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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-5706
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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
of incorporation or organization) Identification No.)
ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073-2137
(Address and zip code of principal executive offices)
(201) 531-8000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common stock, $1.00 par value American Stock Exchange
Pacific Stock Exchange
7.25% Cumulative Convertible Preferred Stock American Stock Exchange
Pacific Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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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.
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant at March 24, 1998 computed by reference to the
last reported sale price of the Common Stock on the composite tape on such date
was $733,380,000.
The number of shares of Common Stock outstanding as of March 24, 1998 was
68,978,294.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be used in connection with the
Registrant's 1998 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
METROMEDIA INTERNATIONAL GROUP, INC.
Metromedia International Group, Inc. ("MMG" or "the Company") is a global
communications and media company engaged in the development and operation of a
variety of communications businesses, including cable television, AM/FM radio
broadcasting, paging, cellular telecommunications, international toll calling,
fixed telephony and trunked mobile radio, in Eastern Europe, the republics of
the former Soviet Union, (the "FSU") and the People's Republic of China
("China") and other selected emerging markets, through its Communications Group
( the "Communications Group").
The Communications Group's investments in communication businesses are made in
two primary geographic areas: Eastern Europe and the FSU, and China. In Eastern
Europe and the FSU, the Communications Group generally owns 50% or more of the
operating Joint Ventures ("Joint Ventures") in which it invests. Currently,
legal restrictions in China prohibit foreign participation in the operations or
ownership in the telecommunications sector. The Communications Group's China
Joint Ventures invest in network construction and development of telephony
networks for China United Telecommunications Incorporated ("China Unicom"). The
completed networks are operated by China Unicom. The China Joint Ventures
receive payments from China Unicom based upon distributable cash flow generated
by the networks, for a cooperation period of 15-25 years for each expansion
phase financed and developed. These payments are in return for the Joint Venture
providing financing, technical advice, consulting and other services.
Hereinafter, all references to the Communications Group's Joint Ventures relate
to the operating Joint Ventures in Eastern Europe and the FSU and the
Communications Group's Joint Ventures in China. Statistical data regarding
subscribers, population, etc. for the Joint Ventures in China relate to the
telephony networks of China Unicom.
During 1997, the Company's Communications Group experienced significant growth.
For example, aggregate subscribers to the Communications Group's Joint Ventures'
various services at the 1997 fiscal year-end was 318,826, representing a growth
of approximately 164% over the 1996 fiscal year-end total of 120,596
subscribers. The Communications Group's financial results for December 31
include the Communications Group's Joint Ventures for the 12 months ending
September 30th.
The Company also owns Snapper, Inc. ("Snapper"), which is a wholly-owned
subsidiary. The Company owned Snapper prior to the November 1 Merger (as defined
below) and the subsequent shift in the Company's business focus to a global
communications and media company. Snapper manufactures
Snapper-Registered Trademark- brand premium-priced power lawnmowers, lawn
tractors, garden tillers, snowthrowers and related parts and accessories.
In November 1995, following the consummation of the November 1 Merger, the
Company publicly announced that it was actively exploring the sale of Snapper
and as a result, for accounting purposes, Snapper was classified as an asset
held for sale and the results of operations for Snapper were not consolidated
with the Company's consolidated results of operations for the period from
November 1, 1995 through October 31, 1996. The Company has decided not to
continue to pursue its previously adopted plan to dispose of Snapper and will
actively manage Snapper to maximize its long-term value. Since November 1, 1996,
the Company has included Snapper's operating results in the consolidated results
of operations of the Company. (see "Business-Snapper").
On July 10, 1997, the Company completed the Entertainment Group Sale (as defined
below), and anticipates completing the sale of Landmark Theatre Group, Inc.
("Landmark"), in April 1998. In addition, the Company owns approximately 39% of
the outstanding common stock of RDM Sports Group, Inc. ("RDM"). On August 29,
1997, RDM and certain of its affiliates filed a voluntary bankruptcy petition
under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court of
the Northern District of Georgia. On February 18, 1998, the Office of the United
States Trustee filed a motion to appoint a
1
ITEM 1. BUSINESS (CONTINUED)
chapter 11 trustee in the United States Bankruptcy Court for the Northern
Division of Georgia. RDM and its affiliates subsequently filed a motion to
convert the chapter 11 cases to cases under chapter 7 of the Bankruptcy Code. On
February 19, 1998, the bankruptcy court granted the United States Trustee's
motion and ordered that a chapter 11 trustee be appointed. On February 25, 1998,
each of the Company's designees on RDM's Board of Directors submitted a letter
of resignation. The chapter 11 trustee is in the process of selling all of its
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 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 ("Orion") and Metromedia International Telecommunications,
Inc. ("MITI") with and into wholly-owned subsidiaries of the Company, and the
merger of MCEG Sterling Incorporated ("Sterling") with and into the Company
(collectively, the "November 1 Merger"), the Company changed its name from "The
Actava Group Inc." to "Metromedia International Group, Inc." 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 under this caption constitute
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). See "Special Note
Regarding Forward-Looking Statements" on page 49.
DESCRIPTION OF BUSINESS GROUPS
COMMUNICATIONS GROUP
The Communications Group was founded in 1990 to take advantage of the rapidly
growing demand for modern communications services in Eastern Europe and the FSU,
China and other selected emerging markets and launched its first operating
system in 1992. At December 31, 1997, the Communications Group owned interests
in and participated with partners in the management of Joint Ventures that had
44 operational systems, consisting of 9 cable television systems, 15 AM/FM radio
broadcasting stations, 11 paging systems, 1 international toll calling service,
5 trunked mobile radio systems, 2 GSM cellular telephone systems and 1 Joint
Venture that is building out an operational GSM system and providing financing,
technical assistance and consulting services to the local system operator. In
addition, the Communications Group has interests in and participates with
partners in the management of Joint Ventures that, as of December 31, 1997, had
4 pre-operational systems, consisting of 1 cable television system, 1 wireless
local loop service provider and 2 companies participating in the construction
and development of local telephone networks in China for up to 1 million lines.
The cable system launched operations in January 1998 and the Company believes
that the other three systems will be launched during 1998. The Communications
Group generally owns approximately 50% or more of the Joint Ventures in which it
invests. The Company's objective is to establish the Communications Group as a
major multiple-market provider of modern communications services in Eastern
Europe and the FSU, China and other selected emerging markets.
The Communications Group's Joint Ventures experienced significant growth in
1997. Total subscribers at the end of the 1997 fiscal year-end was 318,826
compared with 120,596 at fiscal year-end 1996, which represents an increase of
approximately 164%. The Company's financial results for December 31 include the
Group's Joint Ventures for the 12 months ending September 30th. Total combined
revenues reported by the Communications Group's consolidated and unconsolidated
Joint Ventures for the years ended December 31, 1997, 1996 and 1995 were $91.2
million, $57.2 million, and $23.9 million, respectively. The Communications
Group invested approximately $104.7 million, $52.2 million and $21.1 million
during the
2
ITEM 1. BUSINESS (CONTINUED)
years ended December 31, 1997, 1996 and 1995, respectively, in the construction
and development of its consolidated and unconsolidated Joint Ventures'
communications networks and broadcasting stations.
The following chart summarizes operating statistics by service type of both the
licensed but pre-operational and operational systems constructed by the
Communications Group's Joint Ventures:
TARGET
MARKETS POPULATION/
OPERATIONAL HOUSEHOLDS
AT (MM)(A) AGGREGATE
PRE-OPERATIONAL DECEMBER AT SUBSCRIBERS AT
MARKETS AT 31, DECEMBER 31, DECEMBER 31,
DECEMBER 31, ----------- ------------- ----------------
COMMUNICATIONS SERVICE 1997 1997 1996 1997 1996 1997 1996
- ---------------------------------------- --------------- ---- ---- ------- ---- ------- -------
Cable Television........................ 1(b) 9 9 9.5 9.5 225,525 69,118
AM/FM Radio Broadcasting................ -- 15 6 10.7 9.9 n/a n/a
Paging(c)............................... -- 11 9 89.5 89.5 57,831 44,836
Telephony:
Cellular Telecommunications............. -- 3(d) -- 13.5 13.4 21,842 n/a
International Toll Calling(e)........... -- 1 1 5.5 5.5 n/a n/a
Trunked Mobile Radio(f)................. -- 5 4 56.2 56.2 13,628 6,642
Fixed Telephony(g)...................... 3 -- -- 41.8(h) 40.8 -- --
--
---- ---- ------- -------
4 44 29 318,826 120,596
--
--
---- ---- ------- -------
---- ---- ------- -------
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(a) Covers both pre-operational markets and operational markets. Target
population is provided for paging, telephony other than fixed telephony and
trunked mobile radio systems, and target households are provided for cable
television systems, radio stations and fixed telephony.
(b) The Communications Group owns 45% of a wireless cable television Joint
Venture in St. Petersburg, Russia that began operations in January 1998.
(c) Target population for the Communications Group's paging Joint Ventures
includes the total population in the jurisdictions where such Joint Ventures
are licensed to provide services. In many markets, however, the
Communications Group's paging system currently only covers the capital city
and is expanding into additional cities.
(d) The Communications Group's operational systems include its Joint Venture
operating a GSM system in Latvia and Georgia and its Joint Venture in Ningbo
City, China, which is participating in the build-out of an operational GSM
system and providing financing, technical assistance and consulting services
to the systems' operators.
(e) Provides international toll calling services between Georgia and the rest of
the world and is the only Intelsat-designated representative in Georgia to
provide such services.
(f) Target population for the Communications Group's trunked mobile radio
systems includes total population in the jurisdictions where such Joint
Ventures are licensed to provide services. In many markets, the
Communications Group's systems are currently only operational in major
cities.
(g) The Communications Group owns 54% interests in two pre-operational Joint
Ventures in China that are participating in the construction and development
of a local telephone network for up to 1 million lines and a 50% interest in
a pre-operational Joint Venture in Kazakstan that is licensed to provide
wireless local loop telephone services throughout Kazakstan.
(h) Indicates population of Sichuan Province and City of Chongqing in China,
where the Communications Group is participating in the construction of a
local network, and Kazakstan where the Communications Group's Joint Venture
is licensed to operate.
3
ITEM 1. BUSINESS (CONTINUED)
BUSINESS STRATEGY
The Communication's Group's markets generally have large populations, with high
density and strong economic potential, but lack reliable and efficient
communications services. The Communications Group believes that most of these
markets have a growing number of persons who desire and can afford high quality
communications services. The Communications Group has assembled a management
team consisting of executives who have significant experience in the
communications services industry and in operating businesses in developing
markets. This management team believes that the Communications Group's systems
can be constructed with relatively low capital investments and focuses on
markets where the Company can provide multiple communications services. The
Company believes that the establishment of a far-reaching communications
infrastructure is crucial to the development of the economies of these
countries, and such development will, in turn, contribute to 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 is well positioned to capitalize on opportunities to provide
additional communications services in its markets as new licenses are awarded.
In addition to its existing projects and licenses, the Communications Group
continues to explore a number of investment opportunities in wireless telephony
systems in certain markets in Eastern Europe, including Romania, the FSU,
including Kazakstan, China and other selected emerging markets, and has
installed test systems in certain of these markets. The Communications Group
believes that its wireless local loop telephony technology is a high quality and
cost effective alternative to the existing, often antiquated and overloaded
telephone systems in these markets. The Communications Group also believes that
its system has a competitive advantage in these markets because the equipment
can be installed quickly at a competitive price, as compared to alternative
wireline providers which often take several years to provide telephone service.
In addition, unlike certain other existing wireless telephony systems in the
Communications Group's target markets, the equipment utilized by the
Communications Group includes digital, high-speed technology, which can be used
for high-speed facsimile and data transmission, including Internet access.
The Communications Group's objective is to become the leading multiple-market
provider of communications services in Eastern Europe and the FSU, China and
other selected emerging markets. The Communications Group intends to achieve its
objective and expand its subscriber and customer bases, as well as its revenues
and cash flow, by pursuing the following strategies:
UTILIZE LOW COST WIRELESS TECHNOLOGIES THAT ALLOW FOR RAPID BUILD-OUT. The use
of wireless technologies has allowed and will continue to allow the
Communications Group to build-out its existing and future license areas faster
and at a lower cost than the construction of comparable wired networks. Many
markets where the Communications Group has or is pursuing wireless licenses have
limitations on wireline construction above ground and/or underground.
COMPLETE BUILD-OUT OF EXISTING LICENSE AREAS. Since its formation in 1990, the
Communications Group has been investing in Joint Ventures to obtain
communications licenses in certain emerging markets. During the years ended
December 31, 1997, 1996 and 1995, the Communications Group invested
approximately $104.7 million, $52.2 million and $21.1 million, respectively, in
the construction and
4
ITEM 1. BUSINESS (CONTINUED)
development of its consolidated and unconsolidated Joint Ventures'
communications networks and broadcast stations in existing license areas.
AGGRESSIVELY GROW THE SUBSCRIBER AND ADVERTISER BASE IN EXISTING LICENSE
AREAS. The Communications Group's existing license areas, in the aggregate,
represent a large potential revenue base. The Communications Group is
aggressively marketing its services in these areas and is experiencing
significant increases in its subscriber count and advertising base. The
Communications Group believes it will continue to add subscribers by (i)
targeting each demographic in its markets with customized communications
services, (ii) cross-marketing and bundling communications services to existing
customers, (iii) providing technologically-advanced services and a high level of
customer service, (iv) providing new and targeted programming on its radio
stations to increase advertising revenue, and (v) opportunistically acquiring
additional existing systems in its service areas and in other strategic areas to
increase its subscriber base.
PURSUE ADDITIONAL OPPORTUNITIES IN EXISTING MARKETS. The Communications Group
is pursuing opportunities to provide additional communications services in
regions in which it currently operates. For example, in 1997, the Communications
Group launched cellular telecommunications services in Latvia where it already
provides cable television, paging and radio broadcasting services, and
commercial cellular telecommunications services and radio broadcasting in
Georgia, where it already provides cable television, paging and international
toll calling. This strategy enables the Communications Group to (i) leverage its
existing infrastructure and brand loyalty, (ii) capitalize on marketing
opportunities afforded by bundling its services, and (iii) build brand loyalty
and awareness. The Communications Group believes that it has several competitive
advantages that will enable it to obtain additional licenses and/or agreements
in these markets, including (i) established relationships with local strategic
joint venture partners and local government, (ii) a proven track record of
handling and operating quality systems, and (iii) a fundamental understanding of
the regions' political, economic and cultural climate.
TAKE ADVANTAGE OF ECONOMIES OF SCALE. The Communications Group is actively
pursuing acquisitions and building new systems which enable it to link its
existing networks and take advantage of roaming between its systems. Such
acquisitions also allow the Communications Group to increase efficiencies
through economies of scale. In January 1998, the Communications Group entered
into a definitive agreement to purchase 50% of Mobile Telecom, the largest
provider of paging services in the Russian Federation. The inclusion of Mobile
Telecom in the Communication Group's paging group will provide customers of each
of its paging Joint Ventures significantly greater roaming ability and will
enable the Communications Group to make larger volume equipment purchases which
should translate into lower prices and lower costs for its paging Joint
Ventures.
INVEST IN NEW MARKETS. The Communications Group is actively pursuing
investments in Joint Ventures to obtain new licenses and/or agreements for
wireless communications services in new markets. The Company is targeting
emerging markets with strong economic potential which lack adequate
communications services. In evaluating whether to enter a new market, the
Communications Group assesses, among other factors, the (i) potential demand for
the Communications Group's services and the availability of competitive
services, (ii) strength of local partners, and (iii) political, social and
economic climate. The Communications Group has identified several attractive
opportunities in Eastern Europe and the Pacific Rim. For example, in 1997, the
Communications Group's Joint Ventures began to provide paging services in
Austria and radio broadcasting in Prague, Czech Republic and in Berlin, Germany.
In addition, in February 1997, MITI acquired Asian American Telecommunications
("AAT"), a company which owns interests and participates in the management of
Joint Ventures with agreements to construct and provide financing for cellular
and wired telephony networks in certain provinces in China.
5
ITEM 1. BUSINESS (CONTINUED)
CABLE TELEVISION
OVERVIEW. The Communications Group commenced offering cable television services
in 1992 with the launch by its Joint Ventures' Kosmos TV in Moscow, Russia
("Kosmos"), and Baltcom TV in Riga, Latvia ("Baltcom"). The Communications Group
currently has interests in Joint Ventures which offer cable television services
in 9 markets in Eastern Europe and the FSU that reported 225,525 subscribers at
December 31, 1997, an increase of approximately 226% from 69,118 subscribers at
December 31, 1996. In addition, the Communications Group has a 45% interest in a
Joint Venture which launched commercial cable television service in St.
Petersburg, Russia in January 1998. The Communications Group believes that there
is a growing demand for multi-channel television services in each of the markets
where its Joint Ventures are operating, which demand is being driven by several
factors including: (i) the lack of quality television and alternative
entertainment options in these markets; (ii) the growing demand for Western-
style entertainment programming; and (iii) the increase in disposable income in
each market, which in turn increases the demand for entertainment services.
TECHNOLOGY. Each of the Communications Group's cable television Joint Ventures
utilizes two distribution technologies: microwave multipoint distribution system
("MMDS") and wireline cable. In some markets, a hybrid combination of MMDS and
wireline cable is employed where MMDS is used to deliver programming directly to
customers' homes as well as to act as a backbone to deliver programming to
wireline cable networks for further distribution to the customer. The
Communications Group believes that MMDS 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 MMDS system generally are significantly
lower than wireline cable or direct-to-home ("DTH") 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 MMDS network combined with the high density of
multi-family dwelling units in these markets gives the MMDS networks very high
line of sight ("LOS") penetration, (iv) the wide bandwidth of the spectrum
typically licensed by each of the Company's Joint Ventures gives each system the
ability to broadcast a wide variety of attractive international and localized
programming, and (v) MMDS is a highly effective means to distribute programming
to wireline cable headends eliminating the need for much of the satellite
receiving equipment at each headend.
In each MMDS system operated by the Communications Group's Joint Ventures,
multichannel signals are broadcast in all directions from a transmission tower
which, in the case of such Joint Ventures' systems, is typically the highest
structure in the city and, as a result, has very high LOS penetration.
Specialized compact receiving antenna systems, installed by the Communications
Group on building rooftops as part of the system or to mini-headends in wireline
systems, receive the multiple channel signals transmitted by the transmission
tower. The signal is then transmitted to each subscriber through a coaxial
cabling system within the building or wireline system. In each city where the
Communications Group provides or expects to provide service, a substantial
percentage of the population (e.g., approximately 90% in Moscow) lives in large,
multi-dwelling apartment buildings. This infrastructure significantly reduces
installation costs and eases penetration of cable television services into a
city because a single MMDS receiving location can bring service to numerous
apartment buildings or wireline cable networks housing a large number of people.
In order to take advantage of such benefits, in many areas, the Company is
wiring buildings and/or neighborhoods so that it can serve all of the residents
in the area through one microwave receiving location. Subscribers to the
Company's premium tiered services typically utilize a set-top converter which
descrambles the signal and are also used as channel selectors. The Company
generally utilizes the same equipment across all of its cable television
systems, which enables it to realize purchasing efficiencies in the build-out of
its networks.
6
ITEM 1. BUSINESS (CONTINUED)
While the Communications Group's cable television systems are generally a
leading provider of multi-channel television services in each of its markets, in
many markets there are several small undercapitalized wireline competitors. The
Communications Group's Joint Ventures in Bucharest, Romania and Chisinau,
Moldova have each acquired existing wireline systems and are in the process of
integrating them into their present systems. The Communications Group believes
that there are additional acquisition/consolidation opportunities in several of
its markets and will pursue the acquisition of select competitors on an
opportunistic basis.
PROGRAMMING. The Communications Group believes that programming is a critical
component in building successful cable television systems. The Communications
Group currently offers a wide variety of programming including English, French,
German and Russian programming, some of which is dubbed or subtitled into the
local language. In order to maximize penetration and revenues per subscriber,
the cable television Joint Ventures generally offer multiple tiers of service
including, at a minimum, a "lifeline" service, a "basic" service and a "premium"
service. The lifeline service generally provides programming of local off-air
channels and an additional two to four channels such as MTV-Europe, Eurosport,
NBC-Europe, VH-1, Cartoon Network, CNN International, SKY News 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, Eurosport, NBC Super Channel, Bloomberg TV, Cartoon
Network/TNT, BBC World, CNN, SKY News and Discovery Channel. Each tier also
offers localized programming.
One of the Communications Group's Joint Ventures offers "pay-per-view" movies in
one of its markets and the Communications Group plans to add similar services to
its program lineups in certain of its other markets. The subscriber pays for
"pay-per-view" services in advance, and the intelligent decoders that the Joint
Venture uses automatically deduct the purchase of a particular service. In
addition, one of the Communications Group's Joint Ventures has created a movie
channel, "TV21," consisting of U.S. and European films dubbed into Russian
language which distributes this channel to most of the Communications Group's
other cable television Joint Ventures. Centralized dubbing and distribution of
this movie channel have enabled the Communications Group to avoid the cost of
separately creating a similar movie channel in its other markets.
MARKETING. While each cable television Joint Venture initially targets its
cable television services toward foreign national households, embassies, foreign
commercial establishments and international and local hotels, each system offers
multiple tiers, at least one of which is targeted toward, and generally within
the economic reach of, a substantial and growing percentage of the local
population in each market. 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. The Communications
Group believes that a growing number of subscribers to local broadcast services
will demand the superior quality programming and increased viewing choices
offered by its cable television service. Upon launching a particular system, the
Communications Group uses a combination of event sponsorships, billboard, radio
and broadcast television advertising to increase awareness in the marketplace
about its services.
COMPETITION. Each of the Communications Group's cable television systems
competes with off-the-air broadcast television stations. In addition, in many of
its cable television markets there are several existing wireline cable
television providers which are generally undercapitalized, small, local
companies that provide limited programming to subscribers in limited service
areas. In many of its cable television markets, the Communications Group
competes with providers of DTH programming services, which offer subscribers
programming directly from satellite transponders. The Communications Group
believes that it has significant competitive advantages over DTH providers in
its lower cost and its ability to offer localized programming.
7
ITEM 1. BUSINESS (CONTINUED)
AM/FM 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 FSU and owns and operates, through Joint Ventures, 15 radio stations. During
1997, the Communications Group acquired interests in additional Joint Ventures
operating radio stations in Prague, Czech Republic; Berlin, Germany; Tbilisi,
Georgia and Vladivostok, Russian Federation and a Joint Venture operating a
radio network in Estonia. In addition, the Communications Group entered into a
definitive agreement to purchase an additional 25% of its Joint Venture
operating two radio stations in St. Petersburg, Russia.
The Communications Group's radio broadcasting strategy is generally to acquire
underdeveloped properties (i.e., stations with insignificant ratings and little
or no positive cash flow) at attractive valuations. The Communications Group
then installs experienced radio management to improve performance through
increased marketing and focused programming. Management utilizes its programming
expertise to tailor specifically the programming of each station utilizing
sophisticated research techniques to identify opportunities within each market,
and programs its stations to provide complete coverage of a demographic or
format type. This strategy allows each station to deliver highly effective
access to a target demographic and capture a higher percentage of the radio
advertising audience share.
PROGRAMMING. Programming in each of the Communications Group's AM and FM
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 listenership 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 present to advertisers with the most desirable market for the
advertiser's 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.
PAGING
OVERVIEW. The Communications Group commenced offering radio paging services in
1994 with the launch of paging networks serving the countries of Estonia and
Romania. Paging systems are useful as a means for one-way business/personal
communications without the need for a recipient to access a telephone network,
8
ITEM 1. BUSINESS (CONTINUED)
which in many of the Communications Group's markets is often overloaded or
unavailable. At December 31, 1997, the Communications Group's paging Joint
Ventures were licensed to offer paging services in markets containing
approximately 89.5 million persons. The Communications Group's Joint Ventures
generally provide service in the capital or major cities in these countries and
is currently expanding the services of such operations to cover additional
areas. The Communications Group believes that these Joint Ventures are leading
providers of paging services in their respective markets with, as of December
31, 1997, an aggregate of 57,831 subscribers, representing an increase of
approximately 29% from 44,836 subscribers at December 31, 1996.
In January 1998, the Communications Group signed a definitive agreement to
purchase 50% of Mobile Telecom, the largest provider of paging services in the
Russian Federation. Mobile Telecom currently provides paging services in Moscow,
St. Petersburg and many other cities in the Russian Federation and has obtained
frequency and operating authority for more than 90 other of the largest cities
in Russia. The acquisition of Mobile Telecom will enable the Communications
Group to expand the roaming capability of the customers of its other paging
Joint Ventures. The inclusion of Mobile Telecom in the Communications Group will
also enable the Communications Group to make larger volume equipment purchases
which should translate into lower prices and lower costs for its other paging
Joint Ventures.
Management believes that its paging Joint Ventures will continue to experience
rapid subscriber growth due to (i) the low landline telephone penetration that
characterizes each of its markets, (ii) the rapid increase in the number of
individuals, corporations and other organizations desiring communication
services that offer substantial mobility, accessibility and the ability to
receive timely information, and (iii) the continued economic growth in these
markets, which is expected to make paging services relatively more affordable to
the general population, and (iv) introduction of calling party pays service in
Austria, Romania, Estonia and Latvia.
The Communications Group offers several types of pagers. However, substantially
all of the Communications Group's subscribers choose alphanumeric pagers, which
emit a variety of tones and display as many as 63 characters. Subscribers may
also purchase additional services, such as paging priority, group calls and
other options. In 1998, the Communications Group is launching calling party pays
service. Calling party pays service is designed to reach a younger demographic
by providing a pager for little or no monthly fee. The Communications Group
receives a fee from the local provider for each call made to the pager. The
Communications Group provides a choice of pagers, which are typically purchased
by the subscriber or leased for a small monthly fee. The Communications Group
also provides 24-hour operator service with operators who are capable of taking
and sending messages in several languages.
TECHNOLOGY. Paging is a one-way wireless messaging technology which uses an
assigned frequency and a specific pager identifier to contact a paging customer
within a geographic service area. Each customer who subscribes to a paging
service is assigned a specific pager number. Transmitters broadcast the
appropriate signal or message to the subscriber's pager, which has been preset
to monitor a designated radio frequency. Each pager has a unique number
identifier, a "cap code," which allows it to pick up only those messages sent to
that pager. The pager signals the subscriber through an audible beeping signal
or an inaudible vibration and displays the message on the subscriber's pager.
Depending on the market, the Joint Ventures offer alphanumeric pagers which have
Latin and/or Cyrillic (Slavic language) character display.
The effective signal coverage area of a paging transmitter typically encompasses
a radius of between 15 and 20 miles from each transmitter site. Obstructions,
whether natural, such as mountains, or man-made, such as large buildings, can
interfere with the signal. Multiple transmitters are often used to cover large
geographic areas, metropolitan areas containing tall buildings or areas with
mountainous terrain.
9
ITEM 1. BUSINESS (CONTINUED)
Each of the Communications Group's paging Joint Ventures uses either terrestrial
radio frequency ("Rf") control links that originate from one broadcast
transmitter which is controlled by a local paging terminal and broadcast to each
of the transmitters, or a satellite uplink which is controlled by the paging
terminal, and which transmits to a satellite and downlinks to a receiving dish
adjacent to each of the transmitters. Once a message is received by each
transmitter in a simulcast market, each transmitter in turn broadcasts the
paging information using the paging broadcast frequency. The Rf control link
frequency is different from the paging broadcast frequency. For non-contiguous
regional coverage, either telephone lines or microwave communication links are
used in lieu of an Rf control link or satellite link.
MARKETING. Paging services are targeted toward people who spend a significant
amount of time outside of their offices, have a need for mobility or are
business people without ready access to telephones. The Communications Group
targets its paging systems primarily to local businesses, the police, the
military and expatriates. Paging provides an affordable way for local businesses
to communicate with employees in the field and with their customers. Subscribers
are charged a monthly fee which entitles a subscriber to receive an unlimited
number of pages each month.
COMPETITION. The Communications Group believes that its Joint Ventures are
leading providers of paging services in each of their respective markets. In
some of the Communications Group's paging markets, however, the Communications
Group has experienced and expects to continue to experience competition from
existing small, local, paging operators who have limited areas of coverage, and
from, in a few cases, paging operators established by Western European and U.S.
investors with substantial experience in paging. The Communications Group
believes it competes effectively with these companies because of, among other
things, its high quality and reliable 24-hour service. The Communications Group
does not have or expect to have exclusive franchises with respect to its paging
operations and may therefore face more significant competition in its markets in
the future from highly capitalized entities seeking to provide similar services.
TELEPHONY
The Communications Group's telephony line of business consists of cellular
telecommunications, international toll calling, trunked mobile radio and fixed
telephony.
CELLULAR TELECOMMUNICATIONS
OVERVIEW. The Communications Group owns a 21% interest in Baltcom GSM which
operates a nationwide cellular telecommunications system in Latvia. The
Communications Group also owns a 34% interest in Magticom, a Joint Venture that
operates cellular telecommunications systems in certain cities in Georgia and is
licensed to provide nationwide services. Western Wireless International Inc.
("Western Wireless"), a leading U.S. cellular provider, is a partner in each of
these Joint Ventures. The Communications Group believes that there is a large
demand for cellular telephone service in each of Latvia and Georgia due to the
limited supply and poor quality of wireline telephone service in these markets
as well as the rapidly growing demand for the mobility offered by cellular
telephony service. Landline telephone penetration is approximately 25% in Latvia
and 9% in Georgia. The demand for reliable and mobile telephone service is
increasing rapidly and the pace is expected to continue as commerce in these
regions continues to experience rapid growth.
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 ("EBRD") pursuant to which the EBRD agreed to lend up to $23.0
million to Baltcom GSM in order to finance its system build-out 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 LIBOR plus 4%
10
ITEM 1. BUSINESS (CONTINUED)
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 EBRD 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 EBRD.
As part of the financing, the EBRD 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 ("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 MITI, pledged their respective
shares to the EBRD as security for repayment of the loan. As of December 31,
1997, Baltcom GSM borrowed $15.0 million from the EBRD. Under the ERBD
agreements, amounts payable to the Communications Group are subordinated to
amounts payable to the ERBD.
In April 1997, the Communications Group's Georgian GSM Joint Venture, Magticom,
entered into a financing agreement with Motorola, Inc. ("Motorola") pursuant to
which Motorola agreed to finance 75% of the equipment, software and services it
provides to Magticom up to an amount equal to $15.0 million. Interest on the
financed amount accrues at 6-month 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.
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 owned to such partners is subordinated to Motorola.
In addition, through AAT, the Communications Group has entered into a Joint
Venture agreement (the "Ningbo JV Agreement") with Ningbo United
Telecommunications Investment Co., Ltd. (the "Ningbo JV") and the Ningbo JV has
entered into a Network System Cooperation Contract with China Unicom (the
"Network System Cooperation Contract") to (i) finance and assist China Unicom in
the construction of an advanced GSM cellular telephone network and (ii) provide
consulting and management support services to China Unicom in its operation of
such network within the City of Ningbo, China. This system, which has an initial
capacity of up to 50,000 subscribers, commenced operations in May 1997. The
Communications Group's Joint Venture is entitled to 73% of the distributed cash
flow, as defined in the Network System Cooperation Contract, from the network
for a 15-year period.
TECHNOLOGY. The Communications Group's cellular telephone networks in Latvia
and Georgia operate on the GSM standard. GSM is the standard for cellular
service throughout Western Europe, which allows the Communications Group's
customers to roam throughout the region. GSM's mobility is a significant
competitive advantage compared to competing Advanced Mobile Phone System
("AMPS") services which cannot offer roaming service in most neighboring
countries in Europe, with the exception of Russia, or Nordic Mobile Telephone
("NMT") services which are based on what the Communications Group believes is an
older and less reliable technology.
MARKETING. The Communications Group targets its cellular telephony services
toward the rapidly growing number of individuals, corporations and other
organizations with a need for mobility, ready access to a high quality voice
transmission service and the ability to conduct business outside of the
workplace or
11
ITEM 1. BUSINESS (CONTINUED)
home. The Communications Group sells cellular phones at a small mark-up to cost.
This pass-through strategy encourages quick market penetration and early
acceptance of cellular telephony as a desirable alternative to fixed land-based
telephony systems.
Management believes that its cellular systems will benefit from several
competitive advantages in each of its markets. The Communications Group intends
to market its cellular telephony service to customers of its existing cable
television and paging services in both Latvia and Georgia. The Communications
Group believes that this database of names will be useful in marketing its
cellular telephony services, as these are customers who have already exhibited
an interest in modern communications services. In addition, these Joint Ventures
intend to market these systems by providing a comprehensive set of packages with
different service features which permit the subscriber to choose the package
that most closely fits his or her needs.
COMPETITION. Baltcom GSM's primary competitor in Latvia is Latvia Mobile
Telecom ("LMT"). LMT commenced service in 1995 and currently has approximately
20,000 subscribers. LMT operates a second system using the older, less efficient
NMT technology that the Communications Group believes will pose less of a
competitive threat than LMT's GSM system. The Communications Group believes that
its primary competitors in Georgia will be Geocell, a Georgian-Turkish Joint
Venture using a GSM system as well as an existing smaller provider of cellular
telephony services which uses the AMPS technology in its network.
While the availability of fixed telephone systems in China is limited in
capacity, the fact that these systems exist and are operated by governmental
authorities means that they are a source of competition for China Unicom's
proposed wireless and fixed telephony operations. In addition, one-way paging
service may be a competitive alternative which is adequate for those who do not
need a two-way service, or it may be a service that reduces wireless telephony
usage among wireless telephony subscribers.
The Communications Group also faces competition from the primary provider of
telephony services in each of its markets, which are the national telephone
systems. However, given the low telephony penetration rates in Latvia and
Georgia and the underdeveloped landline telephone system infrastructure, the
Communications Group believes that cellular telephony provides an attractive
alternative to customers who need fast, reliable and quality telephone service.
INTERNATIONAL TOLL CALLING
OVERVIEW. The Communications Group owns approximately 30% of Telecom Georgia.
Telecom Georgia handles all international calls inbound to and outbound from the
Republic of Georgia. Telecom Georgia has interconnect arrangements with several
international long distance carriers such as Sprint and Telespazio. For every
international call made to the Republic of Georgia, a payment is due to Telecom
Georgia by the interconnect carrier and for every call made from the Republic of
Georgia to another country, Telecom Georgia charges its subscribers and pays a
destination fee to the interconnect carrier.
Since Telecom Georgia commenced operations, long distance traffic in and out of
Georgia has increased dramatically as Telecom Georgia has expanded the number of
available international telephone lines. Incoming call traffic increased from
approximately 200,000 minutes per month in 1993 to the current rate of
approximately 1 million minutes per month, and outgoing call traffic increased
from approximately 100,000 minutes per month in 1993 to the current rate of
approximately 230,000 minutes. Telecom Georgia has instituted several marketing
programs in order to maintain this growth.
COMPETITION. The Communications Group does not currently face any competition
in the international long distance business in Georgia, as Telecom Georgia is
the only entity licensed to handle international call traffic in and out of
Georgia. There can be no assurance that there will not be a competitor in the
future.
12
ITEM 1. BUSINESS (CONTINUED)
TRUNKED MOBILE RADIO
OVERVIEW. The Communications Group currently owns interests in Joint Ventures
which operate 5 trunked mobile radio services in Europe and Kazakstan, servicing
an aggregate of 13,628 subscribers at December 31, 1997 which is an increase of
approximately 105% from 6,642 subscribers at December 31, 1996. Trunked mobile
radio systems are commonly used by construction teams, security services, taxi
companies, service organizations and other groups with a need for significant
internal communications. Trunked mobile radio allows such users to communicate
with members of a closed user group without incurring the expense or delay of
the public switched telephone network, and also provides the ability to provide
dispatch service (i.e., one sender communicating to a large number of users on
the same network). In many cases, the Communications Group's trunked mobile
radio systems are also connected to the public switched telephone network thus
providing some or all of the users the flexibility of communicating outside the
closed user group. The Communications Group believes that lower costs and the
ability to provide dispatch services affords trunked mobile radio significant
advantages over cellular telephony or the public switched telephone network in
fleet applications.
COMPETITION. The Communications Group is a leading provider of trunked mobile
radio in its markets although it faces competition from other trunked mobile
radio service providers and from private networks in all of the markets in which
it operates. Trunked mobile radio also faces competition from cellular
providers, especially for users who need access to the public switched telephone
network for most of their needs, pagers for users who need only one-way
communication and private branch exchanges, where users do not need mobile
communications.
FIXED TELEPHONY
OVERVIEW. The Communications Group is currently exploring a number of
investment opportunities in wireless local loop telephony systems in certain
countries in Eastern Europe and the FSU and other selected emerging markets and
has installed test systems in certain of these markets. The Communications Group
believes that the proposed wireless local loop telephony technology it is using
is a time and cost effective means of improving the communications
infrastructure in such markets. The current telephone systems in these markets
may be antiquated and/or overloaded, and consumers in these markets often must
wait several years to obtain telephone service.
The Company believes that wireless local loop technology is a rapid and cost
effective method to increase the number of subscribers to local telephone
services. Wireless local loop telephony systems can provide telephone access to
a large number of apartment dwellers through a single microwave transceiver
installed on their building. This microwave transceiver sends signals to and
from a receiver located adjacent to a central office of the public switched
telephone network where the signal is routed from or into such network. This
system eliminates the need to build fixed wireline infrastructure between the
central office and the subscribers' building, thus reducing the time and expense
involved in expanding telephone service to customers.
In 1997, the Communications Group's 50% joint venture in Kazakstan, Instaphone,
was licensed to provide wireless local loop telephone services throughout that
country. In order to provide such service, Instaphone has been allocated
frequencies in the 2.3 to 2.5 GHz band in Almaty, the largest city in Kazakstan.
The Communications Group is currently constructing the system necessary to
provide service and negotiating an agreement for interconnection with the local
public switched telephone system. The Communications Group expects Instaphone to
launch commercial service in 1998. The Communications Group has created several
other Joint Ventures that are currently exploring the opportunities to provide
wireless local loop services.
13
ITEM 1. BUSINESS (CONTINUED)
In addition, the Company plans to take advantage of wired telephony
opportunities from time to time. For example, the Communications Group, through
AAT, has entered into joint venture agreements with China Huaneng Technology
Development Corporation in Sichuan Province ("Sichuan JV") and in the city of
Chongqing ("Chongqing JV") to (i) assist China Unicom in the development and
construction of advanced telecommunications systems in the Sichuan Province and
the city of Chongqing, China and (ii) provide telephone consulting and financing
services to China Unicom within Sichuan Province and the city of Chongqing. With
a population of over 110 million and a telephone penetration rate estimated at
less than 2%, the Sichuan Province and the city of Chongqing projects provide a
large potential market for AAT's investments and services. The project involves
a 25-year period of cooperation between the Communications Group's Joint Venture
and China Unicom for the development of a wired local telephone network in the
Sichuan Province and the city of Chongqing with an initial capacity of 50,000
lines. For its services, the Communications Group's Joint Venture is entitled to
78% of the distributable cash flow, defined in the agreement between China
Unicom and the Sichuan JV, from the network for a 25-year period for each phase
of the network developed.
COMPETITION. While the existing wireline telephone systems in Eastern Europe
and the FSU are often antiquated and provide inferior quality service, the fact
that the network infrastructure is already in place means that it is a source of
competition for the Communications Group's proposed wireless telephony
operations. The Communications Group does not have or expect to have exclusive
franchises with respect to its wireless telephony operations and may therefore
face more significant competition in the future from highly capitalized entities
seeking to provide services similar to or competitive with the Communications
Group's services in its markets.
While the availability of fixed telephone systems in China is limited in
capacity, the fact that these systems exist and are operated by governmental
authorities means that they are a source of competition for China Unicom's
proposed wireless and fixed telephony operations. In addition, one-way paging
service may be a competitive alternative which is adequate for those who do not
need a two-way service.
In certain markets, cellular telephone operators exist and represent a
competitive alternative to the Communications Group's proposed wireless local
loop telephony systems. A cellular telephone can be operated in the same manner
as a wireless loop telephone in that either type of service can simulate the
conventional telephone service by providing local and international calling from
a fixed position in its service area. However, while cellular telephony enables
a subscriber to move from one place in a city to another while using the
service, wireless local loop telephony is intended to provide fixed telephone
services which can be deployed as rapidly as cellular telephony but at a lower
cost per line. This lower cost makes wireless local loop telephony a more
attractive telephony alternative to a large portion of the populations in the
Communications Group's markets that do not require mobile communications. In
addition, because the wireless local loop technology which the Communications
Group is using operates at 64 kilobits per second, it can be used for high speed
facsimile and data transmission, including Internet access.
LICENSES
The Communications Group's operations are subject to governmental regulation in
its markets and its operations require certain governmental approvals. There can
be no assurance that the Communications Group will be able to obtain all
necessary approvals to operate additional cable television, wireless telephony
or paging systems or radio broadcasting stations in any of the markets in which
it is seeking to establish additional businesses.
The licenses pursuant to which the Communications Group's businesses operate are
issued for limited periods, including certain licenses which are renewable
annually. Certain of these licenses expire over the
14
ITEM 1. BUSINESS (CONTINUED)
next several years. One of the licenses held by the Communications Group has
expired, although the Communications Group has been permitted to continue
operations while the reissuance is pending. The Communications Group has applied
for a renewal and expects a new license to be issued. Five other licenses held
or used by the Communications Group will expire during 1998, including the
license for Radio Juventus, the Company's radio operation in Hungary. The
failure of such licenses to be renewed may have a material adverse effect on the
Company's results of operations. Additionally, certain of the licenses pursuant
to which the Communications Group's businesses operate contain network build-out
milestone clauses. The failure to satisfy such milestones could result in the
loss of such licenses which may have a material adverse effect on the
Communications Group.
In the case of the licenses other than Radio Juventus, the Company's Joint
Ventures will apply for renewals of their licenses. While there can be no
assurance that these four licenses will be renewed, based on past experience,
the Communications Group expects to obtain such renewals. In the case of Radio
Juventus, the Communications Group plans to cause the venture to participate in
a competitive tender for a regional broadcasting license to cover Budapest and
certain other areas in Hungary. The Company believes that Radio Juventus'
prospects for winning such tender, which will be determined by the strength of
its bid in the tender in comparison to the bids of other participants in the
tender, are good.
JOINT VENTURE OWNERSHIP STRUCTURES/LIQUIDITY ARRANGEMENTS
The following table summarizes the Communications Group's Joint Ventures and
subsidiaries at December 31, 1997, as well as the amounts contributed, amounts
loaned net of repayments and total amounts invested in such Joint Ventures and
subsidiaries at December 31, 1997 (in thousands).
AMOUNT TOTAL INVESTMENT
CONTRIBUTED TO AMOUNT LOANED TO IN
COMPANY JOINT VENTURE/ JOINT VENTURE/ JOINT VENTURE/
JOINT VENTURE (1) OWNERSHIP % SUBSIDIARY SUBSIDIARY SUBSIDIARY (8)
- ------------------------------------------- --------------- --------------- ----------------- ------------------
CABLE TELEVISION
Romsat Cable TV (Bucharest, Romania) (2) 97% $ 612 $ 6,055 $ 6,667
(11).....................................
Viginta (Vilnius, Lithuania) (2)........... 55% 397 2,363 2,760
Kosmos TV (Moscow, Russia)................. 50% 1,093 10,053 11,146
Baltcom TV (Riga, Latvia).................. 50% 819 11,811 12,630
Ayety TV (Tbilisi, Georgia)................ 49% 779 7,025 7,804
Kamalak TV (Tashkent, Uzbekistan).......... 50% 655 3,137 3,792
Sun TV (Chisinau, Moldova)................. 50% 400 5,835 6,235
Alma TV (Almaty, Kazakstan)................ 50% 222 3,547 3,769
Cosmos TV (Minsk, Belarus)................. 50% 400 2,844 3,244
Teleplus (St. Petersburg, Russia) (4)...... 45% 990 103 1,093
15
ITEM 1. BUSINESS (CONTINUED)
AMOUNT TOTAL INVESTMENT
CONTRIBUTED TO AMOUNT LOANED TO IN
COMPANY JOINT VENTURE/ JOINT VENTURE/ JOINT VENTURE/
JOINT VENTURE (1) OWNERSHIP % SUBSIDIARY SUBSIDIARY SUBSIDIARY (8)
- ------------------------------------------- --------------- --------------- ----------------- ------------------
PAGING
Baltcom Paging (Tallinn, Estonia) (2)...... 85% $ 3,715 $ 1,380 $ 5,095
CNM (Romania) (2).......................... 54% 490 4,409 4,899
Paging One Services (Austria) (2).......... 100% 1,036 5,673 6,709
Baltcom Plus (Riga, Latvia)................ 50% 250 2,776 3,026
Paging One (Tbilisi, Georgia).............. 45% 250 1,329 1,579
Raduga Poisk (Nizhny Novgorod, Russia)..... 45% 330 48 378
PT Page (St. Petersburg, Russia)........... 40% 1,102 -- 1,102
Kazpage (Kazakstan) (9).................... 26-41% 520 343 863
Kamalak Paging (Tashkent, Samarkand, 50% 180 1,809 1,989
Bukhara and Andijan, Uzbekistan).........
Alma Page (Almaty and Ust-Kamenogorsk, 50% -- 2,161 2,161
Kazakstan)...............................
Paging Ajara (Batumi, Georgia)............. 35% 43 233 276
RADIO BROADCASTING
Radio Juventus (Budapest, Hungary) (2)..... 100% 8,107 -- 8,107
SAC (Moscow, Russia) (2)................... 83% 631 3,011 3,642
Radio Skonto (Riga, Latvia) (2)............ 55% 302 252 554
Radio One (Prague, Czech Republic) (2)..... 80% 627 213 840
NewsTalk Radio (Berlin,Germany) (2)........ 70% 2,758 1,203 3,961
Radio Vladivostok, (Vladivostok, Russia) 51% 170 -- 170
(10).....................................
Country Radio (Prague, Czech Republic) 85% 2,040 -- 2,040
(10).....................................
Radio Georgia (Tbilisi, Georgia) (10)...... 51% 222 -- 222
Eldoradio (formerly Radio Katusha)(St. 50% 464 930 1,394
Petersburg, Russia) (5)..................
Radio Nika (Socci, Russia)................. 51% 260 43 303
AS Trio LSL (Tallinn, Estonia) (5)......... 49% 1,572 -- 1,572
INTERNATIONAL TOLL CALLING
Telecom Georgia (Tbilisi, Georgia)......... 30% 2,554 -- 2,554
TRUNKED MOBILE RADIO
Protocall Ventures, Ltd. (2) (3)........... 56% 2,550 10,725 13,275
Spectrum (Kazakstan) (12).................. 31% 36 724 760
CELLULAR TELECOMMUNICATIONS
Baltcom GSM (Latvia)....................... 21% 13,483 -- 13,483
Magticom (Tbilisi, Georgia)................ 34% 7,890 -- 7,890
Ningbo Ya Mei Communications (Ningbo City, 41% 9,444 19,306 28,750
China) (6)...............................
FIXED TELEPHONY
Sichuan Tai Li Feng Telecommunications, Co. 54% 11,087 -- 11,087
(Sichuan Province, China) (4) (7)........
Chongqing Tai Le Feng Telecommunication, 54% 7,439 -- 7,439
Co.
(Chongqing City, China) (4) (7)..........
Instaphone (Kazakstan) (4)................. 50% 4 680 684
------- -------- --------
TOTAL................................ $ 85,923 $ 110,021 $ 195,944
------- -------- --------
------- -------- --------
- ------------------------
(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.
16
ITEM 1. BUSINESS (CONTINUED)
(2) Results of operations are consolidated with the Company's financial
statements.
(3) The Communications Group owns its trunked mobile radio ventures through
Protocall, in which it has a 56% ownership interest. Through Protocall, the
Communications Group owns interests in (i) Belgium Trunking (24%), which
provides services in Brussels and Flanders, Belgium, (ii) Radiomovel
Telecommunicacoes (36%), which provides services in Portugal, (iii)
Teletrunk Spain (17-48% depending on the joint venture), which provides
services through 4 Joint Ventures in Madrid, Valencia, Aragon and Catalonia,
Spain and (iv) Spectrum (31%), which operates in Almaty and Aryran,
Kazakstan. A portion of the Communications Group's interest in Spectrum is
held directly. The above amounts include $36,050 contributed to Spectrum
directly by the Company. In March 1998, the Communications Group increased
its ownership of Belgium Trunking to 50%.
(4) Pre-operational systems as of December 31, 1997. In January 1998, Teleplus
began to provide cable television services in St. Petersburg, Russia.
(5) Eldoradio includes two radio stations operating in St. Petersburg, Russia
and AS Trio LSL includes four operating in various cities throughout
Estonia. In December 1997, the Communications Group entered into a
definitive agreement to purchase an additional 25% of Eldoradio, increasing
its ownership percentage to 75%.
(6) Ningbo Ya Mei Communications is participating in the build-out of an
operational GSM system in Ningbo City, China, and providing financing,
technical assistance and consulting services to the systems operator.
(7) Sichuan Tai Li Feng Telecommunications, Co. and Chongqing Tai Le Feng
Telecommunication, Co. are pre-operational Joint Ventures that are
participating in the construction and development of a local telephone
network in the Sichuan Province and the City of Chongqing, China.
(8) The total investment does not include any incurred losses.
(9) Kazpage is comprised of a service entity and 10 paging Joint Ventures that
provide services in Kazakstan. The Company's interest in the Joint Ventures
ranges from 26% to 41% and its interest in the service entity is 51%.
Amounts described as loaned in the above table represent loans to the
service entity which in turn funds the Joint Ventures.
(10) The investment in these Joint Ventures were made in the quarter ended
December 31, 1997. The Joint Ventures' results of operations will be
consolidated with the Company's financial statements in the quarter ended
March 31, 1998.
(11) In March 1998, the Communications Group increased its ownership of Romsat
to 100%.
(12) In March 1998, Spectrum and its shareholders, including the Communications
Group, entered into a subscription agreement with the European Bank for
Reconstruction and Development ("EBRD") and the Fund New Europe ("FNE")
pursuant to which the EBRD will purchase 30% and FNE 3% of the shares of
Spectrum in return for making equity contributions to Spectrum of $181,800
and $18,200, respectively. In connection with such investment, the EBRD has
agreed to make a loan of up to $2,000,000 to Spectrum. The closing of the
share purchase and loan are subject to the satisfaction of the conditions
precident set forth in the subscription agreement.
Generally, the Communications Group owns 50% or more of the equity in a Joint
Venture with the balance of such equity being owned by a local entity, often a
government-owned enterprise. In China, the Communications Group's Joint Ventures
enter into a network system cooperation contract where the Joint Ventures are
responsible for financing, providing technical advice on the construction and
management consulting services on the operation of the relevant networks. In
some cases, the Communications Group
17
ITEM 1. BUSINESS (CONTINUED)
owns or acquires interests in entities (including competitors) that are already
licensed and are providing service. Joint Ventures' day-to-day activities are
managed by a local management team selected by its board of directors or its
shareholders. The operating objectives, business plans and capital expenditures
of a Joint Venture are approved by its board of directors, or in certain cases,
by its shareholders. In most cases, an equal number of directors or managers of
the Joint Venture are selected by the Communications Group and its local
partner. In other cases, a different 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 FSU are
limited liability entities which are generally permitted to enter into
contracts, acquire property and assume and undertake obligations in their own
names. Because these Joint Ventures are limited liability companies, the Joint
Ventures' equity holders have limited liability to the extent of their
investment. Under the Joint Venture agreements, each of the Communications Group
and the local Joint Venture partner is obligated to make initial capital
contributions to the Joint Venture. In general, a local Joint Venture partner
does not have the resources to make cash contributions to the Joint Venture. In
such cases, the Company has established or plans to establish an agreement with
the Joint Venture whereby, in addition to cash contributions by the Company,
both the Company and the local partner make in-kind contributions (usually
communications equipment in the case of the Company and frequencies, space on
transmitting towers and office space in the case of the local partner), and the
Joint Venture partner 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, the Joint Ventures are significantly limited or prohibited
from distributing profits to its shareholders. As of December 31, 1997, the
Company had obligations to fund (i) an additional $149,000 to the equity of its
Joint Ventures in Eastern Europe and the FSU (or to complete the payment of
shares purchased by the Company) and (ii) up to an additional $19.0 million with
respect to the various credit lines the Company has extended to its Joint
Ventures in Eastern Europe and the FSU. The Company's funding commitments under
such credit lines are contingent upon its approval of the Joint Ventures'
business plans. To the extent that the Company does not approve a Joint
Venture's business plan, the Company is not required to provide funds to such
Joint Venture under the credit line. The distributions (including profits) from
the Joint Venture to the Company and the local partner are made on a pro rata
basis in accordance with their respective ownership interests.
In addition to loaning funds to the Joint Ventures, the Communications Group
often provides certain services to many of the Joint Ventures for a fee. The
Communications Group often does not require start-up Joint Ventures to reimburse
it for certain services that it provides such as engineering advice, assistance
in locating programming, and assistance in ordering equipment. As each Joint
Venture grows, the Communications Group institutes various payment mechanisms to
have the Joint Venture reimburse it for services where they are provided. The
failure of the Communications Group to obtain reimbursement of such services
will not have a material impact on the Company's results of operations.
Under existing legislation in certain of the Communications Group's markets,
distributions from a Joint Venture to its partners is subject to taxation. The
laws in the Communications Group's markets vary
18
ITEM 1. BUSINESS (CONTINUED)
markedly with respect to the tax treatment of distributions to Joint Venture
partners and such laws have also recently been revised significantly in many of
the Communications Group's markets. There can be no assurance that such laws
will not continue to undergo major changes in the future which could have a
significant negative impact on the Company and its operations.
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 and mid-mount commercial equipment includes
commercial quality self-propelled walk-behind lawnmowers and wide area and
front-mount zero turn radius lawn equipment.
Snapper products are premium-priced, generally selling at retail from $300 to
$10,500. Snapper sells and supports directly a 5,000-dealer network for the
distribution of its products. Snapper also sells its products through foreign
distributors and offers a limited selection of residential walk-behind
lawnmowers and rear-engine riding lawnmowers through approximately 250 Home
Depot locations.
A large percentage of the residential sales of lawn and garden equipment are
made during a 17-week period from early spring to mid-summer. Although some
sales are made to the dealers and distributors prior to this period, the largest
volume of sales is made during this time. The majority of revenues during the
late fall and winter periods are related to snow thrower shipments. Snapper has
an agreement with a financial institution which makes floor-plan financing for
Snapper products available to dealers. This agreement provides financing for
dealer inventories and accelerates cash flow to Snapper. Under the terms of this
agreement, a default in payment by one of the dealers on the program is
non-recourse to Snapper. If there is a default by a dealer Snapper is obligated
to repurchase any equipment recovered from the dealership that is new and
unused. At December 31, 1997 there was approximately $65.7 million outstanding
under this floor-plan financing arrangement. The Company has guaranteed
Snapper's payment obligations under this arrangement.
Snapper also makes available, through General Electric Credit Corporation, a
retail customer revolving credit plan. This credit plan allows consumers to pay
for Snapper products over time. Consumers also receive Snapper credit cards
which can be used to purchase additional Snapper products.
Snapper manufactures its products in McDonough, Georgia at facilities totaling
approximately 1.0 million square feet. Excluding engines and tires, Snapper
manufactures a substantial portion of the component parts to its products. Most
of the parts and material for Snapper's products are commercially available from
a number of sources.
During the three years ended December 31, 1997, Snapper spent an average of $4.4
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 based
upon 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 manufacture and distribute
products that compete with Snapper's, including The Toro Company, Lawn-Boy (a
product of
19
ITEM 1. BUSINESS (CONTINUED)
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 (the "Exchange Transaction"). At
the time of the Exchange Transaction, RDM, a New York Stock Exchange ("NYSE")
listed company, through its operating subsidiaries, was a leading manufacturer
of fitness equipment and toy products in the United States.
In connection with the Exchange Transaction, the Company, RDM and certain
officers of RDM entered into a shareholders agreement, pursuant to which, among
other things, the Company obtained the right to designate four individuals to
serve on RDM's Board of Directors, subject to certain reductions.
In June 1997, RDM entered into a $100.0 million revolving credit facility (the
"RDM Credit Facility") with a syndicate of lenders led by Foothill Capital
Corporation (the "Lender") and used a portion of the proceeds of such facility
to refinance its existing credit facility. In order to induce the Lender to
extend the entire amount of the RDM Credit Facility, Metromedia Company
("Metromedia"), a company controlled by John Kluge, the Chairman of the Board of
Directors of the Company and Stuart Subotnick, the Chief Executive Officer of
the Company provided the Lender with a $15.0 million letter of credit (the
"Metromedia Letter of Credit") that could be drawn by the Lender (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 Letter of Credit, RDM issued to Metromedia
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
(the "RDM Warrants"). In accordance with the terms of the agreement entered into
in connection with the RDM Credit Facility, Metromedia offered the Company the
opportunity to substitute its Letter of Credit for the Metromedia 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 ("Letter of Credit") for
the Metromedia 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, the Lender
declared an Event of Default (as defined 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 proceeded with the
liquidation of their assets and properties and have discontinued ongoing
business operations. 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 RDM's financial difficulties and
uncertainties, the NYSE 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, the Lender drew the entire
amount of the Letter of Credit. Consequently, the Company will become subrogated
to the Lender's secured claims against the Company in an amount equal to the
drawing under the Letter of Credit, following payment in full of the
20
ITEM 1. BUSINESS (CONTINUED)
Lender. 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 that RDM's remaining assets will be sufficient to
pay any such subrogations claims.
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 ENTERTAINMENT GROUP SALE
On July 10, 1997, the Company consummated the sale (the "Entertainment Group
Sale") of substantially all of the assets of its Entertainment Group, consisting
of Orion Pictures Corporation ("Orion"), Samuel Goldwyn Company ("Goldwyn") and
Motion Picture Corporation of America ("MPCA") (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, for
a gross consideration of $573.0 million. The Company had operated the
Entertainment Group since the November 1 Merger. The Company used $296.4 million
of the proceeds from the Entertainment Group Sale to repay all amounts
outstanding under the Entertainment Group's credit facilities and certain other
indebtedness of the Entertainment Group and $140.0 million of such proceeds to
repay all of its outstanding debentures.
LANDMARK SALE
On December 17, 1997, the Company entered into an agreement (the "Landmark
Agreement") with Silver Cinemas, Inc. ("Silver Cinemas"), pursuant to which the
Company sold to Silver Cinemas (the "Landmark Sale") all of the assets, except
cash and certain of the liabilities of Landmark, for an aggregate cash purchase
price of approximately $62.5 million. The Company anticipates that the Landmark
Sale will be consummated in April 1998.
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 1997 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, 1997. As of December 31, 1997, the Company
had a remaining reserve of approximately $1.1 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's liability, if any, has not been determined, but the
Company believes that such liability will not be material.
21
ITEM 1. BUSINESS (CONTINUED)
The Company, through a wholly owned subsidiary, owns approximately 17 acres of
real property located in Opelika, Alabama (the "Opelika Property"). The Opelika
Property was formerly owned by Diversified Products Corporation ("DP"), 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, DP 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 (the "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 DP 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 requires
the Company to present for ADEM's approval a written environmental remediation
plan for the Opelika Property. The Company has 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 ADEM that the work was completed and the Company will
undertake to monitor the property on a quarterly basis. The Company believes
that its reserves of approximately $1.6 million will be adequate to cover all
further costs of remediation.
EMPLOYEES
As of March 9, 1998, the Company through its subsidiaries had approximately
1,300 regular employees. Of which, approximately 700 employees were represented
by unions under collective bargaining agreements. In general, the Company
believes that its employee relations are good.
SEGMENT AND GEOGRAPHIC DATA
Business segment data and information regarding the Company's foreign revenues
by country area are included in notes 2, 3 and 14 to the Notes to Consolidated
Financial Statements included in Item 8 hereof.
22
ITEM 2. PROPERTIES
The following table contains a list of the Company's principal properties:
NUMBER OF
------------------------
DESCRIPTION OWNED LEASED LOCATION
- -------------------------------------------------------------- ----------- ----------- --------------------------------
THE COMMUNICATIONS GROUP:
Office space -- 1 Stamford, Connecticut
Office space -- 1 Moscow, Russia
Office space -- 1 Vienna, Austria
Office space -- 2 New York, New York
Office space -- 1 Beijing, People's Republic of
China
GENERAL CORPORATE:
Office space -- 1 East Rutherford, New Jersey
SNAPPER:
Manufacturing plant 1 -- McDonough, Georgia
Distribution facility -- 2 McDonough, Georgia
Distribution facility -- 1 Dallas, Texas
Distribution facility -- 1 Greenville, Ohio
Distribution facility -- 1 Reno, Nevada
The Company's management believes that the facilities listed above are generally
adequate and satisfactory for their present usage and are generally well
utilized.
23
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 this purported class and derivative
action in the Delaware Court of Chancery (the "Court") on February 22, 1991
against Fuqua Industries, Inc. ("Fuqua"), Intermark, Inc. ("Intermark"), the
then-current directors of Fuqua 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 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 and Intermark
in the absence of approval by a majority of Fuqua's 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
board members (i) entered into an agreement pursuant to which Triton Group, Inc.
(which was subsequently merged into Intermark, "Triton") was exempted from 8
Del. C. 203 and (ii) undertook a program pursuant to which 4.9 million shares of
Fuqua 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, the 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 (2) undertook a program pursuant to which 4.9 million shares of Fuqua
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.
On March 9, 1998, defendants 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 filed its answer the same
day, submitting itself to the jurisdiction of the Court for a proper resolution
of the claims purported to be set forth by the plaintiffs. On March 10, 1998,
defendant J.B. Fuqua filed his answer denying each of the substantive
allegations of wrongdoing contained in the third amended complaint.
MICHAEL SHORES V. SAMUEL GOLDWYN COMPANY, ET AL.
On May 20, 1996, SHORES V. SAMUEL GOLDWYN COMPANY, ET AL., Case No. BC 150360,
was filed in the Superior Court of the State of California as a purported class
action lawsuit. Plaintiff Michael Shores alleged that, in connection with the
Goldwyn Merger, Goldwyn's directors and majority shareholder breached their
fiduciary duties to the public shareholders of Goldwyn. Plaintiff subsequently
added, in an amended
24
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
complaint, an allegation that the Company aided and abetted the other
defendants' fiduciary breaches. The Company successfully demurred to the amended
complaint on the ground that it did not state a cause of action against the
Company, and plaintiff was given an opportunity to replead. Plaintiff filed a
second amended complaint and alleged, in addition to his other claims, that the
Company negligently misrepresented and/or omitted material facts in the
Company's prospectus issued for the Goldwyn Merger. The Company again
successfully demurred to the second amended complaint, and the court refused to
allow the plaintiff another opportunity to replead the aiding and abetting claim
against the Company, but the plaintiff may replead the negligent
misrepresentation claim. The plaintiff has repleaded the third amended complaint
alleging only the negligent misrepresentation claim. The Company believes it has
meritorious defenses and is vigorously defending such action.
SAMUEL GOLDWYN, JR. V. METRO-GOLDWYN-MAYER INC., ET AL.
On October 29, 1997, Samuel Goldwyn, Jr., the former chairman of Goldwyn, filed
SAMUEL GOLDWYN, JR. V. METRO-GOLDWYN-MAYER INC., ET AL., Case No. BC 180290, in
Superior Court of the State of California, alleging that the Company
fraudulently induced him and the Samuel Goldwyn, Jr. Family Trust (the "Trust")
to enter into various agreements in connection with the Goldwyn Merger; breached
an agreement to guarantee the performance of Goldwyn Entertainment Company's
obligations to the Trust; and is using, without permission, the "Samuel Goldwyn"
trademark. The complaint also alleges that the Company and other defendants
breached Mr. Goldwyn's employment agreement and fiduciary duties owed to him and
the Trust, both before and after the sale of Goldwyn Entertainment Company to
Metro-Goldwyn-Mayer Inc. The Company had demurred on the plaintiff's complaint.
The Company believes it has meritorious defenses and is vigorously defending
such action.
SYDNEY H. SAPOWITZ AND SID SAPSOWITZ & ASSOCIATES, INC. V. JOHN W. KLUGE, STUART
SUBOTNICK, METROMEDIA INTERNATIONAL GROUP, ET AL.
On June 30, 1997, the plaintiffs in SYDNEY H. SAPSOWITZ AND SID SAPSOWITZ &
ASSOCIATES, INC. V. JOHN W. KLUGE, STUART SUBOTNICK, METROMEDIA INTERNATIONAL
GROUP, INC., ORION PICTURES CORPORATION, LEONARD WHITE, ET AL. filed a lawsuit
in Superior Court of the State of California alleging $28.7 million in damages
from the breach of an agreement to pay a finder's fee in connection with the
Entertainment Group Sale. The Company believes it has meritorious defenses and
is vigorously defending such action.
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 MITI conspired against
and tortiously interfered with plaintiffs' potential contracts involving certain
oil exploration and production contracts in Siberia and telecommunications
contracts in the Russian Federation. Plaintiffs are claiming damages, for which
all defendants could be held jointly and severally liable, of an amount in
excess of $395.0 million. On or about February 27, 1998 MITI filed its answer
denying each of the substantive allegations of wrongdoing contained in the
complaint. The Company believes that it has meritorious defenses and is
vigorously defending this action.
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
25
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
directors against, among other things, any and all judgments, fines, penalties,
amounts paid in settlements and expenses paid or incurred by virtue of the fact
that such officer or director was acting in such capacity to the extent not
prohibited by law.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and certain executive officers of the
Communications Group and their respective ages and positions are as follows:
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
John W. Kluge................... 83 Chairman
Stuart Subotnick................ 56 Vice Chairman, President and Chief Executive Officer
Silvia Kessel................... 47 Executive Vice President, Chief Financial Officer and Treasurer
Arnold L. Wadler................ 54 Executive Vice President, General Counsel and Secretary
Robert A. Maresca............... 63 Senior Vice President
Vincent D. Sasso, Jr............ 39 Vice President
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS
INC.:
Carl C. Brazell................. 56 Co-President
Richard J. Sherwin.............. 55 Co-President
William Manning................. 41 Senior Vice President and Chief Financial Officer
METROMEDIA CHINA
CORPORATION ("MCC"):
Max E. Bobbitt.................. 52 President and Chief Executive Officer
Mark Hauf....................... 49 Executive Vice President and Chief Operating Officer
G. Mont Williams................ 53 Senior Vice President and Chief Technical Officer
SNAPPER, INC.:
Robin G. Chamberlain............ 38 President and Chief Executive Officer
J. Roddy Wells.................. 38 Senior Vice President and Chief Financial Officer
The following is a biographical summary of the experience of the executive
officers of the Company and certain executive officers of the Company's
subsidiaries.
Mr. Kluge has served as Chairman of the Board of Directors of the Company since
the consummation of the November 1 Merger and served as Chairman of the Board of
Orion from 1992 until the Entertainment Group Sale. In addition, Mr. Kluge has
served as Chairman and President of Metromedia and its predecessor-in-interest,
Metromedia, Inc. for over six years. Mr. Kluge is also a director of Metromedia
Fiber Network, Inc., Occidental Petroleum Corporation and Conair Corporation.
Mr. Kluge is Chairman of the Company's Executive Committee and is a member of
the Nominating Committee.
Mr. Subotnick has served as Vice Chairman of the Board of Directors since the
consummation of the November 1 Merger and as President and Chief Executive
Officer of the Company since December, 1996.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
In addition, Mr. Subotnick served as Vice Chairman of the Board of Orion from
November, 1992 until the Entertainment Group Sale. Mr. Subotnick has served as
Executive Vice President of Metromedia Company and its predecessor-in-interest,
Metromedia, Inc., for over six years. Mr. Subotnick is also Chairman of the
Board of Directors of Big City Radio, Inc., and also is a director of Metromedia
Fiber Network, Inc., Carnival Cruise Lines, Inc., and, was a director of RDM
from February 28, 1997 to February 25, 1998. Mr. Subotnick is a member of the
Executive Committee of the Company.
Ms. Kessel has served as Executive Vice President, Chief Financial Officer and
Treasurer since August 29, 1996 and, from November 1, 1995 until that date, as
Senior Vice President, Chief Financial Officer and Treasurer of the Company. In
addition, Ms. Kessel served as Executive Vice President of Orion from January,
1993 until the Entertainment Group Sale, Senior Vice President of Metromedia
since 1994 and President of Kluge & Company since January 1994. Prior to that
time, Ms. Kessel served as Senior Vice President and a Director of Orion from
June 1991 to November 1992 and Managing Director of Kluge & Company (and its
predecessor) from April 1990 to January 1994. Ms. Kessel is also a director of
Metromedia Fiber Network, Inc. and Big City Radio, Inc. and was a director of
RDM from February 28, 1997 to February 25, 1998. Ms. Kessel is a member of the
Nominating Committee of the Company.
Mr. Wadler has served as Executive Vice President, General Counsel and Secretary
since August 29, 1996 and, from November 1, 1995 until that date, as Senior Vice
President, General Counsel and Secretary of the Company. In addition, Mr. Wadler
served as a Director of Orion from 1991 until the Entertainment Group Sale and
as Senior Vice President, Secretary and General Counsel of Metromedia for over
six years. Mr. Wadler is also a director of Metromedia Fiber Network, Inc. and
Big City Radio, Inc. Mr. Wadler is Chairman of the Nominating Committee of the
Company.
Mr. Maresca has served as a Senior Vice President of the Company since November
1, 1995 and has served as a Senior Vice President-Finance of Metromedia for over
six years.
Mr. Sasso has served as the Company's Vice President of Financial Reporting
since July 1996. Prior to that time, Mr. Sasso served in a number of positions
at KPMG Peat Marwick LLP from November 1984 to July 1996, including partner from
July 1994 to June 1996.
Mr. Brazell has served as Co-President and Director of MITI and a predecessor
company since 1993. Prior to that time, Mr. Brazell served as President and
Chief Executive Officer of Command Communications, Inc., an owner of radio
properties, and prior to that served in various capacities in the radio
broadcasting industry, including serving as President of the radio division of
Metromedia, Inc., the predecessor-in-interest to Metromedia Company.
Mr. Sherwin has served as Co-President and Director of MITI and was a founder of
the predecessor company, International, Telcell, Inc., since October 1990. Prior
to that time, Mr. Sherwin served as the Chief Operating Officer of Graphic
Scanning Corp., a leading operator of cellular telephone, radio paging and
wireless cable television in the United States. Prior to his role at Graphic
Scanning Corp., he served in a number of marketing and sales positions with IBM.
Mr. Sherwin has served as Chairman of the Board and a director of the Personal
Communications Industry Association.
Mr. Manning has served as Senior Vice President and Chief Financial Officer of
MITI since 1992. Prior to joining MITI, Mr. Manning was Vice President and Chief
Financial Officer of the Sillerman Companies, a group of companies primarily
focused on the radio broadcasting industry. He has also held a variety of
management positions in companies such as CBS, Inc. and Control Data
Corporation.
Mr. Bobbitt has served as President and Chief Executive Officer of AAT since
January 1996 and of MCC since March 1, 1997. In January 1995, Mr. Bobbitt
retired from ALLTEL Corporation, a leading telecommunications and information
services company. During his twenty-four career with ALLTEL
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
Corporation, Mr. Bobbitt served as a director and held various positions
including President and Chief Operating Officer, Executive Vice President and
Chief Financial Officer. He currently serves as a director of WorldCom, Inc., an
international telecommunications and information services company.
Mr. Hauf joined MCC in September 1996 as Senior Vice President and Chief
Information Officer. He became Executive Vice President and Chief Operating
Officer in July 1997. He was Vice President and Chief Information Officer for
Universal Oil Products from March 1995 to September 1996. He was a founding
partner and Chief Information Officer of Multimedia Sales Agent, Inc. from
September 1993 to March 1995. He held several positions with Wisconsin Bell from
1968 to 1988 and joined Ameritech from 1988 to 1993 and served as Vice
President-Information Technology Services.
Mr. Williams joined MCC in August 1996 as Senior Vice President and Chief
Technology Officer. He was self employed as a Senior Telecommunications
Consultant from 1992 to August 1996. He served as Vice President of Business
Development and other positions for Ameritech from 1988 to 1992. He served as
Vice President of Business Development and other positions with Sprint from 1982
to 1988.
Ms. Chamberlain joined Snapper in 1989. Ms. Chamberlain has served as President
and Chief Executive Officer of the Company since December 1996, prior to that
Ms. Chamberlain was Vice President and Chief Financial Officer of Snapper and
has also served as Vice President and Treasurer, Controller and Assistant
Controller of Snapper.
Mr. Wells joined Snapper in 1995. Mr. Wells has served as Vice President and
Chief Financial Officer of the Company since 1997 and prior to that served as
Controller. Mr. Wells served in a number of positions including Senior
Accounting and Financial Systems Manager of Southeast Paper Manufacturing
Company from 1987 to 1995.
28
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 (the "AMEX" and "PSE",
respectively) under the symbol "MMG". Prior to November 2, 1995, the Common
Stock was listed and traded on both the NYSE and the PSE 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 AMEX.
MARKET PRICE OF COMMON STOCK
----------------------------------------
1997 1996
------------------ ------------------
QUARTERS ENDED HIGH LOW HIGH LOW
- ----------------------------------------------------------------- ------- ------- ------- -------
March 31......................................................... $11 7/8 $ 9 3/16 $14 1/4 $11 1/2
June 30.......................................................... 13 1/16 7 7/16 16 5/8 12 1/4
September 30..................................................... 12 7/8 10 7/8 12 1/2 9 1/2
December 31...................................................... 14 1/4 8 3/4 12 1/8 8 7/8
Holders of Common Stock are entitled to such dividends as may be declared by the
Company's Board of Directors and paid out of funds legally available for the
payment of dividends. The Company has not paid a dividend to its stockholders
since the dividend declared in the fourth quarter of 1993, and has no plans to
pay cash dividends on the Common Stock in the foreseeable future. The Company
intends to retain earnings to finance the development and expansion of its
businesses. The decision of the Board of Directors as to whether or not to pay
cash dividends in the future will depend upon a number of factors, including the
Company's future earnings, capital requirements, financial condition and the
existence or absence of any contractual limitations on the payment of dividends.
The Company's ability to pay dividends is limited because the Company operates
as a holding company, conducting its operations solely through its subsidiaries.
Certain of the Company's subsidiaries' existing credit arrangements contain, and
it is expected that their future arrangements will similarly contain,
substantial restrictions on dividend payments to the Company by such
subsidiaries. See Item 7-- "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As of March 24, 1998, there were approximately 7,403 record holders of Common
Stock. The last reported sales price for the Common Stock on such date was
$14 7/16 per share as reported by the AMEX.
29
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED FEBRUARY
YEARS ENDED DECEMBER 31, 28,
------------------------------------- -----------------------
1997 1996(1) 1995(2) 1995 1994
----------- ----------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues (3)........................................ $ 204,328 $ 36,592 $ 5,158 $ 3,545 $ 51
Equity in losses of Joint Ventures.................. (13,221) (11,079) (7,981) (2,257) (777)
Loss from continuing operations (3) (4)............. (130,901) (72,146) (36,265) (19,141) (7,334)
Income (loss) from discontinued operations (3)...... 234,036 (38,592) (344,329) (50,270) (125,196)
Loss from extraordinary items (5)................... (14,692) (4,505) (32,382) -- --
Net income (loss)................................... $ 88,443 $ (115,243) $ (412,976) $ (69,411) $ (132,530)
Income (loss) per common share--Basic (6):
Continuing operations............................. $ (2.02) $ (1.33) $ (1.48) $ (0.95) $ (0.43)
Discontinued operations........................... 3.50 (0.71) (14.03) (2.48) (7.28)
Extraordinary items............................... (0.22) (0.08) (1.32) -- --
Net income (loss)................................. $ 1.26 $ (2.12) $ (16.83) $ (3.43) $ (7.71)
Ratio of earnings to fixed charges (7).............. n/a n/a n/a n/a n/a
Weighted average common shares outstanding.......... 66,961 54,293 24,541 20,246 17,188
Dividends per common share.......................... -- -- -- -- --
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets (8).................................... $ 789,272 $ 513,118 $ 328,600 $ 40,282 $ 54,440
Notes and subordinated debt......................... 79,416 190,754 171,004 24,948 9,999
- ------------------------
(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 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 was $11.4 million.
(3) On July 10, 1997, the Company completed the Entertainment Group Sale and
anticipates completing the Landmark Sale in April 1998. 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 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.
(6) The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" and has restated all prior period earnings per share as
required.
(7) For purposes of this computation, earnings are defined as pre-tax earnings
or loss from continuing operations of the Company plus (i) its
majority-owned subsidiaries, whether or not consolidated, (ii) its
proportionate share of any fifty-percent-owned Joint Ventures, and (iii) any
income received from less-than-fifty-percent-owned Joint Ventures. Fixed
charges are the sum of (i) interest costs, (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
30
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
than 1.00 for each of the years ended December 31, 1997, 1996 and 1995 and
for the years ended February 28, 1995 and 1994; thus, earnings available for
fixed charges were inadequate to cover fixed charges for such periods. The
deficiencies in earnings to fixed charges for the years ended December 31,
1997, 1996 and 1995 and for the years ended February 28, 1995 and 1994 were
$142.5 million, $66.5 million, $33.0 million, $18.4 million and $7.3
million, respectively.
(8) Total assets include the net assets of the Entertainment Group and Landmark.
The net assets (liabilities) of the Entertainment Group at December 31, 1996
and 1995 and February 28, 1995 and 1994 were $11.0 million, $12.1 million,
($8.5 million) and $41.8 million, respectively. The revenues of the
Entertainment Group for the years ended December 31, 1996 and 1995 and
February 28, 1995 and 1994 were $135.6 million, $133.8 million, $191.2
million and $175.7 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'S 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
On July 10, 1997 the Company completed the Entertainment Group Sale, and
anticipates completing the sale of Landmark Theatre Group, Inc. ("Landmark") in
April 1998 (see Notes 5 and 6 of the Notes to Consolidated Financial
Statements). Both transactions have been recorded as a sale of a business
segment and, accordingly the consolidated balance sheets reflect the net assets
of the discontinued segments. In addition, the consolidated statements of
operations reflect the results of these operations as discontinued segments.
The continuing business activities of the Company consist of two business
segments: (i) the development and operation of communications businesses in
Eastern Europe and the FSU, China and other selected emerging markets, which
include cable television, paging services, radio broadcasting and various types
of telephony services; and (ii) the manufacture of lawn and garden products
through Snapper.
On November 1, 1995, Orion, MITI, the Company and Sterling consummated the
November 1 Merger. In connection with the November 1 Merger, the Company changed
its name from "The Actava Group Inc." to "Metromedia International Group, Inc."
For financial reporting purposes only, Orion and MITI have been deemed to be the
joint acquirers of Actava and Sterling. The acquisition of Actava and Sterling
was accounted for as a reverse acquisition. As a result of the reverse
acquisition, the historical financial statements of the Company for periods
prior to the November 1 Merger are the combined financial statements of Orion
and MITI, rather than of Actava.
The operations of Actava and Sterling have been included in the accompanying
consolidated financial statements from November 1, 1995, the date of
acquisition. During 1995, the Company adopted a formal plan to dispose of
Snapper and, as a result, Snapper was classified as an asset held for sale and
the results of its operations were not included in the consolidated results of
operations of the Company from November 1, 1995 to October 31, 1996.
Subsequently, the Company announced its intention to actively manage Snapper to
maximize its long term value to the Company. The operations of Snapper are
included in the accompanying consolidated financial statements as of November 1,
1996.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In addition, as of April 1, 1997, for financial statement reporting purposes,
the Company no longer qualifies to treat its investment in RDM as a discontinued
operation and the Company has included in its results of operations the
Company's share of the earnings and losses of RDM. On August 29, 1997, RDM and
certain of its affiliates filed voluntary bankruptcy petitions under chapter 11
of the Bankruptcy Code in the United States Bankruptcy Court for the Northern
District of Georgia. 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 Company does not believe it will be entitled to any
distributions from its equity interest in RDM.
COMMUNICATIONS GROUP
The Company, through the Communications Group, is the owner of various interests
in Joint Ventures that are currently in operation or planning to commence
operations in Eastern Europe, the FSU, China and other selected emerging
markets.
The Communications Group's Joint Ventures currently offer cable television,
AM/FM radio broadcasting, paging, cellular telecommunications, international
toll calling, fixed telephony and trunked mobile radio. The Communications
Group's Joint Ventures' partners are principally governmental agencies or
ministries.
The Communications Group's investments in communications businesses are made in
two primary geographic areas in Eastern Europe and the FSU, and in China. In
Eastern Europe and the FSU, the Communications Group generally owns 50% or more
of the operating Joint Ventures in which it invests. Currently, legal
restrictions in China prohibit foreign ownership and operation in the
telecommunications sector. The Communications Group's China Joint Ventures
invest in network construction and development of telephony networks for China
United Telecommunications Incorporated ("China Unicom"). The completed networks
are operated by China Unicom. The China Joint Ventures receive payments from
China Unicom based on revenues and profits generated by the networks in return
for their providing financing, technical advice and consulting and other
services. Hereinafter, all references to the Communications Group Joint Ventures
relate to the operating Joint Ventures in Eastern Europe and the FSU and the
Communications Group's Joint Ventures in China. Statistical data regarding
subscribers, population, etc. for the Joint Ventures in China relate to the
telephony networks of China Unicom.
The Company's financial statements consolidate the accounts and results of
operations of only 11 of the Communications Group's 44 operating Joint Ventures
at December 31, 1997. Investments in other companies and Joint Ventures which
are not majority owned, or which the Communications Group does not control, but
which the Communications Group exercises significant influence, have been
accounted for using the equity method. Investments of the Communications Group
or its consolidated subsidiaries over which significant influence is not
exercised are carried under the cost method. See Notes 2 and 3 to the "Notes to
Consolidated Financial Statements" of the Company for the year ended December
31, 1997, for these Joint Ventures and their summary financial information.
32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SNAPPER
Snapper manufacturers Snapper-Registered Trademark- brand premium-priced power
lawnmowers, lawn tractors, garden tillers, snowthrowers and related parts and
accessories. The lawnmowers include rear engine riding mowers, front-engine
riding mowers or lawn tractors, and self-propelled and push-type walk-behind
mowers. Snapper also manufactures a line of commercial lawn and turf equipment
under the Snapper brand. Snapper provides lawn and garden products through
distribution channels to domestic and foreign retail markets.
The following table sets forth the operating results for the years ended
December 31, 1997, 1996 and 1995 of the Company's Communications Group and lawn
and garden products segments. Financial information summarizing the results of
operations of Snapper, which was classified as an asset held for sale on
November 1, 1995 to October 31, 1996, is presented in Note 8 to the "Notes to
Consolidated Financial Statements."
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SEGMENT INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS TABLE
(IN THOUSANDS)
1997 1996 1995
----------- ----------- -----------
Communications Group:
Revenues................................................................. $ 21,252 $ 14,047 $ 5,158
Cost of sales and operating expenses..................................... (2,549) (1,558) --
Selling, general and administrative...................................... (68,936) (38,129) (26,991)
Depreciation and amortization............................................ (9,749) (6,403) (2,101)
----------- ----------- -----------
Operating loss....................................................... (59,982) (32,043) (23,934)
----------- ----------- -----------
Equity in losses of Joint Ventures....................................... (13,221) (11,079) (7,981)
Minority interest........................................................ 8,893 666 188
----------- ----------- -----------
(64,310) (42,456) (31,727)
Snapper:
Revenues................................................................. 183,076 22,545 --
Cost of sales and operating expenses..................................... (123,995) (20,700) --
Selling, general and administrative...................................... (67,354) (9,954) --
Depreciation and amortization............................................ (6,973) (1,256) --
----------- ----------- -----------
Operating loss....................................................... (15,246) (9,365) --
----------- ----------- -----------
Corporate Headquarters and Eliminations:
Revenues................................................................. -- -- --
Cost of sales and operating expenses..................................... -- -- --
Selling, general and administrative...................................... (5,549) (9,355) (1,109)
Depreciation and amortization............................................ (12) (18) --
----------- ----------- -----------
Operating loss....................................................... (5,561) (9,373) (1,109)
----------- ----------- -----------
Consolidated-Continuing Operations:
Revenues................................................................. 204,328 36,592 5,158
Cost of sales and operating expenses..................................... (126,544) (22,257) --
Selling, general and administrative...................................... (141,839) (57,439) (28,100)
Depreciation and amortization............................................ (16,734) (7,677) (2,101)
----------- ----------- -----------
Operating loss....................................................... (80,789) (50,781) (25,043)
Interest expense........................................................... (20,922) (19,090) (5,935)
Interest income............................................................ 14,967 8,552 2,506
Income tax benefit (expense)............................................... 5,227 (414) --
Equity in losses of Joint Ventures......................................... (13,221) (11,079) (7,981)
Equity in losses of and writedown of investment in RDM..................... (45,056) -- --
Minority interest.......................................................... 8,893 666 188
Discontinued operations.................................................... 234,036 (38,592) (344,329)
Extraordinary items........................................................ (14,692) (4,505) (32,382)
----------- ----------- -----------
Net income (loss).......................................................... $ 88,443 $ (115,243) $ (412,976)
----------- ----------- -----------
----------- ----------- -----------
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
MMG CONSOLIDATED-RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, net income was $88.4 million as compared
to a net loss of $115.2 million for the prior year.
The net income in 1997 includes the gain on the Entertainment Group Sale of
$266.3 million and losses from discontinued operations of $32.3 million, an
extraordinary loss of $14.7 million relating to the early extinguishment of debt
and a further writedown of the Company's investment in RDM amounting to $45.1
million. The 1996 loss from discontinued operations and extraordinary loss are
attributable to the writedown of the Company's investment in RDM to its net
realizable value, the loss from operations of the Entertainment Group, income
from operations of Landmark and the loss associated with the refinancing of the
Entertainment Group debt facility as part of the acquisition of Goldwyn and MPCA
in July 1996. In addition, net income in 1997 and net loss in 1996 included
equity in losses of the Communications Group's Joint Ventures of $13.2 million
and $11.1 million, respectively.
Operating loss increased to $80.8 million for the year ended December 31, 1997
from $50.8 million for the year ended December 31, 1996. The increase in
operating loss reflects the $5.9 million increase in Snapper's operating loss in
1997, compared to the period of November 1, 1996 to December 31, 1996 and
increases in selling, general and administrative costs due principally to the
continued growth of the Communications Group.
Interest expense increased $1.8 million to $20.9 million in 1997, primarily due
to the inclusion of interest from the Snapper credit facility partially offset
by the repayment of the outstanding debentures in August 1997 at corporate
headquarters. The average interest rate on average debt outstanding of $143.0
million and $174.2 million in 1997 and 1996, respectively was 14.6% and 11.0%,
respectively.
Interest income increased $6.4 million to $15.0 million in 1997, principally
from investment of funds at corporate headquarters from the preferred stock
offering in September 1997 and increased interest income resulting from
increased borrowings under the Communications Group's credit facilities with its
Joint Ventures for their operating and investing cash requirements.
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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
During the year ended December 31, 1996, the Company reported a loss from
continuing operations of $72.1 million, a loss from discontinued operations of
$38.6 million and an extraordinary loss on extinguishment of debt of $4.5
million, resulting in a net loss of $115.2 million. This compares to a loss from
continuing operations of $36.3 million, a loss from discontinued operations of
$344.3 million and a loss on extinguishment of debt of $32.4 million, resulting
in a net loss of $413.0 million for the year ended December 31, 1995. The loss
from continuing operations increased by $35.8 million primarily as a result of
increases in the operating losses at the Communications Group, corporate
overhead and the consolidation of Snapper losses as of November 1, 1996.
The 1996 loss from discontinued operations and extraordinary item loss were
attributable to the writedown of the Company's investment in RDM to its net
realizable value, the loss from operations of the Entertainment Group, income
from operations of Landmark and the loss associated with the refinancing of the
Entertainment Group debt facility as part of the Goldwyn and MPCA acquisitions
in July 1996.
35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The 1995 loss from discontinued operations represents the writedown of the
portion of the purchase price of the Company allocated to Snapper on November 1,
1995 to its net realizable value and the loss from operations of the
Entertainment Group.
The extraordinary loss relating to the early extinguishment of debt in 1995 was
a result of the repayment and termination of certain Entertainment Group debt,
which was refinanced with funds provided under the Old Orion Credit Facility (as
defined in Note 4 to the Consolidated Financial Statements) and a non-interest
bearing promissory note from the Company, and to the charge-off of the
unamortized discount associated with such obligations.
Interest expense increased $13.2 million in 1996. This increase in interest
expense was primarily due to the interest on the debt at corporate headquarters
for twelve months in 1996 as compared to two months in 1995, which was partially
offset by the reduction in interest expense for the Communications Group since
the Company funds its operations. The average interest rates on average debt
outstanding of $174.2 million and $65.4 million in 1996 and 1995, respectively
were 11.0% and 8.8%, respectively.
Interest income increased $6.0 million principally as a result of funds invested
at corporate headquarters from of the common stock offering in July 1996 and
increased interest resulting from increased borrowings under the Communications
Group's credit facilities with its Joint Ventures for their operating and
investing cash requirements.
COMMUNICATIONS GROUP-RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Revenues increased to $21.3 million in 1997 from $14.0 million in 1996. Revenues
of unconsolidated Joint Ventures in 1997 and 1996 appear in Notes 2 and 3 to the
"Notes to Consolidated Financial Statements." The growth in revenue of the
consolidated Joint Ventures has resulted primarily from an increase in radio
operations in Moscow and cable operations in Romania. Revenue from radio
operations increased to $13.5 million in 1997 from $9.4 million in 1996. Cable
television revenues increased by $1.7 million in 1997 from $170,000 in 1996.
Radio paging services generated revenues of $3.3 million for 1997 as compared to
$2.9 million for 1996. Management fees and licensing fees decreased to $1.2
million for 1997 from $1.8 million in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $30.8 million or 81%
in 1997 as compared to 1996. Approximately 50% of the increase relates to the
expansion of operations in China including the dissolution of a Joint Venture
and non-cash compensation expenses. The remaining increase relates to additional
expenses associated with the increase in the number of Joint Ventures and the
need for the Communications Group to support and assist the operations of the
Joint Ventures as well as additional staffing at the radio broadcasting
stations, cable television operations and radio paging operations.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $9.7 million in 1997 from
$6.4 million in 1996. The increase was primarily a result of the amortization of
goodwill in connection with the acquisition of AAT.
36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
EQUITY IN LOSSES OF JOINT VENTURES
The Communications Group accounts for the majority of its Joint Ventures under
the equity method of accounting since it generally does not exercise control.
Under the equity method of accounting, the Communications Group reflects the
cost of its investments, adjusted for its share of the income or losses of the
Joint Ventures, on its balance sheet and reflects generally only its
proportionate share of income or losses of the Joint Ventures in its statement
of operations. The losses recorded in 1997 and 1996 represent the Communications
Group's equity in the losses of the Joint Ventures for the twelve months ended
September 30, 1997 and 1996, respectively. Equity in the losses of the Joint
Ventures by the Communications Group are generally reflected according to the
level of ownership of the Joint Venture by the Communications Group until such
Joint Venture's contributed capital has been fully depleted. Subsequently, the
Communications Group recognizes the full amount of losses generated by the Joint
Venture since the Communications Group is generally the sole funding source of
the Joint Ventures.
EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET UNION
Revenues generated by unconsolidated Joint Ventures were $70.4 million in 1997,
compared to $44.8 million in 1996. The Communications Group recognized equity in
losses of its Joint Ventures of approximately $11.8 million in 1997, compared to
$11.1 million in 1996.
The increase in losses of the Joint Ventures of $700,000 from 1996 to 1997 is
attributable to (i) the commencement of operations of the Communications Group's
Georgian GSM venture which increased the loss by $900,000, (ii) increased equity
losses of the Latvian GSM venture of $1.5 million, and (iii) increased equity
losses of Protocall's trunked mobile radio ventures and the cable ventures in
Latvia and Moldova of $1.0 million, $1.5 million and $900,000, respectively,
which losses were partially offset by increases in the equity results of $1.7
million and $3.4 million of the operations of the Communications Group's cable
venture in Moscow and telephony venture in Georgia.
CHINA
Equity in losses of the Communications Group's Joint Ventures in China, amounted
to $1.4 million in 1997. The loss is attributable to the Communications Group's
Ningbo JV, which commenced operations May 1997.
MINORITY INTEREST
Losses allocable to minority interests increased to $8.9 million in 1997 from
$666,000 in 1996. The increase principally represents the inclusion of losses
allocable to the minority shareholders of MCC.
37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
REVENUES
Revenues of consolidated Joint Ventures increased to $14.0 million in 1996 from
$5.2 million in 1995. Revenues of unconsolidated Joint Ventures for calendar
1996 and 1995 appear in Note 2 to the Consolidated Financial Statements. This
growth resulted primarily from an increase in radio broadcasting operations in
Hungary, paging service operations in Romania and an increase in management and
licensing fees. Revenue from radio operations increased to $9.4 million in 1996
from $3.9 million in 1995. Radio paging services generated revenues of $2.9
million in 1996, as compared to $700,000 in 1995. Management fees and licensing
fees increased to $1.8 million in 1996 from $600,000 in 1995. In 1995, the
Communications Group changed its policy of consolidating these operations by
recording the related accounts and results of operations based on a three-month
lag. As a result, the 1995 consolidated statement of operations reflects nine
months of operations, as compared to twelve months in 1996. Had the
Communications Group applied this method from October 1, 1994, the net effect on
the results of operations would not have been material.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $11.1 million or 41%,
in 1996 as compared to 1995. This increase resulted principally from the hiring
of additional staff, additional expenses associated with the increase in the
number of Joint Ventures, and the need for the Communications Group to support
and assist the operations of the Joint Ventures and additional staffing at the
radio broadcasting stations and radio paging operations.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense increased to $6.4 million in 1996. The
increase was attributable principally to the amortization of goodwill in
connection with the November 1 Merger.
EQUITY IN LOSSES OF JOINT VENTURES
EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET UNION
The Communications Group accounts for the majority of its Joint Ventures under
the equity method of accounting since it generally does not exercise control.
Under the equity method of accounting, the Communications Group reflects the
cost of its investments, adjusted for its share of the income or losses of the
Joint Ventures, on its balance sheet and reflects generally only its
proportionate share of income or losses of the Joint Ventures in its statement
of operations. The losses recorded in 1996 and 1995 represent the Communications
Group's equity in the losses of the Joint Ventures for the twelve months ended
September 30, 1996 and 1995, respectively. Equity in the losses of the Joint
Ventures by the Communications Group are generally reflected according to the
level of ownership of the Joint Venture by the Communications Group until such
Joint Venture's contributed capital has been fully depleted. Subsequently, the
Communications Group recognizes the full amount of losses generated by the Joint
Venture since the Communications Group is generally the sole funding source of
the Joint Ventures.
Revenues generated by unconsolidated Joint Ventures were $44.8 million in 1996,
compared to $19.3 million in 1995. The Communications Group recognized equity in
losses of its Joint Ventures of approximately $11.1 million in 1996, compared to
$8.0 million in 1995.
38
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The increase in losses of the Joint Ventures of $3.1 million from 1995 to 1996
was partially attributable to the acquisition during 1996 of Protocall Ventures,
Ltd., which included five trunked mobile radio Joint Ventures and increased the
losses by $600,000. Further, a loss of $500,000 was incurred in connection with
the expansion of radio broadcasting operations. The Communications Group's
paging ventures in Estonia and Riga and its cable television venture in Tblisi
were responsible for $600,000, $900,000 and $1.0 million, respectively, of the
increased loss. These losses were attributable to increased costs associated
with promotional discount campaigns at the paging ventures, which resulted
ultimately in increased subscribers, and a writedown of older receivable
balances at the cable television venture. Losses were partially offset by an
increase in equity in income of $1.2 million realized at the Communications
Group's telephony venture in Tblisi.
MINORITY INTEREST
Losses allocable to minority interest increased to $666,000 in 1996. The
increase principally represented the inclusion of losses allocable to the
minority shareholders of Protocall Ventures.
ANALYSIS OF COMBINED RESULTS OF OPERATIONS
EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET UNION
The Company is providing as supplemental information the following analysis of
combined revenues and operating income (loss) for its consolidated and
unconsolidated Joint Ventures in Eastern Europe and the FSU. The Company
believes that an analysis of combined operating results provides a meaningful
presentation of the performance of its investments. Note 2 to the Consolidated
Financial Statements provides a listing of the Company's ownership percentages
in each of its unconsolidated Joint Ventures.
Total revenues for the Communications Group's cable television, paging, radio
broadcasting, cellular telecommunications, international toll calling and
trunked mobile radio businesses were $89.8 million, $57.2 million and $23.9
million in 1997, 1996 and 1995, respectively. The annual percentage increase in
revenues were 57% and 139% from 1996 to 1997 and from 1995 to 1996,
respectively. Combined operating income (loss) for all of the Communication
Groups businesses were $604,000, ($4.9) million and ($6.6) million in 1997, 1996
and 1995, respectively.
Cable television revenues were $23.3 million, $15.2 million and $8.1 million in
1997, 1996 and 1995, respectively. This represents annual percentage increases
in revenues of 53% and 88% from 1996 to 1997 and 1995 to 1996, respectively.
Total subscribers increased from 37,900 in 1995 to 69,118 in 1996 and 225,525 in
1997. Combined operating losses for cable television were $6.8 million, $6.0
million and $4.2 million in 1997, 1996 and 1995, respectively. Included in
operating losses in 1997, 1996 and 1995 were depreciation and amortization
charges of $9.6 million, $6.0 million and $2.9 million, respectively.
Subscriber growth and revenue increases during 1996 were the result of
implementing a new strategy, by which buildings were wired in advance and
targeted for a lower priced, broader based program package. This strategy was
implemented in Riga, Lativa and Tashkent, Uzbekistan which had increased
revenues of approximately $2.3 million and $918,000, respectively. In 1997, this
strategy was expanded to all cable ventures, and this coupled with acquisitions
of systems in Romania and Moldova contributed to the subscriber growth and
revenues increases at the operations in Tashkent, Uzbekistan, Kishinev, Moldova
and Almaty, Kazakstan, each of which had revenue increases of $1.5 million, $1.2
million and $1.4 million, respectively. The increases in operating results
reflect the favorable relationship between certain fixed operating costs and the
increase in subscribers, combined with costs savings achieved through economies
of scale resulting in contract re-negotiation with programmers and other
suppliers.
39
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Paging revenues were $13.0 million, $10.9 million and $3.8 million in 1997, 1996
and 1995, respectively. This represents annual percentage increases in revenues
of 19% and 187% from 1996 to 1997 and 1995 to 1996, respectively. Total
subscribers increased from 14,460 in 1995 to 44,836 in 1996 and 57,831 in 1997.
Combined operating losses for paging were $3.9 million, $943,000 and $635,000 in
1997, 1996 and 1995, respectively. Included in operating losses in 1997, 1996
and 1995 were depreciation and amortization charges of $1.6 million, $1.6
million and $600,000, respectively.
Increased paging revenue during 1996 is partially attributable to the expansion
of the paging operation in Tashkent, Uzbekistan, into several cities in
Uzbekistan to provide a wider coverage area than its competitors. This resulted
in a revenue increase of approximately $1.5 million. Other increases in revenue
in 1996 of approximately $826,000 and $1.3 million were achieved at the paging
operations in Tallin, Estonia and Riga, Latvia. During 1997, increases in
revenue of approximately $738,000 and $635,000 achieved at paging operations in
Nizhny Novgorod, Russia and Tashkent, Uzbekistan, respectively, were primarily
attributable for the overall growth. Increases in the operating income for
existing Joint Ventures in 1997 were offset by the operating losses of $2.9
million for the start up of the Austrian paging operations.
Radio broadcasting revenues were $16.0 million, $10.9 million and $4.8 million
in 1997, 1996 and 1995, respectively. This represents annual percentage
increases in revenues of 47% and 127% from 1996 to 1997 and 1995 to 1996,
respectively. Combined operating income (loss) for radio broadcasting was $4.2
million, $279,000 and ($1.5) million in 1997, 1996 and 1995, respectively.
Included in operating income (loss) in 1997, 1996 and 1995 were depreciation and
amortization charges of $699,000, $257,000 and $402,000, respectively.
The revenue growth is due to increases in the number of advertising spots
purchased and increases in the price of the advertising spots. The ability to
sell increased spots at a higher rate is dependent on audience ratings. The
Company has increased its audience share through the use of market research to
determine programming formats and marketing strategies including employing
United States trained sales managers. Specifically, during 1997 this business
strategy resulted in revenue increases of $2.0 million and $1.1 million for
radio operations in Moscow, Russia and St. Petersburg, Russia, respectively. In
addition, the acquisition during 1997 of a four station radio group in Estonia
contributed approximately $744,000 to the revenue increase. In 1996, revenue at
the radio operations in Hungary increased from 1995 by $5.4 million. The steady
increase in operating income from 1995 to 1996 and 1997 is a result of the
increases in revenue growth and is reflective of management's philosophy to
continually develop existing audience share and revenue base offset by the
effects of start-up costs associated with new stations acquired in both 1996 and
1997.
Telephony revenues were $37.5 million, $20.2 million and $7.2 million in 1997,
1996 and 1995, respectively. This represents annual percentage increases in
revenue of 86% and 181% from 1996 to 1997 and 1995 to 1996, respectively. Total
subscribers increased from 6,642 to 24,057 from 1996 to 1997. International toll
calling revenues were $30.9 million, $19.2 million and $7.2 million in 1997,
1996 and 1995, respectively. The Company commenced its trunked mobile radio
operations in 1996 and revenues were $4.0 million and $1.0 million in 1997 and
1996. Cellular telecommunications operations commenced in 1997 and had revenues
of $2.6 million. Combined operating income (loss) for telephony was $7.2
million, $1.7 million and ($292,000) in 1997, 1996 and 1995, respectively.
Included in operating income (loss) for 1997, 1996 and 1995 were depreciation
and amortization charges of $4.6 million, $1.1 million and $465,000,
respectively. Operating income (loss) from international toll calling operations
was $17.2 million, $3.1 million and ($292,000) in 1997, 1996 and 1995. Trunked
mobile radio's operating losses were $3.3 million and $1.4 million in 1997 and
1996, respectively, and operating losses for cellular telecommunications in 1997
were $6.7 million. The increase in international toll calling revenue is
directly attributable to increases in both the incoming and
40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
outgoing minute stream at the Joint Venture in Tblisi, Georgia, which handles
all international calls inbound to and outbound from the Republic of Georgia.
Increased trunked mobile radio revenue was primarily due to an increase of
approximately $2.5 million realized at the Portugal operations. The improvement
in operating results from 1995 to 1996 and 1997 is the result of the Telecom
Georgia international toll calling operating income offset by effect of start up
GSM operations in Latvia and Georgia.
FOREIGN CURRENCY
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 service their U.S. dollar denominated credit
lines, 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 currently does
not hedge against exchange rate risk and therefore could be subject in the
future to 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.
SNAPPER-RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
In order to enhance comparability, the following discussion of Snapper's results
of operations includes pro forma information for 1996 and gives effect as if
Snapper had been included in the Company's results of operations on January 1,
1996. The results of operations for the year ended December 31, 1997 and the pro
forma results of operations for the year ended December 31, 1996 are as follows
(in thousands):
1997 1996
----------- -----------
Revenues............................................................ $ 183,076 $ 153,168
Cost of sales and operating expense................................. (123,995) (130,598)
Selling, general and administrative................................. (67,354) (42,602)
Depreciation and amortization....................................... (6,973) (7,266)
----------- -----------
Operating loss.................................................... $ (15,246) $ (27,298)
----------- -----------
----------- -----------
REVENUES
Snapper's 1997 revenues were $183.1 million compared to $153.2 million in 1996.
In 1997, Snapper completed the implementation of its program to sell products
directly to its dealers. In implementing this program to restructure its
distribution network, Snapper repurchased certain distributor inventory which
resulted in sales reductions of $25.4 million in 1997 and $24.5 million in 1996.
Sales of lawn and garden power equipment contributed to the majority of the
revenues for the two periods. During 1997, lawn and garden equipment sales were
much lower than anticipated due to unseasonably cold weather in April and May,
and due to the impact of lower distributor sales than expected due to the
repurchase of distributor inventories. During the last quarter of 1997, Snapper
sold older lawn and garden equipment repurchased from the distributors at
reduced prices. In addition, mild winter weather during the fourth quarter of
1997
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
negatively impacted sales of snow throwers. In order to manage the levels of
field inventories in 1996, the factory produced at reduced levels compared to
prior years. This reduction adversely impacted sales, but did result in a
decrease in inventory levels.
Gross profit was $59.1 million and $22.6 million for 1997 and 1996,
respectively. Although higher sales margins were obtained from the distribution
network restructuring the low profit results were caused by lower than
anticipated sales as noted above. The profit results in 1996 were the result of
lower sales volumes resulting in reduced plant efficiency.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $67.4 million in 1997,
compared to $42.6 million in 1996. In addition to normal selling, general and
administrative expenses, the 1997 expenses reflect additional television
commercial expenditures to assist Snapper dealers during the distributor network
restructuring. In 1997 and 1996, Snapper also incurred acquisition expenses
related to the repurchase of inventory from nine and eighteen distributorships
during the periods respectively.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses were $7.0 million and $7.3 million for
1997 and 1996, respectively. Depreciation and amortization expenses reflected
the depreciation of Snapper's property, plant, and equipment as well as the
amortization of the goodwill associated with the acquisition of Snapper.
OPERATING LOSS
Snapper experienced operating losses of $15.2 million and $27.3 million during
1997 and 1996, respectively. The loss incurred in 1997 was the result of lower
sales primarily due to unseasonably cool weather in April and May and milder
winter weather during the fourth quarter, in addition to the repurchase of
distributor inventories during the year. The loss incurred in 1996 was the
result of reduced production levels and the repurchase of distributor
inventories during the year.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY
MMG is a holding company and, accordingly, does not generate cash flows. The
Communications Group is dependent on MMG for significant capital infusions to
fund its operations and make acquisitions, as well as to fulfill its commitments
to make capital contributions and loans to its Joint Ventures. Such funding
requirements are based on the anticipated funding needs of its Joint Ventures
and certain acquisitions committed to by the Company. Future capital
requirements of the Communications Group, including future acquisitions, will
depend on available funding from the Company and on the ability of the
Communications Group's Joint Ventures to generate positive cash flows. Snapper
is restricted under covenants contained in its credit agreement from making
dividend payments or advances to MMG and the Company has periodically funded the
short-term working capital needs of Snapper. The Company, at its discretion, can
make dividend payments on its 7 1/4% Cumulative Convertible Preferred Stock in
either cash or Common Stock. If the Company were to elect to pay the dividend in
cash, the annual cash requirement would be $15.0 million.
Since each of the Communications Group's Joint Ventures operates businesses,
such as cable television, fixed telephony, paging and cellular
telecommunications, that are capital intensive and require significant capital
investment in order to construct and develop operational systems and market its
services, the
42
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Company will require in addition to its cash on hand and the proceeds from the
sale of Landmark, additional financing in order to satisfy its on-going working
capital requirements and to achieve its long-term business strategies. Such
additional capital may be provided through the public or private sale of equity
or debt securities of the Company or by separate equity or debt financings by
the Communications Group or certain companies of the Communications Group. No
assurance can be given that 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 from operations may be materially
and adversely affected. The Company believes that its cash on hand, together
with the net proceeds from the sale of Landmark, will be sufficient to fund the
Company's working capital requirements for the remainder of 1998.
Management believes that its long-term liquidity needs will be satisfied through
a combination of the Company's successful implementation and execution of its
growth strategy to become a global communications and media company and the
Communications Group's Joint Ventures achieving positive operating results and
cash flows through revenue and subscriber growth and control of operating
expenses.
As the Communications Group is in the early stages of development, the Company
expects to generate significant consolidated net losses for the foreseeable
future as the Communications Group continues to build out its facilities and
market its services.
COMMUNICATIONS GROUP
The Communications Group has invested significantly (in cash or equipment
through capital contributions, loans and management assistance and training) in
its Joint Ventures. The Communications Group has also incurred significant
expenses in identifying, negotiating and pursuing new wireless
telecommunications opportunities in selected emerging markets. The
Communications Group and virtually all of its Joint Ventures are experiencing
continuing losses and negative operating cash flow since the businesses are in
the development and start-up phase of operations.
EASTERN EUROPE AND THE REPUBLICS OF THE FORMER SOVIET UNION
The cable television, paging, fixed wireless loop telephony, GSM and
international toll calling businesses in the aggregate are capital intensive.
The Communications Group generally provides the primary source of funding for
its Joint Ventures both for working capital and capital expenditures, with the
exception of its GSM Joint Ventures. The GSM Joint Ventures have been funded to
date on a pro-rata basis by western sponsors, and the Communications Group has
funded its pro rata share of the GSM Joint Venture obligations. The
Communications Group has and continues to have discussions with vendors,
commercial lenders and international financial institutions to provide funding
for the GSM Joint Ventures. The Communications Group's Joint Venture agreements
generally provide for the initial contribution of cash or assets by the Joint
Venture partners, and for the provision of a line of credit from the
Communications Group to the Joint Venture. Under a typical arrangement, the
Communications Group's Joint Venture partner contributes the necessary licenses
or permits under which the Joint Venture will conduct its business, studio or
office space, transmitting tower rights and other equipment. The Communications
Group's contribution is generally cash and equipment, but may consist of other
specific assets as required by the applicable Joint Venture agreement.
Credit agreements between the Joint Ventures and the Communications Group are
intended to provide such Joint 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
43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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, 1997, the Communications Group was committed to provide funding
under the various charter fund agreements and credit lines in an aggregate
amount of approximately $102.8 million, of which $19.2 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.
The Communications Group reviews the actual results compared to the approved
business plan on a periodic basis. If the review indicates a material variance
from the approved business plan, the Communications Group may terminate or
revise its commitment to fund under the credit agreements.
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, their ability to control operating
expenses and the sale of commercial advertising time. Management's current plans
with respect to the Joint Ventures are to increase subscriber and advertiser
bases and thereby operating revenues by developing a broader band of programming
packages for wireless cable and radio broadcasting and by offering additional
services and options for paging and telephony services. By offering the large
local populations of the countries in which the Joint Ventures operate desired
services at attractive prices, management believes that the Joint Ventures can
increase their subscriber and advertiser bases and generate positive operating
cash flow, reducing their dependence on the Communications Group for funding of
working capital. Additionally, advances in wireless subscriber equipment
technology are expected to reduce capital requirements per subscriber. Further
initiatives to develop and establish profitable operations include reducing
operating costs as a percentage of revenue and assisting Joint Ventures in
developing management information systems and automated customer care and
service systems. No assurances can be given that such initiatives will be
successful or if successful, will result in such reductions. Additionally, if
the Joint Ventures do become profitable and generate sufficient cash flows in
the future, there can be no assurance that the Joint Ventures will pay dividends
or will return capital at any time.
CHINA
The Sichuan JV and the Chongqing JV are parties to a Network System Cooperation
Contract dated May 1996, with China Unicom (the "Sichuan Network System
Cooperation Contract"). The Sichuan Network System Cooperation Contract provides
for a 25-year period of cooperation between the Sichuan JV and the Chongqing JV
and China Unicom for the development of a local telephone network (the "PSTN
Network") in the Sichuan Province (such project is referred to herein as the
"Sichuan Project") with an initial capacity of 50,000 lines ("Phase 1") and with
China Unicom projecting growth of up to 1,000,000 lines in the Sichuan Province
within the next five years ("Phase 2"). In accordance with the terms of the
Sichuan Network System Cooperation Contract, the Sichuan JV and the Chonqing JV
are responsible for providing the initial capital to develop Phase 1 of the PSTN
Network (including payments for imported equipment) while China Unicom is
responsible for the construction of Phase 1 and operation, management and
maintenance of the PSTN Network in the Sichuan Province and the City of
Chongqing. The Sichuan JV and the Chongqing JV will provide financing,
consulting and management support services to China Unicom for the construction
and operation of the PSTN Network in exchange for a service and support fee
equal to 78% of distributable cash flow from the PSTN Network for a 25-year
period for each phase of the PSTN Network developed, payable semi-annually.
44
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
In connection with MCC's investments in the Sichuan JV and the Chongqing JV, the
Joint Ventures have entered into a Phase 1 loan with Northern Telecom
Communications ("Nortel") for $20.0 million to finance the purchase of Nortel
equipment for the Sichuan Province and City of Chongqing Phase 1 project. The
Company, has secured the Phase 1 loan repayment with a $20.0 million letter of
credit. Nortel has the right to draw down on the $20.0 million letter of credit
for amounts due Nortel by the Sichuan JV and the Chongqing JV if a Phase 2
contract has not been entered into with Nortel to expand the 50,000 lines in
Phase 1 project to at least 150,000 lines within one year from the date of the
Phase 1 contract with Nortel.
If the Phase 2 contract is entered into with Nortel, Sichuan JV and Chongqing JV
plan to enter into a long-term loan facility with Nortel for $100.0 million to
repay the Phase 1 loan and to finance Phase 2 and subsequent phases to expand
the telecommunications network in Sichuan Province and City of Chongqing. No
assurance can be given that Sichuan JV and Chongqing JV will be successful in
executing the long-term loan facility with Nortel. Accordingly, the Company
through the letter of credit may become obligated to finance up to $20.0 million
of the Phase 1 project for the Sichuan JV and Chongqing JV.
The estimated budget for Phase 1 of the Sichuan Project is approximately RMB 242
million or $29.5 million in the Sichuan Province and approximately RMB 242
million or $29.5 million in the City of Chongqing.
Ningbo Telecommunications has assigned to the Ningbo JV its Network System
Cooperation Contract with China Unicom which provides for the development of a
GSM telecommunications network (the "GSM Network") in the City of Ningbo with a
capacity of 50,000 lines (the "Ningbo Project"). In accordance with the terms of
the Network System Cooperation Contract, the Ningbo JV is responsible for
providing the initial capital to develop the Ningbo Project of the GSM Network
while China Unicom is responsible for the construction of the GSM Network and
operation, management and maintenance of the GSM Network in the City of Ningbo.
The Ningbo JV will provide financing, consulting and management support services
to China Unicom for the construction and operation of the GSM Network in
exchange for 73% of the distributable cash flow from the GSM Network for a
15-year period.
The total estimated budget for the Ningbo Project is approximately RMB 247
million or $29.7 million.
The ability of the Communications Group and its Joint Ventures to establish
profitable operations is also subject to significant political, economic and
social risks inherent in doing business in emerging markets such as Eastern
Europe and the FSU and China. These include matters arising out of government
policies, economic conditions, 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.
For the year ended December 31, 1997, the Communications Group's primary source
of funds was from the Company in the form of non-interest bearing intercompany
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 will continue to depend upon the Company for its financing
needs.
45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
SNAPPER
Snapper's liquidity is generated from operations and borrowings. On November 26,
1996, Snapper entered into a credit agreement (the "Snapper Credit Agreement")
with AmSouth pursuant to which AmSouth agreed to make available to Snapper a
revolving line of credit up to $55.0 million, (the "Snapper Revolver"). The
Snapper Revolver was to terminate on January 1, 1999 and is guaranteed by the
Company. The Snapper Revolver contains covenants regarding minimum quarterly
cash flow and equity requirements.
On April 30, 1997, Snapper completed a $10.0 million working capital facility
("Working Capital Facility") with AmSouth. The $10.0 million Working Capital
Facility provided AmSouth with (i) PARI PASSU collateral interest in all of
Snapper's assets (including rights under a Make-Whole and Pledge Agreement made
by Metromedia in favor of AmSouth in connection with the Snapper Revolver)and
(ii) accrued interest on borrowings at AmSouth's floating prime rate (same
borrowing rate as the Snapper Revolver) The Working Capital Facility was due and
payable on October 1, 1997. As additional consideration for AmSouth making this
new facility available, Snapper provided to AmSouth the joint and several
guarantees of Messrs. Kluge and Subotnick, Chairman of the Board of MMG and Vice
Chairman, President and Chief Executive Officer of MMG, respectively, on the
$10.0 million Working Capital Facility. The Company repaid Snapper's Working
Capital Facility on October 1, 1997. During the months of August and September,
MMG loaned Snapper a total of $10.0 million to meet working capital and
distributor repurchase proceeds.
On November 12, 1997, Snapper amended and restated the Snapper Credit Agreement
to increase the amount of the revolving line of credit from $55.0 million to
$80.0 million. The Snapper Revolver bears interest at an applicable margin above
the prime rate (up to 1.5%) or a LIBOR rate (up to 4.0%), and matures on January
1, 2000. The Snapper Revolver continues to be guaranteed by the Company, as well
as, Messrs. Kluge and Subotnick up to $10.0 million. The Snapper Credit
Agreement, as amended, continues to contain certain financial covenants
regarding minimum tangible net worth and satisfying certain quarterly cash flow
requirements.
46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
At December 31, 1997, Snapper was not in compliance with the financial
convenants under the Snapper Revolver. The Company and AmSouth amended the
Snapper Credit Agreement to provide for (i) a reduction in the amount of the
line of credit from $80.0 million to $55.0 million as of July 1, 1998 and (ii) a
reduction in the finished goods advance rate from 80% to 70% as of July 1, 1998
and 50% as of December 31, 1998. As part of the amendment to the Snapper Credit
Agreement, AmSouth waived the covenant defaults as of December 31, 1997.
Furthermore, the amendment replaced the existing 1998 financial covenants with
covenants reflecting Snapper's anticipated cash flow and equity changes based on
the seasonality of the business.
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, 1997, noncancelable commitments under these
agreements amounted to approximately $25.0 million.
Snapper has an agreement with a financial institution which makes available
floor-plan financing to distributors and dealers of Snapper products. This
agreement provides financing for dealer inventories and accelerates Snapper's
cash flow. Under the terms of the agreement, a default in payment by a dealer is
nonrecourse to Snapper. However, Snapper is obligated to repurchase any new and
unused equipment recovered from the dealer. At December 31, 1997, there was
approximately $65.7 million outstanding under this floor-plan financing
arrangement. The Company has guaranteed Snapper's payment obligations under this
agreement.
Management of the Company believes that Snapper's available cash on hand, the
cash flow generated by operating activities, borrowings from the Snapper
Revolver 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.
YEAR 2000 SYSTEM MODIFICATIONS
The Company is currently working to resolve the potential impact of the Year
2000 on the processing of date-sensitive information and network systems. The
Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the Year 2000, which could result in
miscalculations or system failures. The Company evaluates the costs associated
with modifying and testing its systems for the Year 2000. The Company expects to
make some of the necessary modifications through its ongoing investment in
system upgrades. The Company is not yet able to estimate the incremental costs
of the Year 2000 conversion effort, but such costs will be expensed as incurred.
The incremental costs to date have not been material. If the Company, its Joint
Ventures and projects where it does not have a controlling management interest,
customers or vendors are unable to resolve such processing issues in a timely
manner, it could result in a material financial risk. Accordingly, the Company
plans to devote the necessary resources to resolve all significant Year 2000
issues.
MMG CONSOLIDATED
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operations for the year ended December 31, 1997 was $118.6 million,
an increase in cash used in operations of $58.8 million from the prior year.
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Net income (loss) includes significant non-cash items including the gain from
the Entertainment Group Sale, operating loss of discontinued operations, equity
in losses and writedown of investment in RDM, losses on early extinguishment of
debt, depreciation, amortization, equity in losses of Joint Ventures and losses
allocable to minority interests. Excluding the gain from the Entertainment Group
Sale of $266.3 million in 1997, non-cash items increased to $117.0 million from
$64.1 million in 1996. This increase was principally attributable to the
increase in depreciation and amortization associated with the consolidation of
Snapper, losses from discontinued operations and the equity losses and writedown
of the Company's investment in RDM, partially offset by losses allocable to
AAT's minority owners. Changes in assets and liabilities, net of the effect of
acquisitions, decreased cash flows for 1997 and 1996 by $57.8 million and $8.7
million, respectively.
The decrease in cash flows in 1997 resulted from the increased losses in the
Communications Group's operations due to the start-up nature of these operations
and increases in selling, general and administrative expenses to support the
increase in the number of Joint Ventures and the inclusion of Snapper's
operating losses in 1997. The increase in operating assets principally reflects
increases in inventory of Snapper's products.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash provided by investing activities in 1997 was $70.2 million, compared to
cash used in investing activities of $26.8 million in the prior year. The
principal reason for the increase in cash provided by investing activities was
the net proceeds from the Entertainment Group Sale of $276.6 million. Cash used
in investments in and advances to Joint Ventures and additions to property,
plant and equipment were $69.8 million and $10.5 million, respectively, in 1997
as compared to $41.0 million and $5.1 million, respectively in 1996. In
addition, the Communications Group utilized $16.8 million of funds net of cash
acquired in acquisitions in 1997.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities was $88.7 million in 1997, as compared to
$155.5 million in 1996. The current year includes the proceeds from the issuance
of 4,140,000 shares of 7 1/4% Cumulative Convertible Preferred Stock of $199.4
million compared to 1996 which includes proceeds of $190.6 million from the
issuance of 18,400,000 shares of common stock. Of the $156.8 million of payments
in 1997 in notes and subordinated debt, $155.0 million relates to payment on the
Company's debentures. Of the $81.5 million of payments in 1996 on notes and
subordinated debt, $28.8 million was the repayment of a revolving credit
agreement by the Company.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operations in 1996 was $59.9 million, compared to cash used in
operations of $23.8 million in 1995.
The 1996 net loss of $115.2 million includes losses on discontinued operations
of $38.6 million and a loss on early extinguishment of debt of $4.5 million. The
1995 net loss of $413.0 million includes losses on discontinued operations of
$344.3 million and a loss on early extinguishment of debt of $32.4 million. The
1996 loss from continuing operations, was $72.1 million compared to a $36.3
million loss in 1995.
48
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Losses from continuing operations include significant non-cash items of
depreciation, amortization and equity in losses of Joint Ventures. Non-cash
items increased $10.7 million, from $10.3 million in 1995 to $21.0 million in
1996. The increase in non-cash items principally relates to increased
depreciation and amortization related to the November 1 Merger and an increase
in equity losses of the Communications Group's Joint Ventures.
Net changes in assets and liabilities decreased cash flows from operations in
1996 and 1995 by $8.7 million and increased cash flows from operations by $2.1
million, respectively. After adjusting net losses for discontinued operations,
extraordinary items, non-cash items and net changes in assets and liabilities,
the Company utilized $59.9 million of cash in operations in 1996, compared to
$23.8 million in 1995.
The increase in cash utilized in 1996 generally resulted from the increased
losses in the Communications Group's consolidated and equity Joint Ventures due
to the start-up nature of these operations and increases in selling, general and
administrative expenses at the Communications Group and corporate headquarters.
Net interest expense increased principally due to a full year of interest
expense from debt at corporate headquarters.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities amounted to $26.8 million for 1996. During
1996, the Company collected $5.4 million from the proceeds from sale of
short-term investments and paid $41.0 million, $5.1 million and $7.6 million for
investments in and advances to Joint Ventures and additions to property, plant
and equipment and acquisitions by the Communications Group, respectively. In
1995, the Company collected $45.3 million on a note receivable and had net cash
acquired in the November 1 Merger of $66.7 million. In 1995, the Company
invested $21.9 million to fund existing as well as new Joint Ventures.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided by financing activities was $155.5 million for 1996, compared to
cash used in financing activities of $41.1 million in 1995. The principal reason
for the increase of $196.6 million in 1996 was the completion of a public
offering pursuant to which the Company issued 18,400,000 shares of Common Stock,
the proceeds of which, net of transaction costs, was $190.6 million. Of the
$52.6 million in additions to long-term debt, $46.4 million resulted from
borrowings under Snapper's new credit facility. Of the $81.6 million payments of
long-term debt, $28.8 million was the repayment of a revolving credit agreement
by MMG, payments by MMG of notes and debentures of $7.6 million and Snapper's
payment of $38.6 million on its previous credit facility.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company will be required to provide both quantitative and qualitative
disclosures about market risk in its December 31, 1998 Annual Report on Form
10-K.
SPECIAL NOTE REGARDING FOWARD-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
49
SPECIAL NOTE REGARDING FOWARD-LOOKING STATEMENTS (CONTINUED)
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, 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 Company's ability to generate revenues;
political, social and economic conditions and laws, rules and regulations,
particularly in Eastern Europe and the FSU, 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 FSU, China and other 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 FSU, China and other selected emerging markets; which may affect the
Company's results of operations; exchange rate fluctuations; license renewals
for the Company's communications investments in Eastern Europe and the FSU,
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 regulation; and other factors referenced herein. The
Company does not undertake, and specifically declines, any obligations to
release publicly the results of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
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.
50
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, 1997, the Proxy Statement for the 1998 Annual Meeting of
Stockholders, except that certain of the information regarding the Company's
executive officers called for by Item 10 has been included in Part I of this
Annual Report on Form 10-K under the caption "Executive Officers of the
Company." 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
The following Current Report on Form 8-K was filed during the fourth quarter of
1997:
(i) On December 18, 1997, the Company filed a Current Report on Form 8-K to
report that the Company had entered into an agreement on December 17, 1997
with Silver Cinemas, Inc., pursuant to which the Company agreed to sell to
Silver Cinemas, Inc. all of the assets excluding cash and certain of the
liabilities of its subsidiary, Landmark Theatre Group.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METROMEDIA INTERNATIONAL GROUP, INC.
By: /s/ SILVIA KESSEL
-----------------------------------------
Silvia Kessel
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND TREASURER
Dated: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JOHN W. KLUGE Chairman of the Board
- ------------------------------ March 31, 1998
John W. Kluge
Vice Chairman of the Board,
/s/ STUART SUBOTNICK President and Chief
- ------------------------------ Executive Officer March 31, 1998
Stuart Subotnick (Principal Executive
Officer)
Executive Vice President,
/s/ SILVIA KESSEL Chief Financial Officer
- ------------------------------ and Director (Principal March 31, 1998
Silvia Kessel Financial Officer)
/s/ ARNOLD L. WADLER Executive Vice President,
- ------------------------------ General Counsel, March 31, 1998
Arnold L. Wadler Secretary and Director
/s/ ROBERT A. MARESCA Senior Vice President
- ------------------------------ (Principal Accounting March 31, 1998
Robert A. Maresca Officer)
/s/ JOHN P. IMLAY, JR. Director
- ------------------------------ March 31, 1998
John P. Imlay, Jr.
/s/ CLARK A. JOHNSON Director
- ------------------------------ March 31, 1998
Clark A. Johnson
52
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ RICHARD J. SHERWIN Director
- ------------------------------ March 31, 1998
Richard J. Sherwin
/s/ LEONARD WHITE Director
- ------------------------------ March 31, 1998
Leonard White
/s/ CARL E. SANDERS Director
- ------------------------------ March 31, 1998
Carl E. Sanders
53
METROMEDIA INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report..................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997,
1996 and 1995.................................................. F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996..... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997,
1996 and 1995.................................................. F-5
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997,
1996 and 1995.................................................. F-6
Consolidated Statements of Comprehensive Income (Loss) for the
years ended December 31, 1997, 1996 and 1995................... F-7
Notes to Consolidated Financial Statements....................... F-8
Consolidated Financial Statement Schedules:
I. Condensed Financial Information of Registrant............ S-1
II. Valuation and Qualifying Accounts........................ S-5
All other schedules have been omitted either as inapplicable or not required
under the Instructions contained in Regulation S-X or because the information is
included in the Consolidated Financial Statements or the Notes thereto listed
above.
F-1
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, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, 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 Peat Marwick LLP
New York, New York
March 20, 1998
F-2
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Revenues.............................................................. $ 204,328 $ 36,592 $ 5,158
Cost and expenses:
Cost of sales and operating expenses................................ 126,544 22,257 --
Selling, general and administrative................................. 141,839 57,439 28,100
Depreciation and amortization....................................... 16,734 7,677 2,101
--------- --------- ---------
Operating loss........................................................ (80,789) (50,781) (25,043)
Interest expense...................................................... 20,922 19,090 5,935
Interest income....................................................... 14,967 8,552 2,506
--------- --------- ---------
Interest expense, net............................................... 5,955 10,538 3,429
Loss before income tax benefit (expense), equity in losses of
investees, minority interest, discontinued operations and
extraordinary items................................................. (86,744) (61,319) (28,472)
Income tax benefit (expense).......................................... 5,227 (414) --
Equity in losses of Joint Ventures.................................... (13,221) (11,079) (7,981)
Equity in losses of and writedown of investment in RDM Sports Group,
Inc. ............................................................... (45,056) -- --
Minority interest, including $8,332 attributable to Metromedia China
Corporation for the year ended December 31, 1997.................... 8,893 666 188
--------- --------- ---------
Loss from continuing operations....................................... (130,901) (72,146) (36,265)
Discontinued operations:
Gain on disposal and (loss) on assets held for sale................. 266,294 (16,305) (293,570)
Loss from discontinued operations................................... (32,258) (22,287) (50,759)
--------- --------- ---------
Income (loss) before extraordinary items.............................. 103,135 (110,738) (380,594)
Extraordinary items:
Loss and equity in loss on early extinguishment of debt............. (14,692) (4,505) (32,382)
--------- --------- ---------
Net income (loss)..................................................... 88,443 (115,243) (412,976)
Cumulative convertible preferred stock dividend requirement........... (4,336) -- --
--------- --------- ---------
Net income (loss) attributable to common stockholders................. $ 84,107 $(115,243) $(412,976)
--------- --------- ---------
--------- --------- ---------
Weighted average of number of common shares--Basic:................... 66,961 54,293 24,541
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share--Basic:
Continuing operations............................................... $ (2.02) $ (1.33) $ (1.48)
Discontinued operations............................................. $ 3.50 $ (0.71) $ (14.03)
Extraordinary items................................................. $ (0.22) $ (0.08) $ (1.32)
Net income (loss)................................................... $ 1.26 $ (2.12) $ (16.83)
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements
F-3
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents........................................................... $ 129,661 $ 89,400
Short-term investments.............................................................. 100,000 --
Accounts receivable:
Snapper, net...................................................................... 26,494 36,843
Other, net........................................................................ 5,190 3,444
Inventories......................................................................... 96,436 54,404
Other assets........................................................................ 4,021 3,777
------------ ------------
Total current assets............................................................ 361,802 187,868
Investments in and advances to Joint Ventures:
Eastern Europe and the Republics of the Former Soviet Union......................... 86,442 64,727
China............................................................................... 45,851 720
Net assets of discontinued operations:
Entertainment Group................................................................. -- 10,972
Landmark Theatre Group, Inc......................................................... 48,531 46,502
Asset held for sale-RDM Sports Group, Inc............................................. -- 31,150
Property, plant and equipment, net of accumulated depreciation........................ 44,010 35,458
Intangible assets, less accumulated amortization...................................... 200,120 126,643
Other assets.......................................................................... 2,516 9,078
------------ ------------
Total assets.................................................................. $ 789,272 $ 513,118
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.................................................................... $ 30,036 $ 19,384
Accrued expenses.................................................................... 76,897 79,177
Current portion of long-term debt................................................... 21,478 17,544
------------ ------------
Total current liabilities....................................................... 128,411 116,105
Long-term debt........................................................................ 57,938 173,210
Other long-term liabilities........................................................... 8,225 3,590
------------ ------------
Total liabilities............................................................... 194,574 292,905
------------ ------------
Minority interest..................................................................... 34,016 531
Commitments and contingencies
Stockholders' equity:
7 1/4% Cumulative Convertible Preferred Stock....................................... 207,000 --
Common Stock, $1.00 par value, 68,390,800 and 66,153,439 issued and outstanding at
December 31, 1997 and 1996, respectively.......................................... 68,391 66,153
Paid-in surplus..................................................................... 1,007,272 959,558
Restricted stock.................................................................... -- (2,645)
Accumulated deficit................................................................. (718,615) (803,349)
Accumulated other comprehensive loss................................................ (3,366) (35)
------------ ------------
Total stockholders' equity...................................................... 560,682 219,682
------------ ------------
Total liabilities and stockholders' equity.................................... $ 789,272 $ 513,118
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
F-4
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
Operating activities:
Net income (loss).............................................................. $ 88,443 $(115,243) $(412,976)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
(Gain) on disposal and loss on assets held for sale............................ (266,294) 16,305 293,570
Loss from discontinued operations.............................................. 32,258 22,287 50,759
Loss and equity in loss on early extinguishment of debt........................ 14,692 -- --
Losses on early extinguishment of debt of discontinued operations.............. -- 4,505 32,382
Equity in losses and writedown of investment in RDM Sports Group, Inc.......... 45,056 -- --
Equity in losses of Joint Ventures............................................. 13,221 11,079 7,981
Depreciation and amortization.................................................. 16,734 7,677 2,101
Minority interest.............................................................. (8,893) (666) (188)
Other.......................................................................... 3,922 2,881 434
Changes in operating assets and liabilities, net of effect of acquisitions
and consolidation of Snapper:
(Increase) decrease in accounts receivable..................................... 10,443 (909) (581)
Increase in inventories........................................................ (41,137) (2,473) (224)
(Increase) decrease in other assets............................................ 1,691 (5,700) (1,072)
Increase (decrease) in accounts payable and accrued expenses................... (29,681) 1,335 3,833
Other operating activities, net................................................ 900 (968) 159
--------- --------- ---------
Cash used in operations........................................................ (118,645) (59,890) (23,822)
--------- --------- ---------
Investing activities:
Proceeds from Metromedia Company notes receivable.............................. -- -- 45,320
Investments in and advances to Joint Ventures.................................. (69,841) (40,999) (21,949)
Distributions from Joint Ventures.............................................. 5,630 3,438 784
Purchase of short-term investments............................................. (100,000) -- --
Net proceeds from Entertainment Group Sale..................................... 276,607 -- --
Investment in RDM Sports Group, Inc............................................ (15,000) -- --
Proceeds from sale of short-term investments................................... -- 5,366 --
Cash paid for acquisitions and additional equity in subsidiaries............... (13,101) (2,545) --
Cash acquired in acquisitions.................................................. 1,076 7,588 66,702
Acquisition of AAT............................................................. (4,750) -- --
Additions to property, plant and equipment..................................... (10,451) (5,081) (2,324)
Other investing activities, net................................................ 78 5,400 (4,200)
--------- --------- ---------
Cash provided by (used in) investing activities................................ 70,248 (26,833) 84,333
--------- --------- ---------
Financing activities:
Proceeds from issuance of long-term debt....................................... 30,124 52,594 77,916
Proceeds from issuance of stock related to public stock offerings.............. 199,442 190,604 --
Payments on notes and subordinated debt........................................ (156,771) (81,522) (48,858)
Proceeds from issuance of common stock related to incentive plans.............. 18,153 972 2,282
Preferred stock dividends paid................................................. (3,709) -- --
Due to (from) discontinued operations.......................................... 1,419 (7,130) (72,877)
Other financing activities, net................................................ -- -- 399
--------- --------- ---------
Cash provided by (used in) financing activities.......................... 88,658 155,518 (41,138)
--------- --------- ---------
Net increase in cash and cash equivalents........................................ 40,261 68,795 19,373
Cash and cash equivalents at beginning of year................................... 89,400 20,605 1,232
--------- --------- ---------
Cash and cash equivalents at end of year......................................... $ 129,661 $ 89,400 $ 20,605
--------- --------- ---------
--------- --------- ---------
See accompanying notes to consolidated financial statements.
F-5
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7 1/4% CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ACCUMULATED
------------------- ------------------- OTHER
NUMBER OF NUMBER OF PAID-IN RESTRICTED ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SURPLUS STOCK DEFICIT INCOME (LOSS) TOTAL
--------- -------- ---------- ------- ---------- ---------- ----------- ------------- ---------
Balances, February
28, 1995.......... -- $ -- 20,934,898 $20,935 $ 289,229 $-- $(310,138) $ 184 $ 210
November 1 Merger:
Issuance of stock
related to the
acquisition of
Actava and
Sterling........ -- -- 17,974,155 17,974 316,791 -- -- -- 334,765
Issuance of stock
in exchange for
MetProductions
and Met
International... -- -- 3,530,314 3,530 33,538 -- -- -- 37,068
Valuation of
Actava and MITI
options......... -- -- -- -- 25,677 -- -- -- 25,677
Revaluation of
MITI minority
interest........ -- -- -- -- 60,923 -- 23,608 -- 84,531
Adjustment for
change in fiscal
year.............. -- -- -- -- -- -- 11,400 -- 11,400
Issuance of stock
related to
incentive plans... -- -- 174,371 175 2,589 -- -- -- 2,764
Other comprehensive
income............ -- -- -- -- -- -- -- 399 399
Net loss............ -- -- -- -- -- -- (412,976) -- (412,976)
--------- -------- ---------- ------- ---------- ---------- ----------- ------------- ---------
Balances, December
31, 1995.......... -- -- 42,613,738 42,614 728,747 -- (688,106) 583 83,838
Issuance of stock
related to public
offering, net..... -- -- 18,400,000 18,400 172,204 -- -- -- 190,604
Issuance of stock
related to the
acquisitions of
the Samuel Goldwyn
Company and Motion
Picture
Corporation of
America........... -- -- 4,715,869 4,716 54,610 -- -- -- 59,326
Issuance of stock
related to
incentive plans... -- -- 423,832 423 3,997 (3,174) -- -- 1,246
Amortization of
restricted
stock............. -- -- -- -- -- 529 -- -- 529
Other comprehensive
loss.............. -- -- -- -- -- -- -- (618) (618)
Net loss............ -- -- -- -- -- -- (115,243) -- (115,243)
--------- -------- ---------- ------- ---------- ---------- ----------- ------------- ---------
Balances, December
31, 1996.......... -- -- 66,153,439 66,153 959,558 (2,645) (803,349) (35) 219,682
Issuance of stock
related to public
offering, net..... 4,140,000 207,000 -- -- (7,558) -- -- -- 199,442
Increase in equity
resulting from
issuance of stock
by subsidiary..... -- -- -- -- 35,957 -- -- -- 35,957
Issuance of stock
related to
acquisition of a
minority interest
of a subsidiary... -- -- 250,000 250 2,719 -- -- -- 2,969
Issuance of stock
related to
incentive plans... -- -- 1,987,361 1,988 16,596 -- -- -- 18,584
Dividends on 7 1/4%
cumulative
convertible
preferred stock... -- -- -- -- -- -- (3,709) -- (3,709)
Amortization of
restricted
stock............. -- -- -- -- -- 2,645 -- -- 2,645
Other comprehensive
loss.............. -- -- -- -- -- -- -- (3,331) (3,331)
Net income.......... -- -- -- -- -- -- 88,443 -- 88,443
--------- -------- ---------- ------- ---------- ---------- ----------- ------------- ---------
Balances, December
31, 1997.......... 4,140,000 $207,000 68,390,800 $68,391 $1,007,272 $-- $(718,615) $(3,366) $ 560,682
--------- -------- ---------- ------- ---------- ---------- ----------- ------------- ---------
--------- -------- ---------- ------- ---------- ---------- ----------- ------------- ---------
See accompanying notes to consolidated financial statements.
F-6
METROMEDIA INTERNATIONAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- ----------- -----------
Net income (loss)............................................................ $ 88,443 $ (115,243) $ (412,976)
--------- ----------- -----------
Other comprehensive income, net of tax:
Foreign currency translation adjustment.................................. (2,526) (618) 399
Minimum pension liability................................................ (805) -- --
--------- ----------- -----------
Other comprehensive income (loss)............................................ (3,331) (618) 399
--------- ----------- -----------
Comprehensive income (loss).................................................. $ 85,112 $ (115,861) $ (412,577)
--------- ----------- -----------
--------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-7
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.
("MITI" or the "Communications Group") and Snapper Inc. ("Snapper") as of
November 1, 1996 (see notes 7 and 8). All significant intercompany transactions
and accounts have been eliminated.
On July 10, 1997, the Company completed the sale of substantially all of its
entertainment assets (the "Entertainment Group Sale") (see note 5). The
transaction has been recorded as a discontinuance of a business segment, and
accordingly the consolidated balance sheet at December 31, 1996 reflects the net
assets of the discontinued segment. The consolidated statements of operations
reflect the results of operations through May 2, 1997, the date of the execution
of the definitive agreement relating to the Entertainment Group Sale, of the
discontinued segment. The Company recorded a gain on the sale of the
discontinued segment on July 10, 1997 (see note 5).
In addition, the Company anticipates completing the sale of Landmark Theatre
Group ("Landmark") in April 1998 (see note 6). Accordingly, Landmark has been
recorded as a discontinuance of a business segment, and the consolidated balance
sheets at December 31, 1997 and 1996 reflect the net assets of the discontinued
segment. The consolidated statements of operations reflect Landmark's results of
operations through November 12, 1997, the date the Company adopted the plan to
dispose of Landmark, as a discontinued operation.
As of April 1, 1997, for financial statement reporting purposes, the Company 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 a voluntary bankruptcy petition
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the Northern District of Georgia (see note 9).
DIFFERENT FISCAL YEAR ENDS
The Company reports on the basis of a December 31 year end. In connection with
the November 1 Merger discussed in note 7, Orion Pictures Corporation ("Orion")
and MITI, for accounting purposes only, were deemed to be the joint acquirers of
The Actava Group Inc. ("Actava") in a reverse acquisition. As a result, the
historical financial statements of the Company for periods prior to the November
1 Merger are the combined financial statements of Orion and MITI. Orion
historically reported on the basis of a February 28 year end.
The consolidated financial statements for the twelve months ended December 31,
1995 include two months for Orion (January and February 1995) that were included
in the February 28, 1995 consolidated financial statements. The revenues and net
loss for the two month duplicate period are $22.5 and $11.4 million,
respectively. The December 31, 1995 accumulated deficit has been adjusted to
eliminate the duplication of the January and February 1995 net losses.
F-8
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)
DESCRIPTION OF THE BUSINESS
COMMUNICATIONS GROUP
The Company, through the Communications Group, is the owner of various interests
in joint ventures ("Joint Ventures") that are currently in operation or planning
to commence operations in Eastern Europe, the republics of the former Soviet
Union, the People's Republic of China ("China") and other selected emerging
markets. The Communications Group's Joint Ventures in Eastern Europe and Central
Asia currently offer cable television, AM/FM radio broadcasting, paging,
cellular telecommunications, international toll calling and trunked mobile
radio. The Communications Group's Joint Ventures in China provide financing,
technical assistance and consulting services for telecommunication projects. The
Communications Group develops communications business in heavily populated
areas, primarily in countries that lack reliable and efficient communications
services. The Communications Group strategy is to gain early entry into its
target markets in order to capitalize on the increasing demand for quality
modern communications systems. In general, the Communications Group strives to
achieve its goal to become a major multiple-market provider of communications
systems and, accordingly, targets markets where its system can be constructed
without a significant capital investment and where it can cross-market its
service.
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 brand. Snapper provides lawn and garden products through
distribution channels to domestic and foreign retail markets.
A large percentage of the residential sales of lawn and garden equipment are
made during a 17-week period from early spring to mid-summer. Although some
sales are made to the dealers and distributors prior to 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.
LIQUIDITY
MMG is a holding company, and accordingly, does not generate cash flows. The
Communications Group is dependent on MMG for significant capital infusions to
fund its operations, its commitments to make capital contributions and loans to
its Joint Ventures and any acquisitions. Such funding requirements are based on
the anticipated funding needs of its Joint Ventures and certain acquisitions
committed to by the Company. Future capital requirements of the Communications
Group, including future acquisitions, will depend on available funding from the
Company or alternative sources of financing and on the ability of the
Communications Group's Joint Ventures to generate positive cash flows. In
addition, Snapper is restricted under covenants contained in its credit
agreement from making dividend payments or advances to MMG.
In the near-term, the Company intends to satisfy its working capital and capital
commitments with available cash on hand and the proceeds from the sale of
Landmark (see note 6). However, the Communications Group's businesses in the
aggregate are capital intensive and require the investment of significant
amounts of capital in order to construct and develop operational systems and
market its
F-9
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)
services. As a result, the Company will require additional financing in order to
satisfy its on-going working capital, acquisition and expansion requirements and
to achieve its long-term business strategies. Such additional capital may be
provided through the public or private sale of equity or debt securities of the
Company or by separate equity or debt financings by the Communications Group or
certain companies of the Communications Group. No assurance can be given that
additional financing will be available to the Company on acceptable terms, if at
all. If adequate additional funds are not available, the Company may be required
to curtail significantly its long-term business objectives and the Company's
results from operations may be materially and adversely affected.
Management believes that its long term liquidity needs will be satisfied through
a combination of the Company's successful implementation and execution of its
growth strategy to become a global communications and media company and the
Communications Group's Joint Ventures 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.
During the year ended December 31, 1995, the Company changed its policy of
consolidating two indirectly owned subsidiaries by recording the related assets
and liabilities and results of operations based on a three-month lag. As a
result, the 1995 consolidated statement of operations reflects the results of
operations of these subsidiaries for the nine months ended September 30, 1995.
Had the Company applied this method from October 1, 1994, the effect on reported
December 31, 1995 results would not have been material. For the years ended
December 31, 1997 and 1996, the results of operations reflect twelve months of
activity based upon a September 30 fiscal year end of these subsidiaries.
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
F-10
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)
selling them in the near term. Held-to-maturity securities are those securities
in which the Company has the ability and intent to hold the securities until
maturity. All other securities not classified as trading or held-to-maturity are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, net of tax, reported in
stockholders' equity. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization is included in investment income. Realized gains and losses,
and declines in value judged to be other-than-temporary on available-for-sale
securities, are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
Management determines the appropriate classification of investments as trading,
held-to-maturity or available-for-sale at the time of purchase and reevaluates
such designation as of each balance sheet date. At December 31, 1997 and 1996,
the Company did not have any debt and equity security investments.
INVENTORIES
Lawn and garden equipment inventories and pager, telephony and cable inventories
are stated at the lower of cost or market. Lawn and garden equipment inventories
are valued utilizing the last-in, first-out (LIFO) method. Pager, telephony and
cable inventories are calculated on the weighted-average method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated over
their expected useful lives. Generally, depreciation is provided on the
straight-line method for financial reporting purposes. Leasehold improvements
are amortized using the straight-line method over the life of the improvements
or the life of the lease, whichever is shorter.
INTANGIBLE ASSETS
Intangible assets are stated at historical cost, net of accumulated
amortization. Intangibles such as broadcasting licenses and frequency rights are
amortized over periods of 20 to 25 years. Goodwill has been recognized for the
excess of the purchase price over the value of the identifiable net assets
acquired. Such amount is amortized over 25 years using the straight-line method.
Management continuously monitors and evaluates the realizability of recorded
intangibles to determine whether their carrying values have been impaired. In
evaluating the value and future benefits of intangible assets, their carrying
amount is compared to management's best estimate of undiscounted future cash
flows over the remaining amortization period. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. The
Company believes that the carrying value of recorded intangibles is not
impaired.
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
F-11
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)
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
REVENUE RECOGNITION
COMMUNICATIONS GROUP
The Communications Group and its Joint Ventures' 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' radio
operations recognize advertising revenue when commercials are broadcast.
SNAPPER
Sales are recognized when the products are shipped to distributors or dealers.
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 AM/FM radio broadcasting business, the Company trades
commercial air time for goods and services used principally for promotional,
sales and other business activities. An asset and a liability are recorded at
the fair market value of the goods or services received. Barter revenue is
recorded and the liability is relieved when commercials are broadcast, and
barter expense is recorded and the assets are relieved when the goods or
services are received or used.
RESEARCH AND DEVELOPMENT AND ADVERTISING COSTS
Research and development and advertising costs are expensed as incurred.
SELF-INSURANCE
The Company is self-insured for workers' compensation, health, automobile,
product and general liability costs for its lawn and garden operation and for
certain former subsidiaries. The self-insurance claim liability is determined
based on claims filed and an estimate of claims incurred but not yet reported.
MINORITY INTERESTS
Recognition of minority interests' share of losses of consolidated subsidiaries
is limited to the amount of such minority interests' allocable portion of the
common equity of those consolidated subsidiaries.
INCOME TAXES
The Company accounts for deferred income taxes using the asset and liability
method of accounting. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax 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
F-12
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)
reduce deferred tax assets to the amounts expected to be realized. Deferred tax
assets and liabilities are measured using rates expected to be in effect when
those assets and liabilities are recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted 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. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the provisions
of APB 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years as if
the fair-value-based method defined in SFAS 123 had been applied. The Company
has elected to continue to apply the provisions of APB 25 and provide the pro
forma disclosure requirements of SFAS 123.
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.
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
F-13
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)
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. Transaction differences resulting from the use of these
different rates are included in the accompanying consolidated statements of
operations. Such differences amounted to $714,000, $255,000 and $54,000 for the
years ended December 31, 1997, 1996 and 1995, respectively, and were immaterial
to the Company's results of operations for each of the periods presented. In
addition, 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on settlements using present value or other
valuation techniques. These techniques are significantly affected by the
assumptions used, including discount rates and estimates of future cash flows.
In that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instruments. Certain financial instruments and all
non-financial instruments are excluded from the disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value to the Company.
The following methods and assumptions were used in estimating the fair value
disclosures for financial instruments:
CASH AND CASH EQUIVALENTS, RECEIVABLES, SHORT-TERM INVESTMENTS, NOTES RECEIVABLE
AND ACCOUNTS PAYABLE
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, short-term investments, current receivables, notes
receivable 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 and subordinated debt, fair values are based on quoted market
prices, if available. If the debt is not traded, fair value is estimated
based on the present value of expected cash flows. See note 4 for the fair
values of long-term debt.
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
F-14
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)
liabilities and disclosure of the contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates are used when accounting for the
allowance for doubtful accounts, inventory obsolescence, long-lived assets,
intangible assets, product warranty expenses, self-insured workers' compensation
and product liability claims, depreciation and amortization, employee benefit
plans, income taxes and contingencies, among others. The Company reviews all
significant estimates affecting its consolidated financial statements on a
recurring basis and records the effect of any necessary adjustment prior to
their publication. Uncertainties with respect to such estimates and assumptions
are inherent in the preparation of the Company's consolidated financial
statements; accordingly, it is possible that actual results could differ from
those estimates and changes to estimates could occur in the near term.
NEW ACCOUNTING DISCLOSURES
EARNINGS PER SHARE OF COMMON STOCK
In February 1997, Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings per Share" was issued, which specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS"). SFAS
128 is effective for financial statements for both interim and annual periods
ending after December 15, 1997. All prior period EPS data has been restated to
conform with SFAS 128. SFAS 128 replaces the presentation of primary and fully
diluted EPS with basic and diluted EPS.
Basic EPS excludes all dilutive securities. It is based upon the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if securities to issue common
stock were exercised or converted into common stock. In calculating diluted EPS,
no potential shares of common stock are to be included in the computation when a
loss from continuing operations available to common stockholders exists. For the
interim periods in 1997 and 1996 and the years ended December 31, 1997, 1996 and
1995 the Company had losses from continuing operations.
The computation of basic EPS for the years ended December 31, 1997, 1996 and
1995 is as follows (in thousands, except per share amounts):
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ --------------- -----------
1997:
Loss from continuing operations.......................................... $ (130,901)
Less: Preferred stock dividend requirement............................... 4,336
------------
Loss from continuing operations attributable to common stockholders...... $ (135,237) 66,961 $ (2.02)
------------ ------ -----------
------------ ------ -----------
1996:
Loss from continuing operations.......................................... $ (72,146) 54,293 $ (1.33)
------------ ------ -----------
------------ ------ -----------
1995:
Loss from continuing operations.......................................... $ (36,265) 24,541 $ (1.48)
------------ ------ -----------
------------ ------ -----------
The Company had for the years ended December 31, 1997, 1996 and 1995,
potentially dilutive shares of common stock of 19,673,000, 6,381,000 and
3,665,000, respectively (see note 11).
F-15
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)
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
In June 1997, Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income" was issued and established standards for
reporting and disclosure of comprehensive income. Reclassification of financial
statements for earlier periods presented for comparative purposes is required
under SFAS 130. As SFAS 130 only requires additional disclosures in the
Company's consolidated financial statements, its adoption did not have any
impact on the Company's consolidated financial position or results of
operations.
BUSINESS SEGMENT DISCLOSURES
In June 1997, Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information" was issued
and established standards for the reporting of information about operating
segments and requires the reporting of selected information about operating
segments. Reclassification of segment information for earlier periods presented
for comparative purposes is required under SFAS 131. The adoption of SFAS 131
did not result in significant changes to the Company's presentation of financial
data by business segment.
2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-EASTERN EUROPE AND THE
REPUBLICS OF THE FORMER SOVIET UNION
The Communications Group records its investments in other companies and Joint
Ventures which are less than majority-owned, or which the Company does not
control but in which it exercises significant influences at cost, net of its
equity in earnings or losses. Advances to the Joint Ventures under the line of
credit agreements are reflected based on amounts recoverable under the credit
agreement, plus accrued interest.
Advances are made to Joint Ventures in the form of cash, for working capital
purposes and for payment of expenses or capital expenditures, or in the form of
equipment purchased on behalf of the Joint Ventures. Interest rates charged to
the Joint Ventures 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' 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 to provide up to $102.8 million in funding of which $19.2 million
remains available at December 31, 1997. The Communications Group funding
commitments are contingent on its approval of the Joint Ventures' business
plans.
F-16
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-EASTERN EUROPE AND THE
REPUBLICS OF THE FORMER SOVIET UNION (CONTINUED)
At December 31, 1997 and 1996 the Communications Group's unconsolidated
investments in 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,
were as follows (in thousands):
YEAR VENTURE YEAR OPERATIONS
NAME 1997 1996 OWNERSHIP % FORMED COMMENCED
- ---------------------------------------------- --------- --------- ------------- --------------- -----------------
CABLE TELEVISION
Kosmos TV, Moscow, Russia (5)................. $ (123) $ 759 50% 1991 1992
Baltcom TV, Riga Latvia....................... 6,093 8,513 50% 1991 1992
Ayety TV, Tbilisi, Georgia.................... 3,732 4,691 49% 1991 1993
Kamalak TV, Tashkent, Uzbekistan.............. 3,078 4,240 50% 1992 1993
Sun TV, Chisinau, Moldova..................... 4,671 3,590 50% 1993 1994
Cosmos TV, Minsk, Belarus (3)................. 2,135 1,980 50% 1993 1996
Alma TV, Almaty, Kazakstan.................... 2,372 1,869 50% 1994 1995
TV-21, Riga, Latvia........................... 458 -- 48% 1996 1997
--------- ---------
22,416 25,642
--------- ---------
PAGING
Baltcom Paging, Tallinn, Estonia (1).......... -- 3,154 85% 1992 1993
Baltcom Plus, Riga, Latvia.................... 1,232 1,711 50% 1994 1995
Paging One, Tbilisi, Georgia.................. 1,037 829 45% 1993 1994
Raduga Poisk, Nizhny Novgorod, Russia......... 549 450 45% 1993 1994
PT Page, St. Petersburg, Russia............... 1,006 963 40% 1994 1995
Paging Ajara, Batumi, Georgia (3)............. 277 256 35% 1996 1997
Kazpage, Kazakstan (2) (3).................... 864 350 26-41 % 1996 1997
Kamalak Paging, Tashkent, Uzbekistan.......... 1,989 1,791 50% 1992 1993
Alma Page, Almaty, Kazakstan.................. 2,161 971 50% 1994 1995
--------- ---------
9,115 10,475
--------- ---------
RADIO BROADCASTING
Eldoradio (formerly Radio Katusha),
St. Petersburg, Russia........................ 971 435 50% 1993 1995
Radio Nika, Socci, Russia..................... 337 361 51% 1995 1995
AS Trio LSL, Tallinn, Estonia................. 1,593 -- 49% 1997 1997
--------- ---------
2,901 796
--------- ---------
F-17
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-EASTERN EUROPE AND THE
REPUBLICS OF THE FORMER SOVIET UNION (CONTINUED)
YEAR VENTURE YEAR OPERATIONS
NAME 1997 1996 OWNERSHIP % FORMED COMMENCED
- ---------------------------------------------- --------- --------- ------------- --------------- -----------------
INTERNATIONAL TOLL CALLING
Telecom Georgia, Tbilisi, Georgia............. 6,080 2,704 30% 1994 1994
--------- ---------
CELLULAR TELECOMMUNICATIONS
Baltcom GSM, Latvia (3)....................... 11,996 7,874 21% 1996 1997
Magticom, Tbilisi, Georgia (3)................ 6,951 2,450 34% 1996 1997
--------- ---------
18,947 10,324
--------- ---------
TRUNKED MOBILE RADIO
Trunked mobile radio ventures................. 5,390 2,049
--------- ---------
PRE-OPERATIONAL (4)
Teleplus, St. Petersburg, Russia.............. 1,093 554 45% 1996
Telephony related ventures and equipment...... 9,003 8,992
Other......................................... 11,497 3,191
--------- ---------
21,593 12,737
--------- ---------
Total......................................... $ 86,442 $ 64,727
--------- ---------
--------- ---------
- ------------------------
(1) In July 1997, the Communications Group purchased an additional 54% of Estcom
Sweden, the parent company of Baltcom Paging, increasing the ownership of
Estcom Sweden and Baltcom Paging to 100% and 85%, respectively.
(2) Kazpage is comprised of a service entity and 10 paging Joint Ventures. The
Company's interest in the paging Joint Ventures ranges from 26% to 41% and
its interest in the service entity is 51%.
(3) Included in pre-operational at December 31, 1996.
(4) At December 31, 1997 and 1996 included in pre-operational Joint Ventures are
amounts for entities whose Joint Venture agreements are not yet finalized
and amounts expended for equipment for future wireless local loop projects.
(5) The Communications Group has a continuing obligation to fund Kosmos TV under
the credit agreement.
F-18
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-EASTERN EUROPE AND THE
REPUBLICS OF THE FORMER SOVIET UNION (CONTINUED)
Summarized combined balance sheet financial information as of September 30, 1997
and 1996 and combined statement of operations financial information for the
years ended September 30, 1997, 1996 and 1995 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
1997 1996
---------- ---------
Assets:
Current assets........................................................................... $ 30,563 $ 16,073
Investments in wireless systems and equipment............................................ 84,875 38,447
Other assets............................................................................. 9,758 3,100
---------- ---------
Total assets......................................................................... $ 125,196 $ 57,620
---------- ---------
---------- ---------
Liabilities and Joint Ventures' Equity (Deficit):
Current liabilities...................................................................... $ 28,280 $ 18,544
Amount payable under MITI credit facility................................................ 50,692 41,055
Other long-term liabilities.............................................................. 49,232 6,043
---------- ---------
128,204 65,642
Joint Ventures' equity (deficit)......................................................... (3,008) (8,022)
---------- ---------
Total liabilities and Joint Ventures' equity (deficit)............................... $ 125,196 $ 57,620
---------- ---------
---------- ---------
COMBINED STATEMENTS OF OPERATIONS
1997 1996 1995
--------- ---------- ----------
Revenue........................................................................ $ 70,418 $ 44,800 $ 19,344
Expenses:
Cost of service.............................................................. 17,619 15,490 9,993
Selling, general and administrative.......................................... 35,860 25,381 11,746
Depreciation and amortization................................................ 14,348 8,039 3,917
Other........................................................................ 30 1,674 --
--------- ---------- ----------
Total expenses........................................................... 67,857 50,584 25,656
--------- ---------- ----------
Operating income (loss)........................................................ 2,561 (5,784) (6,312)
Interest expense............................................................... (6,339) (3,883) (1,960)
Other loss..................................................................... (2,689) (391) (1,920)
Foreign currency transactions.................................................. (2,757) (425) (203)
--------- ---------- ----------
Net loss....................................................................... $ (9,224) $ (10,483) $ (10,395)
--------- ---------- ----------
--------- ---------- ----------
F-19
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-EASTERN EUROPE AND THE
REPUBLICS OF THE FORMER SOVIET UNION (CONTINUED)
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 all operating
entities being grouped as indicated as of and for the years ended December 31,
1997, 1996 and 1995 (in thousands, except subscribers):
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
CABLE RADIO CELLULAR INTERNATIONAL TRUNKED
TELEVISION PAGING BROADCASTING TELECOMMUNICATIONS TOLL CALLING MOBILE RADIO
---------- -------- ------------- ------------------- ------------- ------------
COMBINED (2)
Revenues......................... $ 23,314 $ 12,999 $ 16,015 $ 2,587 $30,866 $ 4,004
Depreciation and amortization.... 9,648 1,630 699 2,380 1,287 981
Operating income (loss) before
taxes.......................... (6,831) (3,905) 4,182 (6,761) 17,244 (3,325)
Interest income.................. 9 70 152 12 31 22
Interest expense................. 4,146 1,483 469 1,046 382 460
Net income (loss)................ (12,529) (6,516) 1,477 (8,129) 14,030 (3,886)
Assets........................... 36,618 18,001 16,637 53,495 27,558 10,821
Capital expenditures............. 9,667 2,838 739 42,276 8,331 2,560
Contributions to Joint
Ventures (3)................... 16,949 9,208 8,750 11,051 21 8,869
Subscribers (unaudited).......... 225,525 57,831 n/a 10,429 n/a 13,628
CONSOLIDATED SUBSIDIARIES AND
JOINT VENTURES
Revenues......................... $ 1,902 $ 3,318 $ 13,549 $-- $-- $ 598
Depreciation and amortization.... 791 790 607 -- -- 89
Operating income (loss) before
taxes.......................... (1,953) (4,084) 3,935 -- -- 145
Interest income.................. 5 66 146 -- -- 22
Interest expense................. 577 683 387 -- -- --
Net income (loss)................ (2,654) (5,198) 1,356 -- -- 167
Assets........................... 8,148 8,132 15,073 -- -- 6,581
Capital expenditures............. 1,423 1,895 238 -- -- --
UNCONSOLIDATED JOINT VENTURES
Revenues......................... $ 21,412 $ 9,681 $ 2,466 $ 2,587 $30,866 $ 3,406
Depreciation and amortization.... 8,857 840 92 2,380 1,287 892
Operating income (loss) before
taxes.......................... (4,878) 179 247 (6,761) 17,244 (3,470)
Interest income.................. 4 4 6 12 31 --
Interest expense................. 3,569 800 82 1,046 382 460
Net income (loss)................ (9,875) (1,318) 121 (8,129) 14,030 (4,053)
Assets........................... 28,470 9,869 1,564 53,495 27,558 4,240
Capital expenditures............. 8,244 943 501 42,276 8,331 2,560
Net investment in Joint
Ventures....................... 22,416 9,115 2,901 18,947 6,080 5,390
MITI equity in income (losses) of
unconsolidated investees....... (10,609) (1,460) 81 (2,416) 4,209 (1,601)
TOTAL
--------
COMBINED (2)
Revenues......................... $ 89,785
Depreciation and amortization.... 16,625
Operating income (loss) before
taxes.......................... 604
Interest income.................. 296
Interest expense................. 7,986
Net income (loss)................ (15,553)
Assets........................... 163,130
Capital expenditures............. 66,411
Contributions to Joint
Ventures (3)................... 54,848
Subscribers (unaudited).......... 307,413
CONSOLIDATED SUBSIDIARIES AND
JOINT VENTURES
Revenues......................... $ 19,367(1)
Depreciation and amortization.... 2,277
Operating income (loss) before
taxes.......................... (1,957)(1)
Interest income.................. 239
Interest expense................. 1,647
Net income (loss)................ (6,329)(1)
Assets........................... 37,934
Capital expenditures............. 3,556
UNCONSOLIDATED JOINT VENTURES
Revenues......................... $ 70,418
Depreciation and amortization.... 14,348
Operating income (loss) before
taxes.......................... 2,561
Interest income.................. 57
Interest expense................. 6,339
Net income (loss)................ (9,224)
Assets........................... 125,196
Capital expenditures............. 62,855
Net investment in Joint
Ventures....................... 64,849
MITI equity in income (losses) of
unconsolidated investees....... (11,796)
F-20
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-EASTERN EUROPE AND THE
REPUBLICS OF THE FORMER SOVIET UNION (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------
CABLE RADIO INTERNATIONAL TRUNKED
TELEVISION PAGING BROADCASTING TOLL CALLING MOBILE RADIO TOTAL
----------- --------- ------------- ------------- ------------- ---------
COMBINED(2)
Revenues........................................ $ 15,243 $ 10,864 $ 10,899 $ 19,177 $ 1,030 $ 57,213
Depreciation and amortization................... 5,964 1,645 257 617 493 8,976
Operating income (loss) before taxes............ (5,990) (943) 279 3,122 (1,409) (4,941)
Interest income................................. -- 84 90 -- -- 174
Interest expense................................ 2,685 1,039 434 65 223 4,446
Net income (loss)............................... (9,170) (2,896) (681) 2,997 (1,690) (11,440)
Assets.......................................... 27,238 12,829 4,125 13,815 8,345 66,352
Capital expenditures............................ 7,944 3,439 789 2,096 -- 14,268
Contributions to Joint Ventures (3)............. 15,822 9,616 2,510 -- 4,718 32,666
Subscribers (unaudited)......................... 69,118 44,836 n/a n/a 6,642 120,596
CONSOLIDATED SUBSIDIARIES AND JOINT VENTURES
Revenues........................................ $ 170 $ 2,880 $ 9,363 $ -- $ -- $ 12,413(1)
Depreciation and amortization................... 302 461 174 -- -- 937
Operating income (loss) before taxes............ (832) (427) 2,102 -- -- 843(1)
Interest income................................. -- 81 90 -- -- 171
Interest expense................................ 116 270 177 -- -- 563
Net income (loss)............................... (1,216) (1,209) 1,468 -- -- (957)(1)
Assets.......................................... 2,017 3,232 3,483 -- -- 8,732
Capital expenditures............................ 1,813 443 555 -- -- 2,811
UNCONSOLIDATED JOINT VENTURES
Revenues........................................ $ 15,073 $ 7,984 $ 1,536 $ 19,177 $ 1,030 $ 44,800
Depreciation and amortization................... 5,662 1,184 83 617 493 8,039
Operating income (loss) before taxes............ (5,158) (516) (1,823) 3,122 (1,409) (5,784)
Interest income................................. -- 3 -- -- -- 3
Interest expense................................ 2,569 769 257 65 223 3,883
Net income (loss)............................... (7,954) (1,687) (2,149) 2,997 (1,690) (10,483)
Assets.......................................... 25,221 9,597 642 13,815 8,345 57,620
Capital expenditures............................ 6,131 2,996 234 2,096 -- 11,457
Net investment in Joint Ventures................ 23,662 9,869 796 2,704 2,049 39,080
MITI equity in income (losses) of unconsolidated
investees..................................... (7,355) (1,876) (2,152) 899 (595) (11,079)
F-21
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-EASTERN EUROPE AND THE
REPUBLICS OF THE FORMER SOVIET UNION (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------------------
CABLE RADIO INTERNATIONAL
TELEVISION PAGING BROADCASTING TOLL CALLING TOTAL
----------- --------- ------------- ------------- ---------
COMBINED (2)
Revenues................................................... $ 8,105 $ 3,821 $ 4,797 $ 7,190 $ 23,913
Depreciation and amortization.............................. 2,946 602 402 465 4,415
Operating income (loss) before taxes....................... (4,153) (635) (1,492) (292) (6,572)
Interest income............................................ -- 9 13 -- 22
Interest expense........................................... 1,599 456 366 -- 2,421
Net income (loss).......................................... (6,880) (1,337) (1,886) (1,018) (11,121)
Assets..................................................... 20,666 7,954 8,246 14,757 51,623
Capital expenditures....................................... 8,985 2,715 218 9,740 21,658
Contributions to Joint Ventures............................ 12,549 4,533 1,655 898 19,635
Subscribers (unaudited).................................... 37,900 14,460 n/a n/a 52,360
CONSOLIDATED SUBSIDIARIES AND JOINT VENTURES
Revenues................................................... $ -- $ 690 $ 3,879 $ -- $ 4,569(1)
Depreciation and amortization.............................. -- 132 366 -- 498
Operating income (loss) before taxes....................... -- (23) (237) -- (260) (1)
Interest income............................................ -- 9 13 -- 22
Interest expense........................................... -- 161 300 -- 461
Net income (loss).......................................... -- (228) (498) -- (726) (1)
Assets..................................................... -- 2,398 7,999 -- 10,397
Capital expenditures....................................... -- 40 172 -- 212
UNCONSOLIDATED JOINT VENTURES
Revenues................................................... $ 8,105 $ 3,131 $ 918 $ 7,190 $ 19,344
Depreciation and amortization.............................. 2,946 470 36 465 3,917
Operating income (loss) before taxes....................... (4,153) (612) (1,255) (292) (6,312)
Interest income............................................ -- -- -- -- --
Interest expense........................................... 1,599 295 66 -- 1,960
Net income (loss).......................................... (6,880) (1,109) (1,388) (1,018) (10,395)
Assets..................................................... 20,666 5,556 247 14,757 41,226
Capital expenditures....................................... 8,985 2,675 46 9,740 21,446
Net investment in Joint Ventures........................... 20,536 6,036 1,174 2,078 29,824
MITI equity in income (losses) of unconsolidated
investees................................................ (5,834) (454) (1,388) (305) (7,981)
- ------------------------
(1) Does not reflect the Communications Group's and Protocall's headquarter's
revenue and selling, general and administrative expenses for the years ended
December 31, 1997, 1996 and 1995, respectively.
(2) On September 30, 1996, the Communications Group purchased an additional 32%
of SAC/Radio 7, increasing the ownership percentage to 83% and acquiring
control of its business. Accordingly, this investment is accounted for on a
consolidated basis from this date forward and its results are reflected as
such in the above tables. Results of operations for the year ended September
30, 1996 and prior are included with the unconsolidated Joint Ventures.
(3) In 1997, the Communications Group made investments of $2,599 in Fixed
Telephony. In 1996, investments of $10,361 and $9,189 were made in Cellular
Telecommunications and Fixed Telephony, respectively. In 1995, investments
of $448 and $999 were made in Trunked Mobile Radio and Fixed Telephony,
respectively.
F-22
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-EASTERN EUROPE AND THE
REPUBLICS OF THE FORMER SOVIET UNION (CONTINUED)
The Communication Group's trunked mobile radio Joint Ventures are owned through
its 56% ownership interest in Protocall Ventures. In October 1997, Protocall
increased its ownership percentages in its Spanish Joint Ventures from 6%-16% to
17%-48%.
In December 1997, the Communications Group completed the purchase of 85% of
Country Radio, a Joint Venture operating radio stations in Prague, Czech
Republic and in January 1998, the Communications Group signed a definitive
agreement to purchase 50% of a paging company in the Russian Federation.
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-CHINA
In February, 1997, Metromedia China Corporation ("MCC") a subsidiary of the
Company with telephony interests in China, acquired Asian American
Telecommunications Corporation ("AAT") pursuant to a Business Combination
Agreement (the "BCA") in which MCC and AAT agreed to combine their businesses
and operations. Pursuant to the BCA, each AAT shareholder and warrant holder
exchanged (i) one share of AAT common stock (the "AAT Common Stock") for one
share of MCC Common Stock, par value $.01 per share ("MCC Common Stock"), (ii)
one warrant to acquire one share of AAT Common Stock at an exercise price of
$4.00 per share for one warrant to acquire one share of MCC Common Stock at an
exercise price of $4.00 per share and (iii) one warrant to acquire one share of
AAT Common Stock at an exercise price of $6.00 per share for one warrant to
acquire one share of MCC Common Stock at an exercise price of $6.00 per share.
AAT is engaged in the development and construction of communication services in
China. The transaction was accounted for as a purchase, with MCC as the
acquiring entity.
As a condition to the closing of the BCA, MITI purchased from MCC, for an
aggregate purchase price of $10.0 million, 3,000,000 share of MCC Class A Common
Stock, par value $.01 per share (the "MCC Class A Common Stock") and warrants to
purchase an additional 1,250,000 shares of MCC Class A Common Stock, at an
exercise price of $6.00 per share. Shares of MCC Class A Common Stock are
identical to shares of MCC Common Stock except that they are entitled, when
owned by MITI, to three votes per share on all matters voted upon by MCC's
stockholders and to vote as a separate class to elect six of the ten members to
MCC's Board of Directors. The securities received by the Communications Group
are not registered under the Securities Act, but have certain demand and
piggyback registration rights as provided in the stock purchase agreement. As a
result of the transaction MITI owned 56.5% of MCC'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 AAT transaction was determined to be $86.0 million.
The excess of the purchase price over the fair value of the net tangible assets
acquired was $69.0 million. This has been recorded as goodwill and is being
amortized on a straight-line basis over 25 years. The amortization of such
goodwill for the year ended December 31, 1997 was approximately $2.3 million.
The purchase price was allocated as follows (in thousands):
Current assets..................................... $ 46
Property, plant and equipment...................... 279
Investments in Joint Ventures...................... 18,950
Goodwill........................................... 68,975
Current liabilities................................ (2,202)
Other liabilities.................................. (5)
---------
Purchase price................................... $ 86,043
---------
---------
F-23
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-CHINA (CONTINUED)
The difference between the Company's investment balance of $18.6 million in MCC
prior to the acquisition of AAT and 56.52% of the net equity of MCC subsequent
to the acquisition of AAT of $53.7 million was recorded as an increase to
paid-in surplus of $35.1 million in the consolidated statements of stockholders'
equity.
At December 31, 1997 and 1996, the Company's investments in the Joint Ventures
in China, at cost, net of adjustments for its equity in earnings or losses, were
as follows:
MCC YEAR YEAR
OWNERSHIP VENTURE OPERATIONS
NAME 1997 1996 % FORMED COMMENCED
- ---------------------------------------- ------- ----------- ------- ------- ---------------
Sichuan Tai Li Feng
Telecommunications Co., Ltd.
("Sichuan JV")........................ $10,946 $ -- (1) 92% 1996 Pre-operational
Chongqing Tai Le Feng Telecommunications
Co., Ltd.
("Chongqing JV")...................... 7,425 -- 92% 1997 Pre-operational
Ningbo Ya Mei
Telecommunications Co., Ltd.
("Ningbo JV")......................... 27,480 -- (1) 70% 1996 1997
Beijing Metromedia-Jinfeng
Communications
Technology Development Co. Ltd.
("Golden Cellular JV")................ -- 720 60% 1996
------- -----------
$45,851 $ 720
------- -----------
------- -----------
- ------------------------
(1) AAT was acquired on February 28, 1997 and had net investments at predecessor
cost of $10.5 million and $3.7 million in Sichuan JV and Ningbo JV,
respectively, as of December 31, 1996.
The Joint Ventures participate in project cooperation contracts with China
United Telecommunications Incorporated ("China Unicom") that entitle the Joint
Ventures to certain percentages of the projects' distributable cash flows. The
Joint Ventures amortize the contributions to these cooperation contracts over
the cooperation periods of benefit (15 to 25 years).
(A) SICHUAN JV
On May 21, 1996, AAT entered into a Joint Venture Agreement with China Huaneng
Technology Development Corp. ("CHTD") for the purpose of establishing Sichuan
Tai Li Feng Telecommunications Co., Ltd. ("Sichuan JV"). Also on May 21, 1996,
Sichuan JV entered into a Network Systems Cooperation Contract (the "STLF
Contract") with China Unicom. The STLF Contract provides for the establishment
of a network of 50,000 local telephone lines in the Sichuan Province (the
"Sichuan Network"), approximately 350 kilometers of secondary class fiber
optical toll lines between Chengdu and Chongqing cities. This initial phase has
a contractual term of twenty-five years. Subsequent phases are projected to
expand the Sichuan Network to more than 1,000,000 lines of local telephone
network and expand the intra-provincial long distance toll lines.
Under the STLF Contract, China Unicom will be responsible for the construction
and operation of the Sichuan Network, while Sichuan JV will provide financing
and consulting services for the project.
F-24
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-CHINA (CONTINUED)
Distributable Cash Flows, as defined in the STLF Contract, are to be distributed
22% to China Unicom and 78% to Sichuan JV for a twenty-five year period for each
phase. Sichuan JV holds title to all assets constructed, except for gateway
switches and long distance transmission facilities. On the tenth anniversary of
the completion of the Sichuan Network's initial phase, the assets will transfer
from Sichuan JV to China Unicom. The Joint Venture considers the cost of these
fixed assets to be part of its contribution to the STLF Contract.
The total amount to be invested in Sichuan JV is $29.5 million with equity
contributions from its shareholders amounting to $12.0 million. AAT is required
to make capital contributions to Sichuan JV of $11.4 million, representing 95%
of the Sichuan JV's equity. CHTD is required to contribute $600,000,
representing 5% of the Sichuan JV's equity. The remaining investment will be in
the form of $17.5 million of loan from AAT and Northern Telecom Communications
("Nortel"), the manufacturer of the equipment for construction of the network.
Ownership in the Sichuan JV is 92% by AAT and 8% by CHTD.
AAT also has a consulting contract with CHTD for assistance with operations in
China. Under the contract, the Company is obligated to pay an annual fee of RMB
15.0 million (U.S. $1.8 million) at December 31, 1997 exchange rates. During
1997 and 1996, AAT paid CHTD approximately $1.8 million and $914,000,
respectively, under the agreement.
(B) CHONGQING JV
In May 1997, China established the City of Chongqing as a separate municipal
government from the Province of Sichuan. On September 9, 1997, AAT entered into
a Joint Venture Agreement with CHTD for the purpose of establishing Chongqing
Tai Le Feng Telecommunication Co., Ltd. ("Chongqing JV"). Sichuan JV and
Chongqing JV entered into an agreement whereby the Chongqing JV assumed the
rights and obligations of the Sichuan JV under the STLF contract as it relates
to the financing and consulting services for the Sichuan Network that is
constructed by China Unicom within the City of Chongqing.
The total amount to be invested in Chongqing JV is $29.5 million with equity
contributions from its shareholders amounting to $14.8 million. AAT is required
to make capital contributions of $14.1 million representing 95% of the Chongqing
JV's equity. CHTD is required to contribute $740,000 representing 5% of the
Chongqing JV's equity. The remaining investment in Chongqing JV will be in the
form of $14.7 million of loans from AAT and Nortel. Ownership in the Chongqing
JV is 92% by AAT and 8% by CHTD.
(C) NINGBO JV
AAT entered into a Joint Venture Agreement with Ningbo United Telecommunications
Investment Co., Ltd. ("NUT") on September 17, 1996 for the purpose of
establishing Ningbo Ya Mei Telecommunications Co., Ltd ("Ningbo JV"). Ningbo JV
is engaged in the development of a GSM telecommunications project in the City of
Ningbo, Zhejiang Province, for China Unicom. This project entailed construction
of a mobile communications network with a capacity for 50,000 subscribers. China
Unicom is the operator of the network, and Ningbo JV provides financing and
consulting services to China Unicom.
NUT assigned Ningbo JV the rights and obligations received by NUT under a
Network System Cooperation Contract (the "NUT Contract") with China Unicom,
including the right to expand the project to a capacity of 50,000 subscribers.
NUT has also agreed to assign the rights of first refusal on additional
telecommunications projects to Ningbo JV in the event such rights are granted to
NUT by China Unicom. Distributable Cash Flows, as defined in the NUT Contract
are to be distributed 27% to China Unicom and 73% to Ningbo JV for a 15 year
period for each phase. Under the NUT Contract, Ningbo JV will own 70%
F-25
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-CHINA (CONTINUED)
of all assets constructed. Ningbo JV's ownership of these assets will transfer
to China Unicom as Ningbo JV's project investment is returned. The Ningbo JV
considers the cost of these assets to be part of its contribution to the NUT
Contract.
Under the terms of the Ningbo JV, AAT provided $8.3 million of capital
contributions, representing 70% of Ningbo JV's equity. NUT provided $3.6 million
of capital contributions to Ningbo JV, representing 30% of Ningbo JV's equity.
The Ningbo JV arranged loans with AAT, manufacturers of the equipment for the
project and banks in the amount of $17.8 million.
As of December 31, 1997, AAT had long-term loans to Ningbo JV in the amount of
$19.3 million. A substantial portion of these loans was to refinance previous
loans from manufacturers. These loans bear interest at 10% per annum.
The following table represents summary financial information for the Joint
Ventures and their related projects in China as of and for the year ended
December 31, 1997 (in thousands, except subscribers):
NINGBO SICHUAN CHONGQING
JV JV JV TOTAL
----------- ----------- ------------- ----------
Revenues...................................................... $ 1,422 $ -- $ -- $ 1,422
Depreciation and amortization................................. 1,154 25 -- 1,179
Operating income (loss)....................................... 56 (223) (20) (187)
Interest income (expense) net................................. (1,870) 70 5 (1,795)
Net loss...................................................... (1,814) (153) (15) (1,982)
Assets........................................................ 36,605 11,899 7,901 56,405
Net investment in project..................................... 32,669 8,815 3,791 45,275
AAT equity in loss of Joint Venture........................... (1,270) (141) (14) (1,425)
Ningbo JV records revenue from the China Unicom project based on amounts of
revenues and profits reported to it by China Unicom through September 30, 1997.
For the period ended September 30, 1997 revenues were $2.8 million and net
income was $1.8 million.
(D) GOLDEN CELLULAR JV
The Company is in the process of dissolving Beijing Metromedia-Jinfeng
Communications Technology Development Co. Ltd. ("Golden Cellular JV"), a Joint
Venture created in March 1996, with Golden Cellular Communication Co., Ltd.
("GCC") 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.
GCC and Metromedia China Telephony Limited ("MCTL") entered into a settlement
contract on March 3, 1998 which provides the terms for dissolution of the Golden
Cellular JV.
MCTL has agreed to reimburse GCC $876,000 for certain development expenses
incurred by GCC and assign to GCC all of MCTL's rights to the assets of the
Golden Cellular JV, valued at approximately $720,000.
Certain equipment imported to China by MCTL will be transferred out of China.
MCTL will be solely responsible for the costs of shipping the equipment out of
China.
F-26
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO JOINT VENTURES-CHINA (CONTINUED)
The Company has recorded $1.5 million, as the estimated cost to dissolve the
Golden Cellular JV which is included in operating expenses in the consolidated
statements of operations.
4. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consisted of the following (in
thousands):
1997 1996
---------- ----------
MMG (EXCLUDING COMMUNICATIONS GROUP, ENTERTAINMENT GROUP AND SNAPPER)
6 1/2% Convertible Debentures due 2002, net of unamortized discount of $15,261............ $ -- $ 59,739
9 1/2% Debentures due 1998, net of unamortized discount of $86............................ -- 59,398
9 7/1% Senior Debentures due 1997, net of unamortized premium of $38...................... -- 15,038
10% Debentures due 1999................................................................... -- 5,467
MPCA Acquisition Notes Payable due 1997................................................... -- 1,179
Other..................................................................................... 1,410 1,805
---------- ----------
1,410 142,626
---------- ----------
ENTERTAINMENT GROUP
Notes payable to banks under Credit, Security and Guaranty Agreements..................... -- 247,500
Other guarantees and contracts payable, net of unamortized discounts of $2,699............ -- 15,033
---------- ----------
-- 262,533
---------- ----------
COMMUNICATIONS GROUP
Hungarian Foreign Trade Bank.............................................................. -- 246
---------- ----------
-- 246
---------- ----------
SNAPPER
Snapper Revolver.......................................................................... 75,359 46,419
Industrial Development Bonds.............................................................. 1,024 1,050
---------- ----------
76,383 47,469
---------- ----------
Capital lease obligations, interest rates of 7% to 13%.................................... 1,623 6,185
---------- ----------
Long-term debt including discontinued operations........................................ 79,416 459,059
Long-term debt, attributable to discontinued operations................................. -- (268,305)
Current portion......................................................................... (21,478) (17,544)
---------- ----------
Long-term debt........................................................................ $ 57,938 $ 173,210
---------- ----------
---------- ----------
Aggregate annual repayments of long-term debt over the next five years and
thereafter are as follows (in thousands):
1998............................................... $ 21,478
1999............................................... 818
2000............................................... 55,249
2001............................................... 1,091
2002............................................... 92
Thereafter......................................... 688
F-27
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
MMG (EXCLUDING COMMUNICATIONS GROUP, ENTERTAINMENT GROUP AND SNAPPER)
In connection with the Entertainment Group Sale (see note 5), the Company repaid
all of its outstanding debentures. During August 1997, the Company repaid its
9 1/2% Subordinated Debentures, 10% Subordinated Debentures and 6 1/2%
Convertible Subordinated Debentures. In connection with the repayment of its
outstanding debentures, the Company expensed certain unamortized discounts
associated with the debentures and recognized an extraordinary loss of $13.6
million on the extinguishment of the debt.
The 9 7/8% Senior Subordinated Debentures were paid in March 1997.
ENTERTAINMENT GROUP
On July 10, 1997, in connection with the Entertainment Group Sale (see note 5),
the Entertainment Group Credit Facility, as defined below was repaid.
On July 2, 1996, the Entertainment Group entered into a credit agreement with
Chase Bank as agent for a syndicate of lenders, pursuant to which the lenders
provided to the Entertainment Group and its subsidiaries a $300 million credit
facility (the "Entertainment Group Credit Facility"). The $300 million facility
consisted of a secured term loan of $200 million (the "Term Loan") and a
revolving credit facility of $100 million, including a $10 million letter of
credit subfacility, (the "Revolving Credit Facility"). Proceeds from the Term
Loan and $24.0 million of the Revolving Credit Facility were used to refinance
the existing indebtedness of Orion (the "Old Orion Credit Facility"), Goldwyn
and MPCA (as defined in note 10). In connection with the refinancing of the Old
Orion Credit Facility, the Entertainment Group expensed the deferred financing
costs associated with the Old Orion Credit Facility and recorded an
extraordinary loss of approximately $4.5 million in 1996.
At the November 1 Merger date (see note 7), proceeds from the Old Orion Credit
Facility as well as amounts advanced from MMG under a subordinated promissory
note, were used to repay and terminate all outstanding Plan debt obligations
($210.7 million) and to pay certain transaction costs. To record the repayment
and termination of the Plan debt, the Entertainment Group removed certain
unamortized discounts associated with such obligations from its accounts and
recognized an extraordinary loss of $32.4 million on the extinguishment of debt
in 1995.
COMMUNICATIONS GROUP
A loan from the Hungarian Foreign Trade Bank, which bore interest at 34.5%, was
repaid in 1997.
Included in interest expense for the years ended December 31, 1996 and 1995 are
$107,000 and $3.8 million, respectively, of interest on amounts due to
Metromedia Company ("Metromedia"), an affiliate of the Company.
SNAPPER
On November 26, 1996, Snapper entered into a credit agreement (the "Snapper
Credit Agreement") with AmSouth Bank of Alabama ("AmSouth"), pursuant to which
AmSouth had agreed to make available to Snapper a revolving line of credit up to
$55.0 million, upon the terms and subject to conditions contained in the Snapper
Credit Agreement (the "Snapper Revolver") for a period ending on January 1, 1999
(the "Snapper Revolver Termination Date"). The Snapper Revolver is guaranteed by
the Company.
Interest under the Snapper Revolver is payable at Snapper's option at a rate
equal to either (i) prime plus .5% (from November 26, 1996 through May 25, 1997)
and prime plus 1.5% (from May 26, 1997 to the
F-28
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
Snapper Revolver Termination Date) and (ii) LIBOR (as defined in the Snapper
Credit Agreement) plus 2.5% (from November 26, 1996 through May 25, 1997) and
LIBOR plus 3.5% (from May 26, 1997 to the Snapper Revolver Termination Date).
The Snapper Revolver 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 material 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 Snapper,
without the prior written consent of AmSouth; (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 at any time (a) an Event of Default (as
defined in the Snapper Credit Agreement) exists or would result because of such
payment, (b) there would be less than $10 million available to Snapper under the
terms of the Snapper Credit Agreement, (c) a single payment would exceed $3
million, (d) prior to January 1, 1998, and (e) such payment would occur more
frequently than quarterly after January 1, 1998; (vi) make loans, issue
additional indebtedness or make any guarantees. In addition, Snapper is required
to maintain at all times as of the last day of each month a specified net worth.
The Snapper Credit Agreement is secured by a first priority security interest in
all of Snapper's assets and properties and is also entitled to the benefit of a
replenishable $1.0 million cash collateral account, which was initially funded
by Snapper. Under the Snapper Credit Agreement, AmSouth may draw upon amounts in
the cash collateral account to satisfy any payment defaults by Snapper and
Messrs. Kluge and Subotnick, Chairman of the Board of MMG and Vice Chairman,
President and Chief Executive Officer of MMG, respectively, are obligated to
replenish such account any time amounts are so withdrawn up to the entire amount
of the Snapper Revolver.
Under the Snapper Credit Agreement, the following events, among others, each
constitute an "Event of Default": (i) breach of any representation or warranty,
certification or certain covenants made by Snapper or any due observance or
performance to be observed or performed by Snapper; (ii) failure to pay within 5
days after payment is due; and (iii) a "change of control" shall occur. For
purposes of the Snapper Credit Agreement, "change of control" means (i) a change
of ownership of Snapper that results in the Company not owning at least 80% of
all the outstanding stock of Snapper, (ii) a change of ownership of the Company
that results in (a) Messrs. Kluge and Subotnick not having beneficial ownership
or common voting power of at least 15% of the common voting power of the
Company, (b) any person having more common voting power than Messrs. Kluge and
Subotnick, or (c) any person other than Messrs. Kluge and Subotnick for any
reason obtaining the right to appoint a majority of the board of directors of
the Company.
At December 31, 1996, Snapper was not in compliance with certain of these
covenants. The Company and AmSouth amended the Snapper Credit Agreement to
provide for (i) an annual administrative fee to be paid on December 31, 1997,
(ii) an increase in Snapper's borrowing rates as of December 31, 1997 (from
prime rate to prime rate plus 1.50% and from LIBOR plus 2.50% to LIBOR plus
4.00%), and (iii) an increase in Snapper's commitment fee as of December 31,
1997 from .50% per annum to .75% per annum. As part of the amendment to the
Snapper Credit Agreement AmSouth waived: (i) the covenant defaults as of
December 31, 1996, (ii) the $250,000 semi-annual administrative fee requirement
which was set to commence on May 26, 1997 and (iii) the mandatory borrowing rate
and commitment fee increase that was to occur on May 26, 1997. Furthermore, the
amendment replaced certain existing financial covenants with
F-29
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
covenants on minimum quarterly cash flow and equity requirements, as defined. In
addition, the Company and AmSouth agreed to a $10.0 million credit facility.
On April 30, 1997, Snapper closed a $10.0 million working capital facility
("Working Capital Facility") with AmSouth which amended Snapper's existing $55.0
million facility. The Working Capital Facility (i) provided AmSouth with a PARI
PASSU collateral interest in all of Snapper's assets (including rights under a
Make-Whole and Pledge Agreement made by Metromedia in favor of AmSouth in
connection with the Snapper Revolver), (ii) accrue interest on borrowings at
AmSouth's floating prime rate (same borrowing rate as the Snapper Revolver), and
(iii) was due and payable on October 1, 1997. On October 1, 1997, the Company
repaid the $10.0 million Working Capital Facility.
On November 12, 1997, Snapper amended and restated the Snapper Credit Agreement
to increase the amount of the revolving line of credit from $55.0 million to
$80.0 million. The Snapper Revolver bears interest at an applicable margin above
the prime rate (up to 1.5%) or a LIBOR rate (up to 4.0%). The Snapper Revolver
matures on January 1, 2000. The Snapper Revolver continues to be guaranteed by
the Company and Messrs. Kluge and Subotnick have agreed to guarantee $10.0
million of the Snapper Revolver. The Snapper Credit Agreement, as amended,
continues to contain certain financial covenants regarding maintaining minimum
tangible net worth and satisfying certain quarterly cash flow requirements.
At December 31, 1997, Snapper was not in compliance with the financial covenants
under the Snapper Revolver. The Company and AmSouth amended the Snapper Credit
Agreement to provide for (i) a reduction in the amount of the line of credit
from $80.0 million to $55.0 million as of July 1, 1998 and (ii) a reduction in
the finished goods advance rate from 80% to 70% as of July 1, 1998 and a further
reduction to 50% on December 31, 1998. As a part of the amendment to the Snapper
Credit Agreement, AmSouth waived the covenant defaults as of December 31, 1997.
Furthermore, the amendment replaced the existing 1998 financial covenants with
covenants reflecting Snapper's anticipated cash flow and equity changes based on
the seasonality of the business.
It is assumed that the carrying value of Snapper's bank debt approximates its
face value because it is a floating rate instrument.
Snapper has industrial development bonds with certain municipalities. The
industrial development bonds mature in 1999 and 2001, and their interest rates
range from 62% to 75% of the prime rate.
5. THE ENTERTAINMENT GROUP SALE
On July 10, 1997, the Company sold the stock of Orion, including substantially
all of the assets of its entertainment group (the "Entertainment Group"),
consisting of Orion, Goldwyn Entertainment Company ("Goldwyn") and Motion
Picture Corporation of America ("MPCA") (and their respective subsidiaries)
which included a feature film and television library of over 2,200 titles to P&F
Acquisition Corp. ("P&F"), the parent company of Metro-Goldwyn-Mayer Inc.
("MGM") 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-30
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. 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):
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
---------
---------
The Entertainment Group's revenues for the period January 1, 1997 to May 2, 1997
and the years ended December 31, 1996 and 1995 were $41.7 million, $135.6
million and $133.8 million, respectively. The Entertainment Group's loss from
operations for the period January 1, 1997 to May 2, 1997 and the years ended
December 31, 1996 and 1995 were $32.2 million, $23.4 million and $50.8 million,
respectively. Loss from operations for the period January 1, 1997 to May 2, 1997
and the years ended December 31, 1996 and 1995 include income tax expense
(benefit) of ($3.2) million, $1.0 million and $767,000, respectively.
Net assets of the Entertainment Group at December 31, 1996 were as follows (in
thousands):
Current assets................................................... $ 101,883
Non-current assets............................................... 327,698
Current liabilities.............................................. (119,314)
Non-current liabilities.......................................... (299,295)
---------
Net assets................................................... $ 10,972
---------
---------
The following pro forma information illustrates the effect of (1) the
Entertainment Group Sale, (2) the repayment of MMG's outstanding subordinated
debentures (see note 4), (3) the acquisition of AAT (see note 3) and (4) the
sale of Landmark (see note 6) on revenues, loss from continuing operations and
loss from continuing operations per share for the years ended December 31, 1997
and 1996. The pro forma information assumes (1) the Entertainment Group Sale,
(2) the repayment of MMG's outstanding subordinated debentures and (3) the
acquisition of AAT and (4) the sale of Landmark occurred at the beginning of
each period. It also assumes Snapper was included in the consolidated results of
operations at the beginning of 1996 (in thousands, except per share amounts).
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues............................................................ $ 204,328 $ 167,215
----------- -----------
----------- -----------
Loss from continuing operations..................................... (123,015) (97,308)
----------- -----------
----------- -----------
Loss from continuing operations per share........................... $ (1.84) $ (1.79)
----------- -----------
----------- -----------
6. SALE OF LANDMARK THEATRE GROUP
On December 17, 1997, the Company entered into an agreement (the "Landmark
Agreement") with Silver Cinemas, Inc. ("Silver Cinemas"), pursuant to which the
Company will sell to Silver Cinemas (the "Landmark Sale") all of the assets,
except cash and certain of the liabilities of Landmark, for an aggregate cash
purchase price of approximately $62.5 million. The Company anticipates that the
Landmark Sale will be consummated in April 1998. The Landmark Sale has been
recorded as a discontinuance of a business
F-31
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SALE OF LANDMARK THEATRE GROUP (CONTINUED)
segment in the accompanying consolidated financial statements. The Company
expects to record a gain on the sale of the discontinued segment.
The net assets of Landmark at December 31, 1997, November 12, 1997, the date the
Company adopted a plan to dispose of Landmark, and December 31, 1996 were as
follows (in thousands):
DECEMBER 31, NOVEMBER 12, DECEMBER 31,
1997 1997 1996
------------ ------------ ------------
Current assets..................... $ 793 $ 906 $ 796
Non-current assets................. 57,183 57,523 58,719
Current liabilities................ (6,286) (4,738) (7,496)
Non-current liabilities............ (4,922) (5,160) (5,517)
------------ ------------ ------------
Net assets....................... $ 46,768 $ 48,531 $ 46,502
------------ ------------ ------------
------------ ------------ ------------
Landmark's revenues and income (loss) from operations for the period January 1,
1997 to November 12, 1997 and for the period July 2, 1996 (date of acquisition
of Landmark) to December 31, 1996 were $48.7 million, ($108,000), $29.6 million
and $1.2 million, respectively. Loss from operations for the period January 1,
1997 to November 12, 1997 includes income taxes of $408,000.
7. THE NOVEMBER 1 MERGER
On November 1, 1995, (the "Merger Date") Orion, MITI, the Company and MCEG
Sterling Incorporated ("Sterling"), consummated the mergers contemplated by the
Amended and Restated Agreement and Plan of Merger (the "Merger Agreement") dated
as of September 27, 1995. The Merger Agreement provided for, among other things,
the simultaneous mergers of each of Orion and MITI with and into OPC Merger
Corp. and MITI Merger Corp., the Company's recently-formed subsidiaries, and the
merger of Sterling with and into the Company (the "November 1 Merger"). In
connection with the November 1 Merger, the Company changed its name from The
Actava Group Inc. to Metromedia International Group, Inc.
Upon consummation of the November 1 Merger, all of the outstanding shares of the
common stock, par value $.25 per share of Orion (the "Orion Common Stock"), the
common stock, par value $.001 per share, of MITI (the "MITI Common Stock") and
the common stock, par value $.001 per share, of Sterling (the "Sterling Common
Stock") were exchanged for shares of the Company's common stock, par value $1.00
per share, pursuant to exchange ratios contained in the Merger Agreement.
Pursuant to such ratios, holders of Orion Common Stock received .57143 shares of
the Company's common stock for each share of Orion Common Stock (resulting in
the issuance of 11,428,600 shares of common stock to the holders of Orion Common
Stock), holders of MITI Common Stock received 5.54937 shares of the Company's
common stock for each share of MITI Common Stock (resulting in the issuance of
9,523,817 shares of the Company's common stock to the holders of MITI Common
Stock) and holders of Sterling Common Stock received .04309 shares of the
Company's common stock for each share of Sterling Common Stock (resulting in the
issuance of 483,254 shares of the Company's common stock to the holders of
Sterling Common Stock).
In addition, pursuant to the terms of a contribution agreement dated as of
November 1, 1995 among the Company and two affiliates of Metromedia,
MetProductions, Inc. ("MetProductions") and Met International, Inc. ("Met
International"), MetProductions and Met International contributed to the Company
an aggregate of $37,068,303 consisting of (i) interests in a partnership and
(ii) the principal amount of indebtedness of Orion and its affiliate, and
indebtedness of an affiliate of MITI, owed to MetProductions
F-32
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. THE NOVEMBER 1 MERGER (CONTINUED)
and Met International respectively, in exchange for an aggregate of 3,530,314
shares of the Company's common stock.
Immediately prior to the consummation of the November 1 Merger, there were
17,490,901 shares of the Company's common stock outstanding. As a result of the
consummation of the November 1 Merger and the transactions contemplated by the
contribution agreement, the Company issued an aggregate of 24,965,985 shares of
common stock. Following consummation of the November 1 Merger and the
transactions contemplated by the contribution agreement, Metromedia and its
affiliates (the "Metromedia Holders") collectively held an aggregate of
15,252,128 shares of common stock (or 35.9% of the issued and outstanding shares
of common stock).
Due to the existence of the Metromedia Holders' common control of Orion and MITI
prior to consummation of the November 1 Merger, their combination pursuant to
the November 1 Merger was accounted for as a combination of entities under
common control. Orion was deemed to be the acquirer in the common control
merger. As a result, the combination of Orion and MITI was effected utilizing
historical costs for the ownership interests of the Metromedia Holders in MITI.
The remaining ownership interests of MITI were accounted for in accordance with
the purchase method of accounting based on the fair value of such ownership
interests, as determined by the value of the shares received by the holders of
such interests at the effective time of the November 1 Merger.
For accounting purposes only, Orion and MITI were deemed to be the joint
acquirers of Actava and Sterling. The acquisition of Actava and Sterling has
been accounted for as a reverse acquisition. As a result of the reverse
acquisition, the historical financial statements of the Company for periods
prior to the November 1 Merger are those of Orion and MITI, rather than Actava.
The operations of Actava and Sterling have been included in the accompanying
consolidated financial statements from November 1, 1995, the date of
acquisition. During December 1995, the Company adopted a formal plan to dispose
of Snapper (see notes 1 and 8). In addition, the Company's investment in RDM was
deemed to be a non-strategic asset (see note 9).
At December 31, 1995, Snapper was recorded in an amount equal to the sum of
estimated cash flows from the operations of Snapper plus the anticipated
proceeds from the sale of Snapper which amounted to $79.2 million. The excess of
the purchase price allocated to Snapper in the November 1 Merger over the
expected estimated cash flows from the operations and sale of Snapper in the
amount of $293.6 million for the year ended December 31, 1995 has been reflected
in the accompanying consolidated statement of operations as a loss on disposal
of a discontinued operation. No income tax benefits were recognized in
connection with this loss on disposal because of the Company's losses from
continuing operations and net operating loss carryforwards.
The purchase price of Actava, Sterling and MITI minority interests, exclusive of
transaction costs, amounted to $438.9 million at November 1, 1995. The excess
purchase price over the net fair value of assets acquired amounted to $404.0
million at November 1, 1995, before the write-off of Snapper goodwill of $293.6
million.
Orion, MITI and Sterling were parties to a number of material contracts and
other arrangements under which Metromedia Company and certain of its affiliates
had, among other things, made loans or provided financing to, or paid
obligations on behalf of, each of Orion, MITI and Sterling. On November 1, 1995
such indebtedness, financing and other obligations of Orion, MITI and Sterling
to Metromedia and its affiliates were refinanced, repaid or converted into
equity of MMG.
F-33
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. THE NOVEMBER 1 MERGER (CONTINUED)
Certain of the amounts owed by Orion ($20.4 million), MITI ($34.1 million) and
Sterling ($524,000) to Metromedia were financed by Metromedia through borrowings
under a $55.0 million credit agreement between the Company and Metromedia (the
"Actava-Metromedia Credit Agreement"). Orion, MITI and Sterling repaid such
amounts to Metromedia, and Metromedia repaid the Company the amounts owed by
Metromedia to the Company under the Actava-Metromedia Credit Agreement. In
addition, certain amounts owed by Orion to Metromedia were repaid on November 1,
1995.
8. SNAPPER, INC.
In connection with the November 1 Merger (see note 7), Snapper was classified as
an asset held for sale. Subsequently, the Company announced its intention not to
continue to pursue its previously adopted plan to dispose of Snapper and to
actively manage Snapper. Snapper has been included in the consolidated financial
statements as of November 1, 1996. The allocation of the November 1, 1996
carrying value of Snapper, $73.8 million, which included an intercompany
receivable of $23.8 million, is as follows (in thousands):
Cash...................................................... $ 7,395
Accounts receivable....................................... 36,544
Inventories............................................... 51,707
Property, plant and equipment............................. 29,118
Other assets.............................................. 773
Accounts payable and accrued expenses..................... (25,693)
Debt...................................................... (40,059)
Other liabilities......................................... (3,200)
---------
Excess of assets over liabilities......................... 56,585
Carrying value at November 1, 1996........................ 73,800
---------
Excess of carrying value over fair value of net assets.... $ 17,215
---------
---------
The excess of the carrying value over fair value of net assets is reflected in
the accompanying consolidated financial statements as goodwill and is being
amortized over 25 years.
The following table summarizes the operating results of Snapper for the ten
months ended October 31, 1996 and for the period November 1, 1995 to December
31, 1995 (in thousands):
1996 1995
---------- ----------
Revenue............................................................... $ 130,623 $ 14,385
Operating expenses.................................................... 148,556 34,646
---------- ----------
Operating loss........................................................ (17,933) (20,261)
Interest expense...................................................... (6,859) (1,213)
Other income (expenses)............................................... 1,210 (259)
---------- ----------
Loss before income taxes.............................................. (23,582) (21,733)
Income taxes.......................................................... -- --
---------- ----------
Net loss.............................................................. $ (23,582) $ (21,733)
---------- ----------
---------- ----------
As part of Snapper's transition to the dealer-direct business, Snapper had from
time to time reacquired the inventories and less frequently had purchased the
accounts receivable of distributors it had canceled. The
F-34
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SNAPPER, INC. (CONTINUED)
purchase of inventories is recorded by reducing sales for the amount credited to
accounts receivable from the canceled distributor and recording the repurchased
inventory at the lower of cost or market. During 1997, 1996 and 1995, 9, 18 and
7 distributors were canceled, respectively. Inventories purchased (and/or
credited to the account of canceled distributors) under such arrangements
amounted to (in thousands):
TEN MONTHS
TWO MONTHS ENDED TWO MONTHS
YEAR ENDED ENDED OCTOBER 31, ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 1996 DECEMBER 31, 1995
----------------- ----------------- --------------- -----------------
Inventories........................... $ 25,405 $ 3,117 $ 21,376 $ 4,596
Decrease in gross profit.............. 8,383 2,106 5,967 1,245
9. INVESTMENT IN RDM
In connection with the November 1 Merger, RDM was classified as an asset held
for sale and the Company excluded its equity in earnings and losses of RDM from
its results of operations. At November 1, 1995, the Company recorded its
investment in RDM to reflect the anticipated proceeds from its sale. During
1996, the Company reduced the carrying value of its investment in RDM to its
then estimated net realizable value of $31.2 million and the writedown of $16.3
million was reflected as a loss from discontinued operations in the 1996
consolidated statement of operations.
On April 1, 1997, for financial statement reporting purposes, the Company no
longer qualified to treat its investment in RDM as a discontinued operation.
Since April 1, 1997, the Company recorded in its results of operations in 1997 a
reduction in the carrying value of its investment in RDM of $18.0 million and
its share of the expected net loss of RDM of $8.2 million.
On June 20, 1997 RDM entered into a $100.0 million revolving and term credit
facility (the "RDM Credit Facility"). The RDM Credit Facility was guaranteed by
a letter of credit in the amount of $15.0 million in favor of the lenders
thereunder ( the "Lenders"), which was obtained by Metromedia Company, and could
not be drawn until five days after a payment default and fifteen days after
Non-Payment Default (as defined under the RDM Credit Facility). In consideration
of providing the letters of credit, Metromedia was granted warrants to purchase
3 million shares of RDM Common Stock (approximately 5% of RDM) ("RDM Warrants")
at an exercise price of $.50 per share. The RDM Warrants have a ten year term
and are exercisable beginning September 19, 1997. In accordance with the terms
of the agreement entered into in connection with the RDM Credit Facility,
Metromedia offered the Company the opportunity to substitute its letter of
credit for Metromedia's letter of credit and to receive the RDM Warrants. On
July 10, 1997, the Company's Board of Directors elected to substitute its letter
of credit for Metromedia's letter of credit and the RDM Warrants were assigned
to the Company.
On August 22, 1997, RDM announced that it had failed to make the August 15, 1997
interest payment due on its subordinated debentures and that it had no present
ability to make such a payment. As a result of the foregoing, on August 22,
1997, the Lender declared an Event of Default, as defined under the RDM Credit
Facility and accelerated all amounts outstanding under such facility. On August
28, 1997, an involuntary bankruptcy petition was filed against a subsidiary of
RDM in Federal bankruptcy court in Montgomery, Alabama. RDM and certain of its
affiliates each subsequently filed voluntary petitions for relief under chapter
11 of the Bankruptcy Code. Since the commencement of their respective chapter 11
cases, RDM and its affiliates have proceeded with the liquidation of their
assets and properties and discontinued ongoing business operations. The Company
does not currently anticipate that it will receive any distributions on account
of its RDM common stock or RDM Warrants. The Company has recorded in
F-35
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INVESTMENT IN RDM (CONTINUED)
its results of operations in 1997 a further reduction in the carrying value of
RDM of $4.9 million and a loss of $15.0 million on the letter of credit
guarantee.
After the commencement of RDM's and its affiliates' chapter 11 cases, the Lender
drew upon the entire amount of the Letter of Credit. Consequently, the Company
will become subrogated to the Lender's secured claims against the Company in an
amount equal to the drawing under the Letter of Credit following payment in full
of the Lender. The Company intends to vigorously pursue its subrogation claims
in the chapter 11 cases. However, it is uncertain what recovery the Company will
obtain in respect of such subrogation claims.
On February 18, 1998 the Office of the United States Trustee filed a motion to
appoint a chapter 11 trustee in the United States Bankruptcy Court for the
Northern Division of Georgia. RDM and its affiliates subsequently filed a motion
to convert the chapter 11 cases to cases under chapter 7 of the Bankruptcy Code.
On February 19, 1998, the bankruptcy court granted the United States Trustee's
motion and ordered that a chapter 11 trustee be appointed. On February 25, 1998,
each of the Company's designees on RDM's Board of Directors submitted a letter
of resignation.
10. ENTERTAINMENT GROUP ACQUISITIONS
On July 2, 1996, the Company consummated the acquisition (the "Goldwyn Company
Merger") of the Samuel Goldwyn Company ("Goldwyn Company") by merging the
Company's newly formed subsidiary, SGC Merger Corp., into Goldwyn Company. Upon
consummation of the Goldwyn Company Merger, Goldwyn was renamed Goldwyn
Entertainment Company. Holders of common stock received .3335 shares of the
Company's common stock (the "Common Stock") for each share of Goldwyn Company
Common Stock in accordance with a formula set forth in the Agreement and Plan of
Merger relating to the Goldwyn Company Merger (the "Goldwyn Company Merger
Agreement"). Pursuant to the Goldwyn Company Merger, the Company issued
3,130,277 shares of common stock.
The purchase price, including the value of existing Goldwyn Company stock
options and transaction costs related to the Goldwyn Company Merger, was
approximately $43.8 million.
Also on July 2, 1996, the Company consummated the acquisition (the "MPCA
Merger", together with the Goldwyn Company Merger, the "July 2 Mergers") of
Motion Picture Corporation of America ("MPCA") by merging the Company's recently
formed subsidiary, MPCA Merger Corp., with MPCA. In connection with the MPCA
Merger, the Company (i) issued 1,585,592 shares of common stock to MPCA's sole
stockholders, and (ii) paid such stockholders approximately $1.2 million in
additional consideration, consisting of promissory notes. The purchase price,
including transaction costs, related to the acquisition of MPCA was
approximately $21.9 million.
The excess of the purchase price over the net fair value of liabilities assumed
in the July 2 Mergers amounted to $125.4 million.
Following the consummation of the July 2 Mergers, the Company contributed its
interests in Goldwyn and MPCA to Orion, with Goldwyn and MPCA becoming
wholly-owned subsidiaries of Orion. Orion, Goldwyn and MPCA were collectively
referred to as the Entertainment Group (see notes 4 and 5). The July 2 Mergers
were recorded in accordance with the purchase method of accounting for business
combinations. The purchase price to acquire both Goldwyn and MPCA were allocated
to the net assets acquired according to management's estimate of their
respective fair values and the results of those purchased businesses have been
included in the accompanying consolidated financial statements from July 2,
1996, the date of acquisition (see notes 4 and 5).
F-36
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 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, 1997.
On September 16, 1997 the Company completed a public offering of 4,140,000
shares of $1.00 par value, 7 1/4% cumulative convertible preferred stock
("Preferred Stock") with a liquidation preference of $50 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 (the "Certificate of Designation")), each holder of Preferred
Stock shall, in the event that the market value at such time is less than the
conversion price of $15.00, have a one-time option to convert the Preferred
Stock into the Company's common stock at a conversion price equal to the greater
of (i) the Market Value, as of the Change of Control Date (as defined in the
Certificate of Designation) and (ii) $8.00. In lieu of issuing shares of the
Company's common stock, the Company may, at its option, make a cash payment
equal to the Market Value of the Company's common stock otherwise issuable.
COMMON STOCK
On July 2, 1996, the Company completed a public offering of 18,400,000 shares of
common stock, generating net proceeds of approximately $190.6 million.
On August 29, 1996, the Company increased the number of authorized shares of
common stock from 110,000,000 to 400,000,000. At December 31, 1997, 1996 and
1995 there were 68,390,800, 66,153,439 and 42,613,738 shares issued and
outstanding, respectively.
As part of the MPCA Merger, the Company issued 256,504 shares of restricted
common stock to certain employees. The common stock was to vest on a pro-rata
basis over a three year period ending in July 1999. The total market value of
the shares at the time of issuance was treated as unearned compensation and was
charged to expense over the vesting period. Unearned compensation charged to
expense for the period ended December 31, 1997 and 1996 was $352,000 and,
$529,000, respectively. In connection with the Entertainment Group Sale, the
256,504 shares of restricted common stock became fully vested. The cost of $2.3
million associated with the vesting of the restricted common stock was recorded
as a reduction to the Entertainment Group Sale gain.
F-37
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 1997, the Company has reserved for future issuance shares of
Common Stock in connection with the stock option plans and Preferred Stock
listed below:
Stock option plans...................................... 10,037,180
Preferred Stock......................................... 13,800,000
---------
23,837,180
---------
---------
STOCK OPTION PLANS
On August 29, 1996, the stockholders of MMG approved the Metromedia
International Group, Inc. 1996 Incentive Stock Option Plan (the "MMG Plan"). The
aggregate number of shares of common stock that may be the subject of awards
under the MMG Plan is 8,000,000. The maximum number of shares which may be the
subject of awards to any one grantee under the MMG Plan may not exceed 250,000
in the aggregate. The MMG Plan provides for the issuance of incentive stock
options, nonqualified stock options and stock appreciation rights in tandem with
the 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, 1997 there
were 3,804,387 additional shares available for grant under the MMG Plan.
Following the November 1 Merger, options granted pursuant to each of the MITI
stock option plan and the Actava stock option plans and, following the Goldwyn
Merger, the Goldwyn stock option plans were converted into stock options
exercisable for common stock of MMG in accordance with their respective exchange
ratios.
The per share weighted-average fair value of stock options granted during 1997
and 1996 was $4.33 and $7.36 on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: expected
volatility of 50% in 1997 and 49% in 1996, expected dividend yield of zero
percent, risk-free interest rate of 5.5% in 1997 and 5.2% in 1996 and an
expected life of 4 years in 1997 and 7 years in 1996.
The Company applies APB 25 in recording the value of stock options granted
pursuant to its plans. No compensation cost has been recognized for stock
options granted under the MMG Plan for the years ended December 31, 1997 and
1996 and for the year ended December 31, 1996 compensation expense of $153,000
has been recorded for stock options under the MITI stock option plan in the
consolidated statements of operations. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
123, the Company's net income (loss) would have (decreased) increased to the pro
forma amounts indicated below (in thousands, except per share amount):
1997 1996
--------- -----------
Net income (loss) attributable to common stockholders:
As reported......................................................... $ 84,107 $ (115,243)
Pro forma........................................................... $ 75,925 $ (118,966)
Income (loss) per common share--Basic:
As reported......................................................... $ 1.26 $ (2.12)
Pro forma........................................................... $ 1.13 $ (2.19)
F-38
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma net income reflects only options granted under the MMG Plan in 1997
and 1996 and the MITI stock option plan in 1996. MITI and Actava stock options
granted prior to the November 1 Merger were recorded at fair value. In addition,
Goldwyn stock options granted prior to the Goldwyn Company Merger, were recorded
at fair value and included in the Goldwyn purchase price.
Stock option activity during the periods indicated is as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
----------- -------------
Balance at December 31, 1995..................................... 1,863,000 $ 4.81
Transfer of Goldwyn options in acquisition....................... 202,000 $ 23.33
Options granted.................................................. 2,945,000 $ 12.63
Options exercised................................................ (167,000) $ 7.46
Options forfeited................................................ (264,000) $ 13.03
-----------
Balance at December 31, 1996..................................... 4,579,000 $ 10.09
Options granted.................................................. 6,629,000 $ 8.75
Options exercised................................................ (2,333,000) $ 9.23
Options forfeited................................................ (234,000) $ 10.22
Options canceled................................................. (2,768,000) $ 12.75
-----------
Balance at December 31, 1997..................................... 5,873,000 $ 7.66
-----------
-----------
At December 31, 1997 the range of exercise prices and the weighted-average
remaining contractual lives of outstanding options was $1.08-$56.22 and 8.5
years, respectively.
In addition to the MMG Plan, at December 31, 1997, there were 360,000 shares
that may be the subject of awards under other existing stock option plans.
At December 31, 1997 and 1996, the number of stock options exercisable was
2,573,000 excluding any effects of accelerated vesting, and 2,031,000,
respectively, and the weighted-average exercise price of these options was $6.99
and $7.92, respectively.
On March 26, 1997 the Board of Directors approved the cancellation and
reissuance of all stock options previously granted pursuant to the MMG 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 MMG Plan.
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.
The MMG Plan provides that upon a sale of "substantially all" of the Company's
assets, all unvested outstanding options to acquire the Common Stock under such
plan would vest and become immediately exerciseable. In connection with the
Entertainment Group Sale, the Company's Compensation Committee determined that
the Entertainment Group Sale constituted a sale of "substantially all" of the
Company's assets for purposes of the MMG Plan, thereby accelerating the vesting
of all options outstanding under such plan. As of December 31, 1997, 2,328,489
options had been issued to the directors, officers and certain employees of the
Company, Landmark and the Communications Group, and remain outstanding under the
MMG Plan and 1,526,632 of such options had not vested. All such options are
exercisable at a
F-39
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCKHOLDERS' EQUITY (CONTINUED)
price equal to $9.31 per share. All of the directors of the Company have agreed
to waive the accelerated vesting of their options and the Company is in the
process of obtaining waivers from the remaining officers and employees of the
Company and Communications Group.
On December 13, 1995, the Board of Directors of the Company terminated the
Actava 1991 Non-Employee Director Stock Option Plan. The Company had previously
reserved 150,000 shares for issuance upon the exercise of stock options granted
under this plan and had granted 20,000 options thereunder.
12. 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.
Income tax expense (benefit) for the years ended December 31, 1997, 1996 and
1995 consists of the following (in thousands):
1997 1996 1995
------- ------- -------
Federal....................... $(9,935) $ -- $ --
State and local............... 1,982 -- --
Foreign....................... 914 414 --
------- ------- -------
Current....................... (7,039) 414 --
Deferred...................... 1,812 -- --
------- ------- -------
$(5,227) $ 414 $ --
------- ------- -------
------- ------- -------
The provision for income taxes for the years ended December 31, 1997, 1996 and
1995 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 $23.2 million, $4.4
million and $1.9 million for the years ended December 31, 1997, 1996 and 1995,
respectively. Pre-tax losses from domestic operations were $112.9 million, $67.3
million and $34.4 million for the years ended December 31, 1997, 1996 and 1995,
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, 1997 and 1996 reflects estimates of withholding and remittance
taxes.
F-40
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
The temporary differences and carryforwards which give rise to deferred tax
assets and (liabilities) at December 31, 1997 and 1996 are as follows (in
thousands):
1997 1996
----------- -----------
Net operating loss carryforward......................................................... $ 65,261 $ 61,803
Allowance for doubtful accounts......................................................... 3,842 3,911
Capital loss carryforward............................................................... -- 6,292
Reserves for self-insurance............................................................. 10,464 10,415
Investment in equity investee........................................................... 28,425 12,325
Purchase of safe harbor lease investment................................................ (6,628) (7,903)
Minimum tax credit (AMT) carryforward................................................... 13,036 8,805
Other reserves.......................................................................... 10,604 10,770
Other................................................................................... (117) (4,905)
----------- -----------
Subtotal before valuation allowance..................................................... 124,887 101,513
Valuation allowance..................................................................... (124,887) (101,513)
----------- -----------
Deferred taxes.......................................................................... $ -- $ --
----------- -----------
----------- -----------
The net change in the total valuation allowance for the years ended December 31,
1997, 1996 and 1995 was an increase of $23.4 million, $18.3 million, and $79.4
million, respectively.
The Company's income tax expense (benefit) for the years ended December 31,
1997, 1996 and 1995, differs from the expense (benefit) that would have resulted
from applying the federal statutory rates during those periods to income (loss)
before income tax expense (benefit). The reasons for these differences are
explained in the following table (in thousands):
1997 1996 1995
---------- ---------- ----------
Benefit based upon federal statutory rate of 35%.............................. $ (47,645) $ (25,106) $ (12,693)
Foreign taxes in excess of federal credit..................................... 914 414 --
Amortization of goodwill...................................................... 1,729 1,492 --
Foreign operations............................................................ 8,126 1,548 656
Change in valuation allowance................................................. 17,370 11,330 9,645
Equity in losses of Joint Ventures............................................ 7,616 10,690 2,377
Minority interest of consolidated subsidiaries................................ (3,112) (233) (66)
Impact of alternative minimum tax............................................. 7,452 -- --
Other, net.................................................................... 2,323 279 81
---------- ---------- ----------
Income tax expense (benefit).................................................. $ (5,227) $ 414 $ --
---------- ---------- ----------
---------- ---------- ----------
At December 31, 1997 the Company had available net operating loss carryforwards
and unused minimum tax credits of approximately $186.5 million and $13.0
million, respectively, which can reduce future federal income taxes. These
carryforwards and credits begin to expire in 2008. The minimum tax credit may be
carried forward indefinitely to offset regular tax in certain circumstances.
The use by the Company of the pre-November 1, 1995 net operating loss
carryforwards reported by Actava and MITI ("the Pre-November 1 Losses") (and the
subsidiaries included in their respective affiliated groups of corporations
which filed consolidated Federal income tax returns with Actava and MITI as the
parent corporations) are subject to certain limitations as a result of the
November 1 Merger, respectively.
F-41
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
Under Section 382 of the Internal Revenue Code, annual limitations generally
apply to the use of the Pre-November 1 Losses by the Company. The annual
limitations on the use of the Pre-November 1 Losses of Actava and MITI by the
Company approximate $18.3 million and $10.0 million per year, respectively. To
the extent Pre-November 1 Losses equal to the annual limitation with respect to
Actava and MITI are not used in any year, the unused amount is generally
available to be carried forward and used to increase the applicable limitation
in the succeeding year.
The use of Pre-November 1 Losses of MITI is also separately limited by the
income and gains recognized by the corporations that were members of MITI
affiliated group. Under proposed Treasury regulations, such Pre-November 1
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 Merger, the Company succeeded to approximately
$92.2 million of Pre-November 1 Losses of the Actava Group. 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 Losses are utilized they
will reduce income tax expense.
13. EMPLOYEE BENEFIT PLANS
The Communications Group and Snapper have defined contribution plans which
provide for discretionary annual contributions covering substantially all of
their employees. Participating employees can defer receipt of up to 15% of their
compensation, subject to certain limitations. The Communications Group matches
50% of the amounts contributed by plan participants up to 6% of their
compensation. Snapper's employer match is determined each year, and was 50% of
the first 6% of compensation contributed by each participant for the year ended
December 31, 1997 and the period November 1, 1996 to December 31, 1996. The
contribution expense for the years ended December 31, 1997, 1996 and 1995 was
$527,000, $375,000, $124,000, respectively.
In addition, Snapper has a profit sharing plan covering substantially all
non-bargaining unit employees. Contributions are made at the discretion of
management. No profit sharing amounts were approved by management for the years
ended December 31, 1997 and 1996.
Prior to the November 1 Merger, Actava had a noncontributory defined benefit
plan which was "qualified" under Federal tax law and covered substantially all
of Actava's employees. In addition, Actava had a "nonqualified" supplemental
retirement plan which provided for the payment of benefits to certain employees
in excess of those payable by the qualified plans. Following the November 1
Merger (see note 7), the Company froze the Actava noncontributory defined
benefit plan and the Actava nonqualified supplemental retirement plan effective
as of December 31, 1995. Employees no longer accumulate benefits under these
plans.
In connection with the November 1 Merger, the projected benefit obligation and
fair value of plan assets were remeasured considering the Company's freezing of
the plan. The excess of the projected benefit obligations over the fair value of
plan assets in the amount of $4.9 million was recorded in the allocation of
purchase price. The recognition of the net pension liability in the allocation
of the purchase price eliminated any previously existing unrecognized gain or
loss, prior service cost, and transition asset or obligation related to the
acquired enterprise's pension plan. During 1997, certain actuarial assumptions
F-42
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
relating to the qualified pension plan, were revised which resulted in an
additional minimum liability of $805,000, net of tax.
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 cost
(income) for the years ended December 31, 1997 and 1996 amounts to $61,000,
($90,000), $128,000 and ($104,000), respectively. Snapper's defined benefit
plan's projected benefit obligation and fair value of plan assets at December
31, 1997 and 1996 were $6.7 million, $7.2 million, $5.4 million and $6.7
million, respectively. Accrued post-retirement benefit cost at December 31, 1997
and 1996 was $3.0 million and $3.1 million, respectively. Disclosures regarding
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, 1997
and 1996.
F-43
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BUSINESS SEGMENT DATA
The business activities of the Company constitute two business segments (see
note 1, Description of the Business) and are set forth in the following table
(in thousands):
1997 1996 1995
---------- ----------- -----------
COMMUNICATIONS GROUP CONSOLIDATED:
Revenues................................................................... $ 21,252 $ 14,047 $ 5,158
Direct operating costs..................................................... (71,485) (39,687) (26,991)
Depreciation and amortization.............................................. (9,749) (6,403) (2,101)
---------- ----------- -----------
Operating loss........................................................... (59,982) (32,043) (23,934)
Interest expense........................................................... (2,164) (356) (3,727)
Interest income............................................................ 6,820 4,448 2,506
Equity in losses of Joint Ventures......................................... (13,221) (11,079) (7,981)
Minority interest.......................................................... 8,893 666 188
---------- ----------- -----------
Loss before income tax benefit (expense)................................. (59,654) (38,364) (32,948)
---------- ----------- -----------
Assets at year end......................................................... 346,437 195,005 161,089
Capital expenditures....................................................... $ 4,832 $ 3,829 $ 2,324
---------- ----------- -----------
---------- ----------- -----------
SNAPPER (1):
Revenues................................................................... $ 183,076 $ 22,545 $ --
Direct operating costs..................................................... (191,349) (30,654) --
Depreciation and amortization.............................................. (6,973) (1,256) --
---------- ----------- -----------
Operating loss........................................................... (15,246) (9,365) --
Interest expense........................................................... (13,142) (1,432) --
Interest income............................................................ 375 115 --
---------- ----------- -----------
Loss before income tax benefit (expense)................................. (28,013) (10,682) --
---------- ----------- -----------
Assets at year end......................................................... 167,858 140,327 --
Capital expenditures....................................................... $ 5,619 $ 1,252 $ --
---------- ----------- -----------
---------- ----------- -----------
OTHER:
Revenues................................................................... $ -- $ -- $ --
Direct operating costs..................................................... (5,549) (9,355) (1,109)
Depreciation and amortization.............................................. (12) (18) --
---------- ----------- -----------
Operating loss........................................................... (5,561) (9,373) (1,109)
Interest expense........................................................... (5,616) (17,302) (2,208)
Interest income............................................................ 7,772 3,989 --
Equity in losses of and writedown of RDM................................... (45,056) -- --
---------- ----------- -----------
Loss before income tax benefit (expense)................................. (48,461) (22,686) (3,317)
---------- ----------- -----------
Assets at year end including discontinued operations and eliminations...... $ 274,977 $ 177,786 $ 167,511
---------- ----------- -----------
---------- ----------- -----------
F-44
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BUSINESS SEGMENT DATA (CONTINUED)
1997 1996 1995
---------- ----------- -----------
CONSOLIDATED:
Revenues................................................................... $ 204,328 $ 36,592 $ 5,158
Direct operating costs..................................................... (268,383) (79,696) (28,100)
Depreciation and amortization.............................................. (16,734) (7,677) (2,101)
---------- ----------- -----------
Operating loss........................................................... (80,789) (50,781) (25,043)
Interest expense........................................................... (20,922) (19,090) (5,935)
Interest income............................................................ 14,967 8,552 2,506
Equity in losses of Joint Ventures......................................... (13,221) (11,079) (7,981)
Equity in losses and writedown of RDM...................................... (45,056) -- --
Minority interest.......................................................... 8,893 666 188
---------- ----------- -----------
Loss before income tax benefit (expense)................................. (136,128) (71,732) (36,265)
Income tax benefit (expense)............................................... 5,227 (414) --
---------- ----------- -----------
Loss from continuing operations.......................................... (130,901) (72,146) (36,265)
Discontinued operations.................................................... 234,036 (38,592) (344,329)
Extraordinary items........................................................ (14,692) (4,505) (32,382)
---------- ----------- -----------
Net income (loss)........................................................ $ 88,443 $ (115,243) $ (412,976)
---------- ----------- -----------
---------- ----------- -----------
Assets at year end......................................................... 789,272 513,118 328,600
Capital expenditures....................................................... $ 10,451 $ 5,081 $ 2,324
---------- ----------- -----------
---------- ----------- -----------
- ------------------------
(1) Represents operations from November 1, 1996 to December 31, 1997.
F-45
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. BUSINESS SEGMENT DATA (CONTINUED)
Information about the Communications Group's operations in different geographic
locations for 1997, 1996 and 1995 is as follows (in thousands):
1997 1996 1995
--------------------- --------------------- -----------------------
COUNTRY ASSETS REVENUES ASSETS REVENUES ASSETS REVENUES
- ----------------------------------------------------- ---------- --------- ---------- --------- ---------- -----------
AUSTRIA.............................................. $ 6,710 $ 179 $ 1,696 $ -- $ 25 $ --
BELARUS.............................................. 2,135 -- 1,981 -- 918 --
CZECH REPUBLIC....................................... 2,986 220 283 -- -- --
ESTONIA.............................................. 4,943 667 3,154 -- 2,585 --
GEORGIA.............................................. 18,911 -- 11,043 -- 6,437 --
GERMANY.............................................. 5,038 36 -- -- -- --
HUNGARY.............................................. 8,154 8,477 10,251 9,214 10,773 3,879
INDONESIA............................................ 20 -- 235 -- -- --
KAZAKSTAN............................................ 6,840 -- 3,274 -- 1,318 --
LATVIA............................................... 19,786 -- 18,558 -- 8,395 --
LITHUANIA............................................ 2,375 296 1,557 69 81 --
MOLDOVA.............................................. 4,673 -- 3,590 -- 1,613 --
PEOPLES REPUBLIC OF CHINA............................ 117,591 -- 5,026 -- 841 --
PORTUGAL............................................. 6,581 598 -- -- -- --
ROMANIA.............................................. 9,412 4,079 4,791 2,981 3,778 690
RUSSIA............................................... 4,601 3,406 4,742 60 7,669 --
UNITED KINGDOM....................................... 11,463 543 9,435 52 448 --
UNITED STATES........................................ 109,050 2,751 109,257 1,671 112,399 589
UZBEKISTAN........................................... 5,168 -- 6,132 -- 3,809 --
---------- --------- ---------- --------- ---------- -----------
$ 346,437 $ 21,252 $ 195,005 $ 14,047 $ 161,089 $ 5,158
---------- --------- ---------- --------- ---------- -----------
---------- --------- ---------- --------- ---------- -----------
The revenues and assets by the Communications Group's lines of business are
disclosed in notes 2 and 3.
All remaining revenues and assets relate to operations in the United States.
15. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION
SHORT-TERM INVESTMENTS
Short-term investments consist of repurchase agreements, which have maturities
of less than six months.
ACCOUNTS RECEIVABLE
The total allowance for doubtful accounts at December 31, 1997 and 1996 was $2.6
million and $1.7 million, respectively.
F-46
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
INVENTORIES
Inventories consist of the following as of December 31, 1997 and 1996 (in
thousands):
1997 1996
--------- ---------
Lawn and garden equipment:
Raw materials......................................................... $ 11,031 $ 18,733
Finished goods........................................................ 84,523 35,113
--------- ---------
95,554 53,846
Less: LIFO reserve.................................................... 1,306 291
--------- ---------
94,248 53,555
--------- ---------
Telecommunications:
Pagers................................................................ 1,083 635
Telephony............................................................. 425 --
Cable................................................................. 680 214
--------- ---------
2,188 849
--------- ---------
$ 96,436 $ 54,404
--------- ---------
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1997 and 1996 consists of the
following (in thousands):
1997 1996
---------- ---------
Land................................................................... $ 871 $ 863
Buildings and improvements............................................. 6,565 6,355
Machinery and equipment................................................ 46,259 31,188
Leasehold improvements................................................. 840 387
---------- ---------
54,535 38,793
Less: Accumulated depreciation and amortization........................ (10,525) (3,335)
---------- ---------
$ 44,010 $ 35,458
---------- ---------
---------- ---------
F-47
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996 consist of the following (in
thousands):
1997 1996
--------- ---------
Accrued salaries and wages.............................................. $ 4,737 $ 2,565
Accrued taxes........................................................... 2,842 15,339
Accrued interest........................................................ 1,727 6,066
Self-insurance claims payable........................................... 29,507 29,833
Accrued warranty costs.................................................. 4,293 4,317
Other................................................................... 33,791 21,057
--------- ---------
$ 76,897 $ 79,177
--------- ---------
--------- ---------
RESEARCH AND DEVELOPMENT AND ADVERTISING COSTS
Research and development costs for the year ended December 31, 1997 and the
period November 1, 1996 to December 31, 1996 were $3.8 million and $930,000,
respectively. The Company's advertising costs for the years ended December 31,
1997, 1996 and 1995 were $19.8 million, $4.5 million and $114,000, respectively.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The accumulated other comprehensive income (loss) at December 31, 1997, 1996 and
1995 is as follows (in thousands):
FOREIGN
CURRENCY MINIMUM ACCUMULATED OTHER
TRANSLATION PENSION COMPREHENSIVE
ADJUSTMENTS LIABILITY INCOME (LOSS)
----------- ----------- ------------------
Balances, February 28, 1995..................... $ 184 $ -- $ 184
Current-period change........................... 399 -- 399
----------- ----- -------
Balances, December 31, 1995..................... 583 -- 583
Current-period change........................... (618) -- (618)
----------- ----- -------
Balances, December 31, 1996..................... (35) -- (35)
Current-period change........................... (2,526) (805) (3,331)
----------- ----- -------
Balances, December 31, 1997..................... $ (2,561) $ (805) $ (3,366)
----------- ----- -------
----------- ----- -------
F-48
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
TAX EFFECTS ALLOCATED TO EACH COMPONENT OF OTHER COMPREHENSIVE INCOME (LOSS)
The tax effects allocated to each component of other comprehensive income (loss)
for the years ended December 31, 1997, 1996 and 1995 is as follows (in
thousands):
TAX
PRE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
--------- ----------- -----------
Year ended December 31, 1997:
Foreign currency translation adjustments.................... $ (3,939) $ 1,378 $ (2,561)
Minimum pension liability................................... (1,238) 433 (805)
--------- ----------- -----------
Other comprehensive loss.................................... $ (5,177) $ 1,811 $ (3,366)
--------- ----------- -----------
--------- ----------- -----------
Year ended December 31, 1996:
Foreign currency translation adjustments.................... $ (951) $ 333 $ (618)
--------- ----------- -----------
Other comprehensive loss.................................... $ (951) $ 333 $ (618)
--------- ----------- -----------
--------- ----------- -----------
Year ended December 31, 1995:
Foreign currency translation adjustments.................... $ 614 $ (215) $ 399
--------- ----------- -----------
Other comprehensive income.................................. $ 614 $ (215) $ 399
--------- ----------- -----------
--------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended December
31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
--------- --------- ---------
Cash paid during the year for:
Interest...................................................... $ 22,434 $ 15,545 $ 2,670
--------- --------- ---------
--------- --------- ---------
Taxes......................................................... $ 26,200 $ -- $ 33
--------- --------- ---------
--------- --------- ---------
Supplemental schedule of non-cash investing and financing activities for the
years ended December 31, 1997, 1996 and 1995 (in thousands):
1997 1996 1995
---------- ---------- ----------
Acquisition of businesses:
Fair value of assets acquired............................ $ -- $ -- $ 282,296
Fair value of liabilities assumed........................ -- -- 232,734
---------- ---------- ----------
Net value................................................ $ -- $ -- $ 49,562
---------- ---------- ----------
---------- ---------- ----------
F-49
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. OTHER CONSOLIDATED FINANCIAL STATEMENT INFORMATION (CONTINUED)
In connection with acquisition of Motion Picture Corporation of America in 1996,
the Company issued debt of $1.2 million and restricted common stock valued at
$3.2 million.
See note 8 regarding the consolidation of Snapper.
See note 3 regarding the acquisition of AAT.
Interest expense includes amortization of debt discount of $1.7 million, $2.6
million and $434,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
16. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
The Company is obligated under various operating and capital leases. Total rent
expense amounted to $4.7 million, $1.3 million and $908,000 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Plant, property and
equipment included capital leases of $2.4 million and $676,000 and related
accumulated amortization of $548,000 and $318,000 at December 31, 1997 and 1996,
respectively.
Minimum rental commitments under noncancellable leases are set forth in the
following table (in thousands):
YEAR CAPITAL LEASES OPERATING LEASES
- ------------------------------------------------------------ --------------- ----------------
1998........................................................ $ 821 $ 3,423
1999........................................................ 778 2,860
2000........................................................ 183 2,057
2001........................................................ 14 1,668
2002........................................................ 6 601
Thereafter.................................................. -- 48
------ -------
Total....................................................... 1,802 $ 10,657
-------
-------
Less: amount representing interest.......................... (179)
------
Present value of future minimum lease payments.............. $ 1,623
------
------
Certain of the Company's subsidiaries have employment contracts with various
officers, with remaining terms of up to 2 years, at amounts approximating their
current levels of compensation. The Company's remaining aggregate commitment at
December 31, 1997 under such contracts is approximately $4.1 million.
The Company pays a management fee to Metromedia for certain general and
administrative services provided by Metromedia personnel. Such management fee
amounted to $3.3 million and $1.5 million for the years ended December 31, 1997
and 1996, respectively, and $250,000 for the period November 1, 1995 to December
31, 1995. The management fee commitment for the year ended December 31, 1998 is
$3.5 million.
F-50
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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, 1997, noncancelable commitments under these
agreements amounted to approximately $25.0 million.
Snapper has an agreement with a financial institution which makes available
floor-plan financing to distributors and dealers of Snapper products. This
agreement provides financing for dealer inventories and accelerates Snapper's
cash flow. Under the terms of the agreement, a default in payment by a dealer is
nonrecourse to Snapper. However, Snapper is obligated to repurchase any new and
unused equipment recovered from the dealer. At December 31, 1997, there was
approximately $65.7 million outstanding under this floor-plan financing
arrangement. The Company guarantees the payment obligation of Snapper under this
agreement.
CONTINGENCIES
RISKS ASSOCIATED WITH THE COMMUNICATIONS GROUP'S INVESTMENTS
The ability of the Communications Group and its Joint Ventures to establish
profitable operations is subject to among other things, significant political,
economic and social risks inherent in doing business in Eastern Europe, the
republics of the former Soviet Union, and China. These include potential risks
arising out of government policies, economic conditions, imposition of taxes or
other similar charges by governmental bodies, foreign exchange fluctuations and
controls, civil disturbances, deprivation or unenforceability of contractual
rights, and taking of property without fair compensation.
The Company may also be materially and adversely affected by laws restricting
foreign investment in the field of communications. Certain countries have
extensive restrictions on foreign investment in the communications field and the
Communications Group is attempting to structure its prospective projects in
order to comply with such laws. However, there can be no assurance that such
legal and regulatory restrictions will not increase in the future or, as
currently promulgated, will not be interpreted in a manner giving rise to
tighter restrictions, and thus may have a material adverse effect on the
Company's prospective projects in the country. The Russian Federation has
periodically proposed legislation that would limit the ownership percentage that
foreign companies can have in communications businesses. While such proposed
legislation has not been made into law, it is possible that such legislation
could be enacted in Russia and/or that other countries in Eastern Europe and the
republics of the former Soviet Union may enact similar legislation which could
have a material adverse effect on the business, operations, financial condition
or prospects of the Company. Such legislation could be similar to United States
federal law which limits the foreign ownership in entities owning broadcasting
licenses. Similarly, China's laws and regulations restrict and prohibit foreign
companies or Joint Ventures in which they participate from providing telephony
service to customers in China and generally limit the role that foreign
companies or their Joint Ventures may play in the telecommunications industry.
As a result, a Communications Group affiliate that has invested in China must
structure its transactions as a provider of telephony equipment and technical
support services as opposed to a direct provider of such services. In addition,
there is no way of predicting whether additional foreign 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 the Joint Ventures in which the
Communications Group currently has an ownership interest. If foreign ownership
limitations are enacted in any of the Communications Group's markets and the
Communications Group is required to reduce or restructure its
F-51
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
ownership interests in any ventures, it is unclear how such reduction or
restructuring would be implemented, or what impact such reduction or
restructuring would have on the Communications Group.
The Communications Group's 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 service their U.S. dollar denominated credit
lines, 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 distributed such funds in
U.S. dollars to the Communications Group.
The licenses pursuant to which the Communications Group's businesses operate are
issued for limited periods. Certain of these licenses expire over the next
several years. One of the licenses held by the Communications Group has expired,
although the Communications Group has been permitted to continue operations
while the reissuance is pending. The Communications Group has applied for a
renewal and expects a new license to be issued. Five other licenses held or used
by the Communications Group will expire during 1998, including the license for
Radio Juventus, the Company's radio operation in Hungary. The failure of such
licenses to be renewed may have a material adverse effect on the Company's
results of operations. Additionally, certain of the licenses pursuant to which
the Communications Group's businesses operate contain network build-out
milestone clauses. The failure to satisfy such milestones could result in the
loss of such licenses which may have a material adverse effect on the
Communications Group.
In the case of the licenses other than Radio Juventus, the Company's Joint
Ventures will apply for renewals of their licenses. While there can be no
assurance that these four licenses will be renewed, based on past experience,
the Communications Group expects to obtain such renewals. In the case of Radio
Juventus, the Communications Group plans to cause the venture to participate in
a competitive tender for a regional broadcasting license to cover Budapest and
certain other areas in Hungary. The Company believes that Radio Juventus'
prospects for winning such tender, which will be determined by the strength of
its bid in the tender in comparison to the bids of other participants in the
tender, are good.
CREDIT CONCENTRATIONS
The Communications Group's trade receivables do not represent significant
concentrations of credit risk at December 31, 1997, 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, 1997 and 1996.
FINANCIAL GUARANTEES
In connection with MCC's investments in the Sichuan JV and the Chongqing JV, the
Joint Ventures have entered into a Loan for the initial phase ("Phase 1 Loan")
with Nortel for $20.0 million to finance the purchase of Nortel equipment for
the Sichuan Province and City of Chongqing initial phase ("Phase 1
F-52
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Project"). The Company, has secured the Phase 1 Loan repayment with a $20.0
million letter of credit. Nortel has the right to draw down on the $20.0 million
letter of credit for amounts due Nortel by the Sichuan JV and the Chongqing JV
if a contract for a second phase ("Phase 2 Contract") has not been entered into
with Nortel to expand the 50,000 lines in the Phase 1 Project to at least
150,000 lines within one year from the date of the contract for the initial
phase with Nortel.
If the Phase 2 Contract is entered into with Nortel, Sichuan JV and Chongqing JV
plan to enter into a long-term loan facility with Nortel for $100.0 million to
repay the Phase 1 Loan and to finance a second phase and subsequent phases to
expand the telecommunications network in Sichuan Province and City of Chongqing.
No assurance can be given that Sichuan JV and Chongqing JV will be successful in
executing the long-term loan facility with Nortel. Accordingly, the Company
through the letter of credit may become obligated to finance up to $20.0 million
of the Phase I Project for the Sichuan JV and Chongqing JV.
In addition, the Company has guaranteed certain indebtness of one of the
Company's cellular telecommunications Joint Ventures. The total guarantee is for
$15.0 million of which $4.3 million has been borrowed at December 31, 1997.
As part of the financing of a Joint Venture, MITI and its Joint Venture partner
provided a 5% equity interest to the lender. The lender can put back the equity
interest to MITI 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, MITI and its Joint Venture partner agreed to provide an additional
$7.0 million in funding to the Joint Venture.
SELF-INSURANCE LIABILITIES
At December 31, 1997 the Company had $17.8 million of outstanding letters of
credit which principally collateralize certain liabilities under the Company's
self-insurance program.
LITIGATION
The Company is involved in various legal and regulatory proceedings and while
the results of any litigation or regulatory issue contain an element of
uncertainty, management believes that the outcome of any known, pending or
threatened legal proceedings will not have 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 1997 and are not expected to
be material in future years.
The Company has agreed to indemnify the purchaser of a former subsidiary of the
Company for certain obligations, liabilities and costs incurred by such
subsidiary arising out of environmental conditions existing on or prior to the
date on which the subsidiary was sold by the Company. The Company sold the
subsidiary 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
F-53
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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, 1997. As of December 31, 1997, the Company
had a remaining reserve of approximately $1.1 million to cover its obligations
of its former subsidiary. During 1995, the Company was notified by certain
potentially responsible parties at a superfund site in Michigan that the former
subsidiary may be a potentially responsible party at such site. The former
subsidiary's liability, if any, has not been determined but the Company believes
that such liability will not be material.
The Company, through a wholly-owned subsidiary, owns approximately 17 acres of
real property located in Opelika, Alabama (the "Opelika Property"). The Opelika
Property was formerly owned by Diversified Products Corporation ("DP"), 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. DP 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, DP 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 (the
"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 DP except for the Opelika Property. The
Company believes that the reserves of approximately $1.6 million previously
established by the Company for the Opelika Property will be adequate to cover
the cost of the remediation plan that has been developed.
F-54
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected financial information for the quarterly periods in 1997 and 1996 is
presented below (in thousands, except per-share amounts):
FIRST QUARTER OF SECOND QUARTER OF
-------------------------------- --------------------------------
1997(A)(B)(L) 1996(A)(L) 1997(B)(L) 1996(A)(L)
------------- ------------- ---------- ----------------
Revenues................................ $ 58,975 $ 3,164 $ 52,000 $ 2,775
Operating loss.......................... (10,164) (7,443) (17,059) (10,645)
Interest expense, net................... (2,885) (3,610) (4,361) (3,806)
Equity in losses of Joint Ventures...... (1,598) (1,783) (587) (1,985)
Loss from continuing operations......... (13,505) (12,823) (45,958)(h) (16,428)
Loss from discontinued operations....... (8,753)(d)(e) (6,318)(d) (25,914)(d)(e) (2,422)(d)
Loss from extraordinary items........... -- -- (1,094)(h) --
Net loss................................ (22,258) (19,141) (72,966) (18,850)
Income (loss) per common share--Basic:
Continuing operations................. $ (0.21) $ (0.30) $ (0.69) $ (0.38)
Discontinued operations............... $ (0.13) $ (0.15) $ (0.39) $ (0.06)
Extraordinary items................... $ -- $ -- $ (0.02) $--
Net loss.............................. $ (0.34) $ (0.45) $ (1.10) $ (0.44)
THIRD QUARTER OF FOURTH QUARTER OF
-------------------------------- --------------------------------
1997(L) 1996(A)(B)(L) 1997 1996(A)(B)(C)(L)
------------- ------------- ---------- ----------------
Revenues................................ $ 36,545 $ 4,380 $ 56,808 $26,273
Operating loss.......................... (20,803) (10,022) (32,763) (22,671)
Interest income (expense), net.......... 143 (1,008) 1,148 (2,114)
Equity in losses of Joint Ventures...... (5,376) (2,292) (5,660) (5,019)
Loss from continuing operations
attributable to common stockholders... (31,863)(f)(i) (13,263) (43,911)(f) (29,632)
Income (loss) from discontinued
operations............................ 269,072(d)(e) (25,092)(d)(e)(g) (369)(e) (4,760)(d)(e)
Loss from extraordinary items........... (13,598)(j) (4,505)(k) -- --
Net income (loss) attributable to common
stockholders.......................... 223,611 (42,860) (44,280) (34,392)
Income (loss) per common share--Basic:
Continuing operations................. $ (0.48) $ (0.20) $ (0.64) $ (0.45)
Discontinued operations............... $ 4.01 $ (0.39) $ (0.01) $ (0.07)
Extraordinary items................... $ (0.20) $ (0.07) $ -- $--
Net income (loss)..................... $ 3.33 $ (0.66) $ (0.65) $ (0.52)
- ------------------------
(a) Revenues, operating loss and interest income (expense), net, have been
restated to reflect the Entertainment Group Sale.
(b) Revenues, operating loss and interest income (expense), net, have been
restated to reflect Landmark as a discontinued operation.
F-55
METROMEDIA INTERNATIONAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
(c) Includes the consolidation of Snapper as of November 1, 1996
(d) On July 10, 1997, the Company consummated the Entertainment Group Sale
resulting in a gain of $266.3 million, net of taxes. The transaction has
been treated as a discontinuance of a business segment and, accordingly, the
consolidated financial statements reflect the results of operations of the
Entertainment Group as a discontinued segment. The third quarter gain has
been restated by $16.6 million to reflect adjustments in taxes originally
reported in the Company's September 30, 1997 10-Q.
(e) The Company anticipates completing the Landmark Sale in April 1998. 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.
(f) 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.
(g) Reflects the writedown of the Company's investment in RDM.
(h) Includes the equity in losses of and writedown of investment in RDM of $25.1
million and the equity in early extinguishment of debt of RDM.
(i) Includes equity in losses of RDM of $19.9 million.
(j) In connection with the Entertainment Group Sale, the Company repaid all of
its outstanding debentures and expensed the unamortized discounts associated
with the debentures.
(k) In connection with the refinancing of the Entertainment Group Credit
Facility, the Company expensed the unamortized deferred financing costs.
(l) The Company has adopted SFAS 128 and all prior periods earnings per share
have been restated, as required.
F-56
EXHIBIT INDEX
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
- ----------------- ------------------------------------------------ ------------------------------------------------
2.2 Agreement and Plan of Reorganization dated as of Quarterly Report on Form 10-Q for the three
July 20, 1994 by and among, The Actava Group months ended June 30, 1994, Exhibit 99.1
Inc., Diversified Products Corporation, Hutch
Sports USA Inc., Nelson/Weather-Rite, Inc.,
Willow Hosiery Company, Inc. and Roadmaster
Industries, Inc.
2.3 Amended and Restated Agreement and Plan of Current Report on Form 8-K for event occurring
Merger dated as of September 27, 1995 by and on September 27, 1995, Exhibit 99(a)
among The Actava Group Inc., Orion Pictures
Corporation, MCEG Sterling Incorporated,
Metromedia International Telecommunications,
Inc., OPG Merger Corp. and MITI Merger Corp. and
exhibits thereto. The Registrant agrees to
furnish copies of the schedules supplementally
to the Commission on request.
2.5 Agreement and Plan of Merger dated as of January Current Report on Form 8-K dated January 31,
31, 1996 by and among Metromedia International 1996, Exhibit 99.1
Group, Inc., The Samuel Goldwyn Company and SGC
Merger Corp. and exhibits thereto. The
registrant agrees to furnish copies of the
schedules to the Commission upon request.
3.1 Restated Certificate of Incorporation of Registration Statement on Form S-3 (Registration
Metromedia International Group, Inc. No. 33-63853), Exhibit 3.1
3.2 Restated By-laws of Metromedia International Registration Statement on Form S-3 (Registration
Group, Inc. No. 33-6353), Exhibit 3.2
4.1 Indenture dated as of August 1, 1973, with Application of Form T-3 for Qualification of
respect to 9 1/2% Subordinated Debentures due Indenture under the Trust Indenture Act of 1939
August 1, 1998, between The Actava Group Inc. (File No. 22-7615), Exhibit 4.1
and Chemical Bank, as Trustee.
4.2 Agreement among The Actava Group, Inc., Chemical Registration Statement on Form S-14
Bank and Manufacturers Hanover Trust Company, (Registration No. 2-81094), Exhibit 4.2
dated as of September 26, 1980, with respect to
successor trusteeship of the 9 1/2% Subordinated
Debentures due August 1, 1998.
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
- ----------------- ------------------------------------------------ ------------------------------------------------
4.3 Instrument of registration, appointment and Annual Report on Form 10-K for the year ended
acceptance dated as of June 9, 1986 among The December 31, 1986, Exhibit 4.3
Actava Group Inc., Manufacturers Hanover Trust
Company and Irving Trust Company, with respect
to successor trusteeship of the 9 1/2%
Subordinated Debentures due August 1, 1998.
4.4 Indenture dated as of March 15, 1977, with Registration Statement on Form S-7 (Registration
respect to 9 7/8% Senior Subordinated Debentures No. 2-58317), Exhibit 4.4
due March 15, 1997, between The Actava Group
Inc. and The Chase Manhattan Bank, N.A., as
Trustee.
4.5 Agreement among The Actava Group Inc., The Chase Registration Statement on Form S-14
Manhattan Bank, N.A. and United States Trust (Registration No. 2-281094), Exhibit 4.5
Company of New York, dated as of June 14, 1982,
with respect to successor trusteeship of the
97/8% Senior Subordinated Debentures due March
15, 1997.
4.6 Indenture between National Industries, Inc. and Post-Effective Amendment No. 1 to Application on
First National City Bank, dated October 1, 1974, Form T-3 for Qualification of Indenture Under
with respect to the 10% Subordinated Debentures, The Trust Indenture Act of 1939 (File No.
due October 1, 1999. 22-8076), Exhibit 4.6
4.7 Agreement among National Industries, Inc., The Registration Statement on Form S-14
Actava Group Inc., Citibank, N.A., and Marine (Registration No. 2-81094), Exhibit 4.7
Midland Bank, dated as of December 20, 1977,
with respect to successor trusteeship of the 10%
Subordinated Debentures due October 1, 1999.
4.8 First Supplemental Indenture among The Actava Registration Statement on Form S-7 (Registration
Group Inc., National Industries, Inc. and Marine No. 2-60566), Exhibit 4.8
Midland Bank, dated January 3, 1978,
supplemental to the Indenture dated October 1,
1974 between National and First National City
Bank for the 10% Subordinated Debentures due
October 1, 1999.
4.9 Indenture dated as of August 1, 1987 with Annual Report on Form 10-K for the year ended
respect to 6 1/2% Convertible Subordinated December 31, 1987, Exhibit 4.9
Debentures due August 4, 2002, between The
Actava Group Inc. and Chemical Bank, as Trustee.
2
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
- --------------- ------------------------------------------------ ------------------------------------------------
10.1 1982 Stock Option Plan of The Actava Group Inc. Proxy Statement dated March 31, 1982, Exhibit A
10.2 1989 Stock Option Plan of The Actava Group Inc. Proxy Statement dated March 31, 1989, Exhibit A
10.3 1969 Restricted Stock Plan of The Actava Group Annual Report on Form 10-K for the year ended
Inc. December 31, 1990, Exhibit 10.3
10.4 1991 Non-Employee Director Stock Option Plan. Annual Report on Form 10-K for the year ended
December 31, 1991, Exhibit 10.4
10.5 Amendment to 1991 Non-Employee Director Stock Annual Report on Form 10-K for the year ended
Option Plan. December 31, 1992, Exhibit 10.5
10.6 Snapper Power Equipment Profit Sharing Plan. Annual Report on Form 10-K for the year ended
December 31, 1987, Exhibit 10.6
10.7 Retirement Plan executed November 1, 1990, as Annual Report on Form 10-K for the year ended
amended effective January 1, 1989. December 31, 1990, Exhibit 10.7
10.8 Supplemental Retirement Plan of The Actava Group Annual Report on Form 10-K for the year ended
Inc. December 31, 1983, Exhibit 10.8
10.9 Supplemental Executive Medical Reimbursement Annual Report on Form 10-K for the year ended
Plan. December 31, 1990, Exhibit 10.9
10.10 Amendment to Supplemental Retirement Plan of The Annual Report on Form 10-K for the year ended
Actava Group Inc., effective April 1, 1992. December 31, 1991, Exhibit 10.10
10.11 1992 Officer and Director Stock Purchase Plan. Annual Report on Form 10-K for the year ended
December 31, 1991, Exhibit 10.11
10.12 Form of Restricted Purchase Agreement between Annual Report on Form 10-K for the year ended
certain officers of The Actava Group Inc. and December 31, 1991, Exhibit 10.12
The Actava Group Inc.
10.14 Form of Indemnification Agreement between Actava Annual Report on Form 10-K for the year ended
and certain of its directors and executive December 31, 1993, Exhibit 10.14
officers.
10.15 Employment Agreement between The Actava Group Current Report on Form 8-K dated
Inc. and John D. Phillips dated April 19, 1994. April 19, 1994, Exhibit 10.15
10.16 First Amendment to Employment Agreement dated Annual Report on Form 10-K for the year ended
November 1, 1995 between Metromedia December 31, 1995, Exhibit 10.16
International Group and John D. Phillips.
10.17 Option Agreement between The Actava Group Inc. Current Report on Form 8-K dated
and John D. Phillips dated April 19, 1994, Exhibit 10.17
April 19, 1994.
3
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
- --------------- ------------------------------------------------ ------------------------------------------------
10.18 Registration Rights Agreement among The Actava Current Report on Form 8-K dated
Group Inc., Renaissance Partners and John D. April 19, 1994, Exhibit 10.18
Phillips dated
April 19, 1994.
10.19 Shareholders Agreement dated as of December 6, Annual Report on Form 10-K for the year ended
1994 among The Actava Group Inc., Roadmaster, December 31, 1994, Exhibit 10.19
Henry Fong and Edward Shake.
10.20 Registration Rights Agreement dated as of Annual Report on Form 10-K for the year ended
December 6, 1994 between The Actava Group Inc. December 31, 1994, Exhibit 10.20
and Roadmaster.
10.21 Environmental Indemnity Agreement dated as of Annual Report on Form 10-K for the year ended
December 6, 1994 between The Actava Group Inc. December 31, 1994, Exhibit 10.21
and Roadmaster.
10.22 Lease Agreement dated October 21, 1994 between Annual Report on Form 10-K for the year ended
JDP Aircraft II, Inc. and The Actava Group Inc. December 31, 1994, Exhibit 10.22
10.23 Lease Agreement dated as of October 4, 1995 Quarterly Report on Form 10-Q for the quarter
between JDP Aircraft II, Inc. and The Actava ended September 30, 1995, Exhibit 10.23
Group Inc.
10.37 Management Agreement dated November 1, 1995 Annual Report on Form 10-K for the year ended
between Metromedia Company and Metromedia December 31, 1995, Exhibit 10.37
International Group, Inc.
10.38 The Metromedia International Group, Inc. 1996 Proxy Statement dated August 6, 1996, Exhibit B
Incentive Stock Plan.
10.39 License Agreement dated November 1, 1995 between Annual Report on Form 10-K for the year ended
Metromedia Company and Metromedia International December 31, 1995, Exhibit 10.39
Group, Inc.
10.40 MITI Bridge Loan Agreement dated February 29, Annual Report on Form 10-K for the year ended
1996, among Metromedia Company and MITI December 31, 1995, Exhibit 10.40
10.41 Metromedia International Telecommunications, Quarterly Report on Form 10-Q for the quarter
Inc. 1994 Stock Plan ended March 31, 1996, Exhibit 10.41
10.42 Amended and Restated Credit Security and Quarterly Report on Form 10-Q for the quarter
Guaranty Agreement dated as of November 1, 1995, ended June 30, 1996, Exhibit 10.42
by and among Orion Pictures Corporation, the
Corporate Guarantors' referred to herein, and
Chemical Bank, as Agent for the Lenders.
10.43 Metromedia International Group/Motion Picture Quarterly Report or Form 10-Q for the quarter
Corporation of America Restricted Stock Plan ended June 30, 1996, Exhibit 10.43
4
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
- --------------- ------------------------------------------------ ------------------------------------------------
10.44 The Samuel Goldwyn Company Stock Awards Plan, as Registration Statement on Form S-8 (Registration
amended No. 333-6453), Exhibit 10.44
10.45 Credit Agreement, dated November 26, 1996 Annual Report on Form 10-K for the year ended
between Snapper, Inc. and AmSouth Bank of December 31, 1996, Exhibit 10.45
Alabama
10.46 Amendment No. 1 to License Agreement dated June Annual Report on Form 10-K for the year ended
13, 1996 between Metromedia Company and December 31, 1996, Exhibit 10.46
Metromedia International Group, Inc.
10.47 Amendment No. 1 to Management Agreement dated as Annual Report on Form 10-K for the year ended
of January 1, 1997 between Metromedia Company December 31, 1996, Exhibit 10.47
and Metromedia International Group, Inc.
10.48 Amended and Restated Agreement and Plan of Annual Report on Form 10-K for the year ended
Merger, dated as of May 17, 1996 between December 31, 1996, Exhibit 10.48
Metromedia International Group, Inc., MPCA
Merger Corp. and Bradley Krevoy and Steven
Stabler and Motion Picture Corporation of
America
10.49* Amendment to Snapper Credit Agreement, dated
November 12, 1997 between Snapper, Inc. and
AmSouth Bank of Alabama
10.50* Limited Guaranty Agreement, dated as of November
12, 1997 by John W. Kluge and Stuart Subotnick
in favor of AmSouth Bank of Alabama
10.51* Asset Purchase Agreement dated as of December
17, 1997
11* Statement of computation of earnings per share
12* Ratio of earnings to fixed charges
16 Letter from Ernst & Young to the Securities and Current Report on Form 8-K dated November 1,
Exchange Commission. 1995
21 List of subsidiaries of Metromedia International
Group, Inc.
23* Consent of KPMG Peat Marwick LLP regarding Annual Report on Form 10-K for the year ended
Metromedia International Group, Inc. December 31, 1996, Exhibit 21
27* Financial Data Schedule
- ------------------------
* Filed herewith
5
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND THE PERIOD FROM NOVEMBER 1 TO DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995
----------- ----------- -----------
Revenues................................................................... $ -- $ -- $ --
Cost and expenses:
Selling, general and administrative.................................... 5,549 9,355 1,109
Depreciation and amortization.......................................... 12 18 --
----------- ----------- -----------
Operating loss............................................................. (5,561) (9,373) (1,109)
Interest income (expense), net............................................. 2,156 (13,313) (2,208)
Equity in losses of subsidiaries........................................... (88,581) (49,460) (32,948)
Equity in losses and writedown of investment in RDM Sports Group, Inc...... (45,056) -- --
Income tax benefit......................................................... 6,141 -- --
----------- ----------- -----------
Loss from continuing operations............................................ (130,901) (72,146) (36,265)
Discontinued operations:
Gain on disposal and (loss) on assets held for sale...................... 266,294 (16,305) (293,570)
Equity in losses of discontinued operations.............................. (32,258) (22,287) (50,759)
----------- ----------- -----------
Income (loss) before extraordinary items................................... 103,135 (110,738) (380,594)
Extraordinary items:
Loss and equity in loss on early extinguishment of debt.................. (14,692) (4,505) (32,382)
----------- ----------- -----------
Net income (loss).......................................................... 88,443 (115,243) (412,976)
Cumulative convertible preferred stock dividend requirement................ (4,336) -- --
----------- ----------- -----------
Net income (loss) attributable to common stockholders...................... $ 84,107 $ (115,243) $ (412,976)
----------- ----------- -----------
----------- ----------- -----------
Weighted average of number of common shares--Basic:........................ 66,961 54,293 24,541
----------- ----------- -----------
----------- ----------- -----------
Income (loss) per common share--Basic:
Continuing operations.................................................... $ (2.02) $ (1.33) $ (1.48)
Discontinued operations.................................................. $ 3.50 $ (0.71) $ (14.03)
Extraordinary item....................................................... $ (0.22) $ (0.08) $ (1.32)
Net income (loss)........................................................ $ 1.26 $ (2.12) $ (16.83)
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of the condensed financial
information.
See notes to Condensed Financial Information on page S-4.
S-1
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
1997 1996
------------ -----------
ASSETS:
Current assets:
Cash and cash equivalents............................................................ $ 121,892 $ 83,855
Short-term investments............................................................... 100,000 --
Other assets......................................................................... 2,631 2,765
------------ -----------
Total current assets........................................................... 224,523 86,620
Investment in RDM Sports Group, Inc.................................................... -- 31,150
Net assets of discontinued operations.................................................. 48,531 57,474
Investment in subsidiaries............................................................. 82,809 141,518
Intercompany accounts.................................................................. 256,037 103,427
Other assets........................................................................... 1,923 2,542
------------ -----------
Total assets................................................................... $ 613,823 $ 422,731
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable..................................................................... $ 2,039 $ 2,453
Accrued expenses..................................................................... 49,443 57,581
Current portion of long-term debt.................................................... 420 17,158
------------ -----------
Total current liabilities...................................................... 51,902 77,192
Long-term debt......................................................................... 990 125,467
Other long-term liabilities............................................................ 249 390
------------ -----------
Total liabilities.............................................................. 53,141 203,049
------------ -----------
Stockholders' equity:
Preferred stock...................................................................... 207,000 --
Common stock......................................................................... 68,391 66,153
Paid-in surplus...................................................................... 1,007,272 959,558
Restricted stock..................................................................... -- (2,645)
Accumulated deficit.................................................................. (718,615) (803,349)
Accumulated other comprehensive loss................................................. (3,366) (35)
------------ -----------
Total stockholders' equity..................................................... 560,682 219,682
------------ -----------
Total liabilities and stockholders' equity..................................... $ 613,823 $ 422,731
------------ -----------
------------ -----------
The accompanying notes are an integral part of the condensed financial
information.
See Notes to Condensed Financial Information on page S-4.
S-2
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
AND THE PERIOD FROM NOVEMBER 1 TO DECEMBER 31, 1995
(IN THOUSANDS)
1997 1996 1995
----------- ----------- -----------
Net income (loss).......................................................... $ 88,443 $ (115,243) $ (412,976)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
(Gain) on disposal and loss on assets held for sale...................... (266,294) 16,305 293,570
Equity in losses of discontinued operations.............................. 32,258 22,287 50,759
Loss and equity in loss on early extinguishment of debt.................. 14,692 4,505 32,382
Equity in losses and writedown of investment in RDM Sports Group, Inc.... 45,056 -- --
Equity in losses of subsidiaries......................................... 88,581 49,460 32,948
Amortization of debt discounts........................................... 1,711 2,607 434
Change in cumulative translation adjustment of subsidiaries.............. (2,526) (618) 399
Changes in operating assets and liabilities:
(Increase) decrease in other current assets.............................. 134 245 (5,567)
Decrease in other assets................................................. 619 1,983 5,035
Increase (decrease) in accounts payable, accrued expenses and other
liabilities............................................................ (41,804) (7,651) 1,769
----------- ----------- -----------
Cash used in operations.............................................. (39,130) (26,120) (1,247)
----------- ----------- -----------
Investing activities:
Proceeds from notes receivable........................................... -- -- 45,320
Net proceeds from Entertainment Group Sale............................... 276,607 -- --
Proceeds from sale of short-term investments............................. -- 5,366 --
Purchase of short-term investments....................................... (100,000) -- --
(Investment in) distribution from subsidiaries........................... -- 5,400 (4,230)
Investment in RDM Sports Group, Inc...................................... (15,000) -- --
Cash acquired, net in merger............................................. -- 819 66,702
----------- ----------- -----------
Cash provided by (used in) investing activities...................... 161,607 11,585 107,792
----------- ----------- -----------
Financing activities:
Proceeds from (payment of) revolving term loan........................... -- (28,754) 28,754
Payments on notes and subordinated debt.................................. (156,524) (7,656) (48,222)
Proceeds from issuance of stock.......................................... 217,595 191,576 2,282
Preferred stock dividends paid........................................... (3,709) -- --
Due from subsidiary...................................................... (143,221) (66,128) --
Due to (from) discontinued operations.................................... 1,419 (7,130) (72,877)
----------- ----------- -----------
Cash provided by (used in) financing activities...................... (84,440) 81,908 (90,063)
----------- ----------- -----------
Net increase in cash and cash equivalents.................................. 38,037 67,373 16,482
Cash and cash equivalents at beginning of year............................. 83,855 16,482 --
----------- ----------- -----------
Cash and cash equivalents at end of year................................... $ 121,892 $ 83,855 $ 16,482
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of the condensed financial
information.
See Notes to Condensed Financial Information on page S-4.
S-3
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO CONDENSED FINANCIAL INFORMATION
DECEMBER 31, 1997, 1996 AND 1995
(A) Prior to the November 1 Merger discussed in note 7 to the "Notes to
Consolidated Financial Statements," there was no parent company. The
accompanying parent company financial statements reflect only the operations
of MMG for the years ended December 31, 1997 and 1996 and from November 1,
1995 to December 31, 1995 and the equity in losses of subsidiaries and
discontinued operations for the years ended December 31, 1997, 1996 and
1995. The calendar 1995 amounts, prior to the November 1 Merger, shown in
the historical consolidated financial statements represent the combined
financial statements of Orion (shown as a discontinued operation) and MITI
prior to the November 1 Merger and formation of MMG.
(B) Principal repayments of the Registrant's borrowings under debt agreements
and other debt outstanding at December 31, 1997 are expected to be required
no earlier than as follows (in thousands):
1998................................................. $ 420
1999................................................. 66
2000................................................. 72
2001................................................. 78
2002................................................. 86
Thereafter........................................... 688
For additional information regarding the Registrant's borrowings under debt
agreements and other debt, see note 4 to the "Notes to Consolidated Financial
Statements."
S-4
METROMEDIA INTERNATIONAL GROUP, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCES FOR DOUBTFUL ACCOUNTS, ETC. (DEDUCTED FROM CURRENT RECEIVABLES)
(IN THOUSANDS)
CHARGED
BALANCE AT TO COSTS BALANCE
BEGINNING AND OTHER DEDUCTIONS/ AT END OF
OF PERIOD EXPENSES CHARGES WRITE-OFFS PERIOD
----------- ----------- ----------- ------------- -----------
Year ended December 31, 1997............................. $ 1,691 $ 1,675 $ -- $ (790) $ 2,576
----------- ----------- ----- ----- -----------
----------- ----------- ----- ----- -----------
Year ended December 31, 1996............................. $ 313 $ 1,378 $ -- $ -- $ 1,691
----------- ----------- ----- ----- -----------
----------- ----------- ----- ----- -----------
Year ended December 31, 1995............................. $ 223 $ 90 $ -- $ -- $ 313
----------- ----------- ----- ----- -----------
----------- ----------- ----- ----- -----------
S-5