**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

(Mark One)

x  QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended August 31, 2004ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934For the transition period from __________ to ___________

Commissionfile number: 0-1460

**MOSCOW CABLECOM CORP.**(Exact name of Registrant as specified in its charter)

 
| **DELAWARE**                                                                                                                                                                                                                                                                                     | **06-0659863**                        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization)                                                                                                                                                                                                                                  | (I.R.S.  Employer Identification No.) |
|                                                                                                                                                                                                                                                                                             |                                  |
| **405 Park Avenue, New York, New York**                                                                                                                                                                                                                                                          | **10022**                             |
| (Address  of principal executive offices)                                                                                                                                                                                                                                                        | (Zip  Code)                           |
|                                                                                                                                                                                                                                                                                             |                                  |
| **                                       (212) 826-8942**                                          |
|                                         (Registrant's  telephone number, including area code) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  x No o 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Exchange Act).  Yes o  No x

The number of shares of the Registrant's $.01 par valuecommon stock outstanding at September 30, 2004 was 8,797,100.

  
MOSCOW CABLECOM CORP.FORM 10-Q

TABLEOF CONTENTS

Page No.

Part I.      Financial  Information

 

Item 1:    Financial  Statements:

 

                Consolidated  Condensed Balance Sheets as of August 31, 2004 and February 29, 2004

3

                Consolidated  Condensed Statements of Operations for the Three and Six  Months Ended                   August 31, 2004 and 2003  

  4

                Consolidated  Condensed Statements of Cash Flows for the Six Months Ended                   August 31, 2004 and 2003  

  5

                Notes  to Consolidated Condensed Financial Statements

6

 

Item 2:    Management's  Discussion and Analysis of Financial Condition and Results of Operations

12

 

Item 3:    Quantitative  and Qualitative Disclosures About Market Risk

17

 

Item 4:    Controls  and Procedures

18

 

Part II.  Other  Information

 

 

Item 1:    Legal  Proceedings

18

Item 6:    Exhibits  and Reports on Form 8-K

19

 

Signature

20

 

2Table of Contents
**Part I.  Financial InformationItem 1.  Financial Statements**

MOSCOW CABLECOM CORP.Consolidated Condensed Balance Sheets(In thousands, except per share data)

August 31, 2004

February 29, 2004

(unaudited)

**ASSETS**

Current assets:

Cash and cash equivalents

$               1,572 

$           3,240

Marketable securities 

1,837 

2,897

Accounts and other receivables, less allowance for  doubtful accounts of $39 and $38, respectively

  156 

  124

Inventories  

601 

793

Taxes receivable

1,434 

1,396

Prepaid expenses and other current assets

543 

154

Deferred income taxes (Note 4)

154 

- 

 

 

Total current assets

6,297 

8,604

Property, plant and equipment, net 

16,871 

13,552

Construction in progress and advances

2,772 

5,209

Prepaid pension expense

4,840 

4,754

Intangible assets and goodwill

- 

10,071

Intangible assets, net (Note 2)

5,760 

-

Goodwill (Note 2)

4,493 

-

Investment in Institute for Automated Systems (Note 3)

7,723 

7,894

Other assets

987 

448

 

 

Total assets

$           49,743 

$         50,532

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

Current liabilities:

 

 

Current maturities of long-term debt  

$                598 

 $              598

Payable to affiliate 

2,302 

1,824

Accounts payable

1,419 

880

Accrued liabilities   

1,670 

1,565

Deferred income taxes (Note 4)

- 

614

 

 

Total current liabilities

5,989 

5,481

Long-term debt, less current maturities  

2,858 

2,941

Other long-term obligations

1,195 

625

Deferred income taxes (Note 4) 

4,592 

4,063

 

 

Total liabilities

14,634 

13,110

 

 

Commitments and contingencies 

 

 

Stockholders' equity:

 

 

Cumulative convertible preferred stock, no par value;  authorized 800,000  shares; 150,144 shares and 188,006  shares issued and outstanding,   respectively; liquidation  preference $18.75 per share (Note 6)

  2,792 

  3,497

Common stock, $.01 par value; authorized 15,000,000  shares; issued and  outstanding 8,575,962 shares and  8,430,335 shares respectively

  86 

  84

Additional paid-in capital

34,324 

33,350

Retained earnings (accumulated deficit)

(2,093)

491

 

 

Total stockholders' equity

35,109 

37,422

 

 

Total liabilities and stockholders' equity

$          49,743 

$            50,532

The accompanying notes are anintegral part of these consolidated condensed financial statements.

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MOSCOW CABLECOM CORP.Consolidated Condensed Statements of Operations(In thousands, except per share data)(unaudited)

 

Three months  ended August 31,

 

Six months ended  August 31,

2004

2003

 

2004

2003
                  
Sales and  revenues

 

 

 

 

 

 Subscription fees

$ 1,239 

- 

 

$ 2,330 

- 

 Connection fees  and equipment sales

124 

 - 

 

233 

- 

 Other

41 

- 

 

219 

- 

 

 

 

 

 

Total revenue

1,404 

- 

 

2,782 

- 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 Services from  related party

323 

- 

 

619 

- 

 Salaries and  benefits

52 

- 

 

353 

- 

 Depreciation and  amortization

345 

- 

 

649 

- 

 Other

609 

- 

 

858 

- 

 

 

 

 

 

Total cost of sales

1,329 

- 

 

2,479 

- 

 

 

 

 

 

Gross margin

75 

- 

 

303 

- 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 Salaries and  benefits

883 

124 

 

1,644 

243 

 Depreciation

92 

60 

 

211 

118 

 General and  administrative

1,087 

401 

 

1,901 

1,110 

 

 

 

 

 

 Total operating  expenses

2,062 

585 

 

3,756 

1,471 

 

 

 

 

 

Loss from operations

(1,987)

(585)

 

(3,453)

(1,471)

 

 

 

 

 

Equity in losses of Institute for Automated  Systems

  (39)

  - 

 

  (171)

  - 

Equity in losses of Moscow Broadband  Communication Ltd.

  - 

  (147)

 

  - 

  (321)

Investment income and other income

194 

335 

 

526 

945 

Interest expense

(61)

(63)

 

(121)

(119)

Foreign currency translation gain

52 

- 

 

45 

- 

 

 

 

 

 

Loss before income taxes

(1,841)

(460)

 

(3,174)

(966)

Income tax benefit (expense)

113 

(197)

 

180 

(104)

Losses of subsidiaries prior to  consolidation

- 

- 

 

525 

- 

 

 

 

 

 

 

Net loss

(1,728)

(657)

 

(2,469)

(1,070)

Preferred dividends

(56)

(70)

 

(115)

(141)

 

 

 

 

 

Net loss applicable to common shares

$(1,784)

$   (727)

 

$(2,584)

$(1,211)

 

 

 

 

 

***Earnings per common share:***

 

 

 

 

 

Basic and diluted (Note 5)

$  (0.21)

$  (0.35)

 

$  (0.30)

$  (0.58)

The accompanying notes are an integral part of these consolidated condensedfinancial statements

4.
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MOSCOW CABLECOM CORP.Consolidated Condensed Statements of Cash Flows(In thousands)(unaudited)

             Six months ended

August 31, 2004

August 31, 2003

***Cash flows from operating activities:***

 

 
         
Net (loss) income

$            (2,469)

$            (1,070)

*Adjustments to  reconcile net loss to net cash*

 

 

*(used in) operating  activities:*

 

 

  Losses of subsidiaries  prior to consolidation

(525)

- 

  Equity in losses  of Institute for Automated Systems

171 

- 

  Equity in losses  of Moscow Broadband Communication Ltd.

- 

321 

  Depreciation and  amortization

860 

120 

  Stock-based  compensation

436 

- 

  Deferred income  taxes

(198)

355 

  Pension income 

(86)

(84)

  Net gains from  marketable securities

(126)

(684)

*Changes in operating  assets and liabilities:*

 

 

  Accounts and  other receivables

(32)

(104)

  Inventories

192 

- 

  Prepaid expenses  and other assets

(726)

(34)

  Accounts payable

1,017 

(131)

  Accrued  liabilities and other long-term obligations

447 

(227)

                Net cash used in  operating activities

  (1,039)

  (1,538)

 

 

***Cash flows from investing activities:***

 

 

  Investment in  ComCor-TV

- 

(3,500)

  Purchases of  property and equipment

(1,438)

(42)

  Purchases of  marketable securities

(386)

- 

  Proceeds from  sales of marketable securities

1,572 

- 

                Net  cash used in investing activities

(252)

(3,542)

 

 

***Cash flows from financing activities:***

 

 

  Principal  payments on long-term debt

(83)

(28)

  Proceeds from  mortgage loan

- 

1,966 

  Redemption of  preferred stock

(165)

- 

  Preferred  dividends paid 

(129)

(141)

 

 

                Net  cash (used in) provided by financing activities

(377)

1,797

 

 

  Net decrease in  cash and cash equivalents

(1,668)

(3,283)

 

 

 

  Cash and cash  equivalents - beginning of period

3,240 

6,279 

 

 

  Cash and cash  equivalents - end of period

$               1,572 

$               2,996 

 

 

  Noncash financing  activities:

  Shares of Common  Stock issued in exchange for 29,101 shares of      Series A  Preferred Stock

  88,894 

  - 

The accompanying notesare an integral part of these consolidated condensed financial statements.

5
Table of Contents
MOSCOW CABLECOM CORP.Notes to Consolidated Condensed Financial Statements (unaudited)

(1)           Accounting Policies

Theaccompanying unaudited interim financial statements and related notes should beread in conjunction with the audited Consolidated Financial Statements ofMoscow CableCom Corp. (the "Company") and related notes as contained in theAnnual Report on Form 10-K for the fiscal year ended February 29, 2004.  The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with U.S.generally accepted accounting principles and reflect all adjustments(consisting only of normal recurring adjustments) and accruals necessary in thejudgment of management for a fair presentation of such statements.  The condensed consolidated statements ofoperations for the interim periods are not necessarily indicative of theresults for a full fiscal year.  

TheCompany anticipates the need for additional financing to support its currentoperations.  On August, 26, 2004, theCompany entered into agreements for $51 million of equity and debt financingfrom affiliates of Columbus Nova Capital, (together with its affiliates,"Columbus Nova"), a private global investment group, pursuant to which ColumbusNova will acquire 4,500,000 shares of newly created Series B Preferred Stockfor $5.00 per share and warrants to acquire an additional 8,283,000 shares ofSeries B Preferred Stock at $5.00 per share exercisable within five years ofclosing, and extend up to $28.5 million of debt financing.  The closing of the equity and debt financingis subject to, among other things, approval from the Company's stockholders.Columbus Nova Capital has entered into voting agreements with the holders ofapproximately 54% of the outstanding shares of the Company's common stock inwhich such stockholders have agreed to vote in favor of the proposals whichwill allow the Company to complete these transactions.  The Companycurrently expects to be able to close the Columbus Nova equity and debttransactions by the end of December 2004.

The Columbus Nova financing,along with expected cash flows generated from operations in the future, isexpected to be sufficient to enable the Company to expand CCTV's access networkfrom approximately 297,000 homes at August 31, 2004 to one million homes withinthree years of the closing of the transaction. If the Columbus Nova financingdoes not close, there can be no assurance that the Company would be able toattract sufficient capital from other sources to enable it to continue to meetits debt service, preferred dividend and operating expenses obligations or forit to support the continued growth of CCTV's operations or, if it weresuccessful in attracting capital, that the terms of such capital would not bemore dilutive to existing stockholders in terms of percentage ownership than theColumbus Nova financing and would not be dilutive in terms of book value or ourcurrent loss per share. The Company has commitments from existingstockholders for an additional $2.1 million of funding if additional externalfinancing is not obtained to fund the Company's current operations, and it believesthat it has access to sufficient capital to finance  the current level ofoperations for the next 12 months. 

Inconnection with the transaction with Columbus Nova,based on a market price of the Company'sCommon Stock of $8.70 per share,the Company expects to recorda non-cash charge of an estimated$47.3 million relatingto the beneficial conversion feature of the Series B Preferred Stock and thewarrants to be issued to Columbus Nova as a result of the purchase price forthese Common Stock equivalents being below the market value of the Common Stockat the time of entering the Subscription Agreement.  

*Consolidation*

TheCompany has consolidated the accounts of all its wholly-owned andmajority-owned subsidiaries.  TheStatement of Operations for each of ZAO ComCor-TV ("CCTV") and Moscow BroadbandCommunication Ltd ("MBC") have been consolidated on a two-month lag basis, buttheir results for the period from January 1, 2004 to February 24, 2004 (thedate on which they were acquired by the Company) have been excluded to theextent that the Company did not have a direct or indirect equity interest intheir results prior to their acquisition on February 24, 2004.  This adjustment has been reflected as"Losses of subsidiaries prior to consolidation".

*Stock-based Compensation Plans*

TheCompany follows Accounting Principles Board Opinion No. 25, "Accounting forStock Issued to Employees" and related Interpretations, in accounting for itsstock-based compensation plans and has elected to continue to use the intrinsicvalue-based method to account for stock option grants.  The intrinsic value of stock-basedcompensation issued to employees as of date of grant is recognized as suchgrants are vested.  In addition, forstock options granted, the Company has adopted the disclosure-only provisions

6

Table of Contents

of SFAS No. 148, "Accounting for Stock-Based Compensation - Transition andDisclosure", an amendment of Statement of Financial Accounting Standards No.123.  Accordingly, no compensationexpense has been recognized for the Company's stock option plans.  Had we elected to recognize compensationexpense based upon the fair value at the grant dates for awards under the stockoption plans, net loss per share would have been increased to the pro formaamounts indicated in the following table (in thousands, except per share data):
 
                        Three  months ended

                            Six months ended

August  31, 2004

August  31, 2003

 

August  31, 2004

August  31, 2003

Net loss:

As reported

$            (1,728)

$                (727)

 

$           (2,584)

$            (1,211)

 

 

 

 

 

Deduct: Total stock  based compensation  expense determined  under the fair value  method, net of taxes

  (6)

  - 

 

  (6)

  - 

Pro-forma

$(1,734)

$(727)

 

$(2,590)

$(1,211)
                  
Basic and Diluted  net loss per Share:

 

 

 

 

 

As reported

$(0.21)

$(0.35)

 

$(0.30)

$(0.58)

Pro-forma

$(0.21)

$(0.35)

 

$(0.30)

$(0.58)

Theweighted average fair value of the Company's stock options was calculated usingthe Black-Scholes Option Pricing Model with the following assumptions used forgrants in their respective periods.  Forperiods ended in 2004; no dividend yield; expected volatility of 70%; risk freeinterest rate of 3.5%; and expected life of 5 years.  There were 95,000 options granted during the six months endedAugust 31, 2004 with a fair value of $3.99 per share.  No options were granted during the six months ended August 31,2003.

(2)           Intangible Assets and Goodwill

In May 2003,the Company entered into agreements with Moscow Telecommunications Corporation("COMCOR") in which the Company agreed to acquire control over 100% of theoutstanding stock of CCTV through i) the contribution of cash into CCTV, ofwhich $3.5 million was made in May 2003; ii) the issuance of 4,220,879 sharesof its Common Stock in exchange for the shares of CCTV held by or to beacquired by COMCOR; and iii) the issuance of 2,250,000 shares of its CommonStock in exchange for the 75% of MBC not previously owned by the Company.  On February 24, 2004, the Company issued4,000,000 shares of its Common Stock to COMCOR and 2,250,000 shares of itsCommon Stock to the shareholders of MBC to acquire control over all the outstandingequity of CCTV.  

Theconsideration for the acquisition of CCTV and MBC has been valued at $30.7million, which includes the cash contribution of $3.5 million in May 2003 and$27.2 million representing the value of shares of Common Stock issued andcommitted to be issued based upon the market price of $4.21 per share for theCompany's Common Stock at the time the agreements were reached and announced inMay 2003. The purchase price has been allocated as follows (in thousands): 

Net assets of CCTV

$12,315

43.5% equity interest in Institute for Automated  Systems  ("IAS")

    7,882

Intangible assets and goodwill

  10,555

 

Total       

              $30,752

 

SFAS No. 141requires that the purchase method of accounting be used for all businesscombinations initiated after June 30, 2001. SFAS No. 141 also specifies criteria that intangible assets acquired ina purchase method business combination must meet in order to be recognized andreported apart from goodwill.  SFAS No.142 requires that goodwill and intangible assets with indefinite useful livesno longer be amortized, but instead be tested at least annually for impairment.

The Company's agreement with COMCOR, pursuant to which COMCOR providessignal delivery and other services from its fiber optic network to CCTV, hasbeen concluded at rates more favorable to the Company than current marketterms.  Accordingly, the Company hasrecorded an intangible asset related to the economic savings associated withthis agreement.    Although thisagreement does not expire until 2053, the Company believes that obsolescence,demand, competition, and other economic factors limit the usefulness of theagreement and, accordingly, the agreement is being amortized over a useful lifeof 10 years based on the consideration of the aforementioned factors.

7Table of Contents
CCTV's licenses to provide television broadcast serviceshave also been determined to have a finite life of 10 years based upon theexpectation of obsolescence, demand, competition and other economic factorsthat limit the useful life of the asset. 

For the three and six month periods ended August 31,2004, the Company recorded $151,000 and $302,000, respectively of amortizationrelating to the COMCOR agreement and CCTV's broadcast license assets.  Over each of the next five years, theCompany expects to recognize annual amortization of approximately $604,000related to these intangible assets.

The $4,493,000 of goodwillrecorded in connection with the acquisition of CCTV represents the excess ofthe acquisition price over the currently estimated fair value of the identifiedtangible and intangible assets of CCTV. In accordance with SFAS No. 142, goodwill is not being amortized andwill be tested for impairment at least annually. The impairment test involves acomparison of the fair value of the reporting unit as defined under SFAS No.142, with carrying amounts.  If thereporting unit's aggregated carrying amount exceeds its fair value, then anindication exists that the reporting unit's goodwill may be impaired.  The impairment to be recognized is measuredby the amount by which the carrying value of the reporting unit being measuredexceeds its fair value, up to the total amount of the assets.

At February 29, 2004, the allocation of the purchase price had not beenfinalized and accordingly the composition of intangible assets was notavailable.  This allocation process hassince been completed, and accordingly, at August 31, 2004, the Company'sintangible assets were comprised as follows (in thousands):

  Gross value

Accumulated  amortization

  Net value

Agreement with COMCOR

$       3,490 

$        (174)

$    3,316

Broadcasting licenses

2,572 

(128)

2,444

 

 

 

Totals

$       6,062 

$        (302)

$   5,760
 
*Licenses*

CCTV's three licenses for TV broadcasting services, telematic servicesand data transmission services (the "Licenses") expired in August andSeptember 2004.  Applications for renewal of each of the Licenses were filed with the Ministryof Information Technologies and Communications (the "Communications Ministry")on June 24, 2004.  The CommunicationsMinistry returned these applications to CCTV on July 5, 2004, stating that theCommunications Ministry was unable to renew such Licenses because (i) theFederal Agency for Surveillance in the Communications Field, a governmentalauthority responsible for the issuance of telecommunication licenses (the"Communications Service"), has not been registered as a legal entityand (ii) the list of communications-related activities that are subject tolicensing has not been approved following the commencement of thereorganization of the Russian Government in March 2004.  On July 28, 2004, CCTV sent a letter to theCommunications Service, requesting that the Communications Service inform CCTVas to what action, if any, it is required to take until its Licenses are renewed.  On August 25, 2004, CCTV received a responsefrom the Communications Service, requesting that CCTV re-submit itsapplications for renewal of the Licenses. On September 30, 2004, CCTV re-submitted its applications to theCommunications Service. 

The Company and CCTV expect that the Licenseswill be renewed, although there can be no assurances that they will berenewed.  The Company believes that therisk of the Licenses not being renewed is minimal.  CCTV has complied will all statutory requirements to obtain therenewal of its Licenses. Nevertheless, CCTV could be deemed to be operating inviolation of Russian law that provides for civil, administrative and criminalliability for engaging in licensed activities without a valid license.  If the Licenses are not renewed and CCTV isfound to be in violation of applicable Russian law, there would be a materialadverse effect on the Company's financial condition and results of operations.

(3)**          **Investment in Institute For Automated Systems IAS is a telecommunications company that operates a data communications networkin Russia. As a result of the acquisitions of CCTV and MBC in February 2004,the Company has a 43.5% equity interest in IAS, which it records on a two-monthlag basis consistent with the accounting for each of CCTV and MBC. For thethree and six month period ended August 31, 2004, the Company recorded $39,000and $171,000, respectively, as its equity in IAS' losses for the three and sixmonths ended June 30, 2004.

8Table of Contents
 

TheCompany's investment in IAS is recorded at $7,723,000 as compared to the bookvalue of 43.5% of IAS' equity, which is $2,992,000.  The difference reflects theacquisition cost of 43.5% of IAS by the Company as determined by the allocationof the overall purchase price for the Company's acquisition of CCTV and MBC inFebruary 2004.  

The following presents the summarized financial condition of IAS asof June 30, 2004 and the results of its operations for the three and six monthsthen ended (in thousands):

Balance Sheet

 

June 30, 2004

 Current assets

 

$            1,911 

 Non-current assets

8,541 

 

 

     Total assets

 

$         10,452 

 

 

 Current liabilities

$            1,748 

 Non-current liabilities

 

1,826 

 

 

     Total liabilities

      

3,574 

 

 

     Shareholders' equity

                 

               6,878 

            

$         10,452 
         
Three months ended

Six months ended

Statement of Operations

June 30, 2004

June 30, 2004

 

 

Revenues

$                 1,222 

$              2,516 

Cost of revenues

(976)

(2,021)

Operating expenses

(341)

(738)

 

 

Loss from operations

(95)

(243)

Foreign currency  transaction gain (loss)

80 

(4)

Interest expense, net

(66)

(137)

Income tax expense

(9)

(9)

 

 

Net loss

$                   (90)

$               (393)

(4)           Income Taxes

Income tax benefitrepresents an estimate of the effective income tax rate for the current fiscalyear after considering valuation allowances with respect to the Company'sability to realize tax benefits from its operating losses and its equity in thelosses of IAS.

(5)           Loss Per Share

Loss pershare is computed based on the weighted average number of common and commonequivalent shares outstanding.  Dilutedearnings per share assumes full conversion of all convertible securities intocommon stock at the later of the beginning of the year or date of issuance,unless antidilutive.   For the three andsix month periods ended August 31, 2004 and 2003, the assumed conversion of theCompany's 10 1⁄2% Debentures or its Series A Preferred Stock or the presumedexercise of outstanding stock options had antidilutive effects on the Company'sloss per share.

9Table of Contents
  Three months ended August 31,

 

  Six  months ended August 31,

2004

2003

 

2004

2003

Calculation  of basic loss per share

 

 

 

 

 

 

 

 

 

 

Numerator for basic  and diluted loss per share:

 

 

 

 

 

Net loss applicable to common shares

$  (1,784)

$   (727)

 

$   (2,584)

$   (1,211)

 

 

 

 

 

Denominator for basic  loss per share:

 

 

 

 

 

Weighted average  number of shares outstanding during the period

  8,563 

  2,100 

 

  8,488 

  2,100 

Effect of dilutive  securities

- 

- 

 

- 

- 

 

 

 

 

 

Denominator for  diluted loss per share

8,563 

2,100 

 

8,488 

2,100 

 

 

 

 

 

Basic loss per share

$   (0.21)

$  (0.35)

 

$    (0.30)

$    (0.58)

 

 

 

 

 

Diluted loss per share

$   (0.21)

$  (0.35)

 

$    (0.30)

$    (0.58)

(6)                Preferred  StockIn April 2004, the Company called for the redemption of 35,000 shares, orapproximately 18.6%, of the outstanding shares of its Series A Preferred Stock("Preferred Stock") with a redemption date, as extended, of May 14, 2004.  As a result of the redemption and voluntaryconversions of the Preferred Stock into Common Stock in lieu of redemption,8,761 shares of Preferred Stock were redeemed and 29,016 shares of PreferredStock were converted into 88,635 shares of Common Stock. In addition, during thequarter ended August 31, 2004, 85 shares of Preferred Stock were exchanged for259 shares of Common Stock.  At August31, 2004, 150,144 shares of Preferred Stock remain outstanding.

(7)                Retirement Plans

The Company maintains a non-contributory defined benefit plan and adefined contribution plan which collectively cover substantially all full-timeemployees.  The defined contributionplan is funded through employees' contributions and employer's matchingcontributions.  Pension expense for theCompany's defined contribution plan totaled $2,000 and $5,000 for the three andsix months ended August 31, 2004, as compared to expenses of $0 for the threeand six-month periods ended August 31, 2003. Forfeiture funds were used in the prior year to reduce the Company'scontributions to this plan.

The projected benefit obligationsfor the Company's defined benefit plan were determined using the followingassumptions:

2004 

2003 

 

 

Discount rate

6.00%

6.50%

Future compensation growth rate

5.00%

5.00%

Long-term rate of return on plan  assets

8.00%

8.00%

 

 

The required use of expectedlong-term rate of return on plan assets may result in recognized pension incomethat is greater or less than the actual returns of those plan assets in anygiven year.  Over time, however, theexpected long-term returns are designed to approximate the actual long-termreturns and therefore the pattern of income and expense recognition will moreclosely match the pattern of the services provided by the employees.  Differences between actual and expectedreturns are recognized in the calculation of net periodic pension cost or(income) over five years as provided for in the accounting rules.

These expected returns on planassets take into account long-term expectations for future returns andinvestment strategy.

The discount rate assumptions used for pension benefit plan accountingreflects the prevailing rates available on high-quality, fixed-income debtinstruments.  The rate of compensation increase is another significantassumption used in the actuarial model for pension accounting and is determinedby the Company based upon its long-term plans for such increases.

10Table of Contents
 

 

 

Three months ended  August 31,

 

Six months ended  August 31, 

2004

2003

 

2004

2003

Components of periodic benefit cost:

 

 

 

 

 

Service cost of benefits accrued

$       6 

$        7 

 

$    12 

$     14 

Interest cost on projected benefit obligations

205 

203 

 

410 

406 

Expected return on plan assets

(281)

(277)

 

(562)

(554)

Amortization of unrecognized actuarial  losses

  27 

  25 

 

  54 

  50 

 

 

 

 

 

Net periodic benefit gain

$   (43)

$    (42)

 

$   (86)

$   (84)

 

 

 

 

 

TheCompany expects that it will not be required to make any contributions to thedefined benefit plan during FY05.

(8)          Related Party Transactions

TheCompany receives signal delivery services and data network services fromCOMCOR. During the three and six months ended August 31, 2004, charges for suchservices totaled $322,000 and $619,000, respectively. At August 31, 2004, theCompany was indebted to COMCOR in the amount of $2,753,000, of which $1,380,000was committed to be settled in exchange for 220,879 shares of the Company'sCommon Stock, under terms of the agreements leading to the Company'sacquisition of CCTV. The liability has been adjusted to reflect the fair valueof such Common Shares to be issued as of the date of the announcement of thetransaction with COMCOR in May 2003. The 220,879 shares of common stock were issued on September 20, 2004.

(9)           Commitments and ContingenciesAt August31, 2004, the Company remained obligated to issue 220,879 shares of its commonstock to COMCOR as settlement of $1,380,000 of liabilities to COMCOR to occurin accordance with terms of the agreements which resulted in the Companyacquiring COMCOR'S equity interest in CCTV. These shares were issued on September 20, 2004.

At August 31, 2004, CCTV had issued commitments totaling $331,000 inconnection with the build-out of its "last-mile" access network in Moscow.

(10)         Subsequent Events

OnSeptember 20, 2004, the Company issued 220,879 shares of its Common Stock to COMCOR in exchange for the sharesof CCTV's Preferred Stock which COMCOR had recently acquired as settlement ofapproximately $1,380,000 of CCTV's liabilities to COMCOR in accordance with theagreements leading to the Company's acquisition of CCTV..

*Columbus Nova Transaction*

InSeptember 2004, CCTV received $2 million of proceeds from  Columbus Nova  pursuant to the terms of a $4 million Bridge Loanfacility that was entered into in connection with the signing of definitiveagreements which outline the terms and condition of $51 million of equity anddebt financing to be obtained by the Company from  Columbus Nova.  Outstanding amounts under theBridge Loan facility are payable upon the closing of the equity and debtfinancing agreements with Columbus Nova Capital. The closing of the equity anddebt financing is subject to, among other things, approval from the Company'sstockholders. Columbus Nova Capital has entered into voting agreements with theholders of approximately 54% of the outstanding shares of the Company's stockin which such stockholders have agreed to vote in favor of the proposals whichwill allow the Company to complete these transactions. The Company currentlyexpects that it will be able to close on the Columbus Nova financing by the endof the calendar year 2004.  In the eventthat the equity and debt financing are not approved by the Company'sstockholders, or otherwise are not consummated, the Bridge Loan facility willmature on June 30, 2005.

11Table of Contents
**Item 2.  Management's Discussionand Analysis of Financial Condition and Results of Operations**

The accompanyingManagement's Discussion and Analysis of Financial Condition and Results ofOperations ("MD&A") should be read in conjunction with the MD&A in theCompany's Report on Form 10-K for the year ended February 29, 2004.

OverviewThe Company is a holdingcompany which on February 24, 2004, completed the acquisition of 100% of CCTV,a Russian company that delivers cable television, high speed data transmissionand Internet services to its customers in Moscow, Russia.  CCTV is an early stage business that iscurrently expanding its network and attempting to increase its customerbase.  Prior to February 2004, theCompany had an indirect equity interest in CCTV through its 25% equity interestin MBC, which in turn held 50% voting control over CCTV.  As an integral component of the acquisitionof CCTV, the Company also acquired the 75% of MBC that it did not previouslyown. Furthermore, the Company has recently entered into agreements which,subject to stockholder approval and closing, will result in the Companyreceiving up to $51 million of proceeds from an equity and debt financingfacility from Columbus Nova Capital. The debt and equity financing package willresult in the issuance of 4,500,000 shares of a newly-created Class B PreferredStock which will result in Columbus Nova Capital acquiring approximately a 34%equity interest in the Company, and approximately 55% equity interest on afully diluted basis after considering the warrants to acquire 8,283,000additional shares of Class B Preferred Stock which will be issued in connectionwith the financing. The proceeds from the equity and debt financingare expected to be sufficient to allow the Company to increase its "last mile"access network of homes in Moscow from approximately 198,000 homes toapproximately 1,000,000 homes within a three-year period of time from theclosing of the transaction.

The Columbus Nova equity and debt financing is expected toprovide the Company with the capital that it believes is needed to moreaggressively build-out the access network, expand sales and marketing programsand improve certain aspects of the Company's administrative infrastructure. Thetransaction will also involve the addition of new senior management and newmembers to the Company's Board of Directors. Such changes are expected to havepronounced impacts on the Company's future results of operations.

 In connection with thetransaction with Columbus Nova, based on a market price of the Company's CommonStock of $8.70 per share, the Company expects to record a non-cash charge of anestimated $47.3 million relating to the beneficial conversion feature of theSeries B Preferred Stock and the warrants to be issued to Columbus Nova as aresult of the purchase price for these Common Stock equivalents being below themarket value of the Common Stock at the time of entering the SubscriptionAgreement.  

The Company also has a trading portfolio of equity investments which at August31, 2004 was valued at $1,837,000.Due to the acquisition of CCTV in February 2004, the current year informationis not comparative with prior year information.  We have incorporated certain historical operating results of CCTVinto our discussion to assist in the analysis and evaluation of our results.

Critical AccountingPolicies and EstimatesThe MD&A discusses theCompany's consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  On an on-going basis, management evaluatesits estimates and judgments, including those related to bad debts, investments,income taxes, financing operations, retirement benefits, and contingencies andlitigation.  Management bases itsestimates and judgments on historical experience and on various other factorsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

Management believes the followingcritical accounting policies, among others, affect its more significantjudgments and estimates used in the preparation of its consolidated financialstatements.  

Revenue RecognitionRevenue is primarily derived fromthe sale of cable television and Internet services to subscribers and isrecognized in the period the related services are provided.  Under SAB 104, the Company defers connectionfees, set-top box and modem sales and related costs, and recognizes them over afive-year period, which represents the estimated customer relationshipperiod.  The Company follows theguidance of FASB 51 in recognizing initial connection revenues and directselling costs.  All revenues arerecorded (net of VAT) only when there is persuasive evidence of an arrangement,services have been delivered, the price is fixed or determinable and collectionis reasonably assured.

12Table of Contents
Doubtful AccountsThe Company maintains allowances for doubtful accounts for estimated lossesresulting from the inability of the Company to collect amounts due from others.

Prepaid Pension ExpenseThe Company accounts for itsdefined benefit pension plan in accordance with SFAS No. 87, "Employers'Accounting for Pension Plans", which provides for the delayed recognition ofactuarial gains and losses that arise from differences between actual resultsof the plan from the actuarially calculated results based on several factorsincluding employee mortality and turnover, investment return on plan assets andthe discount rates used to record the present value of the obligations of theplan.  To the extent that unrecognizedgains or losses exceed 10% of the greater of the plans projected benefitobligation or the market value of its assets, such excess is amortized over theestimated remaining service period for active employees.  The Company considers and adjusts the variousassumptions utilized in the calculations such as the discount rate, futurecompensation growth rate and the long-term rate of return on plan assets, asmarket conditions warrant.

ConsolidationFor the three and six monthsended August 31, 2004, the Company's consolidated results of operations includethe results of each of CCTV and MBC for the three and six months ended June 30,2004.  However, their results ofoperations from January 1, 2004 to February 24, 2004 have been excluded fromthe Company's consolidated results  tothe extent that the Company did not have a prior direct or indirect equityinterest in their results.  Suchexcluded results have been reflected as "Losses of subsidiaries prior toconsolidation" on the Company's consolidated statements of operations.

Valuation of Long-Lived AssetsLong-lived assets such asproperty, plant, and equipment and acquisition-related intangible assets arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount may not be recoverable. For assets the Company intendsto hold for use, if the total of the expected future undiscounted cash flows isless than the carrying amount of the asset, a loss would be recognized for thedifference between the fair value and carrying value of the asset. For assetsthe Company intends to dispose of by sale, a loss would be recognized for theamount that the estimated fair value, less costs to sell, is less than thecarrying value of the assets. The Company periodically evaluates the usefullives of its property, plant, and equipment based on changes in technology,current business developments, and other industry conditions. It is reasonablypossible that these assets could become impaired as a result of these factors. 

Valuation of GoodwillIn accordance with SFASNo. 142, the Company completes an impairment test of goodwill annually, ormore frequently if an event occurs or circumstances change that would morelikely than not reduce the fair value of our business enterprise below itscarrying value. The impairment test requires the Company to estimate the fairvalue of our overall business enterprise. In the absence of a currenttransaction for the sale of our business enterprise, we believe a discountedcash flow (DCF) model, rather than the market price of our common stock,is the best technique with which to estimate the fair value of our businessenterprise.  The Company has determinedthat we have one reporting unit for purposes of testing goodwill, andtherefore, the DCF model is largely a function of the cash flows of thebusiness enterprise.

Deferred Tax AssetsThe Company records a valuationallowance to reduce its deferred tax assets to the amount that it believes ismore likely than not to be realized. The Company considers future taxableincome and ongoing prudent and feasible tax planning strategies in assessingthe need for the valuation allowance. When the Company determines that it may not be able to realize all orpart of its net deferred tax assets, a valuation allowance to reduce thedeferred tax assets to estimated recoverable amounts is charged to income inthe period such determination is made. Likewise, should the Company determine that it would be able to realizeits deferred tax assets in the future in excess of its net recorded amount, areduction in the valuation allowance would increase income in the period suchdetermination is made. 

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RESULTSOF OPERATIONS - THREE AND SIX MONTHS ENDED AUGUST 31, 2004 VS. THREE AND SIXMONTHS ENDED AUGUST 31, 2003

For the three monthsended August 31, 2004, the Company reported net loss applicable to commonshareholders of $1,784,000, or $0.21 per share, basic and diluted, as comparedto a loss of $727,000 or $0.35 per share for the three months ended August 31,2003.  For the six months ended August31, 2004, the Company reported a net loss applicable to common shareholders of$2,584,000 or $0.30 per share, basic and diluted, as compared to a net loss of$1,211,000, or $0.58 per share for the six months ended August 31, 2003.  The results are not comparable, as thecurrent year's three and six month results reflect the full consolidation

 ofCCTV's results of operations, while the prior year's results included theCompany's indirect 12.5% interest in CCTV's results arising from the Company'suse of the equity method of accounting for the investment.  In addition to CCTV's operating progress,the effects of purchase accounting have generally resulted in lower amounts ofdepreciation and amortization than had been reported by CCTV due to the factthat a substantial portion of the carrying value of CCTV's assets were reducedbased on their fair value at the date of acquisition in 2004.  The per share results in the current fiscalyear's three and six-month periods reflect the increase in the Company'soutstanding shares, primarily as the result of the shares of common stockissued in February 2004 to enable the acquisition of CCTV and MBC.  The per share loss amounts do not includethe effects of the additional 220,879 shares of common stock that were issuedto COMCOR on September 20, 2004 pursuant to the terms of the acquisitionagreements.

Subscription RevenueFor the three and six monthsended August 31, 2004, the Company recorded $1,239,000 and $2,330,000respectively of revenues for its cable television and Internet accessservices.   The Company did notconsolidate CCTV's results in the prior year, but the change from the prioryear is as follows (dollars in thousands):

                  Three Months Ended

                   Six Months Ended

August 31, 2004

August 31,   2003

  Change

August 31,  2004

August 31,   2003

  Change

Television services

$        390

$       195

100.0%

$   730

$   363

101.1%

Internet access services

849

418

103.1%

1,600

773

107.0%

 

 

 

 

 

 

$     1,239

$        613

102.1%

$2,330

$1,136

105.1%

Television revenues increased assubscribers for its terrestrial broadcasting television increased to 60,953 asof June 30, 2004, which is an increase of 25.2% from the 48,672 subscribersreported as of June 30, 2003.   Inaddition, subscribers of premium television services increased 71.7% from 4,003at June 30, 2003 to 6,873 at June 30, 2004. The terrestrial and premium subscriber growth represent increases of8.1% and 32.7% respectively, from December 31, 2003 levels.  The subscriber amounts include inactivesubscribers, or subscribers who had not paid for services in the months beingreported, which for terrestrial services averaged approximately 2.4% and 3.5%during the six month periods ended June 30, 2004 and 2003, respectively, andfor premium television service, averaged approximately 31.2% and 24.5% ofreported total subscribers, respectively, during these periods.

The subscriber growth wasaccomplished from sales in areas of Moscow that were newly accessed since June30, 2003 and from increased market penetration in areas to which the Companyhad previously accessed through its hybrid co-axial fiber network whichprovides the "last mile" access from the fiber optic network which the Companyleases to the homes.  At June 30, 2004,the Company had market penetration for its terrestrial and premium televisionservices of 34.8% and 4.1%, respectively, as compared to market penetration of37.0% and 3.0%, respectively, at June 30, 2003.  At June 30, 2004, the number of homes passed increased to196,944, which is a 49.6% increase as compared to 131,615 homes passed as ofJune 30, 2003.

Internet access service revenueincreased due to increases in the number of subscribers for theseservices.  At June 30, 2004, there were14,093 reported subscribers for Internet access services, which is an increaseof 104.4% from the 6,895 subscribers reported a year earlier and an 40.7%increase during the six months from the December 31, 2003 subscriber count of10,015.  The subscriber amounts includeinactive subscribers, which averaged approximately 22.4% during the six monthsended June 30, 2004, as compared to an average inactive level of approximately17.8% during the six months ended June 30, 2003.  Market penetration of Internet services was approximately 7.2% ofthe 196,944 homes passed at June 30, 2004, as compared to market penetration of3.5% of the 131,615 homes passed at June 30, 2003.

Connection fees and equipmentsalesFor the three months ended August 31, 2004, the Company recorded $124,000 ofconnection fees and equipment sales.  The Company did not consolidateCCTV's results in the prior year, but the current year revenue levels representa decrease of $27,000 or 17.9%, as compared to the $151,000 of revenuesrecognized by CCTV during the three months ended June 30, 2003.  For thesix

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months ended August 31, 2004, the Company recorded $233,000 of connectionfees and equipment sales as compared to $328,000 of such sales reported by CCTVin the prior year's first six months.  The lower revenue relates to thesignificant discount on set top boxes for premium television subscribers thatwere given during the period as part of sales promotions.  

Other revenueFor the three months and sixmonths ended August 31, 2004, the Company recorded $41,000 and $219,000, respectively,of other revenue, of which approximately $15,000 and $144,000 respectivelyrelate to revenues from COMCOR due to CCTV's participation as a subcontractorin a City of Moscow build-out program in the Zelenograd region.  During the comparable three and six monthperiods in the prior year before its consolidation into the Company's FinancialStatements, CCTV recorded approximately $80,000 and $100,000, respectively, ofother revenue.

Cost of salesCost of sales for the threemonths ended August 31, 2004 totaled $1,329,000 or 94.7% of total revenue toproduce gross margin of $75,000.  Forthe six months ended August 31, 2004, cost of sales totaled $2,479,000, or89.1% of total revenue for a gross margin total of $303,000.  The Company did not consolidate CCTV'sresults of operations in the prior year, but CCTV did report cost of sales of$1,133,000 and $2,312,000, respectively, in the comparable three and six monthperiods in the prior year.  Such amountsrepresented 134.2% and 147.8% of revenues respectively during thoseperiods.  The prior year results includeapproximately $536,000 of amortization of intangible assets as compared to$302,000 for the current year's first six months.  All other components increased primarily due to expandedactivities which resulted in higher wages, secondary node costs, and equipmentcosts for subscriber set top boxes and cable modems.

Operating expensesOperatingexpenses totaled $2,062,000 and $3,756,000 respectively during the three andsix months ended August 31, 2004, respectively.  For the three and six months ended August 31, 2003, the Companyrecorded $585,000 and $1,417,000, respectively, of expenses, but these amountsare not readily comparable because of the acquisition of CCTV and MBC.  Corporate-level expenses during the threemonths ended August 31, totaled $994,000 which represents an increase of  $409,000, or 69.9%, from the prior yearcosts.  Year-to-date corporate-level expensesof $1,671,000 are $200,000 or 13.6% higher than the $1,471,000 of such costsincurred in the prior fiscal years comparable six month period.  Grants of shares of Common Stock to certainofficers and directors and increased travel costs, including certain costswhich had been borne by Moscow Broadband Communication in the prior year,contributed to the increased cost levels.

CCTVincurred $1,043,000 and $2,062,000, respectively, of operating expenses in thethree and six month periods ended June 30, 2004.  These represent increases of 40.9% and 34.2%, respectively fromthe operating expenses reported by CCTV for the comparable three and six monthperiods in the prior year.  Increasedsalaries, professional fees and costs associated with the TV guide designed tobetter market the Company's premium television services accounted for theincrease in costs.  

Equityin losses of IASForthe three and six months ended August 31, 2004, the Company recorded a $39,000and $171,000, respectively, expense as its equity in the losses of IAS.  This represents 43.5% of IAS's losses of$393,000 for the three months ended June 30, 2004.  For the prior year, the Company did not consolidate CCTV'sresults of operations, but CCTV did record equity losses of $39,000 and its41.7% equity interest in IAS's losses which totaled $39,000 and $84,000, respectivelyfor the three and six months ended June 30, 2003.  MBC owned only 1.8% of IAS and did not utilize equity accountingin the prior year.  IAS's losses for thefirst six months increased primarily due to $140,000 of interest expense on abank loan, and increased personnel costs.

Investment income and other incomeForthe three and six months ended August 31, 2004, investment income and otherincome totaled $194,000 and $526,000, respectively, as compared to $335,000 and$945,000 in the comparable three and six month periods in the prior fiscalyear.  Significant components ofinvestment income and other income are as follows (in thousands):

15
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                     Three  months ended 

 

                      Six  months ended

August  31, 2004

August  31, 2003

 

August  31, 2004

August  31, 2003

 

 

 

 

 

Net gains from  domestic  trading portfolio

  $                     58

  $                  228

 

 $                  126

  $                 684

Rental income

77

79

 

156

155

Interest and dividends

8

6

 

21

26

Ultrasonic royalties

7

22

 

55

35

Change in deferred  compensation accounts

  44

  -

 

  30

  45

Precious metals  recovery

-

-

 

138

-

 

 

 

 

 

$                  194

$                  335

 

$                  526

$                 945

 

 

 

 

 

Therecovery of the value of precious metals relates to the Company's formerElectronics segment which used outside refiners to process its precious metalscrap.

InterestexpenseInterestexpense totaled $61,000 and $121,000, respectively, for the three and sixmonths ended August 31, 2004 which represent minor changes from the interestrecorded in the comparable period of the prior fiscal year.  The lower interest resulting from principalpayments on the Company's 10 1⁄2% subordinated debentures was more than offset bythe interest expense of a $2 million mortgage which was closed in the secondquarter of the prior fiscal year.

Incometax benefitIncometax benefit has been accrued based upon the estimated effective tax rates forthe fiscal year, after considering valuation allowances related to theCompany's ability to realize such tax benefits.  

Lossesof subsidiaries prior to consolidationForthe six months ended August 31, 2004, the Company has added back the net lossesof each of CCTV and MBC to the extent that it did not have a direct or indirectequity interest in these entities from January 1, 2004 to the date of theiracquisition, February 24, 2004.

PreferreddividendsPreferreddividends during the three and six months ended May 31, 2004 totaled $56,000and $115,000, respectively, as compared to $70,000 and $141,000, respectivelyof dividends in the comparable periods of the prior fiscal year.  The reduction reflects the effects ofredemption and conversion of a total of 37,777 shares of the Preferred Stock inthe first quarter of the current fiscal year and a conversion of 85 shares ofPreferred Stock in the second quarter of the current fiscal year.

LIQUIDITYAND CAPITAL RESOURCES

Duringthe six months ended August 31, 2004, the Company used $1,039,000 in itsoperating activities, which is comprised of a use of cash of $1,937,000 in netlosses as adjusted for non-cash items, and $898,000 of cash provided by changesin operating assets and liabilities. During the six month period, the Company used $252,000 in investingactivities, which was comprised of the use of $1,438,000 for capitalexpenditures and a net of $1,186,000 of cash provided by activities relating tothe Company's short-term investment portfolio. Financing activities used $377,000 during the six months ended August31, 2004, as the Company used funds to redeem a portion of its Preferred Stock,pay dividends on its Preferred Stock and make principal payments on a realestate mortgage loan.

AtAugust 31, 2004, the Company's consolidated cash position was $1,572,000 and ithad $1,837,000 in marketable securities. Subsequent to the quarter end, this cash position was reduced as theCompany's wholly-owned subsidiary CCTV, further expanded its access network forthe delivery of television and Internet access services.  

CCTV's strategy and business plan will continue to require capitalinvestment.  On August, 26, 2004, the Company entered into agreements for$51 million of equity and debt financing with Columbus Nova, a private globalinvestment group, pursuant to which Columbus Nova will acquire 4,500,000 sharesof newly created Series B Preferred Stock for $5.00 per share and warrants toacquire an additional 8,283,000 shares of Series B Preferred Stock at $5.00 pershare exercisable within five years of closing, and extend up to $28.5 millionof debt financing.  In September 2004, CCTV received an initial $2 millionunder a $4 million Bridge Loan facility

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associated with the debt financing facility to allow CCTV to accelerate plansfor further build-out and more aggressively market to potential customers inareas which it has and will access through its "last mile" hybrid fiber co-axialnetwork. Without the financing to be obtained from Columbus Nova, or otheroutside sources of capital, the Company may not be able to proceed with thebuild-out of this access network as planned, which in turn, would significantlylimit the Company's ability to continue to increase its revenues and achieveprofitability.  The Company currently expects that it will be able to closeon the Columbus Nova financing by the end of the calendar year 2004, at whichtime it will receive $22.5 million from the sale of the Series B Preferred Stockand $18.5 million of debt financing, a portion of which will be used to repaythe Bridge Loan facility.   In the interim, the Company expects that CCTV willreceive an additional $2 million of proceeds from the Bridge Loan facility tofurther allow it to make commitments for continued build-out of the network into2005.  Outstanding amounts under the Bridge Loan facility are payable uponthe closing of the equity and debt financing agreements with Columbus Nova. Theclosing of the equity and debt financing is subject to, among other things,approval from the Company's stockholders. Columbus Nova has entered into votingagreements with the holders of approximately 54% of the outstanding shares ofthe Company's stock in which such stockholders have agreed to vote in favor ofthe proposals which will allow the Company to complete these transactions. Inthe event that the equity and debt agreements are not approved by the Company'sstockholders, or otherwise are not consummated, the Bridge Loan facility willmature on June 30, 2005.

The Columbus Nova financing,along with expected cash flows generated from operations in the future, isexpected to be sufficient to enable the Company to expand CCTV's access networkfrom approximately 297,000 homes at August 31, 2004 to one million homes withinthree years of the closing of the transaction.

If the Columbus Nova financingdoes not close, there can be no assurance that the Company would be able toattract sufficient capital from other sources to enable it to continue to meetits debt service, preferred dividend and operating expenses obligations or forit to support the continued growth of CCTV's operations or, if it weresuccessful in attracting capital, that the terms of such capital would not bemore dilutive to existing stockholders in terms of percentage ownership thanthe Columbus Nova financing and would not be dilutive in terms of book value orour current loss per share.  

The Company has commitmentsfrom existing shareholders for an additional $2.1 million of funding ifadditional external financing is not obtained to fund the Company's currentoperations, and it believes that it has access to sufficient capital to financethe current level of operations for the next 12 months.

*Recently Issued Accounting Standards*In June 2004, the Financial Accounting Standards Board ("FASB") issued an interpretation of FASB No. 143, *Accountingfor Asset Retirement Obligations*. This interpretation clarifies the scope and timing of liabilityrecognition for conditional asset retirement obligations under FASB No. 143,and is effective no later than the end of our next fiscal year.  We have determined that this interpretation,and the adoption of FASB No. 143, will not have a material impact on ourconsolidated financial statements or cash flows.

In March 2004, the FASB publishedan Exposure Draft, *Shares-Based Payment*, an amendment of FASB StatementsNo. 123 and No. 95.  Under this FASB proposal, all forms of share-basedpayment to employees, including employee stock options, would be treated ascompensation and recognized in the income statement.  This proposedstatement would be effective for the beginning of our 2005 fiscal year. The Company currently accounts for stock options under APB No. 25. 

OFFBALANCE SHEET ARRANGEMENTSTheCompany has a contingent liability with respect to a $386,000 letter of creditissued by its bank to secure performance bonds issued in connection with anunresolved state income tax matter. The Company believes that its accruals aresufficient to meet any obligations that may arise from this matter.

The Company is also party to certain operating leases which will require$32,000 of payments to be made during the remainder of FY05, $40,000 duringFY06 and $11,000 during FY07.

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

TheCompany is exposed to market risk from changes in equity security prices,interest rates and from factors that impact equity investments in Russia, asdiscussed in the Company's Annual Report on Form 10-K for the year endedFebruary 29, 2004.  The followinginformation is presented to update the status of the identified risks.

EQUITYSECURITY RISKAtAugust 31, 2004, the Company has equity risk with respect to $1,837,000 ofinvestments in U.S. based publicly traded financial institutions held in itstrading portfolio.  The Company bearsthe risk of the fluctuations of market prices of the stock of these companies.

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FOREIGNINVESTMENT RISKThe Company's investment in CCTVis subject to currency fluctuations, and the economic and political risksassociated with Russia. The Company has not entered into any derivativeinstruments to hedge the risks associated with this investment. This investmentalso bears the risk of CCTV's ability to increase its revenues through theaddition of subscribers for its cable television, high-speed data transmissionand Internet services. The subscriber growth is largely dependent upon CCTV's abilityto build-out its access network from the MFON which it leases from COMCOR,which is largely dependent upon it receiving a sufficient amount of capital topay for the equipment and construction costs.

CCTV currently provides TV broadcasting services, telematic servicesand data transmission services under three licenses (the "Licenses")that expired in August and September 2004. Applications for renewal of each of theLicenses were filed with the Communications Ministry on June 24, 2004.  The Communications Ministry returned theseapplications to CCTV on July 5, 2004, stating that the Communications Ministrywas unable to renew such Licenses because (i) the  Federal Agency for Surveillance in the Communications Field, agovernmental authority responsible for the issuance of telecommunicationlicenses (the "Communications Service"), has not been registered as alegal entity and (ii) the list of communications-related activities that aresubject to licensing has not been approved following the commencement of thereorganization of the Russian Government in March 2004.  On July 28, 2004, CCTV sent a letter to theCommunications Service, requesting that the Communications Service inform CCTVas to what action, if any, it is required to take until its Licenses arerenewed.  On August 25, 2004, CCTVreceived a response from the Communications Service, requesting that CCTVre-submit its applications for renewal of the Licenses.  On September 30, 2004, CCTV re-submitted itsapplications to the Communications Service. 

The Company expects that the Licenses will be renewed, although therecan be no assurances that they will be renewed.  The Company believes that the risk of the Licenses not beingrenewed is minimal.  CCTV has compliedwill all statutory requirements to obtain the renewal of its Licenses.  Nevertheless, CCTV could be deemed to beoperating in violation of Russian law that provides for civil, administrativeand criminal liability for engaging in licensed activities without a validlicense.  If the Licenses are notrenewed and CCTV is found to be in violation of applicable Russian law, therewould be a material adverse effect on the Company's financial condition andresults of operations.

INTERESTRATE RISKAtAugust 31, 2004, Andersen Land Corp., a wholly owned subsidiary of the Company,was liable in the amount of $1,806,000 under a mortgage collateralized by areal estate property and an assignment of rental income from the lease of theproperty.  Interest under this note willfluctuate at 2.25% above the London Interbank Offered Rate (LIBOR), which willexpose the Company at each periodic renewal of the rate.  At August 31, 2004, the interest rate onthis mortgage loan was 3.81%, which is scheduled to be re-set in October 2004.

**Item 4. Controls and Procedures**

(a)  Evaluation of disclosure controls and procedures.  The Company's principal executive officerand principal financial officer have concluded that the Company's disclosure controlsand procedures (as defined in Exchange Act Rule 13a-15(e)), based on theirevaluation of such controls and procedures conducted as of the end of theperiod covered by this report, are effective to ensure that informationrequired to be disclosed by the Company in the reports it files under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission and that such information is accumulated andcommunicated to the Company's management, including its principal executiveofficer and principal financial officer, as appropriate to allow timelydecisions regarding required disclosure.

(b) Changes in internal control over financial reporting.  There has been no change in the Company's internalcontrol over financial reporting during the last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, theCompany's internal control over financial reporting.

**Part II.  Other Information**

**Item 1. Legal Proceedings**

*Morton International, Inc. v. A.E. StaleyMfg. Co. et al. and Velsicol Chemical Corp. v. A.E. Staley Mfg. Co. et al.*As originally reported in theCompany's Form 10-K for the year ended February 28, 1997, in July 1996, twocompanion lawsuits

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were filed in the United States District Court for theDistrict of New Jersey, by various owners and operators of the Ventron-VelsicolSuperfund Site ("Site").  The lawsuits, which were subsequentlyconsolidated, were filed under the Comprehensive Environmental ResourceCompensation and Liability Act ("CERCLA"), the ResourceConservation and Recovery Act, the New Jersey Spill Act and New Jersey commonlaw, alleging that the defendants (over 100 companies, including the Company's wholly-owned subsidiary, The J.M. NeyCompany ("JM Ney") were generators of certain wastes allegedly processed at theSite.  The lawsuits seek recovery ofcosts incurred and a declaration of future liability for costs to be incurredby the owners and operators in studying and remediating the Site. 

As further reported in the Company's Form 10-Q for the period ended November30, 2001, this case was dismissed without prejudice and the plaintiffs' abilityto reinstate their claims were limited for a minimum of three years untilOctober 2004.  If the plaintiffsreinstate the case, given the legal and factual issues that remain outstanding,the Company currently has no basis to ascertain the range of loss, should anyoccur, with respect to an outcome that may be considered unfavorable.  This contingent liability was not assumed bythe buyer of JM Ney's net assets.

*Norman D. Mass and Lois RavageMass v. Amchem Products, Inc. et. al. (New York State Supreme Court, County ofNew York, Index 101931-04) and Loretta Brienza and Brent Brienza v. A.W. ChestertonCompany et. al. (New York State Supreme Court, County of New York, Index104076-04).*

As originally reported in theCompany's Form 10-K for the year ended February 29, 2004, in March and April2004, JM Ney, now known as Andersen Land Corp., was served with a summons and acomplaint in the above-captioned matters in which it and in excess of onehundred (100) other parties were named as defendants in an asbestosrelated civil action for negligence and product liability filed in the SupremeCourt of New York in which the plaintiffs claim damages from being exposed toasbestos and asbestos products alleged to have been manufactured or supplied bythe defendants, including JM Ney's former dental division.  The plaintiffshave not provided any specific allegations of facts as to which defendants mayhave manufactured or supplied asbestos and asbestos products which are allegedto have caused the injuries.

The Company believes that it has insurance that potentiallycovers this claim and is in the process of notifying its insurance carriers toprovide reimbursement of defense costs and liability, should any arise. Based upon the answers to the interrogatories that have been supplied by theplaintiffs' attorneys, it does not appear to the Company that JM Neymanufactured the product containing asbestos that is the subject of thislitigation. As of this date, the Company has no basis to conclude that thelitigation may be material to the Company's financial condition orbusiness.  The Company intends to vigorously defend the lawsuit.

**Item 6.  Exhibits and Reports onForm 8-K**
  ExhibitsDescription10.1Consulting Agreement    with Francis E. Baker and amendments.10.2Letter Agreement    with Andrew M. O'Shea.31.1Certification of the    Company's Chief Executive Officer pursuant to Rule 13a-14(a).31.2Certification of the    Company's Chief Financial Officer pursuant to Rule 13a-14(a).32.1Certification of the    Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2Certification of the    Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(a)     Exhibits  required by Item 601 of Regulation S-K:

                                

(b)        Reports on Form 8-K

  During the three months ended  August 31, 2004, the Company filed the following reports on Form  8-K:

 

 
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On June  14, 2004, the Company filed a Form 8-K under Items 5 and 7 to report that it  had issued a press release announcing an agreement between CCTV and NTV-Plus  pursuant to which CCTV will offer its customers premium television content  offered by NTV-Plus. 

 
On June  17, 2004, the Company filed a Form 8-K under Items 7 and 12 to report that it  had issued a press release setting forth the Company's financial results for  the fourth quarter and year ended February 29, 2004 and the results of a  partial redemption of its Preferred Stock.  

On June  28, 2004, the Company filed a Form 8-K under Items 5 and 7 to report that it  had issued a press release announcing the election of Oliver R. Grace, Jr. as  its Chairman of the Board. 

On July  20, 2004, the Company filed a Form 8-K under Items 7 and 12 to report that it  had issued a press release setting forth the Company's financial results for  the first quarter ended May 31, 2004.   

On July  21, 2004, the Company filed a Form 8-K under Items 5 and 7 to report that it  had issued a press release announcing an agreement for a $51 Million  Financing to expand the cable network in Moscow to 1 million homes passed. 

On July  21, 2004, the Company filed a Form 8-K under Items 5 and 7 to report that it  issued a press release announcing operating progress at ComCor-TV in terms of  growth of its access network as of June 30, 2004 and increases in its  subscribers and revenues from subscriber services. 

On  August 31, 2004, the Company filed a Form 8-K under Items 1.01, 2.06, 8.01  and 9.01 to report that it had signed definitive agreements with the private  global investment group Columbus Nova Capital, pursuant to which Columbus  Nova will provide the Company with a $51 million financing package. 

Subsequent  to the end of the quarter, the Company filed the following reports on From  8-K: 

On  September 7, 2004, the Company filed a Form 8-K under Items 2.03 and 9.01 to  report that on September 3, 2004, the Company received $2 million of loan  proceeds pursuant to the $4 million Working Capital Bridge Loan Facility  which it entered into with Amatola Enterprises Limited, an affiliate of  Columbus Nova Capital, on August 26, 2004. 

On  September 20, 2004, the Company filed a Form 8-K under Item 2.03 to report  that it had issued 220,879 shares of its Common Stock to acquire shares of  CCTV's Preferred Stock that had been issued to COMCOR pursuant to terms of  the agreement for the acquisition of CCTV which closed in February 2004. 

On  October 12, 2004, the Company filed a Form 8-K under Items 8.01 and 9.01 to  report the financial statements of MBC and CCTV to comply with the  requirements for Form S-3 which the Company filed on October 13, 2004.

On  October 13, 2004, the Company filed a Form 8-K/A under Items 8.01 and 9.01 to amend the Form 8-K  filed on October 12, 2004.  The purpose of this amendment was to file  revised consents of ZAO PricewaterhouseCoopers Audit.

             

**SIGNATURE**

**MOSCOW CABLECOM CORP.**

By:          /s/ Oliver R. Grace, Jr.

                Oliver R. Grace, Jr.

                Chairman, President and Chief  Executive Officer

Date:       October 15, 2004 

By:          /s/ Andrew M. O'Shea

                Andrew M. O'Shea

                Chief Financial Officer

Date:       October 15, 2004

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