% 1997
Alma Page, Almaty, Kazakhstan (4).................. -- -- 50% 1995
Kamalak Paging, Tashkent, Uzbekistan............... 1,884 2,260 50% 1993
Mobile Telecom, Russia (7)......................... 6,711 7,405 50% 1998
------- -------
8,595 9,665
------- -------
</TABLE>
F-20
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
<TABLE>
<CAPTION>
YEAR
OPERATIONS
NAME 1999 1998 OWNERSHIP % COMMENCED (1)
- ---- -------- -------- ----------- -------------
<S> <C> <C> <C> <C>
RADIO BROADCASTING
Radio Nika, Socci, Russia.......................... 287 244 51% 1995
AS Trio LSL, Estonia............................... 1,514 1,903 49% 1997
------- -------
1,801 2,147
------- -------
PRE-OPERATIONAL (8)................................
ATK, Archangelsk, Russia (9)....................... -- 1,746 81% --
Telephony related ventures and equipment........... 954 2,612
Other.............................................. 6,192 6,313
------- -------
7,146 10,671
------- -------
Total.............................................. $78,067 $87,163
======= =======
</TABLE>
- ------------------------
(1) Indicates year operations commenced, or in the case of acquired operational
entities, the year of acquisition.
(2) In August 1998, the Communications Group increased its ownership in Baltcom
GSM from 21% to 22% and in Magticom from 34% to 35%.
(3) At December 31, 1999, the results of Baltcom GSM were taken off the
three-month lag, therefore the results and related equity in loss of the
investment include 15 months of operations. The additional three months of
equity pickup relating to Baltcom GSM is immaterial to the results of
operations of the Company in 1999.
(4) Investment balance reflects write down of investment.
(5) At December 31, 1998, Tyumenruskom and Caspian American Telecom were
classified as pre-operational.
(6) In April 1999, Caspian American Telecom became operational; however, its
operational results are reported on a three-month lag. In May 1999, the
Communications Group sold 2.2% of its shares of Omni-Metromedia, thereby
reducing its ownership interest in Caspian American Telecom to 37%.
(7) 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 in 2000 and 2001. Each of the two
earnout payments is to be equal to $2.5 million, adjusted up or down based
upon performance in 1999 and 2000, respectively, as compared to certain
financial targets. The Company does not believe that any payment will be due
with respect to 1999. Simultaneously with the purchase of Mobile Telecom,
the Company purchased 50% of a related pager distribution company for
$500,000. Approximately $7.0 million of the purchase price was allocated to
goodwill.
(8) At December 31, 1999 and December 31, 1998, 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) Included in the Company's consolidated financial statements in the current
period.
F-21
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
Summarized combined balance sheet financial information of unconsolidated joint
ventures as of September 30, 1999 and 1998 and combined statement of operations
financial information for the years ended September 30, 1999, 1998 and 1997
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>
1999 1998
-------- --------
<S> <C> <C>
Assets:
Current assets.............................................. $ 37,611 $ 34,617
Investments in systems and equipment........................ 131,592 111,114
Other assets................................................ 5,642 7,103
-------- --------
Total assets.......................................... $174,845 $152,834
======== ========
Liabilities and Joint Ventures' Deficit:
Current liabilities......................................... $ 46,160 $ 31,934
Amount payable under credit facility........................ 98,540 66,574
Other long-term liabilities................................. 79,053 82,314
-------- --------
223,753 180,822
Joint ventures' deficit..................................... (48,908) (27,988)
-------- --------
Total liabilities and joint ventures' deficit......... $174,845 $152,834
======== ========
</TABLE>
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... $115,088 $ 98,709 $70,418
Costs and Expenses:
Cost of sales and operating expenses........................ 27,427 26,697 17,619
Selling, general and administrative......................... 55,937 50,082 35,860
Depreciation and amortization............................... 31,325 25,768 14,348
Other....................................................... 26 (5) 30
-------- -------- -------
Total expenses........................................ 114,715 102,542 67,857
-------- -------- -------
Operating income (loss)..................................... 373 (3,833) 2,561
Interest expense............................................ (17,487) (13,521) (6,339)
Other loss.................................................. (860) (2,384) (2,689)
Foreign currency transactions............................... (4,807) (4,055) (2,757)
-------- -------- -------
Net loss.................................................... $(22,781) $(23,793) $(9,224)
======== ======== =======
</TABLE>
F-22
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
For the years ended December 31, 1999, 1998 and 1997 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.
The following tables represent summary financial information for the Company's
operating unconsolidated joint ventures being grouped as indicated as of and for
the years ended December 31, 1999, 1998 and 1997. For the years ended
December 31, 1999, 1998 and 1997 the results of operations presented below are
before the elimination of intercompany interest (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------------------------------------------
WIRELESS FIXED CABLE RADIO
TELEPHONY TELEPHONY TELEVISION BROADCASTING PAGING TOTAL
--------- ---------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 49,172 $25,012 $27,616 $2,195 $11,093 $115,088
Depreciation and amortization......... 18,004 3,264 9,232 244 581 31,325
Operating income (loss)............... 2,027 (1,747) 697 (119) (485) 373
Interest income....................... 151 -- 279 -- -- 430
Interest expense...................... (10,763) (1,197) (5,305) (42) (180) (17,487)
Net loss.............................. (9,540) (8,701) (3,369) (145) (1,026) (22,781)
Assets................................ 98,353 37,710 33,257 1,045 4,480 174,845
Capital expenditures.................. 23,323 9,865 7,716 56 576 41,536
Net investment in joint ventures...... 21,121 12,776 26,628 1,801 8,595 70,921
Equity in income (losses) of
unconsolidated investees............ (6,128) (15,021) 329 (153) (478) (21,451)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------
WIRELESS FIXED CABLE RADIO
TELEPHONY TELEPHONY (1) TELEVISION BROADCASTING PAGING TOTAL
--------- ------------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 22,091 $30,266 $27,996 $2,134 $16,222 $ 98,709
Depreciation and amortization......... 9,384 2,546 12,056 212 1,570 25,768
Operating income (loss)............... (5,665) 5,061 (3,737) (125) 633 (3,833)
Interest income....................... 2 14 4 -- 3 23
Interest expense...................... (6,831) (1,286) (4,538) (15) (851) (13,521)
Net income (loss)..................... (12,821) 1,618 (8,985) (221) (3,384) (23,793)
Assets................................ 75,629 29,424 33,363 1,320 13,098 152,834
Capital expenditures.................. 31,781 5,992 12,047 328 2,204 52,352
Net investment in joint ventures...... 22,865 7,090 27,009 2,147 9,665 68,776
Equity in income (losses) of
unconsolidated investees............ (5,867) 201 (3,877) (108) (7,460) (17,111)
</TABLE>
F-23
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMMUNICATIONS GROUP--EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET
UNION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------
WIRELESS FIXED CABLE RADIO
TELEPHONY TELEPHONY (1) TELEVISION BROADCASTING PAGING TOTAL
--------- ------------- ---------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 2,587 $34,272 $21,412 $2,466 $ 9,681 $ 70,418
Depreciation and amortization......... 2,380 2,179 8,857 92 840 14,348
Operating income (loss)............... (6,761) 13,774 (4,878) 247 179 2,561
Interest income....................... 12 31 4 6 4 57
Interest expense...................... (1,046) (842) (3,569) (82) (800) (6,339)
Net income (loss)..................... (8,129) 9,977 (9,875) 121 (1,318) (9,224)
Assets................................ 53,495 31,798 28,470 1,564 9,869 125,196
Capital expenditures.................. 42,276 10,891 8,244 501 943 62,855
Net investment in joint ventures...... 18,947 12,230 23,022 2,901 9,144 66,244
Equity in income (losses) of
unconsolidated investees............ (2,027) 2,608 (7,212) 159 (761) (7,233)
</TABLE>
- ------------------------
(1) 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 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 subject to concurrence with the Caspian American business
plans. At December 31, 1999, $27.3 million of commitments remain available to
Caspian American subject to concurrence with the Caspian American business plan.
During the fourth quarter of 1999, the Company determined that there was a
decline in value of its investment in Caspian American that was other than
temporary and has recorded the decline of $9.9 million as an impairment charge.
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.
4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA
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.
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.
F-24
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (CONTINUED)
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
$86.0 million. The excess of the purchase price over the fair value of the net
tangible assets acquired was $69.0 million. The difference between the Company's
investment balance of $18.6 million in Metromedia China prior to the acquisition
of Asian American Telecommunications and 56.5% of the net equity of Metromedia
China subsequent to the acquisition of Asian American Telecommunications, was
recorded as an increase to paid-in surplus of $35.1 million in the consolidated
statements of stockholders' equity.
At December 31, 1999 and 1998, 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 1999 1998 OWNERSHIP % FORMED COMMENCED
- ---- -------- -------- ----------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Sichuan Tai Li Feng
Telecommunications Co., Ltd.
("Sichuan JV")....................... $15,899 $19,292 92% 1996 1999
Chongqing Tai Le Feng
Telecommunications Co., Ltd.
("Chongqing JV")..................... 14,001 15,504 92% 1997 1999
Ningbo Ya Mei
Telecommunications Co., Ltd.
("Ningbo JV")........................ 5,153 29,741 70% 1996 1997
Ningbo Ya Lian
Telecommunications Co., Ltd.
("Ningbo JV II")..................... 4,949 7,022 70% 1998 1998
Huaxia Metromedia Information
Technology Co., Ltd.
("Huaxia JV")........................ 980 -- 49% 1999 Pre-operational
------- -------
$40,982 $71,559
======= =======
</TABLE>
Metromedia International Group and Metromedia International Telecommunications
have made intercompany loans to Metromedia China under a credit agreement, and
Metromedia China has used the proceeds of these loans to fund its investments in
these joint ventures in China. At December 31, 1999, Metromedia China owed
$63.9 million under this credit agreement (including accrued interest).
The Company's investments in telecommunications joint ventures in China were
made through its majority-owned subsidiary, Asian American Telecommunications
Corporation. These joint ventures supported the construction and development of
telephony networks by China United Telecommunications Incorporated, a Chinese
telecommunications operator known as China Unicom. Because legal restrictions in
China prohibit direct foreign investment and operating participation in domestic
telephone companies, the Company's joint ventures were limited to providing
financing and consulting services to China Unicom under contracts. By the terms
of these contracts and in return for
F-25
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (CONTINUED)
services rendered, the joint ventures were to receive payments from China Unicom
based on the cash flows generated by China Unicom's network businesses. This
arrangement, known as a sino-sino-foreign joint venture cooperation, was
commonly accepted at the time the Company's joint ventures were formed. Since
the arrangement specifically limited the joint ventures' participation in and
control over China Unicom's actual business operations, Asian American
Telecommunications accounted for its sino-sino-foreign joint venture investments
under the equity method. The Company invested in four Chinese telecommunications
joint ventures in this fashion--two in Ningbo Municipality, one in Sichuan
Province and one in Chongqing City.
Beginning in mid-1998, the Chinese government unofficially began reconsidering
the advisability of allowing the sino-sino-foreign joint venture cooperation
arrangements undertaken by China Unicom. At that time, more than forty such
cooperation contracts had been established with foreign-invested joint ventures
covering China Unicom's operations in various parts of China. By mid-1999, the
government reached the conclusion that China Unicom's sino-sino-foreign
cooperation framework was in conflict with China's basic telecommunications
regulatory policies and should henceforth cease. China Unicom was instructed to
terminate or very substantially restructure all of its sino-sino-foreign joint
venture cooperation contracts.
In July 1999, Ningbo Ya Mei Telecommunications, Ltd., one of the Company's two
telecommunications joint ventures in Ningbo Municipality, China, received a
written notice from China Unicom stating that the Chinese government had
directed China Unicom to terminate further cooperation with Ningbo Ya Mei. China
Unicom subsequently informed the Company that the notification also applies to
the Company's other telecommunications joint venture in Ningbo Municipality. In
subsequent notifications from China Unicom to the Company's joint ventures,
China Unicom stated its intention to terminate all cooperation contracts with
sino-sino-foreign joint ventures in China, pursuant to an August 30, 1999
mandate from the Chinese Ministry of Information Industry. In its notifications,
China Unicom requested that negotiations begin regarding a suitable settlement
of all matters related to the winding up of the Company's joint ventures
cooperation agreements with China Unicom as a result of the Ministry of
Information Industry notice. With the issuance of these notifications, China
Unicom ceased further performance under its cooperation contracts with the
Company's joint ventures. However, China Unicom did make distribution of amounts
owed to the Company's Ningbo Ya Mei joint venture for the first half of 1999
according to the terms of the cooperation contract. The Company, through its
four joint ventures, entered into negotiations with China Unicom in
September 1999 to reach suitable terms for termination of the cooperation
contracts.
On November 6, 1999, the Company's four Chinese joint ventures engaged in
projects with China Unicom each entered into non-binding letters of intent with
China Unicom which set forth certain terms for termination of their cooperation
arrangements with China Unicom. On December 3, 1999, legally binding settlement
contracts incorporating substantially the terms set forth in the November
letters of intent were executed between China Unicom and the four joint
ventures, thereby terminating the joint ventures' further cooperation with China
Unicom. Under the terms of the settlement contracts, the four joint ventures
will each receive cash amounts in RMB from China Unicom in full and final
payment for the termination of their cooperation contracts with China Unicom.
Upon receipt of this payment, China Unicom and the joint ventures will waive all
of their respective relevant rights against the other party with respect to the
cooperative arrangements. In addition, all assets pertinent to China Unicom's
networks that are currently held by the joint ventures will be unconditionally
F-26
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (CONTINUED)
transferred to China Unicom. China Unicom effected payment to the joint ventures
of the amounts prescribed in the settlement contracts on December 10, 1999.
Subsequently and prior to the end of 1999, the boards of directors of the four
joint ventures each passed formal resolutions to commence dissolution of the
joint ventures. The Company expects such dissolution to be completed for all
four joint ventures by mid-2000.
Each of the Company's China telecommunications joint ventures stopped its
accounting for its share of the net distributable cash flows under the
cooperation agreements with China Unicom and the amortization of the investment
in the China Unicom projects effective July 1, 1999 based on the termination
notices received from China Unicom.
For the period ended December 31, 1999, the four China telecommunications joint
ventures have performed impairment analyses of their investments in projects
with China Unicom. These analyses were based on the terms of settlement
contracts the joint ventures executed with China Unicom on December 3, 1999. The
joint ventures each received sufficient amounts in their settlements with China
Unicom so as to recover their recorded investment balances as of December 31,
1999. Accordingly, no impairment writedowns were taken by the joint ventures
during 1999.
Through December 3, 1999, the date on which settlement contracts terminated the
joint ventures' further cooperation with China Unicom, the Company continued to
account for its investments in its China telecommunications joint ventures under
the equity method of accounting. The Company has performed an impairment
analysis of its investments in and advances to joint ventures and related
goodwill to determine the amount that these assets have been impaired. The
Company reviewed its investment in these joint ventures for other than temporary
decline and the Company has determined the related goodwill should be considered
an asset to be disposed of and has estimated the fair value less costs to
dispose of its investment and has stopped amortizing the balance. The Company
believes that the termination of the four joint ventures' cooperation agreements
with China Unicom is an event that gives rise to an accounting loss which is
probable. The amount of the non-cash impairment charge is the difference between
the sum of the carrying values of its investments and advances made to joint
ventures plus goodwill less the Company's best estimate of total amounts it will
receive from the four joint ventures through their dissolution. The Company will
receive substantial portions of the China Unicom settlement payments to the
joint ventures via repayment of advances and distribution of joint venture
assets on dissolution. China Unicom's settlement payments to the joint ventures
were made in RMB. However, the joint ventures' formation contracts and loan
agreements with Asian American Telecommunications had been registered with
Chinese authorities so as to assure the joint ventures' ability to convert RMB
deposits into foreign exchange for payment to the Company. The Company
anticipates that it will fully recover its investments in and advances to the
four affected joint ventures. As of December 31, 1999, the joint ventures had
conveyed to Asian American Telecommunications in the form of repayment of
advances approximately $29.3 million in US Dollars from the China Unicom
settlement. As of December 31, 1999, investments in and advances to these four
joint ventures, exclusive of goodwill, were approximately $40.0 million.
The Company's current estimate of the total amount it will ultimately receive
from the four terminated joint ventures is $90.1 million (at December 31, 1999
exchange rates) of which $29.3 million has been received. Full distribution of
all expected funds must await the Chinese government's recognition and approval
of the completion of formal dissolution proceedings for the four joint ventures.
This is expected by mid-2000 and the Company anticipates no problems in
ultimately dissolving the joint
F-27
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (CONTINUED)
ventures. However, some variance from the Company's current estimates of the
amounts finally distributed to Asian American Telecommunications may arise due
to settlement of the joint ventures' tax obligations in China and exchange rate
fluctuations. The Company cannot assure at this time that this variance will not
be material.
The currently estimated $90.1 million in total payments from the Company's four
joint ventures that had cooperated with China Unicom is insufficient to fully
recover the goodwill recorded in connection with the Company's investment in
these joint ventures. As a result, the Company has recorded a non-cash
impairment charge of $45.7 million in 1999 for the write-off of goodwill. The
remaining balance of goodwill at December 31, 1999 is $20.7 million. Further
adjustments may be required after receipt of final distributions from the four
terminated joint ventures.
HUAXIA JV
On May 7, 1999, Asian American Telecommunications entered into a joint venture
agreement with All Warehouse Commodity Electronic Commerce Information
Development Co., Ltd., a Chinese trading company, for the purpose of
establishing Huaxia Metromedia Information Technology Co., Ltd., known as Huaxia
JV. Also on May 7, 1999, Huaxia JV entered into a computer information system
and services contract with All Warehouse and its parent company, China Product
Firm Corporation. The Huaxia JV will develop and operate electronic commerce
computer information systems for use by All Warehouse and China Product Firm and
its affiliates and customers. The contract has a term of thirty years and grants
Huaxia JV exclusive rights to manage all of All Warehouse and China Product
Firm's electronic trading systems during that period.
The total amount to be invested in Huaxia JV is $25.0 million with registered
capital contributions from its shareholders amounting to $10.0 million. Asian
American Telecommunications will make registered capital contributions of
$4.9 million and All Warehouse will contribute $5.1 million. The remaining
investment in Huaxia JV will be in the form of up to $15.0 million of loans from
Asian American Telecommunications. As of December 31, 1999, Asian American
Telecommunications has made $980,000 of its scheduled registered capital
investment. Huaxia JV received its operating license on July 5, 1999 and has
begun operations. Ownership in Huaxia JV is 49% by Asian American
Telecommunications and 51% by All Warehouse.
Huaxia JV is established as a sino-foreign equity joint venture between Asian
American Telecommunications and All Warehouse Commodity Electronic Commerce
Information Development Co., Ltd. The Huaxia JV does not have any contractual
relationship with China Unicom and is engaged in business fundamentally
different from that of the Communications Group's joint ventures cooperating
with China Unicom. Computer and software services, such as offered by the Huaxia
JV, are subject to regulations different from those applied to
telecommunications in China. The Communications Group believes that the
fee-for-services arrangement of Huaxia JV and the lines of business undertaken
by the joint venture do not constitute foreign involvement in telecommunications
activities, which are at the center of Chinese authorities' actions against the
Communication Group's joint telecommunications projects with China Unicom.
F-28
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (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, 1999, 1998, and 1997 respectively, (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------
NINGBO NINGBO SICHUAN CHONGQING
JV JV II JV JV TOTAL
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 1,995 $ 504 $ -- $ 54 $ 2,553
Depreciation and amortization................ (1,231) (144) (264) (341) (1,980)
Operating income (loss)...................... 479 307 (482) (521) (217)
Interest expense, net........................ (2,907) (280) (989) (214) (4,390)
Net income (loss)............................ 8,419 9,198 3,344 3,321 24,282
Equity in income (losses) of joint ventures
through December 3, 1999................... 14 117 (508) (471) (848)
Assets....................................... 16,755 17,996 22,904 19,978 77,633
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------
NINGBO SICHUAN CHONGQING
NINGBO JV JV II JV JV TOTAL
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------
NINGBO SICHUAN CHONGQING
JV JV JV TOTAL
-------- -------- --------- --------
<S> <C> <C> <C> <C>
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)
</TABLE>
For the years ended December 31, 1999, 1998 and 1997 the results of operations
presented above are before the elimination of intercompany interest.
F-29
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES--CHINA (CONTINUED)
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 provided the terms for dissolution of the Golden
Cellular JV. Metromedia China Telephony reimbursed Golden Cellular $876,000 for
certain development expenses incurred by Golden Cellular and assigned 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 was 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.
5. LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
MMG
10 1/2% Senior Discount Notes, net of discount of $43.2
million................................................... $167,365 $ --
-------- -------
SNAPPER
Snapper Term Loan........................................... 4,000 5,000
Snapper Revolving Loan...................................... 35,653 44,918
Industrial Development Bonds................................ 1,000 1,000
-------- -------
40,653 50,918
-------- -------
COMMUNICATIONS GROUP
Notes payable 10 1/2%....................................... 4,920 --
-------- -------
212,938 50,918
-------- -------
Capital lease obligations and supplier financing, interest
rates of 6% to 10%........................................ 11,014 916
-------- -------
223,952 51,834
Current portion........................................... 11,383 1,723
-------- -------
Long-term debt............................................ $212,569 $50,111
======== =======
</TABLE>
F-30
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Aggregate annual repayments of long-term debt exclusive of capital leases and
supplier financing over the next five years and thereafter are as follows (in
thousands):
<TABLE>
<S> <C>
2000........................................................ $ 5,920
2001........................................................ 2,000
2002........................................................ 1,000
2003........................................................ 36,653
2004........................................................ --
Thereafter.................................................. 210,600
</TABLE>
MMG DEBT
In connection with the acquisition of PLD Telekom, the Company issued
$210.6 million in aggregate principal amount at maturity of 10 1/2% senior
discount notes due 2007 (the "Senior Discount Notes") to the holders of the PLD
notes pursuant to an agreement to exchange and consent, dated as of May 18,
1999, by and among the Company, PLD Telekom and such holders.
The terms of the Senior Discount Notes are set forth in an Indenture, dated as
of September 30, 1999, between the Company and U.S. Bank Trust National
Association as trustee. The Senior Discount Notes will mature on September 30,
2007. The Senior Discount Notes were issued at a discount to their aggregate
principal amount at maturity and will accrete in value until March 30, 2002 at
the rate of 10 1/2% per year, compounded semi-annually to an aggregate principal
amount at maturity of $210.6 million. The Senior Discount Notes will not accrue
cash interest before March 30, 2002. After this date, the Senior Discount Notes
will pay interest at the rate of 10 1/2% per year, payable semi-annually in cash
and in arrears to the holders of record on March 15 or September 15 immediately
preceding the interest payment date on March 30 and September 30 of each year,
commencing September 30, 2002. The interest on the Senior Discount Notes will be
computed on the basis of a 360-day year comprised of twelve months.
The Senior Discount Notes are general senior unsecured obligations of the
Company, rank senior in right of payment to all existing and future subordinated
indebtedness of the Company, rank equal in right of payment to all existing and
future indebtedness of the Company and will be effectively subordinated to all
existing and future secured indebtedness of the Company to the extent of the
assets securing such indebtedness and to all existing and future indebtedness of
the Company's subsidiaries.
The Senior Discount Notes will be redeemable at the sole option of the Company
on and after March 30, 2002 only at a redemption price equal to their principal
amount plus accrued and unpaid interest, if any, up to but excluding the date of
redemption.
Upon the occurrence of a change of control of the Company (as such term is
defined in the indenture), the holders of the Senior Discount Notes will be
entitled to require the Company to repurchase such holders' notes at a purchase
price equal to 101% of the accreted value of the Senior Discount Notes (if such
repurchase is before March 30, 2002) or 101% of the principal amount of such
notes plus accrued and unpaid interest to the date of repurchase (if such
repurchase is after March 30, 2002).
The indenture for the Senior Discount Notes limits the ability of the Company
and certain of its subsidiaries to, among other things, incur additional
indebtedness or issue capital stock or preferred
F-31
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
stock, pay dividends on, or repurchase or redeem their capital stock or
subordinated obligations, invest in and sell assets and subsidiary stock, engage
in transactions with affiliates or incur additional liens. The Indenture for the
Senior Discount Notes also limits the ability of the Company to engage in
consolidations, mergers and transfers of substantially all of its assets and
contains limitations and restrictions on distributions from its subsidiaries.
The Company registered a new series of senior notes under the Securities Act of
1933, as amended, and has exchanged all of its outstanding Senior Discount Notes
for such new series of senior notes which have been registered.
At December 31, 1999 the fair value of the Senior Discount Notes approximates
carrying value.
In connection with the entertainment group sale in 1997 (see note 6), the
Company repaid all of its then 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 an old Snapper credit agreement and 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).
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) and 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) and 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
F-32
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
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.
At March 31, 1999, Snapper was not in compliance with all financial covenants
under its loan and security agreement. On May 14, 1999, the lenders under the
loan and security agreement waived any event of default arising from such
noncompliance. At September 30, 1999, Snapper was not in compliance with all
financial covenants under its loan and security agreement; the lenders waived
any event of default arising from such noncompliance. At December 31, 1999,
Snapper was in compliance with all bank covenants under the loan and security
agreement.
On November 26, 1996, Snapper had entered into a credit agreement with AmSouth
Bank of Alabama, pursuant to which AmSouth 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. This Snapper revolver was guaranteed by the Company, and was
repaid on November 11, 1998.
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. One industrial development bond matured in 1999, and the
remaining industrial development bond matures in 2001. Interest rates range from
62% to 75% of the prime rate.
COMMUNICATIONS GROUP
In connection with the acquisition of PLD Telekom, PLD Telekom entered into an
amended and restated revolving credit note agreement with Travelers. PLD Telekom
agreed to repay Travelers $4.9 million under the Old Travelers Agreement on
August 30, 2000. The interest rate is 10 1/2%. Travelers retained its existing
security interests in certain of PLD Telekom's assets. The performance by PLD
Telekom of its obligations under the New Travelers Agreement is guaranteed by
the Company and certain subsidiaries of PLD Telekom.
At December 31, 1999 the fair value of the debt with Travelers approximates
carrying value.
6. 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.
F-33
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. THE ENTERTAINMENT GROUP SALE (CONTINUED)
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
were $41.7 million. The entertainment group's loss from operations for the
period January 1, 1997 to May 2, 1997 was $32.2 million and included an income
tax benefit of $3.2 million.
The Company became involved in litigation concerning the sale of the
Entertainment Group on July 10, 1997. On June 30, 1997, the plaintiffs in SIDNEY
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 in the State of
California alleging $28.7 million in damages from the alleged breach of an oral
agreement to pay a finder's fee in connection with the Entertainment Group Sale.
On September 23, 1999, the jury in this litigation returned a verdict of
$4.5 million in compensatory damages and $3.4 million in other damages against
the Company. Before the conclusion of the proceedings relating to punitive
damages, the Company agreed to a settlement with the plaintiffs. Under the terms
of the settlement, the Company paid $5.0 million to the plaintiffs on
September 30, 1999 and is obligated to pay an additional $5.0 million on
September 30, 2000 included in accrued expenses and an additional $4.0 million
on September 30, 2001 included in other long-term liabilities. The settlement
fully resolves all litigation among the Company and the other parties in this
litigation. The future settlement payments are secured by a collateralized
letter of credit of $9.0 million. For the year ended December 31, 1999, the
Company has recorded a $12.8 million charge, which represents the net present
value of the payments to be made, against discontinued operations in its results
of operations, as a result of this settlement.
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.
7. 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)
7. 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>
Landmark's revenues and income (loss) from operations for the period January 1,
1997 to November 12, 1997 were $48.7 million and ($108,000), respectively.
Income (loss) from operations for the period January 1, 1997 to November 12,
1997 includes income taxes of $408,000.
8. INVESTMENT IN RDM
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 is in the process of selling all of RDM's assets to satisfy RDM's
obligations to its creditors and the Company believes that it is unlikely that
it will recover any distribution on account of its equity interest in RDM. The
Company also holds certain claims in the RDM proceedings, although there can be
no assurance that the Company will receive any distributions with respect to
such claims.
In 1997 in connection with its investment in RDM, the Company recorded in its
results of operations a reduction in its carrying value and its share of its
losses of RDM of $46.1 million.
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 alleged 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, were 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 disclosed
that its management had discussed the possibility of filing for bankruptcy. The
amended complaints also alleged that the defendants, including the Company and
current and former officers of the Company who served as directors of RDM, were
secondarily liable as controlling persons of RDM. In an opinion dated March 10,
2000, the court dismissed these actions in their entirety.
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 has moved to proceed as co-plaintiff or
to intervene in this proceeding, and the official committee of
F-35
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INVESTMENT IN RDM (CONTINUED)
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
financing of RDM, or to equitably subordinate such claim made by Metromedia
against RDM and other debtors in the bankruptcy proceeding. On March 3, 1999,
the 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. 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. Accordingly, the Company has not
recorded any liability in connection with these proceedings.
9. 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, 1999 and 1998.
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) 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
F-36
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
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
As part of an acquisition in 1996, 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 1997 was $352,000. 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, 1999, the Company has reserved for future issuance shares of
Common Stock in connection with the stock option plans and preferred stock
listed below (in thousands):
<TABLE>
<S> <C>
Stock option plans.......................................... 11,210
Warrants.................................................... 700
Preferred stock............................................. 13,800
------
25,710
======
</TABLE>
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, 1999 there were approximately 3.0 million additional
shares available for grant under the plan.
Following the PLD Telekom acquisition, the PLD Telekom stock options were
converted into stock options exercisable for common stock of MMG in accordance
with the exchange ratio.
The per share weighted-average fair value of stock options granted during 1999,
1998, and 1997 were $2.62, $6.99, and $4.33, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 87% in 1999, 77% in 1998, and 50% in 1997,
expected dividend yield of zero percent, risk-free interest rate of 6.4% in
1999, 5.1% in 1998, and 5.5% in 1997 and an expected life of 4 years.
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, 1999 and 1997.
For the year ended December 31, 1998, compensation expense of
F-37
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
$626,000 was recorded under the 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 amounts):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Net income (loss) attributable to common stockholders:
As reported............................................... $(156,991) $(138,678) $84,107
Pro forma................................................. $(163,297) $(144,778) $75,925
Income (loss) per common share--Basic:
As reported............................................... $ (2.09) $ (2.01) $ 1.26
Pro forma................................................. $ (2.17) $ (2.10) $ 1.13
</TABLE>
Pro forma net income reflects only options granted from 1996 through 1999.
Stock option activity during the periods indicated is as follows (in thousands
except per share amounts):
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE 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
Transfer of options in acquisition of PLD Telekom..... 2,863 $ 5.68
Options granted....................................... 500 $ 3.94
Options exercised..................................... (20) $ 5.41
Options forfeited..................................... (329) $ 9.07
------
Balance at December 31, 1999.......................... 8,217 $ 6.55
======
</TABLE>
At December 31, 1999, 1998, 1997, the number of stock options exercisable was
6,311,000, 2,831,000, and 2,573,000 respectively, and the weighted-average
exercise price of these options was $6.34, $6.63 and $6.99, respectively.
F-38
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about the stock options outstanding
at December 31, 1999 (in thousands except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED- -----------------------------
NUMBER AVERAGE NUMBER WEIGHTED-
OUTSTANDING REMAINING WEIGHTED EXERCISABLE AVERAGE
RANGE OF AT CONTRACTUAL AVERAGE AT EXERCISE
EXERCISE PRICES DECEMBER 31, 1999 LIFE EXERCISE PRICE DECEMBER 31, 1999 PRICE
- --------------- ----------------- ----------- -------------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
$1.08-$5.41.................. 3,025 7.9 $ 3.84 2,605 $ 3.82
$6.30-$9.84.................. 5,029 7.7 $ 8.00 3,586 $ 7.99
$11.69-$12.59................ 163 7.5 $11.97 120 $12.05
</TABLE>
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.
WARRANTS
In connection with the acquisition of PLD Telekom, the Company issued to
Travelers 10-year warrants to purchase 700,000 shares of common stock of the
Company at an exercise price to be determined in December 2000 that will be
between $10.00 and $15.00 per share. However, if the amount outstanding under
the New Travelers Agreement has not been fully repaid by August 30, 2000, the
exercise price of the warrants will be reset to $0.01 per share.
10. 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-39
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
Income tax expense (benefit) for the years ended December 31, 1999, 1998 and
1997, consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal........................................... $ -- $(1,615) $(9,935)
State and local................................... -- -- 1,982
Foreign........................................... 1,215 1,257 914
------ ------- -------
Current........................................... 1,215 (358) (7,039)
Deferred.......................................... -- -- 1,812
------ ------- -------
$1,215 $ (358) $(5,227)
====== ======= =======
</TABLE>
The provision for income taxes for the years ended December 31, 1999, 1998 and
1997 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 $26.5 million,
$38.4 million, and $23.2 million for the years ended December 31, 1999, 1998 and
1997, respectively. Pre-tax losses from domestic operations were
$114.2 million, $97.9 million, and $112.9 million for the years ended
December 31, 1999, 1998, and 1997, respectively.
State and local income tax expense for the year ended December 31, 1997 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, 1999, 1998 and 1997 reflects estimates of withholding and
remittance taxes.
The temporary differences and carryforwards which give rise to deferred tax
assets and (liabilities) at December 31, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
Net operating loss carryforward........................ $ 98,417 $ 67,887
Allowance for doubtful accounts........................ 1,311 2,912
Reserves for self-insurance............................ 7,255 8,512
Investment in equity investee.......................... 28,425 28,425
Purchase of safe harbor lease investment............... (5,677) (6,216)
Minimum tax credit (AMT) carryforward.................. 13,036 13,036
Other reserves......................................... 9,290 11,422
Other.................................................. 76 (2,432)
--------- --------
Subtotal before valuation allowance.................... 152,133 123,546
Valuation allowance.................................... (152,133) (123,546)
--------- --------
Deferred taxes......................................... $ -- $ --
========= ========
</TABLE>
F-40
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
The net change in the total valuation allowance for the years ended
December 31, 1999, 1998, and 1997 was an increase of $28.5 million, a decrease
of $1.3 million and an increase of $23.4 million, respectively.
The Company's income tax expense (benefit) for the years ended December 31, 1999
and 1998, 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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Benefit based upon federal statutory rate of
35%.......................................... $(49,269) $(47,720) $(47,645)
Foreign taxes in excess of federal credit...... 1,215 1,257 914
Amortization of goodwill....................... 19,851 6,340 1,729
Foreign operations............................. 9,286 13,458 8,126
Change in valuation allowance.................. (2,605) 10,572 17,370
Equity in losses of joint ventures............. 8,201 9,036 7,616
Minority interest of consolidated
subsidiaries................................. (9,428) (3,450) (3,112)
Impact of alternative minimum tax.............. -- 1,211 7,452
Current year operating losses not benefited.... 20,502 -- --
Other, net..................................... 3,462 8,938 2,323
-------- -------- --------
Income tax expense (benefit)................... 1,215 $ (358) $ (5,227)
======== ======== ========
</TABLE>
At December 31, 1999 the Company had available net operating loss carryforwards
and unused minimum tax credits of approximately $281.1 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.
Under Section 382 of the Internal Revenue Code, annual limitations will apply to
the use of the pre-October 1, 1999 net operating loss carryforwards of
PLD Telekom Inc. (and subsidiaries included in its consolidated Federal income
tax return). This annual limitation approximates $6.0 million per year.
The use by the Company of the pre-November 1, 1995 net operating loss
carryforwards from the business combination consummated 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.
F-41
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
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.
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 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.
11. 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 in 1999,
1998 and 1997, such amount for employees of the non-bargaining defined
contribution plan was 50% of the first 6% of compensation contributed by each
participant. In April 1999, Snapper implemented a defined contribution plan for
all bargaining unit employees. In 1999, under Snapper's bargaining unit plan,
Snapper matched 25% of the first 4% of compensation contributed by each
participant. The Company's contribution expense for the years ended
December 31, 1999, 1998, and 1997 was $492,000, $517,000, and $527,000,
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 contributions were approved by management for the
years ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998 amounted to $85,000 and $17,000
and $110,000 and $21,000, respectively.
F-42
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
Snapper's defined benefit plan's projected benefit obligation and fair value of
plan assets at December 31, 1999 and 1998 were $6.7 million and $7.4 million and
$7.5 million and $7.7 million, respectively. Accrued post-retirement benefit
costs at December 31, 1999 and 1998 were $3.1 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, 1999 and 1998.
12. BUSINESS SEGMENT DATA
The business activities of the Company consist to two operating groups, the
Communications Group and Snapper.
The Communications Group has operations in Eastern Europe and the republics of
the former Soviet Union and China. Operations in Eastern Europe and the
republics of the former Soviet Union provide the following services:
(i) wireless telephony; (ii) fixed telephony; (iii) cable television;
(iv) radio broadcasting; and (v) paging. Until recently, the Company also held
interests in several telecommunications joint ventures in China. Those joint
ventures were terminated in late 1999 and the Company reached agreement for the
distribution of approximately $90.1 million (based on the December 31, 1999
exchange rate) in settlement of all claims under the joint venture agreements.
The Communications Group is continuing to develop e-commerce business
opportunities in China.
As previously discussed, legal restrictions in China prohibit foreign
participation in the operations or ownership in the telecommunications sector.
The segment information for the Communications Group's China joint ventures
represent the investment in network construction and development of telephony
networks for China Unicom. The segment information does not reflect the results
of operations of China Unicom's telephony networks.
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. The segment
information is based on operating income (loss) which includes depreciation and
amortization. In addition, through the year ended December 31, 1999 the Company
evaluates the performance of the Communications Group's operating segments in
Eastern Europe and the republics of the former Soviet Union on a combined basis.
Equity in income (losses) of unconsolidated investees reflects elimination of
intercompany interest expense.
The Company's segment information is set forth as of and for the years ended
December 31, 1999, 1998 and 1997 in the following tables (in thousands):
F-43
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. BUSINESS SEGMENT DATA (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP--EASTERN EUROPE AND
THE REPUBLICS OF THE FORMER SOVIET UNION
--------------------------------------------------------------------------------------
WIRELESS FIXED CABLE RADIO SEGMENT
TELEPHONY TELEPHONY TELEVISION BROADCASTING PAGING HEADQUARTERS TOTAL
--------- --------- ---------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues......................... $ 53,704 $43,409 $33,171 $16,910 $ 14,143 $ 2,490 $163,827
Restructuring and asset
impairment charge.............. -- -- -- 251 1,926 13,825 16,002
Depreciation and amortization.... 19,620 7,290 11,233 4,244 1,028 12,600 56,015
Operating income (loss).......... 1,229 (6,305) 147 (5,823) (4,160) (53,265) (68,177)
CONSOLIDATED
Revenues......................... $ 4,532 $18,397 $ 5,555 $14,715 $ 3,050 $ 2,490 $ 48,739
Gross profit.....................
Restructuring and asset
impairment charge.............. -- -- -- 251 1,926 13,825 16,002
Depreciation and amortization.... 1,616 4,026 2,001 4,000 447 12,600 24,690
Operating income (loss).......... (798) (4,558) (550) (5,704) (3,675) (53,265) (68,550)
UNCONSOLIDATED JOINT VENTURES
Revenues......................... $ 49,172 $25,012 $27,616 $ 2,195 $ 11,093 -- $115,088
Depreciation and amortization.... 18,004 3,264 9,232 244 581 -- 31,325
Operating income (loss).......... 2,027 (1,747) 697 (119) (485) -- 373
Net income (loss)................ (9,540) (8,701) (3,369) (145) (1,026) -- (22,781)
Equity in income (losses) of
unconsolidated investees....... (6,128) (15,021) 329 (153) (478) -- (21,451)
Loss on disposition of
business....................... (243)
Foreign currency loss............ (4,126)
Minority interest................ 712
Interest expense.................
Interest income..................
Income tax expense...............
Discontinued operations..........
Net loss.........................
Capital expenditures............. 3,287
Assets at December 31, 1999...... 537,279
<CAPTION>
COMMUNICATIONS
GROUP- CORPORATE
CHINA SNAPPER HEADQUARTERS CONSOLIDATED
-------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
COMBINED
Revenues.........................
Restructuring and asset
impairment charge..............
Depreciation and amortization....
Operating income (loss)..........
CONSOLIDATED
Revenues......................... $ -- $216,050 $ -- $264,789
Gross profit..................... 72,373
Restructuring and asset
impairment charge.............. 45,682 -- -- 61,684
Depreciation and amortization.... 1,724 6,173 21 32,608
Operating income (loss).......... (55,861) 12,443 (6,333) (118,301)
UNCONSOLIDATED JOINT VENTURES
Revenues.........................
Depreciation and amortization....
Operating income (loss)..........
Net income (loss)................
Equity in income (losses) of
unconsolidated investees....... (848) -- -- (22,299)
Loss on disposition of
business....................... -- -- -- (243)
Foreign currency loss............ -- -- -- (4,126)
Minority interest................ 26,226 -- -- 26,938
Interest expense................. (17,265)
Interest income.................. 7,304
Income tax expense............... (1,215)
Discontinued operations.......... (12,776)
--------
Net loss......................... $(141,983)
========
Capital expenditures............. 33 2,473 -- $ 5,793
Assets at December 31, 1999...... 66,451 118,259 54,865 $776,854
</TABLE>
F-44
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. BUSINESS SEGMENT DATA (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP--EASTERN EUROPE AND
THE REPUBLICS OF THE FORMER SOVIET UNION
--------------------------------------------------------------------------------------
WIRELESS FIXED CABLE RADIO SEGMENT
TELEPHONY TELEPHONY TELEVISION BROADCASTING PAGING HEADQUARTERS TOTAL
--------- --------- ---------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues......................... $ 22,091 $33,466 $31,440 $19,215 $ 20,426 $ 2,279 $128,917
Depreciation and amortization.... 9,384 3,027 13,597 1,440 3,161 5,784 36,393
Operating income (loss).......... (5,665) 4,875 (5,212) 1,046 (19,999) (87,519) (112,474)
CONSOLIDATED
Revenues......................... $ -- $ 3,200 $ 3,444 $17,081 $ 4,204 $ 2,279 $ 30,208
Gross profit.....................
Asset impairment charge.......... -- -- -- -- 6,280 34,037 40,317
Depreciation and amortization.... -- 481 1,541 1,228 1,591 5,784 10,625
Operating income (loss).......... -- (186) (1,475) 1,171 (20,632) (87,519) (108,641)
UNCONSOLIDATED JOINT VENTURES
Revenues......................... $ 22,091 $30,266 $27,996 $ 2,134 $ 16,222 $ -- $ 98,709
Depreciation and amortization.... 9,384 2,546 12,056 212 1,570 -- 25,768
Operating income (loss).......... (5,665) 5,061 (3,737) (125) 633 -- (3,833)
Net income (loss)................ (12,821) 1,618 (8,985) (221) (3,384) -- (23,793)
Equity in income (losses) of
unconsolidated investees....... (5,867) 201 (3,877) (108) (7,460) -- (17,111)
Gain on disposition of business,
net............................ 5,527
Foreign currency loss............ (137)
Minority interest................ 1,527
Interest expense.................
Interest income..................
Income tax benefit...............
Discontinued operations..........
Net loss.........................
Capital expenditures............. 7,338
Assets at December 31, 1998...... 196,677
<CAPTION>
COMMUNICATIONS
GROUP- CORPORATE
CHINA SNAPPER HEADQUARTERS CONSOLIDATED
-------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
COMBINED
Revenues.........................
Depreciation and amortization....
Operating income (loss)..........
CONSOLIDATED
Revenues......................... $ -- $210,084 $ -- $240,292
Gross profit..................... 62,690
Asset impairment charge.......... -- -- -- 40,317
Depreciation and amortization.... 3,226 6,728 9 20,588
Operating income (loss).......... (14,504) (7,607) 896 (129,856)
UNCONSOLIDATED JOINT VENTURES
Revenues......................... $ 3,483
Depreciation and amortization.... 2,662
Operating income (loss).......... (660)
Net income (loss)................ (3,567)
Equity in income (losses) of
unconsolidated investees....... (1,040) -- -- (18,151)
Gain on disposition of business,
net............................ -- -- -- 5,527
Foreign currency loss............ -- -- -- (137)
Minority interest................ 8,331 -- -- 9,858
Interest expense................. (16,331)
Interest income.................. 12,746
Income tax benefit............... 358
Discontinued operations.......... 12,316
--------
Net loss......................... $(123,670)
========
Capital expenditures............. 155 3,907 -- $ 11,400
Assets at December 31, 1998...... 139,726 132,647 140,591 $609,641
</TABLE>
F-45
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. BUSINESS SEGMENT DATA (CONTINUED)
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP--EASTERN EUROPE AND
THE REPUBLICS OF THE FORMER SOVIET UNION
--------------------------------------------------------------------------------------
WIRELESS FIXED CABLE RADIO SEGMENT
TELEPHONY TELEPHONY TELEVISION BROADCASTING PAGING HEADQUARTERS TOTAL
--------- --------- ---------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED
Revenues......................... $ 2,587 $34,870 $23,314 $16,015 $ 12,999 $ 1,885 $ 91,670
Depreciation and amortization.... 2,380 2,268 9,648 699 1,630 4,906 21,531
Operating income (loss).......... (6,761) 13,919 (6,831) 4,182 (3,905) (39,440) (38,836)
CONSOLIDATED
Revenues......................... $ -- $ 598 $ 1,902 $13,549 $ 3,318 $ 1,885 $ 21,252
Gross profit.....................
Depreciation and amortization.... -- 89 791 607 790 4,906 7,183
Operating income (loss).......... -- 145 (1,953) 3,935 (4,084) (39,440) (41,397)
UNCONSOLIDATED JOINT VENTURES
Revenues......................... $ 2,587 $34,272 $21,412 $ 2,466 $ 9,681 $ -- $ 70,418
Depreciation and amortization.... 2,380 2,179 8,857 92 840 -- 14,348
Operating income (loss).......... (6,761) 13,774 (4,878) 247 179 -- 2,561
Net income (loss)................ (8,129) 9,977 (9,875) 121 (1,318) -- (9,224)
Equity in income (losses) of
unconsolidated investees....... (2,027) 2,608 (7,212) 159 (761) -- (7,233)
Foreign currency gain (loss)..... (770)
Minority interest................ 561
Interest expense.................
Interest income..................
Income tax benefit...............
Discontinued operations..........
Extraordinary items..............
Net income.......................
Capital expenditures............. 4,429
Assets at December 31, 1997...... 227,679
<CAPTION>
COMMUNICATIONS
GROUP- CORPORATE
CHINA SNAPPER HEADQUARTERS CONSOLIDATED
-------------- -------- ------------ ------------
<S> <C> <C> <C> <C>
COMBINED
Revenues.........................
Depreciation and amortization....
Operating income (loss)..........
CONSOLIDATED
Revenues......................... $ -- $183,076 $ -- $204,328
Gross profit..................... 59,080
Depreciation and amortization.... 2,566 6,973 12 16,734
Operating income (loss).......... (17,871) (15,246) (5,561) (80,075)
UNCONSOLIDATED JOINT VENTURES
Revenues......................... $ 1,422
Depreciation and amortization.... 1,179
Operating income (loss).......... (187)
Net income (loss)................ (1,982)
Equity in income (losses) of
unconsolidated investees....... (861) -- (45,056) (53,150)
Foreign currency gain (loss)..... 56 -- -- (714)
Minority interest................ 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
========
Capital expenditures............. 403 5,619 -- $ 10,451
Assets at December 31, 1997...... 118,758 167,858 274,977 $789,272
</TABLE>
F-46
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. BUSINESS SEGMENT DATA (CONTINUED)
Information about the Communications Group's operations in different geographic
locations for 1999, 1998, and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
COUNTRY ASSETS REVENUES ASSETS REVENUES ASSETS REVENUES
- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Austria................................... $ -- $ 537 $ 1,049 $ 802 $ 6,710 $ 179
Azerbaijan................................ 3,274 -- 5,172 -- -- --
Belarus................................... 6,985 212 2,934 -- 2,135 --
Czech Republic............................ 3,117 1,459 3,527 912 2,986 220
Estonia................................... 1,636 731 2,026 1,008 4,943 667
Georgia................................... 19,372 371 24,412 180 18,911 --
Germany................................... 1,555 142 4,941 114 5,038 36
Hungary................................... 5,469 6,653 6,288 6,799 8,154 8,477
Indonesia................................. -- -- -- -- 20 --
Kazakhstan................................ 63,432 4,318 7,162 -- 6,840 --
Krgystan.................................. 1,668 11 -- -- -- --
Latvia.................................... 14,029 632 14,219 668 19,786 --
Lithuania................................. 1,643 1,103 2,141 610 2,375 296
Moldova................................... 4,147 -- 4,896 -- 4,673 --
People's Republic of China (1)............ 66,451 -- 139,726 -- 118,758 --
Portugal.................................. -- -- -- -- 6,581 598
Romania................................... 10,470 4,814 6,115 4,534 9,412 4,079
Russia.................................... 256,304 23,793 17,676 7,905 4,601 3,406
Ukraine................................... 975 721 3,640 87 -- --
United Kingdom............................ 226 -- 1,568 3,492 11,463 543
United States (2)......................... 137,765 3,242 83,675 3,097 107,883 2,751
Uzbekistan................................ 5,212 -- 5,236 -- 5,168 --
-------- ------- -------- ------- -------- -------
$603,730 $48,739 $336,403 $30,208 $346,437 $21,252
======== ======= ======== ======= ======== =======
</TABLE>
- ------------------------
(1) The Communications Group is dissolving four of its China joint ventures
pursuant to the termination of these ventures' cooperation contracts with
China Unicom. For the year ended December 31, 1999, the Company wrote down
$45.7 million of the goodwill associated with these telecommunications
ventures.
(2) Includes goodwill of $123.6 million, $54.5 million and $89.0 million at
December 31, 1999, 1998, and 1997, respectively.
All of the Company's remaining assets and substantially all remaining revenue
relate to operations in the United States.
13. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION
ACCOUNTS RECEIVABLE
The total allowance for doubtful accounts at December 31, 1999 and 1998 was
$2.9 million and $2.2 million, respectively.
F-47
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
INVENTORIES
Inventories consist of the following as of December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Snapper:
Raw materials........................................... $11,346 $ 8,388
Finished goods.......................................... 40,380 55,488
------- -------
51,726 63,876
LIFO reserve............................................ -- (1,660)
------- -------
51,726 62,216
======= =======
Telecommunications:
Pagers.................................................. 152 --
Telephony............................................... 2,934 --
Cable................................................... 397 561
------- -------
3,483 561
------- -------
55,209 $62,777
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1999 and 1998 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Land..................................................... $ 1,441 $ 1,224
Buildings and improvements............................... 14,171 7,274
Machinery and equipment.................................. 202,324 41,263
Leasehold improvements................................... 1,956 967
Construction in progress................................. 2,606 --
-------- -------
222,498 50,728
Less: Accumulated depreciation and amortization.......... 31,480 14,661
-------- -------
$191,018 $36,067
======== =======
</TABLE>
F-48
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
INTANGIBLE ASSETS
Intangible assets at December 31, 1999 and 1998 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Goodwill................................................ $195,661 $166,673
Licenses................................................ 98,957 12,765
Workforce in place...................................... 2,259 --
Customer lists.......................................... 2,899 --
Broadcast rights and other.............................. 2,821 780
-------- --------
302,597 180,218
Less: Accumulated amortization.......................... 28,572 20,688
-------- --------
$274,025 $159,530
======== ========
</TABLE>
The Company has reviewed the amortization periods for its goodwill and other
intangibles associated with licenses for its operations in Eastern Europe and
the republics of the former Soviet Union and has revised these amortization
periods from 25 years to 10 years commencing in the quarter ending
September 30, 1999. The change in estimate has been accounted for prospectively
and will result in additional annual amortization expense of approximately
$4.4 million. In addition, as discussed more fully in note 4, as a result of the
termination of its telecommunications joint ventures in China the Company wrote
off $45.7 million of goodwill.
ACCRUED EXPENSES
Accrued expenses at December 31, 1999 and 1998 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued salaries and wages................................ $ 5,148 $ 4,812
Accrued taxes............................................. 11,944 3,309
Accrued interest.......................................... 1,507 1,696
Self-insurance reserves................................... 19,822 23,311
Accrued warranty costs.................................... 4,831 4,420
Accrued settlement costs.................................. 4,632 --
Accrued restructuring costs............................... 7,328 --
Other..................................................... 30,315 25,781
------- -------
$85,527 $63,329
======= =======
</TABLE>
SELF-INSURANCE RESERVES
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 $6.6 million reduction in the reserve at
December 31, 1998.
F-49
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
RESEARCH AND DEVELOPMENT AND ADVERTISING COSTS
Research and development costs for the years ended December 31, 1999, 1998 and
1997 were $3.0 million, $3.0 million and $3.8 million, respectively. The
Company's advertising costs for the years ended December 31, 1999, 1998, and
1997 were $24.9 million, $24.9 million, and $19.8 million, respectively.
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, 1999, 1998, and 1997 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, 1999:
Foreign currency translation adjustments..... $ 2,098 $ -- $ 2,098
Minimum pension liability.................... 608 -- 608
------- ------ -------
Other comprehensive income................... $ 2,706 $ -- $ 2,706
======= ====== =======
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) $1,413 $(2,526)
Minimum pension liability.................... (1,238) 433 (805)
------- ------ -------
Other comprehensive loss..................... $(5,177) $1,846 $(3,331)
======= ====== =======
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended
December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for:
Interest......................................... $12,665 $16,482 $22,434
======= ======= =======
Taxes............................................ $ 2,324 $ 2,091 $26,200
======= ======= =======
</TABLE>
Interest expense includes amortization of debt discount of $4.5 million and
$1.7 million for the years ended December 31, 1999 and 1997, respectively.
F-50
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company is obligated under various operating and capital leases. Total rent
expense amounted to $5.8 million, $5.8 million and $4.7 million for the years
ended December 31, 1999, 1998 and 1997, respectively. Plant, property and
equipment included capital leases of $1.4 million and $2.4 million, and related
accumulated amortization of $285,000 and $873,000, at December 31, 1999 and
1998, respectively.
Minimum rental commitments under non-cancelable leases and supplier financing
are set forth in the following table (in thousands):
<TABLE>
<CAPTION>
CAPITAL LEASES
AND
YEAR SUPPLIER FINANCING OPERATING LEASES
- ---- ------------------ ----------------
<S> <C> <C>
2000......................................... $ 5,796 $ 6,289
2001......................................... 3,241 4,179
2002......................................... 1,746 2,631
2003......................................... 999 1,841
2004......................................... 395 1,184
Thereafter................................... -- 2,008
------- -------
Total........................................ 12,177 $18,132
=======
Less: amount representing interest........... 1,163
-------
Present value of future minimum lease
payments................................... $11,014
=======
</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, 1999 under such contracts is approximately $4.6 million.
The Company pays a management fee to Metromedia for certain general and
administrative services provided by Metromedia personnel. Such management fee
amounted to $3.8 million, $3.5 million, and $3.3 million for the years ended
December 31, 1999, 1998 and 1997, respectively. The management fee commitment
for the year ended December 31, 2000 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, 1999, non-cancelable commitments under these
agreements amounted to approximately $7.9 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 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, the third-party financial institution can require the Company to
repurchase new and unused equipment from them, if they acquire inventory through
a dealer default and the inventory is not able to be sold to another dealer. At
December 31, 1999, there was approximately $95.0 million outstanding under this
floor-plan financing arrangement. The Company guarantees the payment obligation
of Snapper under this agreement to the third party financing company.
F-51
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
CONTINGENCIES
RISKS ASSOCIATED WITH THE COMMUNICATIONS GROUP'S INVESTMENTS
The ability of the Communications Group and its joint ventures and subsidiaries
(including PLD Telekom Inc.) to establish profitable operations is subject to,
among other things, significant political, economic and social risks inherent in
doing business in emerging markets such as Eastern Europe, the republics of the
former Soviet Union and China. These include matters arising out of government
policies, economic conditions, imposition of or changes in government
regulations or policies, imposition of or changes to taxes or other similar
charges by government bodies, exchange rate fluctuations and controls, civil
disturbances, deprivation or unenforceability of contractual rights, and taking
of property without fair compensation.
During 1998, and continuing in 1999, 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.
Some of the Communications Group's subsidiaries and joint ventures operate in
countries where the inflation rate is extremely high. 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 hyperinflationary levels for some years and as a result, the currency
has essentially lost all intrinsic value.
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 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.
The value of the currencies in the countries in which the Communications Group
operates tends to fluctuate, sometimes significantly. For example, during 1998
and 1999, the value of the Russian Rouble was under considerable economic and
political pressure and has suffered significant declines against the U.S. dollar
and other currencies. In addition, in 1999 local currency devaluations in
Uzbekistan, Kazakhstan and Georgia, in addition to weakening of local currencies
in Austria and Germany, had an adverse effect on the Communications Group's
ventures in these countries. 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.
F-52
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
During 1997 and 1998, the Company made several investments in telecommunications
joint ventures in China through its majority-owned subsidiary, Asian American
Telecommunications Corporation. These ventures were terminated in late 1999 and
agreements were entered into in December 1999 terminating the joint ventures'
further cooperation with China Unicom. Under the terms of the settlement
contracts, the four joint ventures will each receive cash amounts in RMB from
China Unicom in full and final payment for the termination of their cooperation
contracts with China Unicom.
The Company's current estimate of the total amount it will ultimately receive
from the four terminated joint ventures is $90.1 million (at December 31, 1999
exchange rates) of which $29.3 million has been received. Full distribution of
all expected funds must await the Chinese government's recognition and approval
of the completion of formal dissolution proceedings for the four joint ventures.
This is expected by mid-2000 and the Company anticipates no problems in
ultimately dissolving the joint ventures. However, some variance from the
Company's current estimates of the amounts finally distributed to Asian American
Telecommunications may arise due to settlement of the joint ventures' tax
obligations in China and exchange rate fluctuations. The Company cannot assure
at this time that this variance will not be material.
The Communication Group's Huaxia JV is established as a sino-foreign equity
joint venture between Asian American Telecommunications and All Warehouse
Commodity Electronic Commerce Information Development Co., Ltd. The Huaxia JV
does not have any contractual relationship with China Unicom and is engaged in
business fundamentally different from that of the Communication Group's joint
ventures cooperating with China Unicom. Computer and software services such as
offered by the Huaxia JV are subject to regulations different from those applied
to telecommunications in China. The Communications Group believes that the
fee-for-services arrangement of Huaxia JV and the lines of business undertaken
by the joint venture do not constitute foreign involvement in telecommunications
activities, which are at the center of certain Chinese authorities' actions
against the Communication Group's joint telecommunications projects with China
Unicom.
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, 1999, several licenses held by the Communications Group had
expired, although the Communications Group has been permitted to continue
operations while the
F-53
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
decision on reissuance is pending. Certain other licenses held or used by the
Communications Group's joint ventures will expire during 2000. The Company's
joint ventures will apply for renewals of their licenses.
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.
As part of its ongoing strategic review, in late 1999 the Company reevaluated
the operations of Caspian American in order to ascertain the requirement to
account for impairment losses. In view of the low quantity of potential
customers in the region in which the business operates and limited scope for
growth, it was determined that an impairment loss of $9.9 million was required
in 1999 relating to the Company's investment in Caspian American. The venture
has developed a revised operating plan to stabilize its operations and minimize
future funding requirements until potential restructuring options have been
fully explored.
As part of its investment in Tyumenruskom announced in November 1998, the
Company 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 has purchased a digital advanced mobile
phone or DAMPS system cellular system from Ericsson in order to provide fixed
and mobile cellular telephone in the regions of Tyumen and Tobolsk, Russian
Federation. The Communications Group has a $1.7 million equity contribution to
Tyumenruskom and has agreed 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.
Following a reevaluation of the venture's operations as part of the Company's
ongoing strategic reviews, in 1999, $3.8 million of the Company's investment in
this venture was recorded as an impairment change in view of its low
profitability and limited scope for improvement and $4.3 million was accrued for
in connection with a payment guarantee.
CREDIT CONCENTRATIONS
The Communications Group's trade receivables do not represent significant
concentrations of credit risk at December 31, 1999, 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, 1999 and 1998.
F-54
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Certain customers account for a significant portion of the total revenues of
certain of the Communications Group's telephony operations and the loss of these
customers would materially and adversely affect their results of operations.
In addition, several of the Communications Group's customers, interconnect
parties or local operators experience liquidity problems from time to time. The
Group's dependence on these parties may make it vulnerable to their liquidity
problems, both in terms of pressure for financial support for the expansion of
their operations, and in its ability to achieve prompt settlement of accounts.
FINANCIAL GUARANTEES
The Company has guaranteed certain indebtedness of one of the Company's wireless
telecommunications joint ventures. The total guarantee is for $25.0 million of
which $19.1 million has been borrowed at December 31, 1999.
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.
LETTERS OF CREDIT
At December 31, 1999 the Company had $20.1 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 1999 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, 1999. As of
F-55
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
December 31, 1999, the Company had a remaining reserve of approximately
$2.1 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 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 $59,000 will be adequate to cover any further costs.
F-56
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods in 1999 and 1998 is
presented below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST QUARTER OF SECOND QUARTER OF
------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues...................................... $ 67,642 $ 60,219 $ 65,005 $ 74,239
Operating loss................................ (9,746) (17,143) (6,368) (23,193)
Equity in losses of unconsolidated
investees................................... (1,685) (5,500) (4,248) (2,145)
Loss from continuing operations attributable
to common stockholders (a).................. (15,022) (26,715) (15,359) (25,941)
Income (loss) from discontinued operations.... -- -- -- 5,267 (b)
Net loss attributable to common
stockholders................................ (15,022) (26,715) (15,359) (20,674)
Income (loss) per common share--Basic:
Continuing operations....................... $ (0.22) $ (0.39) $ (0.22) $ (0.38)
Discontinued operations..................... $ -- $ -- $ -- $ 0.08
Extraordinary items......................... $ -- $ -- $ -- $ --
Net loss.................................... $ (0.22) $ (0.39) $ (0.22) $ (0.30)
<CAPTION>
THIRD QUARTER OF FOURTH QUARTER OF
------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues...................................... $ 52,934 $ 55,052 $ 79,208 $ 50,782
Operating loss................................ (69,467) (26,004) (32,720)(c)(d) (63,516)(c)
Equity in losses of unconsolidated
investees................................... (909) (1,293) (15,457)(c) (9,213)(c)
Loss from continuing operations attributable
to common stockholders...................... (55,299) (23,101) (58,535) (75,237)
Loss from discontinued operations............. (12,776) -- -- 7,049 (e)
Net loss attributable to common
stockholders................................ (68,075) (23,101) (58,535) (68,188)
Income (loss) per common share--Basic:
Continuing operations....................... $ (0.80) $ (0.33) $ (0.65) $ (1.09)
Discontinued operations..................... $ (0.18) $ -- $ -- $ 0.10
Extraordinary items......................... $ -- $ -- $ -- $ --
Net loss.................................... $ (0.98) $ (0.33) $ (0.65) $ (0.99)
</TABLE>
- ------------------------
(a) 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.
(b) 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.
(c) 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 charge and write down was
$68.9 million in 1999 and $49.9 million in 1998.
F-57
<PAGE>
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(d) Following the acquisition of PLD Telekom on September 30, 1999, the Company
recorded a restructuring charge of $8.4 million.
(e) In 1997, the Company consummated the entertainment group sale. 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.
F-58
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
METROMEDIA INTERNATIONAL GROUP, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues.................................................... $ -- $ -- $ --
Cost and expenses:
Selling, general and administrative....................... 6,313 (905) 5,549
Depreciation and amortization............................. 21 9 12
--------- --------- ---------
Operating income (loss)..................................... (6,334) 896 (5,561)
Interest income (expense), net.............................. 14,266 14,926 2,156
Equity in losses of subsidiaries............................ (137,139) (153,423) (88,581)
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............................. (129,207) (135,986) (130,901)
Discontinued operations:
Gain (loss) on disposal................................... (12,776) 12,316 266,294
Equity in losses of discontinued operations............... -- -- (32,258)
--------- --------- ---------
Income (loss) before extraordinary items.................... (141,983) (123,670) 103,135
Extraordinary item:
Loss and equity in on early extinguishment of debt........ -- -- (14,692)
--------- --------- ---------
Net income (loss)........................................... (141,983) (123,670) 88,443
Cumulative convertible preferred stock dividend
requirement............................................... (15,008) (15,008) (4,336)
--------- --------- ---------
Net income (loss) attributable to common stockholders....... $(156,991) $(138,678) $ 84,107
========= ========= =========
Weighted average number of common shares--Basic............. 75,232 68,955 66,961
========= ========= =========
Income (loss) per common share--Basic:
Continuing operations..................................... $ (1.92) $ (2.19) $ (2.02)
Discontinued operations................................... $ (0.17) $ 0.18 $ 3.50
Extraordinary items....................................... $ -- $ -- $ (0.22)
Net income (loss)......................................... $ (2.09) $ (2.01) $ 1.26
========= ========= =========
</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,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 33,978 $ 128,219
Other assets.............................................. 6,907 11,384
----------- ----------
Total current assets...................................... 40,885 139,603
Investment in and receivables from subsidiaries............. 538,574 13,979
Other assets................................................ 13,979 989
----------- ----------
Total assets.............................................. $ 593,438 $ 466,311
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,649 $ 2,728
Accrued expenses.......................................... 31,903 37,804
----------- ----------
Total current liabilities................................. 37,552 40,532
Long-term debt.............................................. 167,365 --
Other long term liabilities................................. 3,586 239
----------- ----------
Total liabilities......................................... 208,503 40,771
Stockholders' equity
Preferred stock........................................... 207,000 207,000
Common stock.............................................. 93,285 69,119
Paid-in surplus........................................... 1,102,308 1,012,794
Accumulated deficit....................................... (1,014,284) (857,293)
Accumulated other comprehensive loss...................... (3,374) (6,080)
----------- ----------
Total stockholders' equity................................ 384,935 425,540
----------- ----------
Total liabilities and stockholders' equity................ $ 593,438 $ 466,311
=========== ==========
</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>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $(141,983) $(123,670) $ 88,443
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
(Gain) loss on disposal................................... 12,776 (12,316) (266,294)
Equity in losses from discontinued operations............. -- -- 32,258
Loss and equity in loss on early extinguishment of debt... -- -- 14,692
Equity in losses and writedown of investment in RDM Sports
Group, Inc.............................................. -- -- 45,056
Equity in losses of subsidiaries.......................... 137,139 153,423 88,581
Changes in cumulative translation adjustment of
subsidiaries............................................ 608 (1,810) (2,526)
Amortization of debt discount............................. 4,281 -- 1,711
Other..................................................... 1,691 (6,556) --
Changes in operating assets and liabilities:
(Increase) decreases in other current assets.............. 4,477 (89) 134
(Increase) decrease in other assets....................... (4,490) 934 619
Increase (decrease) in accounts payable, accrued expenses
and other liabilities................................... (12,610) (10,423) (41,804)
--------- --------- ---------
Cash provided by (used in) operating activities....... 1,889 (507) (39,130)
--------- --------- ---------
Investing activities:
Net proceeds from sale of discontinued operations......... -- 57,298 276,607
Investment in RDM Sports Group, Inc....................... -- -- (15,000)
(Investment in) distributions from subsidiaries........... (4,815) 14,533 --
Due from subsidiary....................................... (67,906) (153,926) (143,221)
Purchase of short-term investments........................ -- -- (100,000)
Deposit on investment purchase option..................... (8,500) -- --
Proceeds from sale of short-term investments.............. -- 100,000 --
--------- --------- ---------
Cash provided by (used in) investing activities....... (81,221) 17,905 18,386
--------- --------- ---------
Financing activities:
Payments on notes and subordinated debt................... -- (1,410) (156,524)
Proceeds from issuance of stock........................... 99 5,347 217,595
Preferred stock dividends paid............................ (15,008) (15,008) (3,709)
Due to (from) discontinued operations..................... -- -- 1,419
--------- --------- ---------
Cash provided by (used in) financing activities....... (14,909) (11,071) 58,781
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...... (94,241) 6,327 38,037
Cash and cash equivalents at beginning of year............ 128,219 121,892 83,855
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 33,978 $ 128,219 $ 121,892
========= ========= =========
</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, 1999, 1998, AND 1997
(A) The accompanying parent company financial statements reflect only the
operations of MMG for the years ended December 31, 1999, 1998 and 1997 and
the equity in losses of subsidiaries and discontinued operations for the
years ended December 31, 1999, 1998, and 1997.
(B) The principal repayments of the Registrant's borrowings under debt
agreements at December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000 - 2006............. $ --
2007.................... $210,600
</TABLE>
For additional information regarding the Registrant's and subsidiaries'
borrowings under debt agreements and other debt, see note 5 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, 1999............. $2,191 $1,264 $ 61 $ (653) $2,863
====== ====== ========= ======= ======
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
====== ====== ========= ======= ======
</TABLE>
S-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
-----------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------------- --------------------------------------- -----------------------------------------
<C> <S> <C>
2.2 Agreement and Plan of Reorganization Quarterly Report on Form 10-Q for the
dated as of July 20, 1994 by and among, three months ended June 30, 1994, Exhibit
The Actava Group Inc., Diversified 99.1
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 Current Report on Form 8-K for event
of Merger dated as of September 27, occurring on September 27, 1995, Exhibit
1995 by and among The Actava Group 99(a)
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 Current Report on Form 8-K dated January
of January 31, 1996 by and among 31, 1996, Exhibit 99.1
Metromedia International 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.
2.6 Agreement and Plan of Merger, dated Current Report on Form 8-K dated May 19,
as of May 18, 1999, among Metromedia 1999
International Group, Inc., Moscow
Communications, Inc. and PLD Telekom
Inc.
3.1 Restated Certificate of Incorporation Registration Statement on Form S-3
of Metromedia International Group, Inc. (Registration No. 33-63853), Exhibit 3.1
3.2 Restated By-laws of Metromedia Registration Statement on Form S-3
International Group, Inc. (Registration No. 33-6353), Exhibit 3.2
4.1 Indenture dated as of August 1, 1973, Application of Form T-3 for Qualification
with respect to 9 1/2% Subordinated of Indenture under the Trust Indenture
Debentures due August 1, 1998, between Act of 1939 (File No. 22-7615), Exhibit
The Actava Group Inc. and Chemical 4.1
Bank, as Trustee.
4.2 Agreement among The Actava Group, Inc., Registration Statement on Form S-14
Chemical Bank and Manufacturers Hanover (Registration No. 2-81094), Exhibit 4.2
Trust Company, 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>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
-----------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------------- --------------------------------------- -----------------------------------------
<C> <S> <C>
4.3 Instrument of registration, appointment Annual Report on Form 10-K for the year
and acceptance dated as of June 9, 1986 ended December 31, 1986, Exhibit 4.3
among The 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, Registration Statement on Form S-7
with respect to 9 7/8% Senior (Registration No. 2-58317), Exhibit 4.4
Subordinated Debentures 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., Registration Statement on Form S-14
The Chase Manhattan Bank, N.A. and (Registration No. 2-281094), Exhibit 4.5
United States Trust 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, Post-Effective Amendment No. 1 to
Inc. and First National City Bank, Application on Form T-3 for Qualification
dated October 1, 1974, with respect to of Indenture Under The Trust Indenture
the 10% Subordinated Debentures, due Act of 1939 (File No. 22-8076), Exhibit
October 1, 1999. 4.6
4.7 Agreement among National Industries, Registration Statement on Form S-14
Inc., The Actava Group Inc., Citibank, (Registration No. 2-81094), Exhibit 4.7
N.A., and Marine 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 Registration Statement on Form S-7
Actava Group Inc., National Industries, (Registration No. 2-60566), Exhibit 4.8
Inc. and Marine 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 Annual Report on Form 10-K for the year
with respect to 6 1/2% Convertible ended December 31, 1987, Exhibit 4.9
Subordinated Debentures due August 4,
2002, between The Actava Group Inc. and
Chemical Bank, as Trustee.
4.10 Indenture, dated as of September 30, Current Report on Form 8-K for event
1999, between Metromedia International occurring on September 30, 1999
Group, Inc. and U.S. Bank National
Association as Trustee.
10.1 1982 Stock Option Plan of The Actava Proxy Statement dated March 31, 1982,
Group Inc. Exhibit A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
-----------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------------- --------------------------------------- -----------------------------------------
<C> <S> <C>
10.2 1989 Stock Option Plan of The Actava Proxy Statement dated March 31, 1989,
Group Inc. Exhibit A
10.3 1969 Restricted Stock Plan of The Annual Report on Form 10-K for the year
Actava Group Inc. ended December 31, 1990, Exhibit 10.3
10.4 1991 Non-Employee Director Stock Option Annual Report on Form 10-K for the year
Plan. ended December 31, 1991, Exhibit 10.4
10.5 Amendment to 1991 Non-Employee Director Annual Report on Form 10-K for the year
Stock Option Plan. ended December 31, 1992, Exhibit 10.5
10.6 Snapper Power Equipment Profit Sharing Annual Report on Form 10-K for the year
Plan. ended December 31, 1987, Exhibit 10.6
10.7 Retirement Plan executed November 1, Annual Report on Form 10-K for the year
1990, as amended effective January 1, ended December 31, 1990, Exhibit 10.7
1989.
10.8 Supplemental Retirement Plan of The Annual Report on Form 10-K for the year
Actava Group Inc. ended December 31, 1983, Exhibit 10.8
10.9 Supplemental Executive Medical Annual Report on Form 10-K for the year
Reimbursement Plan. ended December 31, 1990, Exhibit 10.9
10.10 Amendment to Supplemental Retirement Annual Report on Form 10-K for the year
Plan of The Actava Group Inc., ended December 31, 1991, Exhibit 10.10
effective April 1, 1992.
10.11 1992 Officer and Director Stock Annual Report on Form 10-K for the year
Purchase Plan. ended December 31, 1991, Exhibit 10.11
10.12 Form of Restricted Purchase Agreement Annual Report on Form 10-K for the year
between certain officers of The Actava ended December 31, 1991, Exhibit 10.12
Group Inc. and The Actava Group Inc.
10.14 Form of Indemnification Agreement Annual Report on Form 10-K for the year
between Actava and certain of its ended December 31, 1993, Exhibit 10.14
directors and executive officers.
10.15 Employment Agreement between The Actava Current Report on Form 8-K dated April
Group Inc. and John D. Phillips dated 19, 1994, Exhibit 10.15
April 19, 1994.
10.16 First Amendment to Employment Agreement Annual Report on Form 10-K for the year
dated November 1, 1995 between ended December 31, 1995, Exhibit 10.16
Metromedia International Group and John
D. Phillips.
10.17 Option Agreement between The Actava Current Report on Form 8-K dated April
Group Inc. and John D. Phillips dated 19, 1994, Exhibit 10.17
April 19, 1994.
10.18 Registration Rights Agreement among The Current Report on Form 8-K dated April
Actava Group Inc., Renaissance Partners 19, 1994, Exhibit 10.18
and John D. Phillips dated April 19,
1994.
10.19 Shareholders Agreement dated as of Annual Report on Form 10-K for the year
December 6, 1994 among The Actava Group ended December 31, 1994, Exhibit 10.19
Inc., Roadmaster, Henry Fong and Edward
Shake.
10.20 Registration Rights Agreement dated as Annual Report on Form 10-K for the year
of December 6, 1994 between The Actava ended December 31, 1994, Exhibit 10.20
Group Inc. and Roadmaster.
10.21 Environmental Indemnity Agreement dated Annual Report on Form 10-K for the year
as of December 6, 1994 between The ended December 31, 1994, Exhibit 10.21
Actava Group Inc. and Roadmaster.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
-----------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------------- --------------------------------------- -----------------------------------------
<C> <S> <C>
10.22 Lease Agreement dated October 21, 1994 Annual Report on Form 10-K for the year
between JDP Aircraft II, Inc. and The ended December 31, 1994, Exhibit 10.22
Actava Group Inc.
10.23 Lease Agreement dated as of October 4, Quarterly Report on Form 10-Q for the
1995 between JDP Aircraft II, Inc. and quarter ended September 30, 1995, Exhibit
The Actava Group Inc. 10.23
10.37 Management Agreement dated November 1, Annual Report on Form 10-K for the year
1995 between Metromedia Company and ended December 31, 1995, Exhibit 10.37
Metromedia International Group, Inc.
10.38 The Metromedia International Group, Proxy Statement dated August 6, 1996,
Inc. 1996 Incentive Stock Plan. Exhibit B
10.39 License Agreement dated November 1, Annual Report on Form 10-K for the year
1995 between Metromedia Company and ended December 31, 1995, Exhibit 10.39
Metromedia International Group, Inc.
10.40 MITI Bridge Loan Agreement dated Annual Report on Form 10-K for the year
February 29, 1996, among Metromedia ended December 31, 1995, Exhibit 10.40
Company and MITI
10.41 Metromedia International Quarterly Report on Form 10-Q for the
Telecommunications, Inc. 1994 Stock quarter ended March 31, 1996, Exhibit
Plan 10.41
10.42 Amended and Restated Credit Security Quarterly Report on Form 10-Q for the
and Guaranty Agreement dated as of quarter ended June 30, 1996, Exhibit
November 1, 1995, by and among Orion 10.42
Pictures Corporation, the Corporate
Guarantors' referred to herein, and
Chemical Bank, as Agent for the
Lenders.
10.43 Metromedia International Group/Motion Quarterly Report or Form 10-Q for the
Picture Corporation of America quarter ended June 30, 1996, Exhibit
Restricted Stock Plan 10.43
10.44 The Samuel Goldwyn Company Stock Awards Registration Statement on Form S-8
Plan, as amended (Registration No. 333-6453), Exhibit
10.44
10.45 Loan and Security Agreement, dated Quarterly Report on Form 10-Q for the
November 11, 1998 among Snapper, Inc. quarter ended September 30, 1998, Exhibit
the lenders named therein and Fleet 10
Capital Corporation, as agent.
10.46 Limited Guaranty Agreement dated Annual Report on Form 10-K for the year
November 11, 1998 by Metromedia ended December 31, 1998, Exhibit 10.46
International Group, Inc. in favor of
Fleet Capital Corporation.
10.47 Amendment No. 1 to License Agreement Annual Report on Form 10-K for the year
dated June 13, 1996 between Metromedia ended December 31, 1996, Exhibit 10.46
Company and Metromedia International
Group, Inc.
10.48 Amendment No. 1 to Management Agreement Annual Report on Form 10-K for the year
dated as of January 1, 1997 between ended December 31, 1996, Exhibit 10.47
Metromedia Company and Metromedia
International Group, Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
-----------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------------- --------------------------------------- -----------------------------------------
<C> <S> <C>
10.49 Amended and Restated Agreement and Plan Annual Report on Form 10-K for the year
of Merger, dated as of May 17, 1996 ended December 31, 1996, Exhibit 10.48
between 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 Annual Report on Form 10-K for the year
December 17, 1997 ended December 31, 1997, Exhibit 10.51
10.51 Voting Agreement, dated as of May 18, Current Report on Form 8-K dated May 19,
1999, among Metromedia International 1999
Group, Inc., PLD Telekom Inc., News
America Incorporated and News PLD LLC.
10.52 Registration Rights Agreement, dated as Current Report on Form 8-K dated May 19,
of May 18, 1999, among Metromedia 1999
International Group, Inc., PLD Telekom
Inc., News America Incorporated and
News PLD LLC.
10.53 Agreement to Exchange and Consent, Current Report on Form 8-K dated May 19,
dated as of May 18, 1999, entered into 1999
among Metromedia International Group,
Inc., PLD Telekom Inc. and the holders
of PLD Telekom Inc.'s outstanding 14.5%
Senior Discount Notes due 2004 and 9%
Convertible Subordinated Notes due
2006.
10.54 Note and Warrant Modification Current Report on Form 8-K dated May 19,
Agreement, dated as of May 18, 1999, 1999
among Metromedia International Group,
Inc., PLD Telekom Inc., The Travelers
Insurance Company and The Travelers
Indemnity Company.
10.55 Letter Agreement, dated as of May 18, Current Report on Form 8-K dated May 19,
1999, between Metromedia International 1999
Group, Inc. and News America
Incorporated.
10.56 Plicom Option Modification Agreement, Current Report on Form 8-K dated May 19,
dated as of May 18, 1999, by and among 1999
Metromedia International Group, Inc.,
PLD Telekom Inc., Technocom Limited,
Plicom Limited, Elite International
Limited, Mark Klabin and Boris
Antoniuk.
10.57 Elite Option Modification Agreement, Current Report on Form 8-K dated May 19,
dated as of May 18, 1999, by and among 1999
Metromedia International Group, Inc.,
PLD Telekom Inc., Technocom Limited,
Elite International Limited and Boris
Antoniuk.
10.58 Bridge Loan Agreement, dated as of Current Report on Form 8-K dated May 19,
May 18, 1999, between PLD Telekom Inc., 1999
as borrower, and Metromedia
International Group, Inc., as lender.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INCORPORATED HEREIN BY REFERENCE
-----------------------------------------
DESIGNATION OF DOCUMENT WITH WHICH EXHIBIT
EXHIBIT IN THIS WAS PREVIOUSLY FILED WITH
FORM 10-K DESCRIPTION OF EXHIBITS COMMISSION
- --------------------- --------------------------------------- -----------------------------------------
<C> <S> <C>
10.59 Pledge Agreement, dated as of May 18, Current Report on Form 8-K dated May 19,
1999, entered into between PLD Telekom 1999
Inc., as pledgor, and Metromedia
International Group, Inc., as pledgee.
11* Statement of computation of earnings
per share.
12* Ratio of earnings to fixed charges
16 Letter from Ernst & Young to the Current Report on Form 8-K dated November
Securities and Exchange Commission. 1, 1995
21 List of subsidiaries of Metromedia Annual Report on Form 10-K for the year
International Group, Inc. ended December 31, 1996, Exhibit 21
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>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Income (loss) per common share--Basic (A):
Continuing operations..................................... $(129,207) $(135,986) $(130,901)
Cumulative convertible preferred stock dividend
requirement............................................. (15,008) (15,008) (4,336)
--------- --------- ---------
Continuing operations attributable to common stock
shareholders............................................ (144,215) (150,994) (135,237)
Discontinued operations................................... (12,776) 12,316 234,036
Extraordinary item........................................ -- -- (14,692)
--------- --------- ---------
Net income (loss) attributable to common stock
shareholders............................................ $(156,991) $(138,678) $ 84,107
========= ========= =========
Weighted average common stock shares outstanding during the
period.................................................... 75,232 68,955 66,961
========= ========= =========
Income (loss) per common share--Basic:
Continuing operations..................................... $ (1.92) $ (2.19) $ (2.02)
Discontinued operations................................... (0.17) 0.18 3.50
Extraordinary items....................................... -- -- (0.22)
--------- --------- ---------
Net income (loss)......................................... $ (2.09) $ (2.01) $ 1.26
========= ========= =========
</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, 1999, 1998 and 1997, 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 DECEMBER 31,
------------------------------------------------------
1999 1998 1997 1996 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.... $(147,639) $(143,059) $(96,207) $(64,563) $(30,086)
Income distributions from less than
fifty-percent-owned joint ventures..... 776 1,964 940 300 --
--------- --------- -------- -------- --------
Adjusted loss.......................... $(146,863) $(141,095) $(95,267) $(64,263) $(30,086)
--------- --------- -------- -------- --------
FIXED CHARGES:
Interest expense, including amortization
of debt discount....................... $ 17,265 $ 16,331 $ 20,922 $ 19,090 $ 5,935
Portion of rent expense representative of
the interest factor.................... 2,219 1,934 1,572 435 303
Preferred stock divided requirement...... 15,008 15,008 4,336 -- --
--------- --------- -------- -------- --------
Total fixed charges.................... $ 34,492 $ 33,273 $ 26,830 $ 19,525 $ 6,238
--------- --------- -------- -------- --------
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, 1999, 1998, 1997, 1996 and 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, 1999, 1998, 1997, 1996 and 1995 were $146.9 million,
$141.1 million, $95.3 million, $64.3 million and $30.1 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 $500,000, $367,000 and $76,000 for the years
ended December 31, 1999, 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, 333-13763, 333-88187 and 333-95159) on Form S-8 of Metromedia
International Group, Inc. of our report dated March 29, 2000, relating to the
consolidated balance sheets of Metromedia International Group, Inc. and
subsidiaries as of December 31, 1999, and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999, and all related
financial statement schedules, which report appears in the December 31, 1999
annual report on Form 10-K of Metromedia International Group, Inc.
KPMG LLP
New York, New York
March 30, 2000
<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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 50,985
<SECURITIES> 0
<RECEIVABLES> 50,708
<ALLOWANCES> (2,863)
<INVENTORY> 55,209
<CURRENT-ASSETS> 174,689
<PP&E> 222,498
<DEPRECIATION> (31,480)
<TOTAL-ASSETS> 776,854
<CURRENT-LIABILITIES> 135,718
<BONDS> 212,569
0
207,000
<COMMON> 93,285
<OTHER-SE> 84,650
<TOTAL-LIABILITY-AND-EQUITY> 776,854
<SALES> 264,789
<TOTAL-REVENUES> 264,789
<CGS> 155,190
<TOTAL-COSTS> 383,090
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,265
<INCOME-PRETAX> (127,992)
<INCOME-TAX> (1,215)
<INCOME-CONTINUING> (129,207)
<DISCONTINUED> (12,776)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141,983)
<EPS-BASIC> (2.09)
<EPS-DILUTED> (2.09)
</TABLE>
