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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 10-Q (MARK ONE) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004 COMMISSION FILE NUMBER 1-5706 
 METROMEDIA INTERNATIONAL GROUP, INC.  DELAWARE
    
    58-0971455(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 8000 Tower Point Drive, Charlotte, North Carolina 28227
(Address and zip code of principal executive offices) (704) 321-7380
(Registrants telephone number, including area code)   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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b of the Exchange Act). Yes o No x The number of shares of common stock outstanding as of July 30, 2004 was
94,034,947.




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METROMEDIA INTERNATIONAL GROUP, INC.
Index to
Quarterly Report on Form 10-Q PagePART IFINANCIAL INFORMATIONItem 1a.
    
    Financial Statements of Metromedia International Group, Inc. (unaudited)Consolidated Condensed Statements of Operations
    
    
    2Consolidated Condensed Balance Sheets
    
    
    3Consolidated Condensed Statements of Cash Flows
    
    
    4Consolidated
Condensed Statements of Stockholders Deficiency and Comprehensive (Loss) Income
    
    
    5Notes to Unaudited Consolidated Condensed Financial Statements
    
    
    6Item 1b.
    
    Financial Statements of Magticom Limited (unaudited)Condensed Statements of Income
    
    
    28Condensed Balance Sheets
    
    
    29Condensed Statements of Cash Flows
    
    
    30Condensed Statements
of Stockholders Equity and Comprehensive (Loss) Income
    
    
    31Notes to Unaudited Condensed Financial Statements
    
    
    32Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    36Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    55Item 4.
    
    Controls and Procedures
    
    
    58PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    58Item 3.
    
    Defaults Upon Senior Securities
    
    
    60Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    61Signatures
    
    
    62Certification of PEO Pursuant to Section 302Certification of PFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  1




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Statements of Operations
 (in thousands, except per share amounts)
 (unaudited)
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    19,312
    
    
    $
    17,802
    
    
    $
    37,875
    
    
    $
    34,456Cost and expenses:Cost of services
    
    
    5,741
    
    
    
    5,787
    
    
    
    11,745
    
    
    
    10,766Selling, general and administrative
    
    
    8,326
    
    
    
    11,132
    
    
    
    15,614
    
    
    
    25,225Depreciation and amortization
    
    
    6,004
    
    
    
    5,172
    
    
    
    11,689
    
    
    
    10,215Operating loss
    
    
    (759
    )
    
    
    (4,289
    )
    
    
    (1,173
    )
    
    
    (11,750
    )Other income (expense):Equity in income of unconsolidated investees
    
    
    5,804
    
    
    
    3,867
    
    
    
    9,974
    
    
    
    6,859Interest expense, net
    
    
    (3,860
    )
    
    
    (4,209
    )
    
    
    (7,876
    )
    
    
    (9,697
    )Gain on retirement of debt
    
    
    
    
    
    
    24,117
    
    
    
    
    
    
    
    24,117Foreign currency gain (loss)
    
    
    504
    
    
    
    10
    
    
    
    (73
    )
    
    
    (404
    )Other income (expense)
    
    
    91
    
    
    
    463
    
    
    
    (34
    )
    
    
    (61
    )Income before income tax expense, minority interest, discontinued
components and the cumulative effect of a change in accounting
principle
    
    
    1,780
    
    
    
    19,959
    
    
    
    818
    
    
    
    9,064Income tax expense
    
    
    (3,116
    )
    
    
    (2,113
    )
    
    
    (3,822
    )
    
    
    (3,483
    )Minority interest
    
    
    (2,226
    )
    
    
    (1,755
    )
    
    
    (4,142
    )
    
    
    (3,988
    )(Loss) income before discontinued components and the cumulative effect
of a change in accounting principle
    
    
    (3,562
    )
    
    
    16,091
    
    
    
    (7,146
    )
    
    
    1,593Income from discontinued components
    
    
    518
    
    
    
    11,120
    
    
    
    6,828
    
    
    
    9,839Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,012Net (loss) income
    
    
    (3,044
    )
    
    
    27,211
    
    
    
    (318
    )
    
    
    13,444Cumulative convertible preferred stock dividend requirement
    
    
    (4,654
    )
    
    
    (4,332
    )
    
    
    (9,226
    )
    
    
    (8,587
    )Net (loss) income attributable to common stockholders
    
    $
    (7,698
    )
    
    $
    22,879
    
    
    $
    (9,544
    )
    
    $
    4,857Weighted average common sharesBasic and Diluted
    
    
    94,035
    
    
    
    94,035
    
    
    
    94,035
    
    
    
    94,035(Loss) income per common share attributable to common stockholders:Continuing operations
    
    $
    (0.09
    )
    
    $
    0.13
    
    
    $
    (0.17
    )
    
    $
    (0.07
    )Income from discontinued components
    
    
    0.01
    
    
    
    0.11
    
    
    
    0.07
    
    
    
    0.10Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net (loss) income per common share attributable to common stockholders
    
    $
    (0.08
    )
    
    $
    0.24
    
    
    $
    (0.10
    )
    
    $
    0.05
 See accompanying notes to unaudited consolidated condensed financial statements. 2




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Balance Sheets
 (in thousands, except share amounts)
 June 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,260
    
    
    $
    26,925Accounts receivable, net
    
    
    5,347
    
    
    
    5,915Prepaid expenses and other assets
    
    
    5,922
    
    
    
    5,981Note receivable
    
    
    6,860
    
    
    
    Current assets of discontinued components
    
    
    3,859
    
    
    
    5,559Total current assets
    
    
    54,248
    
    
    
    44,380Property, plant and equipment, net
    
    
    91,503
    
    
    
    86,305Investments in and advances to business ventures
    
    
    35,220
    
    
    
    34,707Goodwill
    
    
    27,882
    
    
    
    27,540Intangible assets, net
    
    
    4,347
    
    
    
    7,845Other assets
    
    
    5,211
    
    
    
    6,104Noncurrent assets of discontinued components
    
    
    8,430
    
    
    
    20,085Total assets
    
    $
    226,841
    
    
    $
    226,966LIABILITIES AND STOCKHOLDERS DEFICIENCYCurrent liabilities:Accounts payable
    
    $
    2,558
    
    
    $
    4,085Accrued expenses
    
    
    20,473
    
    
    
    23,941Current portion of long-term debt
    
    
    1,714
    
    
    
    1,376Current liabilities of discontinued components
    
    
    5,404
    
    
    
    7,187Total current liabilities
    
    
    30,149
    
    
    
    36,589Long-term debt, less current portion
    
    
    154,252
    
    
    
    153,383Deferred income taxes
    
    
    9,827
    
    
    
    9,426Other long-term liabilities
    
    
    7,490
    
    
    
    7,632Long-term liabilities of discontinued components
    
    
    233
    
    
    
    376Total liabilities
    
    
    201,951
    
    
    
    207,406Minority interest
    
    
    36,359
    
    
    
    32,715Stockholders deficiency:71⁄4% cumulative convertible preferred stock
    
    
    207,000
    
    
    
    207,000Common stock, $0.01 par value, authorized 400.0 million shares, issued and
outstanding
94.0 million shares
    
    
    940
    
    
    
    940Paid-in surplus
    
    
    1,195,864
    
    
    
    1,195,864Accumulated deficit
    
    
    (1,404,216
    )
    
    
    (1,403,898
    )Accumulated other comprehensive loss
    
    
    (11,057
    )
    
    
    (13,061
    )Total stockholders deficiency
    
    
    (11,469
    )
    
    
    (13,155
    )Total liabilities and stockholders deficiency
    
    $
    226,841
    
    
    $
    226,966
 See accompanying notes to unaudited consolidated condensed financial statements. 3




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Statements of Cash Flows
 (in thousands)
 (unaudited)
 Six months ended June 30,2004
    
    2003Operating activities:Net (loss) income
    
    $
    (318
    )
    
    $
    13,444Income from discontinued components
    
    
    (6,828
    )
    
    
    (9,839
    )(Loss) income from continuing operations
    
    
    (7,146
    )
    
    
    3,605Items not requiring cash outlays:Equity in income of unconsolidated investees
    
    
    (9,974
    )
    
    
    (6,859
    )Depreciation and amortization
    
    
    11,689
    
    
    
    10,215Gain on retirement of debt
    
    
    
    
    
    
    (24,117
    )Deferred income tax credit
    
    
    (487
    )
    
    
    Minority interest
    
    
    4,142
    
    
    
    3,988Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (2,012
    )Changes in:Accounts receivable
    
    
    890
    
    
    
    (1,053
    )Prepaid expenses and other assets
    
    
    927
    
    
    
    2,533Other long-term assets and liabilities
    
    
    590
    
    
    
    (1,382
    )Accounts payable and accrued expenses
    
    
    (6,202
    )
    
    
    1,852Cash used in operating activities
    
    
    (5,571
    )
    
    
    (13,230
    )Investing activities:Business acquisitions, net of cash acquired
    
    
    (4,293
    )
    
    
    Distributions from business ventures
    
    
    4,573
    
    
    
    12,287Purchase of short-term investments
    
    
    
    
    
    
    (500
    )Proceeds from sale of businesses, net
    
    
    679
    
    
    
    Additions to property, plant and equipment
    
    
    (6,708
    )
    
    
    (5,863
    )Acquisition of other intangibles
    
    
    
    
    
    
    (743
    )Cash (used in) provided by investing activities
    
    
    (5,749
    )
    
    
    5,181Financing activities:Payments on debt and capital lease obligations
    
    
    (545
    )
    
    
    (984
    )Dividends paid to minority interests
    
    
    (1,015
    )
    
    
    (6,496
    )Cash used in financing activities
    
    
    (1,560
    )
    
    
    (7,480
    )Cash provided by discontinued components, net
    
    
    18,299
    
    
    
    7,260Effect of exchange rate changes on cash
    
    
    (84
    )
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    5,335
    
    
    
    (8,269
    )Cash and cash equivalents at beginning of period
    
    
    26,925
    
    
    
    26,467Cash and cash equivalents at end of period
    
    $
    32,260
    
    
    $
    18,198
 See accompanying notes to unaudited consolidated condensed financial statements. 4




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Statements of Stockholders Deficiency and Comprehensive (Loss) Income
 (in thousands)
 (unaudited)
 71⁄4% CumulativeConvertible Stock
    
    Common Stock
    
    
    
    
    
    
    
    
    
    AccumulatedOther
    
    TotalNumber
    
    
    
    
    
    Number
    
    
    
    
    
    Paid-in
    
    Accumulated
    
    Comprehensive
    
    Stockholders
    
    Comprehensiveof Shares
    
    Amount
    
    of Shares
    
    Amount
    
    Surplus
    
    Deficit
    
    Loss
    
    Deficiency
    
    Income (Loss)Balances at January 1, 2003
    
    
    4,140
    
    
    $
    207,000
    
    
    
    94,035
    
    
    $
    94,035
    
    
    $
    1,102,769
    
    
    $
    (1,414,354
    )
    
    $
    (11,948
    )
    
    $
    (22,498
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,444
    
    
    
    
    
    
    
    13,444
    
    
    $
    13,444Other comprehensive loss,
net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,101
    )
    
    
    (2,101
    )
    
    
    (2,101
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,343Balances at June 30, 2003
    
    
    4,140
    
    
    $
    207,000
    
    
    
    94,035
    
    
    $
    94,035
    
    
    $
    1,102,769
    
    
    $
    (1,400,910
    )
    
    $
    (14,049
    )
    
    $
    (11,155
    )Balances at January 1, 2004
    
    
    4,140
    
    
    $
    207,000
    
    
    
    94,035
    
    
    $
    940
    
    
    $
    1,195,864
    
    
    $
    (1,403,898
    )
    
    $
    (13,061
    )
    
    $
    (13,155
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (318
    )
    
    
    
    
    
    
    (318
    )
    
    $
    (318
    )Other comprehensive
income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,004
    
    
    
    2,004
    
    
    
    2,004Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,686Balances at June 30, 2004
    
    
    4,140
    
    
    $
    207,000
    
    
    
    94,035
    
    
    $
    940
    
    
    $
    1,195,864
    
    
    $
    (1,404,216
    )
    
    $
    (11,057
    )
    
    $
    (11,469
    )
 See accompanying notes to unaudited consolidated condensed financial statements. 5




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Metromedia International Group, Inc. 
 Notes to Unaudited Consolidated Condensed Financial Statements 1. Basis of Presentation, Description of Business, Going Concern and Recent
Developments Basis of Presentation and Description of Business The accompanying consolidated financial statements include the accounts of
Metromedia International Group, Inc. (the Company) and its consolidated
subsidiaries. All significant intercompany transactions and accounts have been
eliminated. The Company is a holding company with ownership interests in telephony and
cable television businesses in Northwest Russia and the Republic of Georgia.
For the six months ended June 30, 2004, the telephony businesses generated 96%
of consolidated revenues, while the cable television businesses generated 4% of
consolidated revenues. Substantially all of the Companys assets are located
and revenues are generated outside of the United States. On September 30, 2003, the Board of Directors formally approved
managements plan of disposing its remaining non-core media businesses. As of
June 30, 2004, the Companys non-core media businesses were comprised of
eighteen radio businesses operating in Finland, Hungary, Bulgaria, Estonia and
the Czech Republic and one cable television network with operations in
Lithuania. Further, as disclosed in Note 15, Subsequent Events  Radio Group
Transaction, the Company entered into a sales purchase agreement for the sale
of seventeen of the Companys remaining eighteen Radio businesses, which is
expected to close in early September 2004. These consolidated financial
statements also include the results of the Companys discontinued business
components (see Note 3, Discontinued Business Components). The accompanying interim consolidated condensed financial statements have
been prepared without audit pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures made are adequate to make the information presented not misleading.
These financial statements should be read in conjunction with the consolidated
financial statements and related footnotes included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2003. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company as of June
30, 2004, and the results of its operations for the three and six month periods
ended June 30, 2004 and 2003 and its cash flows for the six month periods ended
June 30, 2004 and 2003, have been included. The results of operations for the
interim period are not necessarily indicative of the results of operations that
may be realized for the full year. Certain reclassifications have been made to prior periods financial
information to conform to the current period presentation. The Company has reassessed its accounting and presentation of the
withholding taxes that were remitted to foreign governments on dividends
distributed by its business ventures located outside the United States.
Historically, the Company has included such amounts within its selling, general
and administrative expenses. The Company has decided to prospectively present
such withholding taxes as a component of income taxes. In addition, historical
amounts have been reclassified in current period presentation for consistent
presentation purposes. The following table summarizes the withholding taxes
attributable to dividends from business ventures which have been reclassified,
for select historical periods (in thousands): Three Months Ended2002
    
    2003
    
    2004March 31,
    
    $
    
    
    
    $
    
    
    
    $
    381June 30,
    
    
    518
    
    
    
    607
    
    
    
    September 30,
    
    
    
    
    
    
    
    
    
    
    December 31,
    
    
    
    
    
    
    190
    
    
    
    
 Such amounts do not have an impact on earnings per share in prior period financial results or result in an
adjustment to the Company's accumulated deficit. Going Concern and Recent Developments In the first quarter of 2003, the Company embarked on an overall
restructuring of its business (the Restructuring). The Restructuring was
prompted by and was intended to resolve the severe liquidity issues that had
confronted the Company since the beginning of 2002. In this Restructuring, the
Company undertook to sell its non-core businesses, which at the beginning of
the Restructuring included nine cable television networks, twenty radio
broadcasting stations and various non-core telephony businesses located in
Western, Central and Eastern Europe. Proceeds of these sales mitigated
short-term liquidity concerns and provided capital for further core business
development. Upon completion of all planned sales, which is expected in the
third quarter of 2004, the 6




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Company will emerge as a business with its principal attention focused on the
continued development of its core telephony businesses in Northwest Russia and
the Republic of Georgia. In connection with the Restructuring, the Company also substantially
downsized its corporate headquarters staff and undertook actions with the
intended objective of significantly decreasing its corporate overhead cash-burn
rate. The Company relocated its corporate headquarters from New York City, New
York to Charlotte, North Carolina and has achieved a significant reduction in
its corporate personnel and office related expenditures. Further reductions in
corporate overhead expenditures are expected to follow the final disposition of
all remaining non-core media businesses. The Companys core telephony businesses are now:  
    
    PeterStar, the leading competitive local exchange carrier in St.
Petersburg, Russia, in which the Company has a 71% ownership interest;
and  
    
    Magticom, the leading mobile telephony operator in the Republic of
Georgia, in which the Company has an effective 34.5% ownership
interest. Both of these business ventures are currently self-financed and hold
leading positions in their respective markets. Furthermore, the Company also
intends to retain its ownership in Ayety TV (Ayety) (pending the resolution
of a dispute with the owner of a 15% interest in Ayety, see Note 4, Change in
Basis of Presentation), a cable television provider in Tbilisi, Georgia, in
which the Company has an 85% ownership interest and Telecom Georgia, a
long-distance transit operator in Tbilisi, Georgia, in which the Company has a
30% ownership interest. The Company is a holding company; accordingly, it does not generate cash
flows from operations. As of June 30, 2004 and July 31, 2004, the Company had
$31.4 million and $29.8 million, respectively, of unrestricted cash on hand. In
addition, as of June 30, 2004, the Companys consolidated business ventures
held $0.9 million of cash. Furthermore, as of June 30, 2004, the Companys
unconsolidated business ventures had $13.6 million of cash on hand, which is
held in banks in the Republic of Georgia. The Company projects that its current corporate cash reserves, anticipated
cash proceeds of non-core media business sales and the anticipated continuing
dividends from core business operations will be sufficient for the Company to
meet on a timely basis its future corporate overhead requirements and interest
payment obligations, associated with its $152.0 million aggregate principal
amount (fully accreted) 101⁄2% Senior Discount Notes, due 2007 (the Senior
Notes). However, the Company cannot assure that dividends from core businesses
will be declared and paid nor can it assure that it will be successful in
completing the sale of its remaining non-core media businesses or that the
realized cash proceeds, if any, will be sufficient to meet short-term liquidity
requirements. The Company also is subject to legal and contractual
restrictions, including those under the indenture for the Senior Notes, on its
use of any cash proceeds from the sale of its assets or those of its business
ventures. Separately, the Company projects that it has sufficient corporate cash on
hand to support the Companys planned operating, investing and financing cash
flows through the end of 2004, including the Companys $8.0 million semi-annual
interest payment due on September 30, 2004 on its Senior Notes. This projection
does not include cash inflows that might reasonably arise from cash proceeds
realized from the sale of the Companys non-core media businesses or operating
business venture dividend distributions, each of which would further strengthen
the Companys current liquidity position. However, the Company does not believe that it has sufficient corporate
cash on hand today to support the Companys planned operating, investing and
financing cash flows through March 31, 2005, including the Companys $8.0
million semi-annual interest payment that is due on March 31, 2005 associated
with its Senior Notes. If the Company is not able to satisfactorily address the liquidity issues
described above, the Company may have to resort to certain other measures,
including ultimately seeking the protection afforded under the U.S. Bankruptcy
Code. The Company cannot provide assurances at this time that it will be
successful in avoiding such measures. Additionally, the Company has a
stockholders deficit and has suffered recurring operating losses and operating
cash deficiencies. The factors discussed above raise substantial doubt about the Companys
ability to continue as a going concern. The condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. In June 2004, the Company reached an agreement (the Board of Director
Nominee Agreement) with certain holders of the Companys 71⁄4% Cumulative
Convertible Preferred Stock (the Preferred Stock) who represented to the
Company that they held discretionary authority (including the power to vote)
with regard to 2.4 million shares or approximately 58% of the outstanding 4.1
million shares of Preferred Stock (the Participating Preferred Stock
Holders). Under the terms of the Board of Director Nominee Agreement, the
Participating Preferred Stock Holders irrevocably waived the right to request a
special meeting of holders of Preferred Stock to elect directors or take any
action to request such a meeting until immediately after the next annual
meeting of the Companys stockholders is held. In consideration of this
waiver, Messrs. Gale and Henderson, who were identified by the Participating
Preferred Stock Holders as director candidates, were elected as Class III
Directors by the Companys Board of Directors. Their terms will expire at the
Companys next annual meeting of stockholders. At the next annual meeting, the
holders of Preferred Stock will have the right 7




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##### Table of Contents



to vote separately as a class for the election of two directors. It is
expected that Messrs. Gale and Henderson will be nominated for election by the
holders of Preferred Stock to fill these two directorships. The execution of the Board of Director Nominee Agreement was the
culmination of several discussions, which began in late 2003, that the Company
had with several holders of the Companys Preferred Stock. According to the
terms of the Preferred Stock, in the event the Company did not make six (6)
consecutive dividend payments on the Preferred Stock, holders of 25% of the
voting power of the outstanding Preferred Stock became entitled to compel the
Company to call a special meeting of the holders of the Preferred Stock for the
purpose of electing two new directors. The Company believes that the Board of
Director Nominee Agreement was advantageous to the Company because it
eliminated the need to hold a special meeting which would have been both time
consuming and expensive. Opportunities to restructure the Companys balance sheet as well as other
strategic alternatives are being pursued and evaluated, but present Company
plans presume the continued service of the Senior Notes on current terms and
the continued deferral of the payment of dividends on the Preferred Stock. The
Company cannot provide assurances at this time that a capital restructuring or
other strategic alternatives will be consummated or, if consummated, that such
effort would produce a material improvement in short-run cash flows or equity
valuations. 2. Summary of Significant Accounting Policies Stock Option Plans The Company has elected to account for its stock-based compensation in
accordance with the provisions of Accounting Principles Board (APB) No. 25,
Accounting for Stock Issued to Employees and present pro forma disclosures of
results of operations as if the fair value method had been adopted. Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Net (loss) income attributable to common stockholders, as reported
    
    $
    (7,698
    )
    
    $
    22,879
    
    
    $
    (9,544
    )
    
    $
    4,857Stock-based employee compensation expense
determined under fair value based method
    
    
    (85
    )
    
    
    (219
    )
    
    
    (189
    )
    
    
    (391
    )Pro forma net (loss) income
    
    $
    (7,783
    )
    
    $
    22,660
    
    
    $
    (9,733
    )
    
    $
    4,466Net (loss) income per share attributable to common stockholdersBasic and
Diluted:As reported
    
    $
    (0.08
    )
    
    $
    0.24
    
    
    $
    (0.10
    )
    
    $
    0.05Pro forma
    
    $
    (0.08
    )
    
    $
    0.24
    
    
    $
    (0.10
    )
    
    $
    0.05
 Accounting Change Effective January 1, 2003, the Company changed its policy regarding the
accounting for certain business ventures previously reported on a lag basis.
All of the Companys current operating business ventures with the exception of
PeterStar, have historically reported their financial results on a three-month
lag. In an effort to provide more timely and meaningful financial information
on the Companys business operations, the Company determined that all ventures
should be reported on a real-time basis. As a result of this change, a $2.5
million decrease to the accumulated deficit as of January 1, 2003 was recorded,
of which $2.0 million is reflected as income related to the cumulative effect
of a change in accounting principle and the remaining $0.5 million is included
as a cumulative effect of a change in accounting principle in income from
discontinued components for the six months ended June 30, 2003. 8




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##### Table of Contents



The effect of this change on the consolidated statement of operations for
the six months ended June 30, 2003 is as follows (in thousands, except per
share data): Effect of change in year-end for lag venturesSix months ended
    
    Three months
    
    
    
    
    
    Cumulative effectJune 30, 2003,
    
    ended
    
    Three months
    
    of a change in
    
    Six months endedprior to change in
    
    December 31,
    
    ended
    
    accounting
    
    June 30, 2003, asaccounting policy
    
    2002
    
    June 30, 2003
    
    principle
    
    reportedRevenues
    
    $
    34,498
    
    
    $
    (661
    )
    
    $
    619
    
    
    $
    
    
    
    $
    34,456Costs and expenses
    
    
    46,150
    
    
    
    (592
    )
    
    
    648
    
    
    
    
    
    
    
    46,206Operating loss
    
    
    (11,652
    )
    
    
    (69
    )
    
    
    (29
    )
    
    
    
    
    
    
    (11,750
    )Equity in income of unconsolidated
Investees
    
    
    5,819
    
    
    
    (2,886
    )
    
    
    3,926
    
    
    
    
    
    
    
    6,859Other non-operating income and
expenses, net
    
    
    13,899
    
    
    
    
    
    
    
    56
    
    
    
    
    
    
    
    13,955Income (loss) before income tax
expense, minority interest,
discontinued components and
cumulative effect of a change in
accounting principle
    
    
    8,066
    
    
    
    (2,955
    )
    
    
    3,953
    
    
    
    
    
    
    
    9,064Income tax expense
    
    
    (3,483
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,483
    )Minority interest
    
    
    (3,895
    )
    
    
    943
    
    
    
    (1,036
    )
    
    
    
    
    
    
    (3,988
    )Income (loss) before discontinued
components and cumulative effect of
a
change in accounting principle
    
    
    688
    
    
    
    (2,012
    )
    
    
    2,917
    
    
    
    
    
    
    
    1,593Income (loss) from discontinued
components
    
    
    9,213
    
    
    
    (503
    )
    
    
    626
    
    
    
    503
    
    
    
    9,839Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,012
    
    
    
    2,012Net income (loss)
    
    
    9,901
    
    
    
    (2,515
    )
    
    
    3,543
    
    
    
    2,515
    
    
    
    13,444Preferred dividends
    
    
    (8,587
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,587
    )Net income (loss) attributable to
common
Stockholders
    
    $
    1,314
    
    
    $
    (2,515
    )
    
    $
    3,543
    
    
    $
    2,515
    
    
    $
    4,857Income (loss) per common per share
attributable to common stockholders:Continuing operations
    
    $
    (0.09
    )
    
    $
    (0.02
    )
    
    $
    0.04
    
    
    $
    
    
    
    $
    (0.07
    )Discontinued components
    
    
    0.10
    
    
    
    (0.01
    )
    
    
    
    
    
    
    0.01
    
    
    
    0.10Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    0.02Net income (loss) per common share
attributable to common stockholders
    
    $
    0.01
    
    
    $
    (0.03
    )
    
    $
    0.04
    
    
    $
    0.03
    
    
    $
    0.05
 9




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##### Table of Contents



3. Discontinued Business Components On September 30, 2003, the Board of Directors formally approved
managements plan to dispose of the remaining non-core media businesses of the
Company. Management anticipates that the remaining non-core media radio
businesses will be disposed of by September 30, 2004. Furthermore, since the first quarter of 2002, the Company has sought out
opportunities to sell other business ventures for the purpose of improving the
Companys liquidity position. In light of these events, the Company concluded
that certain business ventures meet the criteria for classification as
discontinued business components as outlined in SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, and these entities have been
presented as such within the condensed consolidated financial statements. Accordingly, the income statement of the Company for current and prior
periods has presented the results of operations of the discontinued components,
including any gain or loss recognized on such disposition, in income from
discontinued components and the balance sheets presents the assets and
liabilities of such operations as assets and liabilities of discontinued
components. A summary of significant dispositions of such businesses from January 1,
2003 to June 30, 2004 are summarized below. Radio Skonto On April 28, 2004, the Company sold its 55% interest in Radio Skonto
(Skonto) to A/S Multibanka, a stock company registered in Latvia already
owning 10% of Skonto. In addition, the Company assigned its right to collect
from Skonto unpaid management fees to A/S Multibanka or A/S Multibankas
designee. Total consideration for the ownership rights and assigned receivable
was $0.5 million. The Company recognized a gain on the disposition of $0.3
million in discontinued components in the three months ended June 30, 2004. ATK On March 26, 2004, the Company announced that it completed the sale of its
interest in Arkhangelsk Television Company (ATK) to Yuri Firsov, the General
Director of ATK, for net cash proceeds of $1.5 million. The Company recognized
a gain on the disposition of $0.7 million in discontinued components in the six
months ended June 30, 2004. Romsat On March 4, 2004, the Company announced that it had completed the sale of
its interests in FX Communications S.R.L. (aka Romsat Cable TV) and FX Internet
S.R.L., to a consortium of buyers that includes Romania Cable Systems S.A. and
Astral Telecom S.A. in a transaction that resulted in net cash proceeds of
$16.0 million. The Company recognized a gain on the disposition of $5.8
million in discontinued components in the six months ended June 30, 2004. Sun TV On November 12, 2003, the Company sold its interest in the Moldovan cable
television company Sun TV and Sun Constructie S.R.L., a Moldovan trading
company to Lekert Management, Ltd., a company organized under the laws of
British Virgin Islands for cash consideration of $2.1 million. Lekert
Management, Ltd. is an affiliate of Neocom S.R.L., which owned 35% of Sun TV
prior to the transaction. The Company recorded a charge to earnings in the
third quarter of 2003 in the amount of $0.4 million to reflect its investment
in Sun TV and Sun Constructie at the lower of cost or fair value less cost to
sell. The impairment charge was included in the results of discontinued
components. Technocom On June 25, 2003, the Company sold its wholly-owned subsidiary, Technocom
Limited (Technocom) for $4.5 million. Technocom holds interests in several
Russian telecommunications enterprises including satellite-based transport
operator Teleport-TP. Simultaneous with the sale of Technocom, the Company
entered into agreements to settle all historical claims concerning
Technocom-related businesses, including claims arising from litigation in
Guernsey that Technocom initiated in 2002 concerning its majority-owned
subsidiary Roscomm and from arbitration proceedings initiated in 2003 in
connection with that Guernsey litigation. The Company received cash proceeds of $4.5 million and incurred closing
costs of $0.6 million, principally legal fees and severance costs, resulting in
a gain of $2.9 million on the disposition, which was recorded in discontinued
components in the three months ended June 30, 2003. 10




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##### Table of Contents



Adamant Transaction On April 24, 2003, the Company completed an exchange with Adamant Advisory
Services (Adamant) of its ownership in certain of its business units in
Russia for approximately $58.6 million, face value, of the Companys Senior
Notes held by Adamant. The Company conveyed to Adamant its ownership interests
in Comstar, a Moscow-based fixed-line telephony operator (Comstar); Kosmos
TV, a Moscow-based cable television operator (Kosmos TV); and the Companys
Russian radio businesses (the Radio Businesses). In addition to conveying the
Senior Notes to the Company, Adamant paid $5.0 million in cash and released the
Company of its $3.5 million obligation to pay interest accrued on the Senior
Notes being exchanged. The consideration was determined by arms length
negotiations between the Company and Adamant. The Company recorded a gain related to this transaction of approximately
$31.6 million in the year ended December 31, 2003, which is comprised of a
$24.1 million gain related to the early extinguishment of the exchanged Senior
Notes and a $7.0 million gain on the transfer of the Companys interests in the
Radio Businesses. Such gain on early debt extinguishment was adjusted to $24.6
million in the third quarter of 2003, due to a favorable adjustment of $0.5
million to professional fees previously accrued. The gain on early
extinguishment was reflected in the Companys income from continuing operations
in the three months ended June 30, 2003, while the gain on sale of the
Companys interests in the Radio Businesses was reflected in the income from
operations of discontinued components in the three months ended June 30, 2003. Other The Company recognized a gain of $0.5 million related to the settlement of
remaining severance obligations and other liabilities of discontinued
components in the six months ended June 30, 2004. The Company recognized income of $0.5 million in discontinued components
in the six months ended June 30, 2003 related to the cumulative effect of a
change in accounting principle (see Note 2, Summary of Significant Accounting
Policies  Accounting Change). The Company recognized a gain of $0.7 million in discontinued components
in the three and six months ended June 30, 2003 related to the final accounting
of the sale of Snapper in November 2002. Operating Results The combined operating results of the discontinued radio businesses are as
follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    4,310
    
    
    $
    4,004
    
    
    $
    7,535
    
    
    $
    6,552Operating income (loss)
    
    
    359
    
    
    
    (314
    )
    
    
    (825
    )
    
    
    (1,610
    )Net income (loss)
    
    $
    169
    
    
    $
    (95
    )
    
    $
    (1,117
    )
    
    $
    (1,287
    )
 The combined operating results of the discontinued cable television
businesses are as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    
    
    
    $
    3,174
    
    
    $
    2,080
    
    
    $
    6,111Operating income
    
    
    
    
    
    
    369
    
    
    
    387
    
    
    
    89Net income
    
    $
    
    
    
    $
    681
    
    
    $
    382
    
    
    $
    154
 Included in the discontinued cable businesses operating results for the
six months ended June 30, 2004 are the operating results of Vilsat. However,
subsequent to March 31, 2004, the Company has accounted for its interest in
Vilsat following the cost basis method of accounting. Vilsat operates a cable
television business in Vilnius, Lithuania and is 85% owned by the Company. The
decision to follow the cost basis method of accounting was principally due to
the Companys inability to readily obtain reliable and timely financial
information associated with the financial performance of Vilsat for purposes of
inclusion within the Companys consolidated financial statements. Further,
since the Companys carrying value in Vilsat is negligible and it has no
obligation or intention to fund future amounts to Vilsat, the Companys
carrying value should not change in future periods. 11




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##### Table of Contents



The principal balance sheet items included in Discontinued Business
Components are as follows (in thousands): June 30,
    
    December 31,2004
    
    2003Cash and cash equivalents
    
    $
    828
    
    
    $
    1,402Other receivables
    
    
    
    
    
    
    1,064Other current assets
    
    
    3,031
    
    
    
    3,093Current assets
    
    $
    3,859
    
    
    $
    5,559Intangible assets, net
    
    $
    4,188
    
    
    $
    4,977Goodwill
    
    
    1,866
    
    
    
    8,748Property, plant and equipment, net
    
    
    1,677
    
    
    
    5,647Other noncurrent assets
    
    
    699
    
    
    
    713Noncurrent assets
    
    $
    8,430
    
    
    $
    20,085Accounts payable
    
    $
    1,445
    
    
    $
    2,766Accrued expenses
    
    
    3,959
    
    
    
    4,421Current liabilities
    
    $
    5,404
    
    
    $
    7,187Long-term liabilities
    
    $
    233
    
    
    $
    376
 4. Change in Basis of Presentation The Company is in a commercial dispute with Mtatsminda Ltd.
(Mtatsminda), owner of a 15% interest in Ayety. On June 2, 2004, Mtatsminda sent a letter to the Company in which it
addressed four issues. First, Mtatsminda requested that the Company cause
Ayety to renegotiate the terms pursuant to which Ayety is using 11 broadcast
frequencies which belong to Mtatsminda. Second, Mtatsminda alleges that the
Company has an obligation to pay property taxes on the buildings owned by an
affiliate of the Company in Tbilisi and that the Company has failed to meet
this obligation. Third, Mtatsminda disputes the amount of certain loans made
by the Company to Ayety. Fourth, Mtatsminda alleges that the Company may have
violated laws against bribery of foreign officials and possibly engaged in
other improper or illegal conduct. These issues were again raised by
Mtatsminda in a letter addressed to the Company, dated June 25, 2004. With respect to the broadcast frequencies, Ayety has been using the 11
frequencies under an agreement with Mtatsminda which recently expired. Ayety
is intending to enter into negotiations with Mtatsminda to secure continued
long-term use of these frequencies. The Company believes that the risk of
Mtatsminda withdrawing the right to use its frequencies is remote. With
respect to the property tax issue, the Company is currently investigating this
allegation and has retained outside legal counsel to assist with this
investigation. The Company believes that the amount of tax due, if any, is
relatively low and it has been advised by outside legal counsel that the risk
of a tax assessment is remote. Further, the Company believes that the
allegations related to the amount of the loans made to Ayety are unfounded and
intends to vigorously defend itself on this issue. The Company believes that the fourth allegation is substantially similar
to those raised previously by certain Georgian individuals and described in
Note 12, Commitments and Contingencies  Georgian Matters. The Companys
Board of Directors authorized the Companys outside counsel to conduct an
independent inquiry into the allegations of possible improper or illegal
conduct made by the Georgian individuals. The investigation has been completed
and the results have been reported by the Companys outside counsel to the
Board of Directors of the Company. The investigation did not uncover any
specific factual support for the allegations regarding violations of laws
against bribery of foreign officials, including the Foreign Corrupt Practices
Act, or other alleged improper or illegal conduct. The Audit Committee of the
Companys Board of Directors has reviewed the June 2, 2004 letter sent by
Mtatsminda and believes that the allegations made with respect to violations of
laws and other improper or illegal conduct are substantially similar to those
previously investigated by the Companys outside counsel. For this reason, the
Audit Committee has determined not to re-open the investigation. At the request of Mtatsminda, the Company agreed to participate in a
meeting of Ayety shareholders on June 28, 2004. At that meeting, the Companys
intent was to address matters raised in Mtasmindas letter to the Company dated
June 2, 2004 and to also address matters relative to the poor financial
performance of Ayety, including the Companys decision to remove and appoint a
new General Director of the business. However, at such meeting, Mtatsminda
notified the Company that in March 2003, a new charter of Ayety was prepared
and filed in the Georgian courts (which are responsible for company
registration in Georgia) (the New Charter). Pursuant to the terms of the New
Charter, unanimous shareholder approval is required for certain key decisions,
including the removal and appointment of a new General Director; whereas
previously only a 75% vote was required. Further, at the meeting, Mtatsminda
informed the Company that it would not vote for the Companys proposal
regarding the removal of Ayetys General Director. In addition, Mtatsminda
also informed the Company representatives that they believed the Company,
through its control of Ayety, had disadvantaged Mtatsminda by ensuring that
Ayetys business performed poorly. 12




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##### Table of Contents



The Company believes that the legality of the changes to the charter are
questionable and can be disputed by the Company on the basis that the New
Charter was adopted in a manner that was not in compliance with applicable law.
However, since the New Charter has already been filed and accepted by the
Georgian courts, the New Charter is valid until successfully challenged. Management is attempting to buy-out Mtatsmindas interest in Ayety. If
this course of action fails, the Company might either attempt to resolve the
commercial dispute with Mtatsminda, while simultaneously seeking to nullify the
New Charter, or the Company may dispose of its interest in Ayety. However, it
is uncertain if any of these efforts will succeed. Management has concluded that based on the New Charter, Mtatsminda has
substantive participating rights, including the ability to block appointment
and removal of the General Director and that the Company no longer controls the
day-to-day business affairs of Ayety. Accordingly, effective June 30, 2004, the
Company will no longer account for its ownership interest in Ayety following
the consolidation method of accounting but will follow the equity method of
accounting. Summarized results of operations of the Companys consolidated financial
statements and proforma results of operations of the Company with Ayety
unconsolidated as of all periods presented are as follows (in thousands): Three months ended June 30, 2004
    
    Three Months Ended June 30, 2003As Presented
    
    Proforma
    
    As Presented
    
    ProformaRevenues
    
    $
    19,312
    
    
    $
    18,604
    
    
    $
    17,802
    
    
    $
    17,183Cost of services
    
    
    5,741
    
    
    
    5,718
    
    
    
    5,787
    
    
    
    5,781Selling, general and administrative
    
    
    8,326
    
    
    
    7,665
    
    
    
    11,132
    
    
    
    10,752Depreciation and amortization
    
    
    6,004
    
    
    
    5,894
    
    
    
    5,172
    
    
    
    4,949Operating loss
    
    $
    (759
    )
    
    $
    (673
    )
    
    $
    (4,289
    )
    
    $
    (4,299
    )Equity in income of unconsolidated investees
    
    $
    5,804
    
    
    $
    5,737
    
    
    $
    3,867
    
    
    $
    3,892Net (loss) income
    
    $
    (3,044
    )
    
    $
    (3,044
    )
    
    $
    27,211
    
    
    $
    27,211
 Six months ended June 30, 2004
    
    Six Months Ended June 30, 2003As Presented
    
    Proforma
    
    As Presented
    
    ProformaRevenues
    
    $
    37,875
    
    
    $
    36,504
    
    
    $
    34,456
    
    
    $
    33,133Cost of services
    
    
    11,745
    
    
    
    11,700
    
    
    
    10,766
    
    
    
    10,743Selling, general and administrative
    
    
    15,614
    
    
    
    14,403
    
    
    
    25,225
    
    
    
    24,327Depreciation and amortization
    
    
    11,689
    
    
    
    11,476
    
    
    
    10,215
    
    
    
    9,917Operating loss
    
    $
    (1,173
    )
    
    $
    (1,075
    )
    
    $
    (11,750
    )
    
    $
    (11,854
    )Equity in income of unconsolidated investees
    
    $
    9,974
    
    
    $
    9,910
    
    
    $
    6,859
    
    
    $
    6,663Net (loss) income
    
    $
    (318
    )
    
    $
    (318
    )
    
    $
    13,444
    
    
    $
    13,444
 13




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##### Table of Contents



Summarized balance sheet information of the Companys consolidated
financial statements and proforma balance sheet information of the Company as
if Ayety had been unconsolidated as of December 31, 2003 are as follows (in
thousands): December 31, 2003As Presented
    
    ProformaCurrent assets
    
    $
    44,380
    
    
    $
    44,316Investments in and advances to business ventures
    
    
    34,707
    
    
    
    34,759Property, plant and equipment, net
    
    
    86,305
    
    
    
    85,386Other long-term assets
    
    
    61,574
    
    
    
    61,574Total assets
    
    $
    226,966
    
    
    $
    226,035Current liabilities
    
    $
    36,589
    
    
    $
    35,658Total liabilities
    
    $
    207,406
    
    
    $
    206,475Minority interest
    
    
    32,715
    
    
    
    32,715Total stockholders deficit
    
    
    (13,155
    )
    
    
    (13,155
    )Total liabilities and stockholders deficit
    
    $
    226,966
    
    
    $
    226,035
 5. Investments in and Advances to Business Ventures Credit Agreements with Business Ventures Advances have historically been made to business ventures in the form of
cash, for working capital purposes, payment of expenses or capital
expenditures, or in the form of equipment purchased on behalf of the business
ventures. Interest rates charged to the business 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 business ventures available cash
flow, as defined, prior to any substantial distributions of dividends to the
business venture partners. The Company has entered into credit agreements with
its business ventures, including those classified as discontinued components,
to provide up to $17.2 million in funding of which $5.7 million in funding
obligations remain at June 30, 2004. The Companys funding commitments are
contingent on its approval of the respective business ventures business plans. Such funding commitments and outstanding credit agreement balances have
been significantly reduced since January 1, 2003, principally due to
dispositions of business ventures during the eighteen months ended June 30,
2004. In addition, outstanding credit agreement balances have been reduced by
business venture repayments, including Magticoms repayment of its obligation
to the Company in the first quarter of 2003, partially offset by interest
accruals and limited funding by the Company to existing business ventures. The following table summarizes the credit agreement activity for the six
months ended June 30, 2004 and 2003 (in thousands): Total Contracted Amount
    
    Total Available Credit ObligationSix months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Balances at January 1, 2004 and 2003, respectively
    
    $
    29,929
    
    
    $
    103,963
    
    
    $
    6,251
    
    
    $
    18,388Reductions due to dispositions of businesses
    
    
    (12,700
    )
    
    
    (29,048
    )
    
    
    (250
    )
    
    
    (5,979
    )Reductions due to termination of agreements, net of increases in
Agreements
    
    
    
    
    
    
    (18,650
    )
    
    
    (345
    )
    
    
    (17,192
    )Increase due to payments received and forgiveness of debt, net of
advances given and interest accrued
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    8,976Balances at June 30, 2004 and 2003, respectively
    
    $
    17,229
    
    
    $
    56,265
    
    
    $
    5,686
    
    
    $
    4,193
 Investments in and Advances to Business Ventures As of June 30, 2004 and December 31, 2003, the Companys investment in and
advances to business ventures line item included within the Companys
consolidated balance sheet reflects the Companys 49% equity investment in
Magticom through Telcell 14




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##### Table of Contents



Wireless, LLC, a 70.41% owned subsidiary holding company for which the
Company follows the consolidation method of accounting. The Companys effective
ownership of Magticom is 34.5%. As further described in Note 4, Change in Basis of Presentation, as of
June 30, 2004, the Companys investment in and advances to business ventures
line item also includes the Companys net investment in Ayety. The components of the Companys investments in and advances to business
ventures are as follows (in thousands): June 30, 2004
    
    December 31, 2003Equity in net assets acquired
    
    $
    2,450
    
    
    $
    2,450Accumulated income recognized
    
    
    45,146
    
    
    
    35,172Accumulated dividends received
    
    
    (12,794
    )
    
    
    (1,361
    )Equity portion of cumulative translation adjustment
    
    
    391
    
    
    
    (1,554
    )Net investment in Ayety
    
    
    27
    
    
    
    Total investments in and advances to business ventures
    
    $
    35,220
    
    
    $
    34,707
 Changes in the Investments in and Advances to Business Ventures The changes in the investments in and advances to business ventures are as
follows (in thousands): Six months ended June 30,2004
    
    2003Balance, at beginning of period
    
    $
    34,707
    
    
    $
    30,720Dividends received
    
    
    (11,433
    )
    
    
    (1,361
    )Cash repayments and other
    
    
    
    
    
    
    (11,101
    )Equity ownership in income
    
    
    9,974
    
    
    
    5,325Cumulative effect adjustment on income for lag period
    
    
    
    
    
    
    3,248Equity portion of cumulative translation adjustment
    
    
    1,945
    
    
    
    (1,776
    )Conversion from consolidation to equity method for Ayety
    
    
    27
    
    
    
    Balance, at end of period
    
    $
    35,220
    
    
    $
    25,055
 Combined Information of Unconsolidated Business Ventures Certain cable and telephony business ventures in which the Company
disposed of its interests in were accounted for using the equity method of
accounting. Such ventures principally include: Fixed Telephony businesses
    
    Date of Disposition Comstar
    
    April 24, 2003 MTR Svyaz
    
    June 25, 2003 Teleport-TP
    
    June 25, 2003
 Wireless Telephony businesses Tyumenruskom
    
    September 24, 2003
 Cable Television businesses Baltcom TV
    
    August 1, 2003 Kosmos TV
    
    April 24, 2003 Teleplus
    
    November 21, 2003 Cosmos TV
    
    March 26, 2004
 Comstar and Kosmos TV were disposed as a part of the Adamant transaction
while MTR Svyaz and Teleport TP were disposed as a part of the Technocom
transaction. The remaining transactions are as follows: 15




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##### Table of Contents



Cosmos TV Transaction On March 26, 2004, the Company announced that it has completed the sale of
its interests in various cable ventures, including Cosmos TV (Cosmos), to
Star Broadband Limited, a British Virgin Islands company, which is controlled
by Dominic Reid, former General Director of the Companys cable business group,
for $0.7 million. The results of Cosmos are presented in the Statement of Operations of the
Company as continuing operations and have been included in the Equity in
income (losses) of unconsolidated investees. Teleplus Transaction On November 21, 2003, the Company sold all of its interest in the St.
Petersburg, Russia cable television company, Teleplus, to a Russian company
Svyaz-Kapital and AVT Systems Ltd., a company organized under the laws of
Cayman Islands, for cash consideration of $0.9 million. The Company recognized
a gain of $0.7 million on the disposition in the three months ended December
31, 2003. Tyumenruskom Transaction On September 24, 2003, the Company sold its interest in the Russian mobile
phone company Tyumenruskom to a Russian company for cash consideration of $1.2
million. In addition, the Company was released from its guarantee of
Tyumenruskoms debt by a vendor. The Company had previously recorded a reserve
related to this guarantee that totaled $1.4 million on the date of the
transaction. The Company recognized a gain on the disposition of $2.6 million,
which was recorded in the three months ended September 30, 2003. Baltcom TV Transaction On August 1, 2003, the Company sold all of its interest in the Latvian
cable television company Baltcom TV (Baltcom) to the Latvian company SIA
Alina (Alina) for cash consideration of $14.5 million. Alina was the owner of
45% of Baltcom prior to the transaction. The Company recognized a gain of $9.3
million on the disposition, which was recorded in the three months ended
September 30, 2003. Financial Information The following tables represent summary financial information for the
Companys operating unconsolidated business ventures, including those disposed,
up to the date of disposition, being grouped as indicated as of and for the
three and six months ended June 30, 2004 and 2003. The results of operations
presented below are before the elimination of intercompany interest (in
thousands): Three months ended June 30, 2004Wireless
    
    CableTelephony
    
    Television
    
    TotalRevenues
    
    $
    23,070
    
    
    $
    
    
    
    $
    23,070Cost of services
    
    
    2,865
    
    
    
    
    
    
    
    2,865Selling, general and administrative
    
    
    2,495
    
    
    
    
    
    
    
    2,495Depreciation and amortization
    
    
    3,222
    
    
    
    
    
    
    
    3,222Operating income
    
    
    14,488
    
    
    
    
    
    
    
    14,488Interest and other income (expense), net
    
    
    1,102
    
    
    
    
    
    
    
    1,102Income tax expense
    
    
    (3,747
    )
    
    
    
    
    
    
    (3,747
    )Net income
    
    $
    11,843
    
    
    $
    
    
    
    $
    11,843Capital expenditures
    
    $
    3,407
    
    
    $
    
    
    
    $
    3,407Equity in income of unconsolidated investees
    
    $
    5,804
    
    
    $
    
    
    
    $
    5,804
 16




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##### Table of Contents



Three months ended June 30, 2003Fixed
    
    Wireless
    
    CableTelephony
    
    Telephony
    
    Television
    
    TotalRevenues
    
    $
    4,657
    
    
    $
    17,791
    
    
    $
    2,931
    
    
    $
    25,379Cost of services
    
    
    2,976
    
    
    
    2,820
    
    
    
    513
    
    
    
    6,309Selling, general and administrative
    
    
    919
    
    
    
    2,497
    
    
    
    1,604
    
    
    
    5,020Depreciation and amortization
    
    
    516
    
    
    
    3,547
    
    
    
    516
    
    
    
    4,579Operating income
    
    
    246
    
    
    
    8,927
    
    
    
    298
    
    
    
    9,471Interest and other (expense) income, net
    
    
    (209
    )
    
    
    (69
    )
    
    
    497
    
    
    
    219Income tax expense
    
    
    
    
    
    
    (2,019
    )
    
    
    (312
    )
    
    
    (2,331
    )Net income
    
    $
    37
    
    
    $
    6,839
    
    
    $
    483
    
    
    $
    7,359Capital expenditures
    
    $
    1,415
    
    
    $
    9,310
    
    
    $
    646
    
    
    $
    11,371Equity in (losses) income of unconsolidated investees
    
    $
    (74
    )
    
    $
    3,418
    
    
    $
    523
    
    
    $
    3,867
 Six months ended June 30, 2004Wireless
    
    CableTelephony
    

    Television
    
    TotalRevenues
    
    $
    43,921
    
    
    $
    665
    
    
    $
    44,586Cost of services
    
    
    5,631
    
    
    
    111
    
    
    
    5,742Selling, general and administrative
    
    
    5,039
    
    
    
    278
    
    
    
    5,317Depreciation and amortization
    
    
    7,077
    
    
    
    98
    
    
    
    7,175Operating income
    
    
    26,174
    
    
    
    178
    
    
    
    26,352Interest and other (expense) income, net
    
    
    607
    
    
    
    (57
    )
    
    
    550Income tax expense
    
    
    (6,427
    )
    
    
    
    
    
    
    (6,427
    )Net income
    
    $
    20,354
    
    
    $
    121
    
    
    $
    20,475Capital expenditures
    
    $
    5,925
    
    
    $
    261
    
    
    $
    6,186Equity in income of unconsolidated investees
    
    $
    9,974
    
    
    $
    
    
    
    $
    9,974
 Six months ended June 30, 2003Fixed
    
    Wireless
    
    CableTelephony
    
    Telephony
    
    Television
    
    TotalRevenues
    
    $
    25,270
    
    
    $
    33,178
    
    
    $
    7,656
    
    
    $
    66,104Cost of services
    
    
    12,807
    
    
    
    5,128
    
    
    
    1,483
    
    
    
    19,418Selling, general and administrative
    
    
    6,814
    
    
    
    4,241
    
    
    
    4,208
    
    
    
    15,263Depreciation and amortization
    
    
    4,414
    
    
    
    7,121
    
    
    
    1,883
    
    
    
    13,418Operating income (loss)
    
    
    1,235
    
    
    
    16,688
    
    
    
    82
    
    
    
    18,005Interest and other (expense) income, net
    
    
    (1,123
    )
    
    
    (1,564
    )
    
    
    1,731
    
    
    
    (956
    )Income tax expense
    
    
    (990
    )
    
    
    (4,227
    )
    
    
    (352
    )
    
    
    (5,569
    )Net (loss) income
    
    $
    (878
    )
    
    $
    10,897
    
    
    $
    1,461
    
    
    $
    11,480Capital expenditures
    
    $
    1,798
    
    
    $
    12,215
    
    
    $
    1,088
    
    
    $
    15,101Equity in (losses) income of unconsolidated investees
    
    $
    (468
    )
    
    $
    5,529
    
    
    $
    1,798
    
    
    $
    6,859
 17




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##### Table of Contents



The summarized combined balance sheets of Magticom and Ayety as of June
30, 2004 and the summarized balance sheet of Magticom as of December 31, 2003
are as follows (in thousands): Balance Sheets June 30,
    
    December 31,2004
    
    2003Assets:Cash
    
    $
    13,634
    
    
    $
    17,858Accounts receivable, net
    
    
    2,976
    
    
    
    1,303Other current assets
    
    
    1,765
    
    
    
    771Property and equipment, net
    
    
    61,246
    
    
    
    57,256Other long-lived assets
    
    
    1,585
    
    
    
    1,340Total assets
    
    $
    81,206
    
    
    $
    78,528Liabilities and business ventures equity:Accounts payable
    
    $
    2,019
    
    
    $
    696Accrued expenses and other liabilities
    
    
    9,150
    
    
    
    8,414Other long-term liabilities
    
    
    271
    
    
    
    651Intercompany obligations
    
    
    16,153
    
    
    
    Total liabilities
    
    
    27,593
    
    
    
    9,761Common stock and retained earnings
    
    
    52,771
    
    
    
    71,937Accumulated other comprehensive income (loss)
    
    
    842
    
    
    
    (3,170
    )Business ventures equity
    
    
    53,613
    
    
    
    68,767Total liabilities and business ventures equity
    
    $
    81,206
    
    
    $
    78,528
 6. Long-term Debt 101⁄2% Senior Notes In September 1999, the Company entered into a trust agreement to issue the
Senior Notes in the face amount of $210.6 million. The Senior Notes are
unsecured but rank senior to all existing and future subordinated indebtedness
of the Company. The Senior Notes are not subject to sinking fund requirements
and are redeemable at the Companys option at any time. The principal is due,
in its entirety, in September 2007. The Senior Notes bear interest at a rate of
101⁄2% per annum, payable semiannually. Under the terms of the indenture governing the Senior Notes, the Company
and certain of its subsidiaries are subject to certain covenants pertaining to
its financing activities. Such covenants restrict the Company and certain of
its subsidiaries from paying dividends, acquiring its capital stock, prepaying
subordinated indebtedness, investing in and selling assets and subsidiary
stock, and incurring additional indebtedness, among other activities. In
addition, upon the occurrence of a change of control (as defined) of the
Company, the holders of the Senior Notes have the right to require the Company
to repurchase all or any part of the Senior Notes at a cash purchase price of
101% of the face value of the Senior Notes plus accrued interest as of the date
of repurchase. On April 24, 2003, the Company completed an exchange with Adamant of its
ownership interest in certain of its business units in Russia for, among other
things, approximately $58.6 million face value of Senior Notes held by Adamant,
$5.0 million in cash and a release of its $3.5 million obligation to pay
interest accrued on the Senior Notes being exchanged. With the completion of
this transaction, the outstanding principal balance on the Senior Notes was
reduced to $152.0 million. 7. Stockholders Equity Common Stock On September 24, 2003, the Companys equity securities were removed from
quotation on the OTC Bulletin Board trading system (OTCBB) because the
Company was not then in compliance with NASD Rule 6530. As a result, the
Companys common stock (Common Stock) and Preferred Stock were then quoted on
the Pink Sheets. The Company filed its March 31, 2004 Form 10-Q on June 18, 2004, thus
regaining compliance with OTCBB trading eligibility requirements. On August 6,
2004, the Common Stock (OTCBB: MTRM.OB) began trading on the OTC Bulletin
Board. The Preferred Stock (OTCPK: MTRMP) remains quoted on the Pink Sheets. 18




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##### Table of Contents



Preferred Stock There are 70.0 million authorized shares of preferred stock of the Company
of which 4.1 million shares have been issued and designated as Preferred Stock
with a liquidation preference of $50.00 per share, all of which were
outstanding as of June 30, 2004 and December 31, 2003. Dividends on the Preferred Stock are cumulative from the date of issuance
and payable quarterly, in arrears. The Company may make any payments due on the
Preferred Stock, including dividend payments and redemptions, (i) in cash; (ii)
through issuance of the Companys common stock or (iii) through a combination
thereof. Through March 15, 2001, the Company paid its quarterly dividends in cash.
The Company has elected not to declare a dividend for any quarterly dividend
periods ending after June 15, 2001. As of June 30, 2004, total dividends in
arrears are $55.1 million. The dividend requirement for the twelve months
ending June 30, 2005 will be $19.5 million, inclusive of the effects of
compounding and assuming no payments of the dividends. The Preferred Stock is redeemable at any time, in whole or in part, at the
discretion of the Company, initially at a price of $52.5375 per share in the
year 2000 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 as of
the redemption date. As of June 30, 2004, the Company has not redeemed any of
the Preferred Stock. The Preferred Stock is not subject to any sinking fund
provisions. The Preferred Stock is convertible at any time at the option of the
holders into shares of Common Stock of the Company. The rate used to determine
the number of shares of Common Stock is a function of the liquidation
preference, any accrued and unpaid dividends and the initial conversion price
of $15.00. As of June 30, 2004, no shares of Preferred Stock have been
converted into shares of Common Stock. In the event of any voluntary or
involuntary dissolution, liquidation or winding up of the Company, the holders
of the Preferred Stock will be entitled to be paid out of the Companys assets
available for distribution to its stockholders, before any payment or
distribution is made to the holders of Common Stock or other class of stock
subordinated to the Preferred Stock. The holders of the Preferred Stock are
entitled to receive a liquidation preference in the amount of $50.00 per share,
plus all accrued and unpaid dividends, or a pro rata share of the full amounts
to which the holders of the Preferred Stock are entitled in the event the
liquidation preference cannot be paid in full. Except as described below, the
holders of the Preferred Stock have no voting rights. In June 2004, the Company entered into the Board of Director Nominee
Agreement with certain holders of the Preferred Stock who represented to the
Company that they held discretionary authority (including the power to vote)
with regard to 2.4 million shares or approximately 58% of the outstanding 4.1
million shares of Preferred Stock. Under the terms of the Board of Director
Nominee Agreement, the Participating Preferred Stock Holders irrevocably waived
the right to request a special meeting of holders of Preferred Stock to elect
directors or take any action to request such a meeting until immediately after
the next annual meeting of the Companys stockholders is held. In
consideration of this waiver, Messrs. Gale and Henderson, who were identified
by the Participating Preferred Stock Holders as director candidates, were
elected as Class III Directors by the Companys Board of Directors. Their
terms will expire at the Companys next annual meeting of stockholders. At the
next annual meeting, the holders of Preferred Stock will have the right to vote
separately as a class for the election of two directors. It is expected that
Messrs. Gale and Henderson will be nominated for election by the holders of
Preferred Stock to fill these two directorships. The execution of the Board of Director Nominee Agreement was the result of
several discussions, which began in late 2003, that the Company had with
several holders of the Companys Preferred Stock. According to the terms of
the Preferred Stock, in the event the Company did not make six (6) consecutive
dividend payments on the Preferred Stock, holders of 25% of the voting power of
the outstanding Preferred Stock became entitled to compel the Company to call a
special meeting of the holders of the Preferred Stock for the purpose of
electing two new directors. The Company believes that the Board of Director
Nominee Agreement was advantageous to the Company because it eliminated the
need to hold a special meeting, which would have been both time consuming and
expensive. 8. Employee Benefit Plans The Company has two principal qualified retirement plans in the United
States. These plans covered certain former employees of the Company or one of
its subsidiaries. The Plan covering Company personnel was amended effective
December 31, 1995 and such benefits were frozen as of that date. The Plan
covering the former subsidiaries personnel was amended effective December 31,
2002 and such benefits were frozen as of that date. Both plans are
noncontributory defined benefit pension plans under which pension benefits are
calculated based on years of service and participants compensation. The Companys policy has been to make, at a minimum, annual cash
contributions to the defined benefit pension plans equal to an actuarially
determined amount consistent with federal tax regulations. However, the Company
may from time to time make contributions beyond those legally required. In
2004, the Company currently expects to contribute $1.0 million to the defined
benefit plans. The Companys funding objective has been to accumulate funds at
a relatively stable rate over the participants working lives so benefits are
fully funded at retirement. 19




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##### Table of Contents



The Company also maintains an unqualified, unfunded supplemental
retirement plan for certain former executives based in the U.S. The plan is a
noncontributory defined benefit pension plan under which pension benefits are
calculated based on a formula incorporating years of service and participants
compensation. In addition, the Company also maintains an unfunded group medical
plan and provides life insurance coverage for certain former employees
subsequent to retirement. In 2004, the Company expects to contribute $0.4
million to these aforementioned unfunded benefit plans. Components of net periodic benefit costs are as follows (in thousands): Defined Pension Benefits
    
    Other BenefitsFor the six months ended
    
    For the six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Interest cost on benefit obligations
    
    $
    557
    
    
    $
    566
    
    
    $
    109
    
    
    $

    116Expected return on plan assets
    
    
    (552
    )
    
    
    (491
    )
    
    
    
    
    
    
    Recognized net actuarial loss
    
    
    108
    
    
    
    137
    
    
    
    23
    
    
    
    23Amortization of transition costs
    
    
    (42
    )
    
    
    (42
    )
    
    
    
    
    
    
    Total
    
    $
    71
    
    
    $
    170
    
    
    $
    132
    
    
    $
    139
 The components of net periodic benefit costs for the three months ended
June 30, 2004 and 2003 are approximately one-half of the amounts presented for
the respective six-month period. 9. Earnings Per Common Share Basic earnings per common share (EPS) is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock. The weighted average number of common
shares outstanding for computing basic and diluted EPS was 94.0 million for
each of the periods ended June 30, 2004 and 2003. For the periods ended June
30, 2004 and 2003, 21.2 million and 21.9 million shares, respectively,
attributable to the exercise of outstanding options, warrants and convertible
preferred stock were excluded from the calculation of diluted EPS because the
effect was antidilutive. No adjustments were made to reported net income (loss)
in the computation of EPS. 10. Business Segment Data The Company evaluates the performance of its operating segments based on
operating income and earnings before taxes and minority
interests. Equity in income (losses) of unconsolidated investees reflects
elimination of intercompany interest expense and management fees. The Company has continuing operations in Northwest Russia and the Republic
of Georgia. The Companys reporting segments are comprised of (i) fixed
telephony, (ii) wireless telephony and (iii) cable television. Consolidated fixed telephony is comprised of PeterStar. On October 1,
2003, PeterStar acquired the ownership rights of Baltic Communications Ltd.
(BCL) and prior to such date, BCL was an indirect wholly owned subsidiary of
the Company. Unconsolidated wireless telephony is principally comprised of Magticom. Consolidated cable television is comprised of Ayety. In addition to these business segments, the Company has other operating
activities that are carried out in business ventures which are considered
discontinued components (See Note 3, Discontinued Business Components).
Further, the Company had other unconsolidated activities that were carried out
in business ventures which were disposed of during 2004 and 2003 (See Note 5,
Investments in and Advances to Business Ventures). 20




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##### Table of Contents



The Companys segment information is set forth for the three and six
months ended June 30, 2004 and 2003 in the following tables (in thousands): Three months ended June 30, 2004Corporate, OtherFixed
    
    Wireless
    
    Cable
    
    AndTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    18,604
    
    
    $
    
    
    
    $
    708
    
    
    $
    
    
    
    $
    19,312Cost of services
    
    
    5,718
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    5,741Selling, general and administrative
    
    
    4,440
    
    
    
    
    
    
    
    661
    
    
    
    3,225
    
    
    
    8,326Depreciation and amortization
    
    
    5,875
    
    
    
    
    
    
    
    110
    
    
    
    19
    
    
    
    6,004Operating income (loss)
    
    
    2,571
    
    
    
    
    
    
    
    (86
    )
    
    
    (3,244
    )
    
    
    (759
    )Other income (expense):Equity in (losses) income of unconsolidated
investees
    
    
    
    
    
    
    5,804
    
    
    
    
    
    
    
    
    
    
    
    5,804Interest income (expense), net
    
    
    46
    
    
    
    
    
    
    
    (232
    )
    
    
    (3,674
    )
    
    
    (3,860
    )Foreign currency gain (loss)
    
    
    493
    
    
    
    
    
    
    
    19
    
    
    
    (8
    )
    
    
    504Other income (expense)
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    91Income (loss) before income tax expense, minority
interest, discontinued components and the
cumulative effect of a change in accounting
principle
    
    $
    3,222
    
    
    $
    5,804
    
    
    $
    (299
    )
    
    $
    (6,947
    )
    
    $
    1,780
 Three months ended June 30, 2003Corporate, OtherFixed
    
    Wireless
    
    Cable
    
    AndTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    17,183
    
    
    $
    
    
    
    $
    619
    
    
    $
    
    
    
    $
    17,802Cost of services
    
    
    5,781
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    5,787Selling, general and administrative
    
    
    3,267
    
    
    
    
    
    
    
    380
    
    
    
    7,485
    
    
    
    11,132Depreciation and amortization
    
    
    4,948
    
    
    
    
    
    
    
    223
    
    
    
    1
    
    
    
    5,172Operating income (loss)
    
    
    3,187
    
    
    
    
    
    
    
    10
    
    
    
    (7,486
    )
    
    
    (4,289
    )Other income (expense):Equity in (losses) income of unconsolidated
investees
    
    
    (74
    )
    
    
    3,418
    
    
    
    523
    
    
    
    
    
    
    
    3,867Interest income (expense), net
    
    
    173
    
    
    
    
    
    
    
    (277
    )
    
    
    (4,105
    )
    
    
    (4,209
    )Gain on retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,117
    
    
    
    24,117Foreign currency (loss) gain
    
    
    (85
    )
    
    
    
    
    
    
    55
    
    
    
    40
    
    
    
    10Other (expense) income
    
    
    (270
    )
    
    
    
    
    
    
    
    
    
    
    733
    
    
    
    463Income before income tax expense, minority
interest, discontinued components and the
cumulative effect of a change in accounting
principle
    
    $
    2,931
    
    
    $
    3,418
    
    
    $
    311
    
    
    $
    13,299
    
    
    $
    19,959
 21




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##### Table of Contents



Six months ended June 30, 2004Corporate, OtherFixed
    
    Wireless
    
    Cable
    
    AndTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    36,504
    
    
    $
    
    
    
    $
    1,371
    
    
    $
    
    
    
    $
    37,875Cost of services
    
    
    11,700
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    11,745Selling, general and administrative
    
    
    8,102
    
    
    
    
    
    
    
    1,211
    
    
    
    6,301
    
    
    
    15,614Depreciation and amortization
    
    
    11,439
    
    
    
    
    
    
    
    213
    
    
    
    37
    
    
    
    11,689Operating income (loss)
    
    
    5,263
    
    
    
    
    
    
    
    (98
    )
    
    
    (6,338
    )
    
    
    (1,173
    )Other income (expense):Equity in income of unconsolidated
investees
    
    
    
    
    
    
    9,974
    
    
    
    
    
    
    
    
    
    
    
    9,974Interest expense, net
    
    
    (36
    )
    
    
    
    
    
    
    (460
    )
    
    
    (7,380
    )
    
    
    (7,876
    )Foreign currency (loss) gain
    
    
    (103
    )
    
    
    
    
    
    
    34
    
    
    
    (4
    )
    
    
    (73
    )Other (expense) income
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )Income (loss) before income tax expense, minority
interest, discontinued components and the
cumulative effect of a change in accounting
principle
    
    $
    5,090
    
    
    $
    9,974
    
    
    $
    (524
    )
    
    $
    (13,722
    )
    
    $
    818
 Six months ended June 30, 2003Corporate, OtherFixed
    
    Wireless
    
    Cable
    
    AndTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    33,133
    
    
    $
    
    
    
    $
    1,323
    
    
    $
    
    
    
    $
    34,456Cost of services
    
    
    10,743
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    10,766Selling, general and administrative
    
    
    6,928
    
    
    
    
    
    
    
    898
    
    
    
    17,399
    
    
    
    25,225Depreciation and amortization
    
    
    9,818
    
    
    
    
    
    
    
    298
    
    
    
    99
    
    
    
    10,215Operating income (loss)
    
    
    5,644
    
    
    
    
    
    
    
    104
    
    
    
    (17,498
    )
    
    
    (11,750
    )Other income (expense):Equity in income of unconsolidated
investees
    
    
    (468
    )
    
    
    5,529
    
    
    
    1,798
    
    
    
    
    
    
    
    6,859Interest (expense) income, net
    
    
    81
    
    
    
    
    
    
    
    (476
    )
    
    
    (9,302
    )
    
    
    (9,697
    )Gain on retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,117
    
    
    
    24,117Foreign currency (loss) gain
    
    
    (361
    )
    
    
    
    
    
    
    35
    
    
    
    (78
    )
    
    
    (404
    )Other expense
    
    
    (277
    )
    
    
    
    
    
    
    
    
    
    
    216
    
    
    
    (61
    )Income (loss) before income tax expense,
minority interest, discontinued components
and the cumulative effect of a change in
accounting principle
    
    $
    4,619
    
    
    $
    5,529
    
    
    $
    1,461
    
    
    $
    (2,545
    )
    
    $
    9,064
 22




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##### Table of Contents



Information about the Companys continuing operations by geographic
location is as follows (in thousands): RevenuesFor the six months ended June 30
    
    AssetsCountry/Region
    
    2004
    
    2003
    
    June 30, 2004
    
    December 31, 2003Russia
    
    $
    36,504
    
    
    $
    33,133
    
    
    $
    136,044
    
    
    $
    127,033Georgia
    
    
    1,371
    
    
    
    1,323
    
    
    
    35,220
    
    
    
    35,669$
    37,875
    
    
    $
    34,456
    
    
    $
    171,264
    
    
    $
    162,702
 The
Company has cash of $30.7 million, other assets and minimal fixed assets at its
corporate headquarters in the United States. 11. Other Consolidated Condensed Financial Statement Information Accounts Receivable The total allowance for doubtful accounts at June 30, 2004 and December
31, 2003 was $2.0 million. Intangible Assets Intangible assets, other than goodwill, at June 30, 2004 and December 31,
2003 consist of the following (in thousands): 2004
    
    2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    Amortization
    
    Carrying Value
    
    Cost
    
    Amortization
    
    Carrying ValueLicenses
    
    $
    37,084
    
    
    $
    (34,062
    )
    
    $
    3,022
    
    
    $
    36,755
    
    
    $
    (30,235
    )
    
    $
    6,520Assets not subject to amortization:Numbering capacity
    
    
    1,325
    
    
    
    
    
    
    
    1,325
    
    
    
    1,325
    
    
    
    
    
    
    
    1,325$
    38,409
    
    
    $
    (34,062
    )
    
    $
    4,347
    
    
    $
    38,080
    
    
    $
    (30,235
    )
    
    $
    7,845
 Estimated amortization expense is expected to be $3.0 million for the
remainder of 2004 and insignificant thereafter. The change in the carrying value of goodwill of $0.3 million from December
31, 2003 to June 30, 2004 is principally due to foreign currency fluctuations
during the period. Accrued Expenses Accrued expenses at June 30, 2004 and December 31, 2003 consist of the
following (in thousands): 2004
    
    2003Accrued interest
    
    $
    3,991
    
    
    $
    3,991Self-insurance reserves
    
    
    3,014
    
    
    
    3,149Deferred revenue
    
    
    2,856
    
    
    
    2,874Accrued franchise and other taxes
    
    
    2,971
    
    
    
    3,322Accrued professional fees
    
    
    2,481
    
    
    
    4,598Accrued pension and personnel costs
    
    
    1,425
    
    
    
    2,802Other accrued expenses
    
    
    3,735
    
    
    
    3,205$
    20,473
    
    
    $
    23,941
 Other Long-Term Liabilities Other long-term liabilities at June 30, 2004 and December 31, 2003 consist
of the following (in thousands): 2004
    
    2003Pensions
    
    $
    6,044
    
    
    $
    6,204Deferred revenue
    
    
    1,446
    
    
    
    1,428$
    7,490
    
    
    $
    7,632
 23




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##### Table of Contents



Accumulated Other Comprehensive Loss The accumulated balances for each classification of comprehensive loss are
as follows: Foreign Currency
    
    Minimum
    
    OtherTranslation
    
    Pension
    
    ComprehensiveAdjustments
    
    Liability
    
    Loss2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Balances at January 1
    
    $
    5,619
    
    
    $
    5,042
    
    
    $
    7,442
    
    
    $
    6,906
    
    
    $
    13,061
    
    
    $
    11,948Adjustment
recognized due to changes in functional currency at subsidiaries
    
    
    
    
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,250Realized gains/(losses) as a result of dispositions
    
    
    23
    
    
    
    (377
    )
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    (377
    )Net period change
    
    
    (2,027
    )
    
    
    1,228
    
    
    
    
    
    
    
    
    
    
    
    (2,027
    )
    
    
    1,228Balances at June 30
    
    $
    3,615
    
    
    $
    7,143
    
    
    $
    7,442
    
    
    $
    6,906
    
    
    $
    11,057
    
    
    $
    14,049
 Supplemental Disclosure of Cash Flow Information Supplemental disclosure of cash flow information for the six months ended
June 30, 2004 and 2003 (in thousands): 2004
    
    2003Cash paid during the six months for:Interest
    
    $
    8,073
    
    
    $
    8,320Income taxes
    
    $
    3,731
    
    
    $
    1,819
 12. Commitments and Contingencies Risks Associated with the Companys Investments The ability of the Company and its business ventures to establish and
maintain profitable operations is subject to, among other things, significant
political, economic and social risks inherent in doing business in Russia and
the Republic of Georgia. These include matters arising out of government
policies, economic conditions, imposition of or changes in government
regulations or policies, imposition of or changes to taxes or other similar
charges by government bodies, exchange rate fluctuations and controls, civil
disturbances, deprivation or unenforceability of contractual rights, and taking
of property without fair compensation. Escrowed Severance As a condition of the settlement for the disposal of Snappers assets and
the termination of its employees, the Company was required to escrow monies
owed to former employees under severance arrangements. Such amounts outstanding
totaled $1.0 million as of December 31, 2003. During the six months ended June
30, 2004, the Company settled the remaining severance obligations with the
former employees at a discount, which resulted in the Company receiving $0.3
million of excess escrowed cash from the escrow agent. Campbell Litigation On March 31, 2003, Mr. James Campbell filed a complaint in the Circuit
Court of Walker County, Alabama against Turtle Shell, Inc., formerly known as
Snapper, Inc. (a wholly owned subsidiary of the Company) for damages related to
injuries allegedly sustained by him while operating a Snapper lawnmower. In
November 2002, the Company disposed of all assets and most liabilities of
Snapper, Inc. but retained certain liabilities, including any obligations that
may arise out of this litigation. Mr. Campbell died on July 14, 2003. In light
of Mr. Campbells death, his complaint was amended to include a wrongful death
claim and a claim of damages for any pain and suffering incurred by Mr.
Campbell from the time of injury until death. Mr. Campbells estate was
substituted as the plaintiff in this action. Also named as a defendant in this
case is Briggs & Stratton, the Company that manufactured the engine of the
lawnmower. As more fully described in Note 15, Subsequent Events  Litigation
Settlement  Campbell Litigation, this matter was settled subsequent to June 30, 2004. A complaint was filed against the Company in the Court of Chancery of the
State of Delaware. In the complaint Mr. McLaughlin, the plaintiff, is seeking
to enforce his rights as a shareholder of the Company to inspect and copy
certain books and records of the Company. The Company believes that the request
made by the plaintiff is overly broad and lacks proper purpose and is preparing
to defend its position in court. However, in order to minimize costs of a
potential trial, the Company has entered into discussions with the plaintiff
regarding the nature of information sought by him and has provided certain
requested documents as appropriate. No trial has 24




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##### Table of Contents



been scheduled in this case. The Company is not in a position to predict the
outcome of any such proceedings, or the extent to which they could adversely
affect the Companys financial condition and results of operations. The Company is involved in other various legal and regulatory proceedings.
While the results of any litigation or regulatory issue contain an element of
uncertainty, management believes that the outcome of any of these known,
pending or threatened legal proceedings will not have a material effect on the
Companys consolidated financial position and results of operations, except as
noted above. Georgian Matters As previously disclosed, the Company has received letters from, and
corresponded with, two Georgian individuals involved in the initial formation
of certain of the Companys business ventures in the Republic of Georgia.
These individuals alleged that the Company had not fully complied with its
obligations to them under certain contracts. In addition, the individuals
alleged that Company personnel may have violated the Foreign Corrupt Practices
Act and possibly engaged in other improper or illegal conduct. An investigation
of these allegations conducted by the Companys outside counsel failed to
uncover any specific factual support for any of the allegations of illegal or
improper conduct. The Company determined that allegations of contractual
breach by one of the individuals had no merit and it has bought out the
contract of the second individual. Pension Benefit Guaranty Corporation In the second quarter of 2004, the Company engaged in discussions with the
Pension Benefit Guaranty Corporation regarding the Companys June 23, 2003
notice to them that highlighted i) that the Company may have historically
failed to timely satisfy certain minimum funding requirements with respect to
one plan, (ii) that the sale of corporate assets by a subsidiary of the Company
may have triggered certain PBGC reporting, bonding and/or escrow requirements
with respect to a second plan, (iii) that the Company had recently added extra
contributions to one plan, and (iv) that the Company believes that there are no
further corrective actions required with respect to either plan. As more fully
described in Note 15, Subsequent Events  Litigation Settlement Pension
Benefit Guaranty Corporation, this matter was settled subsequent to June 30,
2004. 13. Related Party Transactions Metromedia Company, the Companys largest shareholder, provides certain
consulting services to the Company on an hourly basis as requested by the
Company in the areas of tax, legal and investor relations pursuant to a
Consulting Services Agreement (the CSA). For the six months ended June 30,
2004 and 2003, the Company paid Metromedia Company consulting fees of $0.2
million pursuant to the CSA. A significant portion of the consulting fees paid
to Metromedia Company in the first half of 2004 and 2003 is principally related
to tax consulting related services with the remainder for executive managerial,
legal and other services. The Company anticipates future payments to
Metromedia Company will be principally related to executive managerial
services, since Metromedia Company ceased providing significant tax consulting
services to the Company in May 2004. Services provided by Metromedia Company pursuant to the CSA have been
provided as requested by the Company and have been invoiced to the Company at
agreed-upon hourly rates. There is no minimum required level of services. The
Company is also obligated to reimburse Metromedia Company for all of its
out-of-pocket costs and expenses incurred and advances paid by Metromedia
Company in connection with services performed by it under the CSA. Pursuant to
the CSA, the Company agreed to indemnify and hold Metromedia Company harmless
from and against any and all damages, liabilities, losses, claims, actions,
suits, proceedings, fees, costs or expenses (including reasonable attorneys
fees and other costs and expenses incident to any suit, proceeding or
investigation of any kind) imposed on, incurred by or asserted against
Metromedia Company in connection with the agreement, other than those in any
way relating to or resulting from the gross negligence or willful misconduct of
Metromedia Company, its employees, consultants or other representatives. The
CSA continues in effect unless and until Metromedia Company or the Company
provided written notice of termination to the other party, whereupon the CSA
will terminate immediately. 14. Acquisitions and Other Transactions PeterStar Acquisitions On April 27, 2004, PeterStar completed the acquisition of 80% of the
outstanding shares of Pskov City Telephone Network (PGTS), an incumbent local
exchange carrier in Northwest Russia, and 89% of the shares of Pskovinterkom, a
smaller local exchange carrier in Pskov and a sister company of PGTS. The Pskov
district is located in the Northwest region of Russia and borders the Baltic
States and Belarus. Total consideration for the transactions was $4.1 million, which was fully
financed by cash available at PeterStar. PeterStar purchased the remaining 11%
of the shares of Pskovinterkom subsequent to June 30, 2004 for nominal
consideration. Based on a preliminary analysis of the fair value of the net assets acquired,
no goodwill has been recognized in respect of the acquisitions. The Company is
currently in the process of analyzing the preliminary assigned fair values. The two companies contributed revenues of $0.6 million and incurred a net
loss of $0.2 million for the six months ended June 30, 2004. 25




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##### Table of Contents



Magticom Activity On February 20, 2004, Dr. George Jokhtaberidze, co-founder and majority
owner of Magticom and son-in-law of former Georgian president Shevardnadze, was
detained in the Republic of Georgia without any charges having been filed
against him. As reported by various media sources, Dr. Jokhtaberidze was being
held in connection with the continuing investigation of various tax-related
matters. On April 26, 2004, the Georgian Government investigations into past
business and tax payment practices of Magticom were completed with no adverse
findings. In addition, the prosecution by the Georgian Government of Dr.
Jokhtaberidze was dropped without finding any wrong-doing and Dr. Jokhtaberidze
was released from the investigative detention on April 26, 2004. The Company
believes that no further investigations or prosecutions of Magticom, Magticom
personnel or Dr. Jokhtaberidze with respect to past business or tax payment
practices will be undertaken by the Georgian Government. The Companys interest in Magticom is held through Telcell, a joint
venture with Western Wireless Corporation. The Company owns 70.41% of the
outstanding equity interest of Telcell through its wholly-owned subsidiary,
International Telcell Cellular, Inc. (ITC). On April 23, 2004, Magticom issued a dividend of $15.6 million. Telcell,
which was entitled to $6.9 million of this dividend, net of taxes, agreed to
loan this amount to Dr. Jokhtaberidze by redirecting its share of the dividend
distribution to him. As security for the loan, Dr. Jokhtaberidze has assigned
to Telcell his right to receive future dividends from Magticom until the loan,
which matures on December 31, 2004, is paid in full. This loan is reflected as
a Note receivable on the consolidated balance sheet as of June 30, 2004.
Magticom expects to pay dividends during the remainder of 2004 in an amount
necessary to make this repayment. However, as described more fully below, the
expectation is that this loan will be repaid during the third quarter of 2004,
as part of a business transaction with Dr. Jokhtaberidze. The Company, the equity holders of Telcell, and Dr. Jokhtaberidze entered
into a binding memorandum of understanding, providing for, upon execution of
definitive documents and satisfaction of certain conditions, Dr. Jokhtaberidze
to convey his 51% interest in Magticom to ITC in exchange for a 49.9% interest
in ITC plus certain cash consideration. The Company will retain the remaining
50.1% majority ownership of ITC. After completion of all transactions
contemplated by this memorandum of understanding, which is currently
contemplated to take place by the end of the third quarter of 2004, the Company
will have the largest effective ownership interest in Magticom at 42.8% and
will be able to exert operational control over Magticom as a result of its
status as managing member of Telcell and majority stockholder of ITC. A portion
of Dr. Jokhtaberidzes cash proceeds from these transactions will be used to
repay the aforementioned loan, with $4.8 million of this repayment being
distributed to the Company in consequence of its current 70.41% ownership
interest in Telcell. On May 1, 2004, ITC entered into a memorandum of understanding with the
Georgian Government (the MOU) providing for issuance by ITC of an assignable
option (the Option) to purchase a 20% ownership interest in Magticom from ITC
after completion of the restructuring of Dr. Jokhtaberidzes ownership interest
in Magticom as discussed above. The Georgian Government is prohibited from directly exercising the Option,
but may assign the Option to certain qualified European Union or American
entities, as defined in the MOU (a Qualified Holder), provided that the
transfer of the Option to a Qualified Holder which directly or indirectly owns
or controls or is controlled by or is under common control with any
telecommunications business in the Republic of Georgia is subject to approval
by ITC at its sole discretion. Furthermore, no Qualified Holder is permitted to
transfer the Option. The exercise price of the Option is based on a formula
that is calculated by using twenty percent of the product of Magticoms
earnings before income taxes, depreciation and amortization (EBITDA) for the
four most recently ended fiscal quarters prior to the date of the exercise of
the Option multiplied by 2.5. Any entity that exercises the Option will be
subject to certain transfer restrictions that encourage holding the acquired
20% Magticom ownership interest for a period of at least 3 years. The Option
will have a limited exercise period of 12 months from the date of issuance. If the Option is exercised, ITC will retain a 31% direct ownership in
Magticom and a 34.5% indirect ownership in Magticom through Telcell, and the
Companys aggregate ownership interest in Magticom will be 32.8%. Furthermore,
the Company would continue to have the largest effective ownership interest in
Magticom, at 32.8%, and will continue to be able to exert operational control
over Magticom as a result of its status as majority stockholder of ITC and
managing member of Telcell. 15. Subsequent Events Radio Group Transaction On July 8, 2004 the Company entered into an agreement to sell its
wholly-owned radio business unit, Metromedia International, Inc. (MII), to
Communicorp Group Limited (Communicorp) for an aggregate cash purchase price
of $14.3 million. The agreement also provides for an adjustment to the cash purchase price if the
consolidated net assets of MII, at closing, differ by more than two percent
(2%) from the projected amount that the Company had provided to Communicorp
(the Net Asset Adjustment Mechanism). At present, the Company does not
anticipate a significant change in the cash purchase price as a result of the
Net Asset Adjustment Mechanism. MII holds the Companys interests in seventeen of the Companys remaining
eighteen radio businesses, which operate in Bulgaria, the Czech Republic,
Estonia, Finland and Hungary. Communicorp will acquire the outstanding stock of
MII for payments of $0.5 million, which has already been received by the
Company, $13.0 million at closing and the remainder six (6) months after 26




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##### Table of Contents



closing. The agreement with Communicorp anticipates a closing in early
September 2004 subject to the satisfaction of certain closing conditions,
including confirmatory due diligence by Communicorp. Such due diligence is
related to the representations and warranties provided by the Company,
including but not limited to, the financial statements of MII (as presented by
the Company) failing to reflect unrecorded liabilities in excess of $3.0
million. In a limited number of circumstances, including in the event that
Communicorp identifies unrecorded liabilities in excess of $3.0 million prior
to closing, Communicorp will have the option to terminate the agreement and
receive repayment of the $0.5 million paid by it to the Company. PeterStar Acquisition On August 3, 2004, the Company announced that PeterStar entered into an
agreement permitting it to acquire 100% of the outstanding shares of
ASPOL-Diamant Murmansk (ADM-Murmansk), an alternative telephone operator in
the Murmansk region of Northwest Russia. Through its telephony network,
utilizing fiber-optic links and digital radio systems, ADM-Murmansk is among
the three largest alternative telephone operators in the Murmansk region,
focusing on the provision of voice, data and Internet services. The Murmansk
region is among Russias top regions with a very high Internet penetration
rate, ranking third just after Moscow and St. Petersburg, and borders Finland
and the Barents Sea (Arctic Ocean). PeterStar has entered into a binding share purchase agreement, subject
only to Russian regulatory approvals, and anticipates approval for the
completion of the transaction late in the third quarter of 2004, or shortly
thereafter. The aggregate cash consideration of $2.1 million will be financed
by cash available at PeterStar. Litigation Settlement Campbell Litigation On August 3, 2004, a settlement agreement was reached between the estate
of Mr. James Campbell, the Company and other co-defendants with respect to the
matter, described in Note 12, Commitments and Contingencies  Campbell Litigation.
All claims against the Company have been released. Pension Benefit Guaranty Corporation In a letter dated August 6, 2004, the Company was informed by the Pension
Benefit Guaranty Corporation that they do not intend to take any action with
respect to the matter addressed in the Companys June 23, 2003 notice to them,
as more fully described in Note 12, Commitments and Contingencies  Pension
Benefit Guaranty Corporation. 27




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MAGTICOM LIMITED 
 CONDENSED STATEMENTS OF INCOME
 (in thousands of US Dollars)
 (unaudited)
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Operating revenues:Service revenues
    
    $
    18,307
    
    
    $
    13,148
    
    
    $
    34,635
    
    
    $
    24,266Interconnect and other revenues
    
    
    4,763
    
    
    
    3,731
    
    
    
    9,286
    
    
    
    6,984Total operating revenues
    
    
    23,070
    
    
    
    16,879
    
    
    
    43,921
    
    
    
    31,250Operating expenses:Cost of services and connection costs
    
    
    2,865
    
    
    
    2,626
    
    
    
    5,631
    
    
    
    4,714Selling, general and administrative
    
    
    2,495
    
    
    
    2,155
    
    
    
    5,039
    
    
    
    3,668Depreciation and amortization
    
    
    3,222
    
    
    
    3,143
    
    
    
    7,077
    
    
    
    6,319Operating income
    
    
    14,488
    
    
    
    8,955
    
    
    
    26,174
    
    
    
    16,549Other income (expense):Interest income
    
    
    143
    
    
    
    1
    
    
    
    303
    
    
    
    81Foreign currency income (loss)
    
    
    956
    
    
    
    (40
    )
    
    
    197
    
    
    
    (89
    )Other income (expense)
    
    
    3
    
    
    
    (14
    )
    
    
    107
    
    
    
    (533
    )Income before income tax
    
    
    15,590
    
    
    
    8,902
    
    
    
    26,781
    
    
    
    16,008Income tax expense
    
    
    3,747
    
    
    
    1,166
    
    
    
    6,427
    
    
    
    3,345Net income
    
    $
    11,843
    
    
    $
    7,736
    
    
    $
    20,354
    
    
    $
    12,663
 See accompanying notes to unaudited condensed financial statements. 28




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MAGTICOM LIMITED 
 CONDENSED BALANCE SHEETS
 (in thousands of US Dollars)
 June 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,629
    
    
    $
    17,858Accounts receivable, net
    
    
    2,904
    
    
    
    1,303Inventory
    
    
    398
    
    
    
    117Prepaid expenses and other current assets
    
    
    1,366
    
    
    
    654Total current assets
    
    
    18,297
    
    
    
    19,932Property, plant and equipment, net
    
    
    60,292
    
    
    
    57,256Intangible assets, net
    
    
    1,585
    
    
    
    1,340Total assets
    
    $
    80,174
    
    
    $
    78,528LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,368
    
    
    $
    696Accrued and other current liabilities
    
    
    5,026
    
    
    
    4,636Dividends payable
    
    
    15,555
    
    
    
    Customer deposits and deferred revenue
    
    
    3,749
    
    
    
    3,778Total current liabilities
    
    
    25,698
    
    
    
    9,110Deferred revenue, less current portion
    
    
    271
    
    
    
    651Stockholders equity:Common stock
    
    
    3,064
    
    
    
    3,064Paid-in surplus
    
    
    2,446
    
    
    
    2,446Retained earnings
    
    
    47,893
    
    
    
    66,427Accumulated other comprehensive income (loss)
    
    
    802
    
    
    
    (3,170
    )Total stockholders equity
    
    
    54,205
    
    
    
    68,767Total liabilities and stockholders equity
    
    $
    80,174
    
    
    $
    78,528
 See accompanying notes to unaudited condensed financial statements 29




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MAGTICOM LIMITED 
 CONDENSED STATEMENTS OF CASH FLOWS
 (in thousands of US Dollars)
 (unaudited)
 Six months ended June 30,2004
    
    2003Operating activities:Net income
    
    $
    20,354
    
    
    $
    12,663Items not requiring cash outlays:Depreciation and amortization
    
    
    7,077
    
    
    
    6,319Deferred income tax credit
    
    
    (254
    )
    
    
    Provision for doubtful accounts
    
    
    11
    
    
    
    (311
    )Loss from disposition of equipment
    
    
    
    
    
    
    1,230Changes in:Accounts receivable
    
    
    (1,596
    )
    
    
    (300
    )Inventories
    
    
    (281
    )
    
    
    (85
    )Accounts payable
    
    
    715
    
    
    
    334Other assets and liabilities
    
    
    (997
    )
    
    
    (644
    )Cash provided by operating activities
    
    
    25,029
    
    
    
    19,206Cash used in investing activities  Additions
to property, plant and equipment and other
    
    
    (5,925
    )
    
    
    (12,215
    )Financing activities:Dividends paid
    
    
    (23,333
    )
    
    
    (1,361
    )Payments on loans payable to shareholder
    
    
    
    
    
    
    (10,926
    )Cash used in financing activities
    
    
    (23,333
    )
    
    
    (12,287
    )Net decrease in cash and cash equivalents
    
    
    (4,229
    )
    
    
    (5,296
    )Cash and cash equivalents at beginning of period
    
    
    17,858
    
    
    
    7,489Cash and cash equivalents at end of period
    
    $
    13,629
    
    
    $
    2,193
 See accompanying notes to unaudited condensed financial statements. 30




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MAGTICOM LIMITED 
 Condensed Statements of Stockholders Equity and Comprehensive (Loss) Income
 (in thousands of US Dollars, except share data)
 (unaudited)
 Common Stock
    
    
    
    
    
    
    
    
    
    AccumulatedNumber
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    Totalof
    
    
    
    
    
    Paid-in
    
    Retained
    
    Comprehensive
    
    Stockholders
    
    ComprehensiveShares
    
    Amount
    
    Surplus
    
    Earnings
    
    Income (Loss)
    
    Equity
    
    (Loss) IncomeBalances at January 1, 2003
    
    
    1,000
    
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    38,098
    
    
    $
    
    
    
    $
    43,608Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,663
    
    
    
    
    
    
    
    12,663
    
    
    $
    12,663Other comprehensive loss,
net of tax:Adjustment recognized due
to change in functional
currency
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,217
    )
    
    
    (4,217
    )
    
    
    (4,217
    )Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (254
    )
    
    
    (254
    )
    
    
    (254
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,192Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,830
    )
    
    
    
    
    
    
    (2,830
    )Balances at June 30, 2003
    
    
    1,000
    
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    47,931
    
    
    $
    (4,471
    )
    
    $
    48,970Balances at January 1, 2004
    
    
    1,000
    
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    66,427
    
    
    $
    (3,170
    )
    
    $
    68,767Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,354
    
    
    
    
    
    
    
    20,354
    
    
    $
    20,354Other comprehensive
income, net of tax:Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,972
    
    
    
    3,972
    
    
    
    3,972Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,326Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,888
    )
    
    
    
    
    
    
    (38,888
    )Balances at June 30, 2004
    
    
    1,000
    
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    47,893
    
    
    $
    802
    
    
    $
    54,205
 See accompanying notes to unaudited condensed financial statements. 31




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Magticom Limited 
 Notes to Unaudited Condensed Financial Statements 1. Description of Business and Basis of Presentation Description of the Business Magticom Limited (Magticom or the Company) owns and operates a Global
System for Mobile (GSM) telephone network in the Republic of Georgia, a
member of the Commonwealth of Independent States (CIS). The Company sells GSM
services to individuals and businesses in Georgia. The Company launched
commercial service on September 22, 1997. The Company was formed on February 12, 1996 as a limited liability
company. The Companys shareholders are Dr. George Jokhtaberidze, a Georgian
citizen, who owns a 51% interest, and Telcell Wireless L.L.C. (Telcell), a
company incorporated in the United States, which owns a 49% interest.
Metromedia International Group, Inc. (MIG) owns 100% of International Telcell
Cellular, Inc. (ITC), which is the managing member of Telcell with a 70.41%
ownership interest in Telcell. The remaining 29.59% ownership interest of
Telcell is indirectly owned by Western Wireless International, Inc. As more
fully described in Note 7, Related Party Transactions, Dr. George
Jokhtaberidze and MIGs ownership interest in Magticom is subject to a pending
restructuring. Basis of Presentation The accompanying interim condensed financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and
related footnotes included in MIGs Annual Report on Form 10-K for the year
ended December 31, 2003. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position of the Company as of June 30, 2004, and the results of
its operations for the three and six-month periods ended June 30, 2004 and 2003
and its cash flows for the six-month periods ended June 30, 2004 and 2003, have
been included. The results of operations for the interim period are not
necessarily indicative of the results that may be realized for the full year. Certain reclassifications have been made to prior periods financial
information to conform to current period presentation. 2. Summary of Significant Accounting Policies Foreign Currency Translation The currency of the Republic of Georgia is the Georgian Lari (GEL). The
GEL is not a convertible currency outside the Republic of Georgia and,
accordingly, any conversion of GEL amounts to US dollars should not be
construed as a representation that GEL amounts could be in the future converted
into US dollars at the exchange rate shown, or at any other exchange rate. Until March 31, 2003, the Companys functional currency was the US Dollar
because it reflected the economic substance of the underlying events and
circumstances of the Company. On April 1, 2003, the Company determined that the
repayment of all loans, which were US Dollar denominated, required it to
reevaluate its operations and, as a result, it concluded that as of that date,
the functional currency should change from the US Dollar to the GEL.
Consequently, at April 1, 2003, the historical bases of the Companys
non-monetary assets were translated from US Dollars to GEL using the exchange
rate in effect as of that date, except for the historical base of the Companys
non-monetary assets that were acquired before January 1, 1999, which were set
using the exchange rate in effect as of January 1, 1999, because as at that
date the GEL ceased to be highly inflationary. The translation of the
non-monetary assets using the GEL as functional currency for the period from
January 1, 1999 to April 1, 2003 resulted in a decrease in property, plant and
equipment of $3,367,000 and an addition of $850,000 to deferred taxes resulting
from the temporary differences between the historical bases and the tax bases
of the non-monetary assets, which were recorded as a cumulative translation
adjustment in equity. The US dollar remains the Companys reporting currency. In accordance with the Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation(SFAS 52), foreign currency denominated monetary
assets and liabilities are translated into GEL at the year-end exchange rate as
set by the Central Bank of the Republic of Georgia. Non-monetary assets and
liabilities are translated at the rates effective on the date the assets were
acquired or liabilities incurred. Foreign currency denominated revenues and
expenses have been translated at average rates that materially reflect the rate
in effect on the date of the transaction. Exchange gains or losses arising
from the translation of foreign currency denominated assets, liabilities,
revenues and expenses into GEL are included in net income. 32




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Nonmonetary Transactions The Company has certain interconnect arrangements with other mobile
telephone providers in the Republic of Georgia for which neither revenues nor
costs are reflected in the financial statements of the Company. The Company
entered into such arrangements such that it may terminate traffic on other
providers networks at no cost, while allowing such providers to terminate
their traffic on the Companys excess capacity. Such interconnect arrangements
have not been reflected in the financial statements as neither the fair value
of the Companys capacity nor the other providers capacity is readily
determinable within a reasonable limit. Such agreements are such that neither
party is entitled to cash unless certain thresholds are met, which may result
in the Company recognizing the incremental costs or revenues dependent upon
volumes of traffic. Through June 30, 2004, the Company had not recognized any
costs or revenues under these arrangements. Business and Economic Environment The environment for business in the Republic of Georgia has changed
rapidly over the last decade from a system where central planning and direction
dominated to one in which market forces increasingly operate. As a result of
the speed and continuation of this complex change, the legal and regulatory
framework in place in more mature market economies for the protection and
regulation of companies and investors is still developing. The Republic of
Georgia has been experiencing political change and macro-economic instability.
These factors have affected and may continue to affect the activities of
enterprises doing business in this environment. Operating in the Republic of
Georgia involves risks, which do not typically exist in more mature and
developed market economies. The accompanying financial statements reflect managements assessment of
the impact of these factors on the operations and the financial position of the
Company. The impact on the Company of the current and future business
environments may differ from managements assessment and such differences may
be significant. 3. Property, Plant and Equipment Property, plant and equipment consisted of the following (in thousands): June 30, 2004
    
    December 31, 2003Telecommunications equipment
    
    $
    101,922
    
    
    $
    93,233Buildings and leasehold improvements
    
    
    4,439
    
    
    
    2,225Office equipment, furniture and software
    
    
    1,858
    
    
    
    962Vehicles
    
    
    1,186
    
    
    
    717Computer equipment
    
    
    437
    
    
    
    352Assets under construction
    
    
    9,873
    
    
    
    8,247119,715
    
    
    
    105,736Accumulated depreciation and amortization
    
    
    (59,423
    )
    
    
    (48,480
    )$
    60,292
    
    
    $
    57,256
 4. Loans Payable to Shareholder The Company had an agreement with a shareholder, Telcell, to provide
financing. The shareholder financing was initially a $2,000,000 non-interest
bearing loan, but was expanded into two additional lines of credit of
$6,000,000, entered into in 1997, and $11,000,000, entered into in 1998
resulting in total available financing of $19,000,000. The $6,000,000 line of
credit incurred interest at LIBOR plus 5% and the $11,000,000 line of credit of
the financing incurred interest at LIBOR plus 3.5%. Such balances were fully
repaid on February 21, 2003. 5. Common Stock On February 17, 2004, the Company declared dividends to its shareholders
totaling $23,333,000 ($23,333 per share) of which, $7,778,000 was paid on
February 27, 2004 and the balance as more fully described in Note 7, Related
Party Transactions was paid on April 23, 2004. On April 8, 2004, the Company declared dividends to its shareholders
totaling $15,555,000 ($15,555 per share) which is reflected as a dividend
payable at June 30, 2004. Such dividends are expected to be paid during the
second half of 2004. 33




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6. Commitments and Contingencies Concentration of Cash Balances The Company has on deposit the majority of its available cash with two
Georgian banks, of which one held $6,962,000 and the other held $6,415,000 as
of June 30, 2004. Risks Associated with the Republic of Georgia The ability of the Company to establish and maintain profitable operations
is subject to, among other things, significant political, economic and social
risks inherent in doing business in the Republic of Georgia. These include
matters arising out of government policies, economic conditions, imposition of
or changes in government regulations or policies, imposition of or changes to
taxes or other similar charges by government bodies, exchange rate fluctuations
and controls, civil disturbances, deprivation or unenforceability of
contractual rights, and taking of property without fair compensation. Events in the Republic of Georgia arising from widespread discontent over
prior public elections, including the premature resignation of President Eduard
Shevardnadze and the election of Mikhail Saakashvili, have significantly
increased the level of political uncertainty. This condition, which is expected
to extend into the foreseeable future, increases the level of economic and
legal risks that the Company faces with respect to its operations. Present
conditions in the Republic of Georgia significantly increase the possibility of
general economic distress, civil unrest, civil war, terrorism and a collapse of
consumer confidence in the Republic of Georgia, each of which could have a
material adverse effect on the Companys operations. The Georgian Tax Inspectorate has performed a review of certain
interconnect arrangements that the Company has with other telecommunications
businesses within the Republic of Georgia to determine whether the Company
complied with Georgian tax regulations. In addition, at the request of the
Prosecutor Generals Office of the Republic of Georgia, the Center for
Expertise and Special Inquiries of the Ministry of Justice of Georgia (the
Representatives of the New Georgian Government) has completed an additional
review of interconnect arrangements to determine whether the Company has
complied with Georgian tax regulations. On February 20, 2004, Dr. George Jokhtaberidze, co-founder and majority
owner of Magticom and son-in-law of former Georgian president Shevardnadze, was
detained in the Republic of Georgia without any charges having been filed
against him. As reported by various media sources, Dr. Jokhtaberidze was being
held in connection with continuing investigation of various tax-related
matters. On April 26, 2004, the Georgian Government investigations into past
business and tax payment practices of Magticom were completed with no adverse
findings. In addition, the prosecution by the Georgian Government of Dr.
Jokhtaberidze was dropped without finding any wrong-doing and Dr. Jokhtaberidze
was released from the investigative detention on April 26, 2004. New Draft Tax Code On June 13, 2004, the Georgian government presented a new draft Tax Code
for public discussion. The draft code is expected to be in effect from January
1, 2005. From twenty-one currently existing taxes in the Republic of Georgia,
there are only nine left in the new draft code: social, income, profit, VAT,
excise, property, gambling, land and tax on usage of natural resources.
According to the draft code, several tax rates are to decrease: the social tax
 from 33% to 20%, income tax  from 20% to 12%, VAT  from 20% to 18%. The
final Tax Code may differ significantly from the draft Tax Code. 7. Related Party Transactions NeoStudia is owned by an affiliate of Dr. George Jokhtaberidze, a
shareholder of the Company. For the three and six-month periods ended June 30,
2004, the Company incurred $310,000 and for the three and six-month periods
ended June 30, 2003, the Company incurred $465,000 and $612,000 respectively,
in relation to advertising work and services from NeoStudia. MagtiWin is owned by an affiliate of Dr. George Jokhtaberidze, a
shareholder of the Company. For the three and six-month periods ended June 30,
2004, the Company incurred $446,000 and $479,000, respectively, and for the
three and six-month periods ended June 30, 2003, the Company incurred $39,000
and $54,000, respectively, in relation to remodeling costs of the Companys
main offices in Tbilisi. Telecom Georgia provides long distance, inter-CIS and local interconnect
telephone services to the Company. For the three and six-month periods ended
June 30, 2004, the Company incurred interconnection expenses of $539,000 and
$955,000, respectively. For the three and six-month periods ended June 30,
2003, the Company incurred interconnection expenses of $569,000 and $1,066,000,
respectively. Telecom Georgia is 30% owned by ITC, which is also an indirect
majority shareholder of Telcell. Also, the interconnect agreements provide a
source of revenue for the Company, which amounted to $708,000 and $1,287,000
for the three and six-month periods ended June 30, 2004, respectively and the
revenues for the Company, amounted to $1,115,000 and $1,898,000 for the three
and six-month periods ended June 30, 2003, respectively. On April 23, 2004, Magticom paid a dividend of $15,555,000, which was
attributable to the Companys dividend declaration on 34




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February 17, 2004. Telcell, which was entitled to $6,860,000 of this dividend,
net of taxes, agreed to loan this amount to Dr. Jokhtaberidze by redirecting
its share of the dividend distribution to him. As security for the loan, Dr.
Jokhtaberidze has assigned to Telcell his right to receive future dividends
from Magticom until the loan, which matures on December 31, 2004, is paid in
full. Magticom expects to pay dividends during the remainder of 2004 in an
amount necessary to make this repayment. However, as described more fully
below, the expectation is that this loan will be repaid during the third
quarter of 2004, as part of a business transaction with Dr. Jokhtaberidze. ITC, a wholly owned subsidiary of MIG is the managing member of Telcell.
MIG, Telcells other member and Dr. Jokhtaberidze entered into a binding
memorandum of understanding, providing for, upon execution of definitive
agreements and satisfaction of certain conditions, Dr. Jokhtaberidze to convey
his 51% interest in Magticom to ITC in exchange for a 49.9% interest in ITC
plus certain cash consideration. MIG will retain the remaining 50.1% majority
ownership of ITC. After completion of all transactions contemplated by this
memorandum of understanding, which is currently contemplated to take place by
the end of the third quarter of 2004, MIG will have the largest effective
ownership interest in Magticom at 42.8% and will be able to exert operational
control over Magticom as a result of its status as managing member of Telcell
and majority stockholder of ITC. A portion of Dr. Jokhtaberidzes cash
proceeds from these transactions will be used to repay the aforementioned loan,
with $4,830,000 of this repayment being distributed to MIG in consequence of
its current 70.41% ownership interest in Telcell. The previously announced Georgian Government investigations into past
business and tax payment practices of Magticom were completed with no adverse
findings. The previously announced prosecution by the Georgian Government of
Dr. Jokhtaberidze has been dropped without finding any wrong-doing and Dr.
Jokhtaberidze has been released from the investigative detention in which he
had been held since February 20, 2004. The Company believes that no further
investigations or prosecutions of Magticom, Magticom personnel or Dr.
Jokhtaberidze with respect to past business or tax payment practices will be
undertaken by the Georgian Government. On May 1, 2004, ITC entered into a memorandum of understanding with the
Georgian Government (the MOU) providing for issuance by ITC of an assignable
option to purchase a 20% ownership interest in Magticom after completion of the
restructuring discussed above. Pursuant to the MOU, ITC commits to issue an
assignable option (the Option) to purchase a 20% ownership interest in
Magticom from the direct 51% post-restructuring interest in Magticom that ITC
will then own. If the Option is exercised, ITC will retain a 31% direct
ownership in Magticom and a 34.5% indirect ownership in Magticom through
Telcell. The Georgian Government is prohibited from directly exercising the Option,
but may assign the Option to certain qualified European Union or American
entities. Any entity that exercises the Option will be subject to certain
transfer restrictions that encourage holding the acquired 20% Magticom
ownership interest for a period of at least 3 years. The Option will have a
limited exercise period of 12 months from the date of issuance. 35




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Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations Certain statements set forth below in thisForm 10-Qconstitute
Forward-looking Statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. See Special Note Regarding Forward-Looking
Statements on page 57. Liquidity and Capital Resources The Company Overview.In the first quarter of 2003, the Company embarked on an overall
restructuring of its business (the Restructuring). The Restructuring was
prompted by and was intended to resolve the severe liquidity issues that had
confronted the Company since the beginning of 2002. In this Restructuring, the
Company undertook to sell its non-core businesses, which at the beginning of
the Restructuring included nine cable television networks, twenty radio
broadcasting stations and various non-core telephony businesses located in
Western, Central and Eastern Europe. Proceeds of these sales mitigated
short-term liquidity concerns and provided capital for further core business
development. Upon completion of all planned sales, the Company will emerge as a
business with its principal attention focused on the continued development of
its core telephony businesses in Northwest Russia and the Republic of Georgia. In connection with the Restructuring, the Company also substantially
downsized its corporate headquarters staff and undertook actions with the
intended objective of significantly decreasing its corporate overhead cash-burn
rate. The Company relocated its corporate headquarters from New York City, New
York to Charlotte, North Carolina and has achieved a significant reduction in
its corporate personnel and office related expenditures. Further reductions in
corporate overhead expenditures are expected to follow the final disposition of
all remaining non-core media businesses. The Restructuring of business interests and corporate operations has
progressed substantially and will be fully completed in the near future. As of
June 30, 2004, the Companys remaining non-core media businesses held for sale
consisted of eighteen radio broadcast stations and one cable television
network. On July 8, 2004, the Company entered into an agreement to dispose of
its interests in seventeen of the radio businesses. Such transaction is
expected to close during the third quarter. The remaining non-core media
businesses are expected to be disposed during the third quarter of 2004. The
Companys core telephony businesses are now:  
    
    PeterStar, the leading competitive local exchange carrier in St.
Petersburg, Russia, in which the Company has a 71% ownership interest;
and  
    
    Magticom, the leading mobile telephony operator in the Republic of
Georgia, in which the Company has an effective 34.5% ownership
interest. Both of these business ventures are currently self-financed and hold
leading positions in their respective markets. Furthermore, the Company also
intends to retain its ownership in Ayety (pending the resolution of a dispute
with the Companys minority shareholder), a cable television provider in
Tbilisi, Georgia, in which the Company has an 85% ownership interest and
Telecom Georgia, a long-distance transit operator in Tbilisi, Georgia, in which
the Company has a 30% ownership interest. The Company expects that these
businesses can be further developed to strengthen the market position of
Magticom. The Company intends to use its corporate cash reserves to provide for
the development of these core businesses, with the expectation that their
future dividend distributions will be sufficient to meet, on a timely basis,
the Companys corporate overhead requirements and indebtedness interest payment
obligations, including those associated with its $152.0 million aggregate
principal (full accreted) 101⁄2% Senior Notes, due 2007 (the Senior Notes). The Company is a holding company; accordingly, it does not generate cash
flows from operations. As a result, the Company is dependent on the earnings of
its subsidiaries and equity investees and the distribution or other payment of
these earnings to it to meet its obligations, including making distributions to
its stockholders. The Companys business ventures are separate legal entities
that have no obligation to pay any amounts the Company owes to third parties.
As a result, although cash balances exist in these business ventures, due to
legal and contractual restrictions cash balances of the business ventures
cannot be readily accessed to meet the Companys liquidity needs without the
distribution of dividends, which require formal declarations to effect
transfers to the Company. Furthermore, the dividend policy of Magticom must be
approved by the Companys partners and thus, is not under the Companys
exclusive control. 36




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##### Table of Contents



Liquidity Issues As of June 30, 2004 and July 31, 2004, the Company had approximately $31.4
million and $29.8 million, respectively, of unrestricted cash on hand. In
addition, as of June 30, 2004, the Companys consolidated business ventures
held $0.9 million of cash. Furthermore, as of June 30, 2004, the Companys
unconsolidated business ventures had $13.6 million of cash on hand which is
held in banks in the Republic of Georgia. The Company projects that its current corporate cash reserves, anticipated
cash proceeds of non-core media business sales and anticipated continuing
dividends from core business operations will be sufficient for the Company to
meet on a timely basis its future corporate overhead requirements and interest
payment obligations, associated with the Senior Notes. However, the Company
cannot assure that dividends from core businesses will be declared and paid nor
can it assure that it will be successful in completing the sale of its
remaining non-core media businesses or that the realized cash proceeds, if any,
will be sufficient to meet short-term liquidity requirements. The Company also
is subject to legal and contractual restrictions, including those under the
indenture for the Senior Notes, on its use of any cash proceeds from the sale
of its assets or those of its business ventures. Separately, the Company projects that it has sufficient corporate cash on
hand to support the Companys planned operating, investing and financing cash
flows through the end of 2004, including the Companys $8.0 million semi-annual
interest payment due on September 30, 2004 on its Senior Notes. This projection
does not include cash inflows that might reasonably arise from cash proceeds
realized from the sale of the Companys non-core media businesses or operating
business venture dividend distributions, each of which would further strengthen
the Companys current liquidity position. However, the Company does not believe that it has sufficient corporate
cash on hand today to support the Companys planned operating, investing and
financing cash flows through March 31, 2005, including the Companys $8.0
million semi-annual interest payment that is due on March 31, 2005 associated
with its Senior Notes. If the Company is not able to satisfactorily address the liquidity issues
described above, the Company may have to resort to certain other measures,
including ultimately seeking the protection afforded under the U.S. Bankruptcy
Code. The Company cannot provide assurances at this time that it will be
successful in avoiding such measures. Additionally, the Company has a
stockholders deficit and has suffered recurring operating losses and net
operating cash deficiencies. The aforementioned factors raise substantial doubt about the Companys
ability to continue as a going concern. The condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Senior Notes In connection with the acquisition of PLD Telekom, the Company issued
$210.6 million in aggregate principal amount at maturity of its Senior Notes in
exchange for PLD Telekoms then outstanding senior notes and convertible
subordinated notes. The Senior Notes accrue interest at the rate of 101⁄2%
per year, payable semi-annually in cash. On April 24, 2003, the Company
completed an exchange with Adamant Advisory Services, a British Virgin Islands
company (Adamant), in which the Company conveyed its ownership interest in
certain of its businesses in Russia in exchange for, among other things,
approximately $58.6 million, face value, of the Companys Senior Notes held by
Adamant. With the completion of this transaction, the outstanding principal
balance on the Senior Notes was reduced to $152.0 million. The Senior Notes are general senior unsecured obligations of the Company,
rank senior in right of payment to all existing and future subordinated
indebtedness of the Company, rank equal in right of payment to all existing and
future senior indebtedness of the Company and will be effectively subordinated
to all existing and future secured indebtedness of the Company to the extent of
the assets securing such indebtedness and to all existing and future
indebtedness of the Companys subsidiaries, whether or not secured. The Senior Notes are redeemable at the sole option of the Company only at
a redemption price equal to their principal amount plus accrued and unpaid
interest, if any, up to but excluding the date of redemption. Upon the occurrence of a change of control of the Company (as such term is
defined in the indenture for the Senior Notes (the Indenture)), the holders
of the Senior Notes will be entitled to require the Company to repurchase their
Senior Notes at a purchase price equal to 101% of the principal amount of such
notes plus accrued and unpaid interest to the date of repurchase. The Indenture limits the ability of the Company and certain of its
subsidiaries to, among other things, incur additional indebtedness or issue
capital stock or Preferred Stock, pay dividends on, and repurchase or redeem
their capital stock or subordinated obligations, invest in and sell assets and
subsidiary stock, engage in transactions with affiliates and incur additional
liens. The Indenture also limits the ability of the Company to engage in
consolidations, mergers and transfers of all or substantially all of its assets
and also contains limitations on restrictions on distributions from its
subsidiaries. Convertible Preferred Stock As of June 30, 2004, there were 4.1 million shares of the Companys
Preferred Stock, par value $1.00 issued and outstanding. 37




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##### Table of Contents



Each share has a liquidation preference of $50.00 plus accrued and unpaid
dividends thereon. Dividends on the Preferred Stock are cumulative from the date of issuance
and payable quarterly, in arrears. The Company may make any payments due on the
Preferred Stock, including dividend payments and redemptions (i) in cash; (ii)
through issuance of the Companys common stock or (iii) through a combination
thereof. Through March 15, 2001, the Company paid its quarterly dividends on the
Preferred Stock in cash. The Company has elected not to declare dividend for
any quarterly dividend periods ending after June 15, 2001. As June 30, 2004,
total dividends in arrears were $55.1 million. The dividend requirement for
the twelve months ending June 30, 2005 will be $19.5 million, including the
effects of compounding and assuming there are no payments of the dividends. Except as described in this paragraph, the holders of the Preferred Stock
have no voting rights. In June 2004, the Company entered into the Board of
Director Nominee Agreement with certain holders of the Preferred Stock who
represented to the Company that they held discretionary authority (including
the power to vote) with regard to 2.4 million shares or approximately 58% of
the outstanding 4.1 million shares of Preferred Stock. Under the terms of the
Board of Director Nominee Agreement, the Participating Preferred Stock Holders
irrevocably waived the right to request a special meeting of holders of
Preferred Stock to elect directors or take any action to request such a meeting
until immediately after the next annual meeting of the Companys stockholders
is held. In consideration of this waiver, Messrs. Gale and Henderson, who were
identified by the Participating Preferred Stock Holders as director candidates,
were elected as Class III Directors by the Companys Board of Directors.
Their terms will expire at the Companys next annual meeting of stockholders.
At the next annual meeting, the holders of Preferred Stock will have the right
to vote separately as a class for the election of two directors. It is
expected that Messrs. Gale and Henderson will be nominated for election by the
holders of Preferred Stock to fill these two directorships. The execution of the Board of Director Nominee Agreement was the
culmination of several discussions, which began in late 2003, that the Company
had with several holders of the Companys Preferred Stock. According to the
terms of the Preferred Stock, in the event the Company did not make six (6)
consecutive dividend payments on the Preferred Stock, holders of 25% of the
voting power of the outstanding Preferred Stock became entitled to compel the
Company to call a special meeting of the holders of the Preferred Stock for the
purpose of electing two new directors. The Company believes that the Board of
Director Nominee Agreement was advantageous to the Company because it
eliminated the need to hold a special meeting, which would have been both time
consuming and expensive. Business Venture Support and Corporate Overhead Costs In the years ended December 31, 2003 and 2002, the Company expended $29.3
million, and $28.2 million, respectively, on support of its subsidiary business
ventures and corporate overheads. As previously noted, the Company is a holding
Company, and as such, is dependent on distributions from its business ventures,
which have been used by the Company to fund such expenditures. The Company
provides business development, marketing and financial reporting services to
its operating units. The principal components of the Companys corporate
overhead costs relate to personnel costs (salaries and wages, other employee
benefits and travel related costs), professional fees (lawyers, accountants and
bankers), consultants, facility related costs and other general and
administrative costs (e.g., insurance and regulatory compliance costs). The Company anticipates that its 2004 corporate overhead expenses will be
significantly lower than what it incurred in 2003. Current expectations are
that overhead will approximate $10.0 million to $12.0 million over the next
twelve months. However, the Companys anticipates that its corporate cash
outlays during the twelve months ended June 30, 2005 will include $15.8 million
for interest payments on the Senior Notes and an estimated $14.0 million to
$16.0 million to fund corporate operations and retire existing corporate
obligations as they come due. For further discussions, see Consolidated
Results of Operations for the six months ended June 30, 2004 compared to the
Consolidated Results of Operations for the six months ended June 30, 2003,
Other Consolidated Results. Commitments Benefit Plans. The Company sponsors two defined benefit pension plans, a
supplemental retirement plan and a postretirement medical benefit plan for
certain former employees of the Company (the Benefit Plans). The Companys
anticipated expenditures for the Benefit Plans are dependent on various
assumptions regarding the ultimate obligation to be paid by the Company on
behalf of the participants. Based on present assumptions, the Company expects
2004 benefits to be paid by these Benefit Plans to be $1.5 million, as compared
with $1.6 million in both 2003 and 2002. The funding obligations for the Benefit Plans are also dependent on
investment returns, discount rates and actuarial assumptions, including
mortality rates, inflation and retirement age. Based on present assumptions,
the Company expects 2004 cash funding for the Benefit Plans to be $1.0 million,
as compared to $2.2 million and $0.9 million in 2003 and 2002, respectively.
However, assumptions are reviewed regularly and the Company may make
contributions beyond those that are currently anticipated. As of June 30,
2004, the Company had contributed $0.6 million of its estimated contributions.
As of December 31, 2003, the unfunded status of the Benefit 38




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##### Table of Contents



Plans was $7.7 million as compared with $9.2 million as of December 31, 2002.
The improvement in the unfunded status from December 31, 2002 to December 31,
2003, is attributable to actual return on plan assets and employer
contributions being in excess of benefits paid pursuant to these Benefit Plans. The Company also maintains an unqualified, unfunded supplemental
retirement plan for certain former executives based in the U.S. The plan is a
noncontributory defined benefit pension plan under which pension benefits are
calculated based on a formula incorporating years of service and participants
compensation. In addition, the Company also maintains an unfunded group medical
plan and provides life insurance coverage for certain former employees
subsequent to retirement. In 2004, the Company expects to contribute $0.4
million to these aforementioned unfunded benefit plans. Credit Agreements.The Company has entered into credit agreements with its
business ventures, including those classified as discontinued components, to
provide up to $17.2 million in funding of which $5.7 million in funding
obligations remain at June 30, 2004. The Companys funding commitments are
contingent on its approval of the respective business ventures business plans. Capital Resources The Companys capital expenditure program for the twelve months ended June
30, 2005 for its core businesses, inclusive of Magticom, is anticipated to
approximate $30.9 million. The Company does not anticipate that corporate
headquarters cash resources will be required to fund this program; that is, the
Company believes that this amount will be funded by the cash reserves and
operating cash flows of the respective business ventures. Discussion of Changes in Financial Position The Companys current ratio, defined as total current assets divided by
total current liabilities, improved from 1.2 to 1.8 as of December 31, 2003 and
June 30, 2004, respectively. The improvement in the current ratio is a result
of the net positive cash-flow influence due to the disposition of non-core
media businesses during the first six months of 2004, positive cash flows at
PeterStar and the impact of cash dividends from Magticom in the period. The
receipt of these proceeds has allowed the Company to continue to fund its
operations to meet its current obligations on a timely basis while maintaining
an overall positive current ratio. A summary of cash flows from continuing
operations is as follows (in thousands): Six months ended June 30,2004
    
    2003Cash flows used in operating activities
    
    $
    (5,571
    )
    
    $
    (13,230
    )Cash paid for the acquisition of property, plant and equipment
    
    $
    (6,708
    )
    
    $
    (5,863
    )Cash (used in) provided by investing activities
    
    $
    (5,749
    )
    
    $
    5,181Cash used in financing activities
    
    $
    (1,560
    )
    
    $
    (7,480
    )Cash provided by discontinued components, net
    
    $
    18,299
    
    
    $
    7,260
 Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Cash Flows from Operating Activities Cash used in operating activities for the six months ended June 30, 2004
was $5.6 million, which is an improvement of $7.7 million as compared to cash
used in operating activities for the six months ended June 30, 2003. The
results of continuing operations, net of non-cash adjustments, resulted in an
increase in cash inflows period-over-period of $13.4 million. This increase
was partially offset by an increase in the use of cash for operating assets and
liabilities in 2004 of $5.7 million. The $13.4 million increase in cash inflows from continuing operations, net
of non-cash adjustments, primarily reflects the $11.0 million reduction of the
operating loss for the comparable periods, in addition to the $1.8 million
reduction in interest expense in 2004. The reduction of the operating loss was
principally driven by increased sales and a reduction in selling, general and
administrative expenses. The $3.9 million increase in revenue had a positive
impact on cash as the average days sales in receivables decreased to 26 days
for the six months ended June 30, 2004 as compared to 31 days in 2003. The $9.6
million reduction in selling, general and administrative expenses had a
significant impact on cash as the majority of the reduction was seen in
salaries and benefits as well as overall professional fees, both of which are
typically paid in the period in which the expense is incurred. The decrease in
the interest expense and the related payments in 2004 is due to the reduction
in the outstanding balance of the Senior Notes on a period-over-period basis,
due to the Adamant Transaction. The $5.7 million increase in the use of cash for operating assets and
liabilities primarily reflects the pay down in 2004 of historical liabilities,
including amounts for professional fees and pension liabilities, as well as an
overall reduction in trade accounts payable on a period-over-period basis.
Based on the overall cash position of the Company in 2004, payables and other
obligations were paid more timely as compared to 2003. 39




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##### Table of Contents



Cash Flows from Investing Activities Cash used in investing activities for the six months ended June 30, 2004
was $5.7 million as compared to cash provided by investing activities of $5.2
million for the six months ended June 30, 2003. The period-over-period change
is principally attributable to the distributions from equity ventures,
primarily Magticom, which were $4.6 million in 2004 as compared to $12.3
million in 2003. The distribution from Magticom in 2003 included a repayment of
the outstanding credit line with the Company. PeterStar used $4.3 million of cash on hand to fund business acquisitions
in 2004. In 2003, PeterStar used $1.2 million of cash to purchase short-term
investments and other intangibles. The Company expended $6.7 million and $5.9 million in the six months ended
June 30, 2004 and 2003, respectively. Such capital expenditures were
principally to fund the growth of PeterStar and the efforts of PeterStar to
market highspeed digital fiber network in lieu of traditional copper telephone
infrastructure. Cash Flows from Financing Activities Cash used in financing activities for the six months ended June 30, 2004
was $1.6 million as compared to $7.5 million for the six months ended June 30,
2003. The change in financing cash flows in 2004 is principally due to less
dividends and other distributions received from Magticom and PeterStar,
resulting in lower payments to minority shareholders. Cash Flows from Discontinued Components Cash provided by discontinued components increased to $18.3 million for
the six months ended June 30, 2004 as compared to $7.3 million for the six
months ended June 30, 2003. During the six months ended June 30, 2004, the
Company received $16.0 million, $1.5 million and $0.5 million related to the
sales of Romsat, ATK and Radio Skonto, respectively. During the six months
ended June 30, 2003, the Company received net cash of $3.9 million and $5.0
million from the sale of Technocom and from the Adamant Transaction,
respectively. This cash inflow was partially offset by cash used to fund the
operations of discontinued components in 2003. Results of Operations Overview The Company has continuing operations in Northwest Russia and the Republic
of Georgia. The Companys reporting segments are comprised of (i) fixed
telephony, (ii) wireless telephony and (iii) cable television. Consolidated fixed telephony is comprised of PeterStar. On October 1,
2003, PeterStar acquired the ownership rights of Baltic Communications Ltd.
(BCL) and prior to such date, BCL was an indirect wholly owned subsidiary of
the Company. Unconsolidated wireless telephony is principally comprised of Magticom. In
addition, unconsolidated wireless telephony includes Tyumenruskom. The Company
disposed of its interests in Tyumenruskom in September 2003. Consolidated cable television is comprised of Ayety. In addition to these business segments, the Company has other operating
activities that are carried out in business ventures, which are considered
discontinued components. The Company has substantially completed a restructuring in which its
interests in most cable television, radio and certain telephony businesses has
been or will be sold and a substantially downsized supervisory staff will
manage the remaining business ventures. This restructuring was prompted by and
is intended to resolve the severe liquidity issues confronting the Company
since the beginning of 2002. This restructuring focuses on core telephony
business operations that are currently self-financed and hold leading positions
in their respective markets. These core operations will be held and developed,
with the expectation that their future dividend distributions will be
sufficient to meet the Companys debt service and overhead requirements. All
other non-core operations will be sold with the intention that sale proceeds
will mitigate short-term liquidity concerns and provide capital for further
core business development. 40




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##### Table of Contents



Segment Information The Companys segment information, including other unconsolidated
operating segments, is set forth for the three and six months ended June 30,
2004 and 2003 in the following tables (in thousands): Segment Information
Three months ended June 30, 2004
(in thousands) Corporate, OtherFixed
    
    Wireless
    
    Cable
    
    andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    18,604
    
    
    $
    
    
    
    $
    708
    
    
    $
    
    
    
    $
    19,312Cost of services
    
    
    5,718
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    5,741Selling, general and administrative
    
    
    4,440
    
    
    
    
    
    
    
    661
    
    
    
    3,225
    
    
    
    8,326Depreciation and amortization
    
    
    5,875
    
    
    
    
    
    
    
    110
    
    
    
    19
    
    
    
    6,004Operating income (loss)
    
    $
    2,571
    
    
    $
    
    
    
    $
    (86
    )
    
    $
    (3,244
    )
    
    
    (759
    )Unconsolidated Business VenturesRevenues
    
    $
    
    
    
    $
    23,070
    
    
    $
    Costs of services
    
    
    
    
    
    
    2,865
    
    
    
    Selling, general and administrative
    
    
    
    
    
    
    2,495
    
    
    
    Depreciation and amortization
    
    
    
    
    
    
    3,222
    
    
    
    Operating income
    
    $
    
    
    
    $
    14,488
    
    
    $
    Net income
    
    $
    
    
    
    $
    11,843
    
    
    $
    Equity in income of unconsolidated
investees
    
    $
    
    
    
    $
    5,804
    
    
    $
    
    
    
    
    
    
    
    
    5,804Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,860
    )Foreign currency gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    504Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,116
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,226
    )Loss before discontinued components
and the cumulative effect of a change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,562
    )Income from discontinued components
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (3,044
    )
 41




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Segment Information
Three months ended June 30, 2003
(in thousands) Corporate, OtherFixed
    
    Wireless
    
    Cable
    
    andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    17,183
    
    
    $
    
    
    
    $
    619
    
    
    $
    
    
    
    $
    17,802Cost of services
    
    
    5,781
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    5,787Selling, general and administrative
    
    
    3,267
    
    
    
    
    
    
    
    380
    
    
    
    7,485
    
    
    
    11,132Depreciation and amortization
    
    
    4,948
    
    
    
    
    
    
    
    223
    
    
    
    1
    
    
    
    5,172Operating income (loss)
    
    $
    3,187
    
    
    $
    
    
    
    $
    10
    
    
    $
    (7,486
    )
    
    
    (4,289
    )Unconsolidated Business VenturesRevenues
    
    $
    4,657
    
    
    $
    17,791
    
    
    $
    2,931Costs of services
    
    
    2,976
    
    
    
    2,820
    
    
    
    513Selling, general and administrative
    
    
    919
    
    
    
    2,497
    
    
    
    1,604Depreciation and amortization
    
    
    516
    
    
    
    3,547
    
    
    
    516Operating income
    
    $
    246
    
    
    $
    8,927
    
    
    $
    298Net income
    
    $
    37
    
    
    $
    6,839
    
    
    $
    483Equity in (losses) income of
unconsolidated investees
    
    $
    (74
    )
    
    $
    3,418
    
    
    $
    523
    
    
    
    
    
    
    
    3,867Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,209
    )Gain on retirement of debt
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    24,117Foreign currency gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    463Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,113
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,755
    )Income before discontinued components
and the cumulative effect of a change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,091Income from discontinued components
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,120Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    27,211
 42




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Segment Information
Six months ended June 30, 2004
(in thousands) Corporate, OtherFixed
    
    Wireless
    
    Cable
    
    andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    36,504
    
    
    $
    
    
    
    $
    1,371
    
    
    $
    
    
    
    $
    37,875Cost of services
    
    
    11,700
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    11,745Selling, general and administrative
    
    
    8,102
    
    
    
    
    
    
    
    1,211
    
    
    
    6,301
    
    
    
    15,614Depreciation and amortization
    
    
    11,439
    
    
    
    
    
    
    
    213
    
    
    
    37
    
    
    
    11,689Operating income (loss)
    
    $
    5,263
    
    
    $
    
    
    
    $
    (98
    )
    
    $
    (6,338
    )
    
    
    (1,173
    )Unconsolidated Business VenturesRevenues
    
    $
    
    
    
    $
    43,921
    
    
    $
    665Costs of services
    
    
    
    
    
    
    5,631
    
    
    
    111Selling, general and administrative
    
    
    
    
    
    
    5,039
    
    
    
    278Depreciation and amortization
    
    
    
    
    
    
    7,077
    
    
    
    98Operating income
    
    $
    
    
    
    $
    26,174
    
    
    $
    178Net income
    
    $
    
    
    
    $
    20,354
    
    
    $
    121Equity in income of unconsolidated
investees
    
    $
    
    
    
    $
    9,974
    
    
    $
    
    
    
    
    
    
    
    
    9,974Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,876
    )Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (73
    )Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,822
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,142
    )Loss before discontinued components
and the cumulative effect of a change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,146
    )Income from discontinued components
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,828Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (318
    )
 43




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##### Table of Contents



Segment Information
Six months ended June 30, 2003
(in thousands) Corporate, OtherFixed
    
    Wireless
    
    Cable
    
    andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    33,133
    
    
    $
    
    
    
    $
    1,323
    
    
    $
    
    
    
    $
    34,456Cost of services
    
    
    10,743
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    10,766Selling, general and administrative
    
    
    6,928
    
    
    
    
    
    
    
    898
    
    
    
    17,399
    
    
    
    25,225Depreciation and amortization
    
    
    9,818
    
    
    
    
    
    
    
    298
    
    
    
    99
    
    
    
    10,215Operating income (loss)
    
    $
    5,644
    
    
    $
    
    
    
    $
    104
    
    
    $
    (17,498
    )
    
    
    (11,750
    )Unconsolidated Business VenturesRevenues
    
    $
    25,270
    
    
    $
    33,178
    
    
    $
    7,656Costs of services
    
    
    12,807
    
    
    
    5,128
    
    
    
    1,483Selling, general and administrative
    
    
    6,814
    
    
    
    4,241
    
    
    
    4,208Depreciation and amortization
    
    
    4,414
    
    
    
    7,121
    
    
    
    1,883Operating income
    
    $
    1,235
    
    
    $
    16,688
    
    
    $
    82Net (loss) income
    
    $
    (878
    )
    
    $
    10,897
    
    
    $
    1,461Equity in (losses) income of
unconsolidated investees
    
    $
    (468
    )
    
    $
    5,529
    
    
    $
    1,798
    
    
    
    
    
    
    
    6,859Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,697
    )Gain on retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,117Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (404
    )Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,483
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,988
    )Income before discontinued components
and the cumulative effect of a
change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,593Income from discontinued components
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,839Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,012Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    13,444
 44




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CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004
COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 2003 Fixed Telephony Consolidated fixed telephony is comprised of PeterStar, the leading
competitive local exchange carrier in St. Petersburg, Russia. On October 1,
2003, PeterStar acquired the ownership rights of BCL, a local and long distance
telephony operator in St. Petersburg, Russia. Prior to October 1, 2003, BCL was
an indirect wholly owned subsidiary of the Company. Accordingly, the results of
PeterStar and BCL have been combined for historical reporting purposes. Revenues.Fixed telephony revenues increased by $1.4 million (8%) to
$18.6 million for the three months ended June 30, 2004 as compared to $17.2
million for the three months ended June 30, 2003. This growth in revenues is driven by a $1.0 million increase in data and Internet services, a $0.3 million growth in business
fixed revenues and a
$0.1 million increase in regulated Vasiliesvsky Island residential telephony.
In addition, Pskov City Telephone Network (PGTS), which was acquired on April
27, 2004, contributed incremental revenue of $0.6 million during the three
months ended June 30, 2004. Such increases were partially offset by a $0.5
million decrease in transit carrier revenues. The increase in business fixed revenues was principally due to PeterStars
efforts to market its highspeed digital fiber network, in lieu of traditional
copper telephone infrastructure, to its business customers. These marketing
efforts have also resulted in 92% of new connections for the three months ended
June 30, 2004 utilizing PeterStars infrastructure versus 84% of new
connections for the three months ended June 30, 2003. Management anticipates
that such connections will continue to remain at such proportionate levels. As
a result, PeterStar has effectively increased its customer base for other high
band-width intensive products. The increase in data and Internet services is principally due to the
growing demand for leased lines and dial up services within the St. Petersburg
market. Management believes that PeterStar has increased its share of the St.
Petersburg Internet services market. Further, although management expects that
it will continue to experience revenue growth for its data and Internet product
portfolio; however, the rate of growth will most likely decline due to
competitive pressures. Vasilievsky Island represents an area of St. Petersburg where PeterStar
provides principally residential telephony services. The revenue increase at
Vasilisevsky Island was principally due to an increase in government regulated
tariffs. Transit carrier revenues are mainly an opportunity based revenue
stream and management does not currently anticipate revenue growth in future
periods. Gross margin.Fixed telephony gross margin increased by $1.9 million
(17%) to $13.3 million for the three months ended June 30, 2004 as compared to
$11.4 million for the three months ended June 30, 2003. Gross margin increased principally due to revenue growth offset by lower
margins on long distance traffic and higher PSTN interconnect and local
unbundling costs. Gross margin as a percentage of revenues was 70% for the
three months ended June 30, 2004 as compared to 66% for the three months ended
June 30, 2003. The increase in gross margin percentage is primarily due to better
utilization of the PeterStar
telecommunications network and reduction of lower margin transit carrier revenues on a
year-over-year basis. In addition, the revenues at PGTS are at higher margins
than those historically recognized at PeterStar. Selling, general and administrative.Fixed telephony selling, general
and administrative expenses increased by $1.1 million (36%) to $4.4 million for
the three months ended June 30, 2004 as compared to $3.3 million for the three
months ended June 30, 2003. The significant components of selling, general and administrative expenses
for PeterStar for the three months ended June 30, 2004 and 2003 are as follows
(in thousands): 2004
    
    2003Personnel related costs
    
    $
    1,667
    
    
    $
    1,381Office related costs
    
    
    1,146
    
    
    
    836Bad debt expense
    
    
    443
    
    
    
    157Taxes other than income
    
    
    308
    
    
    
    246Marketing expenses
    
    
    293
    
    
    
    255Professional services
    
    
    162
    
    
    
    127Other expenses
    
    
    421
    
    
    
    265Total
    
    $
    4,440
    
    
    $
    3,267
 45




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##### Table of Contents



Selling, general and administrative costs increased on a year-over-year
basis due to the inclusion of PGTS selling, general and administrative costs of
$0.3 million in the quarter, additional personnel costs of $0.2 million due to
headcount growth, salary raises to existing personnel of $0.1 million and
higher office costs due to the addition of office space at PeterStars main
office and the opening of a Moscow branch office at the end of 2003. Depreciation and amortization.Fixed telephony depreciation and
amortization expense increased by $1.0 million to $5.9 million for the three
months ended June 30, 2004 as compared to $4.9 million for the three months
ended June 30, 2003. This includes $1.8 million and $1.7 million of license
amortization for the three months ended June 30, 2004 and 2003, respectively,
allocated from corporate headquarters. This growth in depreciation and amortization expense is due to the
increase in investment to expand and upgrade the PeterStar network
infrastructure, thereby creating an increase in the fixed asset depreciable
base when compared to the prior three months. With the exception of the allocated license amortization of $1.8 million,
management expects that such trend will continue in the foreseeable future.
During the fourth quarter of 2004, the allocated license will be fully
amortized and the Company projects that the amortization expense for the
allocated license will be $6.7 million in 2004. Cable Television Consolidated cable television is comprised of Ayety, a cable television
provider in Tbilisi, Georgia. Ayety will not be included in the Companys
consolidated results of operations subsequent to June 30, 2004, as the Company
will no longer consolidate the results of Ayety. Until certain governance
issues are resolved, the results of Ayety TV will be included in the results of
operations of equity interests. Revenues.Cable television revenues increased by $0.1 million (14%) to
$0.7 million for the three months ended June 30, 2004 as compared to $0.6
million for the three months ended June 30, 2003. The growth in Ayety revenues
was caused by an increase in subscribers, which rose from 40 thousand at June
30, 2003 to 41 thousand at June 30, 2004. Revenue on an average revenue per
unit or ARPU decreased in the comparable periods mainly due to the loss of
MMDS (microwave transmission) customers offset by an increase in wired
customers. The ARPU is typically higher for MMDS customers. The loss of MMDS
customers was also partially offset by an increase in internet revenue due to
an increase in subscriber base. Management anticipates that the trend of an
overall loss of MMDS subscribers will continue as competitive wired networks
continued to expand into areas served by Ayetys MMDS system. Gross margin.Cable television gross margin increased by $0.1 million
(12%) to $0.7 million for the three months ended June 30, 2004 as compared to
$0.6 million for the three months ended June 30, 2003 due to the increase in
revenues period-over-period. Selling, general and administrative.Cable television selling, general
and administrative expenses increased by $0.3 million (74%) to $0.7 million in
the three months ended June 30, 2004 as compared to $0.4 million for the three
months ended June 30, 2003. The increase at Ayety reflects a general increase
in costs during the three months. The increase is primarily due to increased
bad debt expense and increased salaries due to the ventures assumption of
payment for the general directors salary beginning in June 2003 and increased
salaries for network maintenance. Prior to June 2003, the general directors
salary was paid by the corporate office. Depreciation and amortization.Cable television depreciation and
amortization expense decreased by $0.1 million to $0.1 million for the three
months ended June 30, 2004 as compared to $0.2 million for the three months
ended June 30, 2003. The decrease in Ayety reflects the fact that certain fixed
assets have become fully depreciated. OTHER CONSOLIDATED RESULTS Other consolidated results include the activities of the corporate
headquarters, which relate to executive, administrative, logistical and
business venture support activities. Selling, general and administrative.Selling, general and
administrative expenses at the corporate level decreased from $7.5 million in
the three months ended June 30, 2003 to $3.2 million for the three months ended
June 30, 2004. 46




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##### Table of Contents



The significant components of corporate selling, general and
administrative expenses for the three months ended June 30, 2004 and 2003 are
as follows (in thousands): 2004
    
    2003Personnel related costs
    
    $
    1,051
    
    
    $
    3,361Professional services
    
    
    988
    
    
    
    2,161Office related expenses and insurance
    
    
    768
    
    
    
    682Restructuring related professional services
    
    
    
    
    
    
    525Other expenses
    
    
    418
    
    
    
    756Total
    
    $
    3,225
    
    
    $
    7,485
 The significant reduction in selling, general and administrative expenses,
on a period-over-period basis, is attributable to Companys initiatives to
reduce corporate overhead burn-rate. The reduction in personnel related costs,
on a period-over-period basis, are due to the Companys actions to
substantially down-size the Companys corporate headquarters personnel
beginning in the first quarter of 2003. The reduction in restructuring and
related professional services costs, on a period-over-period basis, is
attributable to the Companys decision to cease using professional advisors for
its restructuring related initiatives in the beginning of the third quarter of
2003. The reduction in professional services costs, on a period-over-period
basis, is principally attributable to reduced legal fees. The increase in
office related expenses and insurance is primarily due an increase in
self-insurance reserves based on a litigation settlement, partially offset by
overall lower office expenses such as rent and utilities. Management does not
expect significant further reductions in corporate selling, general and
administrative costs. Interest expense, net.Net interest expense for the three months ended
June 30, 2004 decreased by $0.3 million to $3.9 million for the three months
ended June 30, 2004 as compared to $4.2 million for the three months ended June
30, 2003. The decrease was primarily due to the reduction in the Senior Notes
in the second quarter of 2003. This decrease was partially offset by a
reduction in interest income recognized at PeterStar during the comparable
periods. PeterStar has been using cash reserves to fund various acquisitions
in 2004, whereas excess cash was invested in short-term investments in 2003. Equity in income of unconsolidated investees.Equity in income of
unconsolidated investees increased by $1.9 million to $5.8 million for the
three months ended June 30, 2004 as compared to $3.9 million for the three
months ended June 30, 2003. For further information on the ventures reported
under the equity method, refer to the unconsolidated results discussion below. Gain on retirement of debt.On April 24, 2003, the Company completed an
exchange with Adamant of certain business ventures for $58.6 million of the
Senior Notes. The Company recognized a gain of $24.1 million related to the
early extinguishment of the exchanged Senior Notes. Income tax expense.Income tax expense increased by $1.0 million to
$3.1 million for the three months ended June 30, 2004 as compared to $2.1
million for the three months ended June 30, 2003. The income tax expense in
2004 and 2003 is principally from foreign income taxes on PeterStars
operations. In addition, the Company incurred withholding taxes of $1.5 million
and $0.6 million on its dividends from Magticom and PeterStar during the three
months ended June 30, 2004 and 2003, respectively. Minority interest.Minority interest represents the allocation of
income by the Companys majority owned subsidiaries and business ventures to
its minority ownership interest. For the three months ended June 30, 2004 and
2003, the minority interest was $2.2 million and $1.8 million, respectively.
The minority interest amount relates principally to PeterStars and Magticoms
operations. Income from discontinued components.Income from discontinued components
was $0.5 million for the three months ended June 30, 2004 as compared to income
of $11.1 million of the three months ended June 30, 2003. In addition to the
net income from the operations of the discontinued ventures of $0.2 million in
2004 and net income of $0.6 million in 2003, as further discussed in the
section titled Results of Discontinued Components, the Company recognized a
gain on the disposition of Radio Skonto of $0.3 million in the three months
ended June 30, 2004. During the three months ended June 30, 2003, the Company
recognized gains of $2.9 million, $7.0 million and $0.7 million related to the
disposition of Technocom, the disposition of various business ventures in
connection with the Adamant exchange and the final settlement related to the
sale of Snapper, respectively. RESULTS OF UNCONSOLIDATED OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004
COMPARED TO THE RESULTS OF UNCONSOLIDATED OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30, 2003 Fixed Telephony Unconsolidated fixed telephony is comprised of the Companys 30% minority
ownership interest in Telecom Georgia, which is an international and long
distance telephony provider in the Republic of Georgia. Since the Companys US
GAAP investment is zero and as there is no obligation to fund operations, the
Company has not recorded any share of the losses for Telecom Georgia and does
not deem Telecom Georgias current financial performance to be material. 47




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Wireless Telephony Unconsolidated wireless telephony in 2004 is comprised of Magticom located
in Tbilisi, Georgia and in 2003 Tyumenruskom, located in Tyumen, Russia, was
also included. The Company owns effectively 34.5% of Magticom, which operates
and markets mobile voice communications in the Republic of Georgia utilizing a
GSM telephony infrastructure. The Company owned 46% of Tyumenruskom, which
operates and markets communication services in the Tyumen region of Russia
utilizing a D-AMPS telephony infrastructure. The Company disposed of its
interests in Tyumenruskom on September 24, 2003. Revenues.Wireless telephony revenues increased by $5.3 million (30%)
to $23.1 million for the three months ended June 30, 2004 as compared to $17.8
million for the three months ended June 30, 2003. This growth in revenues was
primarily attributable to Magticom, the Companys GSM wireless operator in
Georgia, partially offset by the effect of the Companys sale of Tyumenruskom
in September 2003. Revenues at Magticom increased by $6.2 million (37%) to $23.1 million for
three months ended June 30, 2004 as compared to $16.9 million for three months
ended June 30, 2003. This increase in revenues is due to strong growth in the
subscriber base. Total subscribers were 362 thousand at June 30, 2004 compared
to 284 thousand at June 30, 2003, an increase of 28%. On a comparable currency
basis, revenue growth from traffic, period over period, was 26% and the minutes
of use growth was also 26%. Accordingly, a portion of revenue growth was
attributable to favorable foreign exchange fluctuation. The percentage of
increase in revenue is slightly less than the subscriber growth because as the
subscriber base expands, newer customers tend to have a slightly lower average
revenue. Tyumenruskom contributed $0.9 million for the three months ended June 30,
2003. Gross margin.Wireless telephony gross margin increased by $5.2 million
(35%) to $20.2 million for the three months ended June 30, 2004 as compared to
$15.0 million for the three months ended June 30, 2003. This increase was due
primarily to the increase in gross margin at Magticom. Gross margin at Magticom increased by $5.9 million (42%) to $20.2 million
for the three months ended June 30, 2004 as compared to $14.3 million for the
three months ended June 30, 2003. Total gross margin dollars increased due to
the strong increase in revenue. Gross margin as a percentage of revenues
increased four percentage points to 88% in 2004 due to higher network
utilization. As a result, the overall fixed costs of services as a percentage
of revenue has decreased. In addition, interconnection revenue outpaced
interconnection costs. Magticoms position as a market leader has allowed it
to maintain its margins; however, it is expected that margins will erode as
competition intensifies in the region. Tyumenruskom contributed gross margin of $0.7 million for the three months
ended June 30, 2003. Selling, general and administrative.Wireless telephony selling,
general and administrative expenses remained consistent at $2.5 million for the
three months ended June 30, 2004 and 2003. The significant components of selling, general and administrative expenses
for Magticom for the three months ended June 30, 2004 and 2003 are as follows
(in thousands): 2004
    
    2003Personnel related costs
    
    $
    1,310
    
    
    
    917Taxes other than income
    
    
    745
    
    
    
    803Marketing expenses
    
    
    314
    
    
    
    244Bad debt recovery
    
    
    (51
    )
    
    
    (1
    )Other expenses
    
    
    177
    
    
    
    192Total
    
    $
    2,495
    
    
    
    2,155
 The increase in selling, general and administrative expenses is primarily
due an overall increase in headcount at Magticom and wage increases provided to
employees effective January 2004. The increase in personnel related costs was
partially offset by lower other taxes during comparable quarters due to the
elimination of an entrepreneur tax. Tyumenruskom incurred $0.3 million of selling, general and administrative
expenses during the three months ended June 30, 2003. Depreciation and amortization.Wireless telephony depreciation and
amortization expense decreased by $0.3 million to $3.2 million for the three
months ended June 30, 2004 as compared to $3.5 million for the three months
ended June 30, 2003. This decrease is principally due to the Companys sale of
Tyumenruskom. Depreciation expense for Tyumenruskom for the three months ended
June 30, 2003 was $0.4 million. This reduction in depreciation and
amortization expense was partially offset by an increase of $0.1 million in
depreciation and amortization to $3.2 million at Magticom for the three months
ended June 30, 2004, due to an overall increase in fixed assets during the
period. 48




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Cable Television Unconsolidated cable television was comprised of Cosmos TV, a cable
television provider in Minsk, Belarus of which the Company owned 50%. During
the three months ended June 30, 2003, cable television was also comprised of
Baltcom TV and Teleplus. The Company disposed its interest in Baltcom TV in
August 2003, its interest in Teleplus in November 2003 and its interest in
Cosmos TV in March 2004. Teleplus, Baltcom TV and Cosmos TV generated revenues and operating income
of $2.9 million and $0.3 million, respectively, in the three months ended June
30, 2003. CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004
COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 2003 Fixed Telephony Revenues.Fixed telephony revenues increased by $3.4 million (10%) to
$36.5 million for the six months ended June 30, 2004 as compared to $33.1
million for the six months ended June 30, 2003. This growth in revenues is driven by a $1.7 million increase in data and Internet services, a $1.6 million growth in business
fixed revenues and a
$0.2 million increase in regulated Vasiliesvsky Island residential telephony.
In addition, PGTS, which was acquired on April 27, 2004, contributed
incremental revenue of $0.6 million during the six months ended June 30, 2004.
Such increases were partially offset by a $0.5 million decrease in transit
carrier revenues and $0.2 million decrease in equipment sales. The increase in business fixed revenues was principally due to PeterStars
efforts to market its highspeed digital fiber network, in lieu of traditional
copper telephone infrastructure, to its business customers. These marketing
efforts have also resulted in 91% of new connections for the six months ended
June 30, 2004 utilizing PeterStars infrastructure versus 82% of new
connections for the six months ended June 30, 2003. Management anticipates that
such connections will continue to remain at such proportionate levels. As a
result, PeterStar has effectively increased its customer base for other high
band-width intensive products. The increase in data and Internet services is principally due to the
growing demand for leased lines and dial up services within the St. Petersburg
market. Management believes that PeterStar has increased its share of the
St. Petersburg Internet services market. Further, management expects that it
will continue to experience revenue growth for its data and Internet product
portfolio; however, the rate of growth will most likely decline due to
competitive pressures. Vasilievsky Island represents an area of St. Petersburg where PeterStar
provides principally residential telephony services. The revenue increase at
Vasilisevsky Island was principally due to an increase in government regulated
tariffs. Transit carrier revenues are mainly an opportunity based revenue
stream and management does not currently anticipate revenue growth in future
periods. Gross margin.Fixed telephony gross margin increased by $2.9 million
(13%) to $25.3 million for the six months ended June 30, 2004 as compared to
$22.4 million for the six months ended June 30, 2003. Gross margin increased principally due to revenue growth offset by lower
margins on long distance traffic and higher PSTN interconnect and local
unbundling costs. Gross margin as a percentage of revenues was consistent at
68% for the six months ended June 30, 2004 and 2003. The increase in the gross margin is primarily due to better utilization of
the PeterStar telecommunications network and
reduction of lower margin transit carrier revenues on a year-over-year basis.
In addition, the revenues at PGTS are at higher margins than those historically
recognized at PeterStar. Such increases in the margin percentages were fully
offset by lower margins on long distance traffic, which is traditionally low
margin. Even though long distance traffic volume is increasing, the margin
percentages are contracting due to competitive pressures on tariffs charged to
customers. Furthermore, PeterStars interconnection costs have also increased,
which is another factor that has caused PeterStars gross margin percentage to
decline. As discussed previously, PeterStar has had success in marketing the
use of its digital fiber network to its customer base, which management expects
will halt the erosion of its gross margin in the short-term as PeterStar should
be able to reduce its payments of third-party access fees associated with its
historical reliance upon leased copper line telephone infrastructure. Selling, general and administrative.Fixed telephony selling, general
and administrative expenses increased by $1.2 million (17%) to $8.1 million for
the six months ended June 30, 2004 as compared to $6.9 million for the six
months ended June 30, 2003. 49




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The significant components of selling, general and administrative expenses
for PeterStar for the six months ended June 30, 2004 and 2003 are as follows
(in thousands): 2004
    
    2003Personnel related costs
    
    $
    3,177
    
    
    $
    2,793Office related costs
    
    
    2,115
    
    
    
    1,680Marketing expenses
    
    
    711
    
    
    
    625Taxes other than income
    
    
    586
    
    
    
    588Bad debt expense
    
    
    551
    
    
    
    343Professional services
    
    
    386
    
    
    
    292Other expenses
    
    
    576
    
    
    
    607Total
    
    $
    8,102
    
    
    $
    6,928
 Selling general and administrative costs increased on a year-over-year
basis due to the inclusion of PGTS selling, general and administrative expenses
of $0.3 million, additional personnel costs of $0.2 million due to headcount
growth, salary raises to existing personnel of $0.2 million and higher office
costs due to the addition of office space at PeterStars main office and the
opening of a Moscow branch office at the end of 2003. Depreciation and amortization.Fixed telephony depreciation and
amortization expense increased by $1.6 million to $11.4 million for the six
months ended June 30, 2004 as compared to $9.8 million for the six months ended
June 30, 2003. This includes $3.6 million and $3.3 million of license
amortization for the six months ended June 30, 2004 and 2003, respectively,
allocated from corporate headquarters. This growth in depreciation and amortization expense is due to the
increase in investment to expand and upgrade the PeterStar network
infrastructure, thereby creating an increase in the fixed asset depreciable
base when compared to the prior period. Such increase was partially offset by
the impairment of certain BCL fixed assets as of March 31, 2003, thereby
creating a reduction in its fixed asset depreciable base when compared to prior
period. With the exception of the allocated license amortization of $3.6 million,
management expects that such trend will continue in the foreseeable future.
During the fourth quarter of 2004, the allocated license will be fully
amortized and the Company projects that the amortization expense for the
allocated license will be $6.7 million in 2004. Cable Television Ayety will not be included in the Companys consolidated results of
operations subsequent to June 30, 2004, as the Company will no longer
consolidate the results of Ayety. Until certain governance issues are
resolved, the results of Ayety will be included in the results of operations of
equity interests. Revenues.Cable television revenues increased by $0.1 million (4%) to
$1.4 million for the six months ended June 30, 2004 as compared to $1.3 million
for the six months ended June 30, 2003. The growth in Ayety revenues was caused
by foreign currency fluctuations, as, on a comparable currency basis, revenue
was essentially unchanged. While total subscribers rose from 40 thousand at
June 30, 2003 to 41 thousand at June 30, 2004, revenue on an average revenue
per unit or ARPU decreased in the comparable periods mainly due to the loss of
MMDS (microwave transmission) customers offset by an increase in wired
customers. The ARPU is typically higher for MMDS customers. The loss of MMDS
customers was also partially offset by an increase in internet revenue due to
an increase in subscriber base. Management anticipates that the trend of an
overall loss of MMDS subscribers will continue as competitive wired networks
continued to expand into areas served by Ayetys MMDS system. Gross margin.Cable television gross margin was unchanged at $1.3
million for the six months ended June 30, 2004 and 2003. Gross margin was
favorably impacted by the foreign currency movements period-over-period. This
favorable impact was offset by the unfavorable decline in margins due to the
loss of MMDS customers. Selling, general and administrative.Cable television selling, general
and administrative expenses increased by $0.3 million (35%) to $1.2 million for
the six months ended June 30, 2004 as compared to $0.9 million for the six
months ended June 30, 2003. The increase at Ayety reflects a general increase
in costs during 2004. The increase is primarily due to increased salaries due
to the ventures assumption of payment for the general directors salary
beginning in June 2003 and increased salaries for network maintenance. Prior to
June 2003, the general directors salary was paid by the corporate office. Depreciation and amortization.Cable television depreciation and
amortization expense decreased by $0.1 million to $0.2 million for the six
months ended June 30, 2004 as compared to $0.3 million for the six months ended
June 30, 2003. The decrease in Ayety reflects the fact that a number of fixed
assets have become fully depreciated. 50




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OTHER CONSOLIDATED RESULTS Selling, general and administrative.Selling, general and administrative
expenses at the corporate level decreased from $17.4 million in the six months
ended June 30, 2003 to $6.3 million for the six months ended June 30, 2004. The significant components of corporate selling, general and
administrative expenses for the six months ended June 30, 2004 and 2003 are as
follows (in thousands): 2004
    
    2003Personnel related costs
    
    $
    2,433
    
    
    $
    7,230Professional services
    
    
    1,755
    
    
    
    4,742Office related expenses and insurance
    
    
    1,253
    
    
    
    1,430Restructuring related professional services
    
    
    
    
    
    
    2,588Other expenses
    
    
    860
    
    
    
    1,409Total
    
    $
    6,301
    
    
    $
    17,399
 The significant reduction in selling, general and administrative expenses,
on a period-over-period basis, is attributable to Companys initiatives to
reduce corporate overhead burn-rate. The reduction in personnel related costs,
on a period-over-period basis, are due to the Companys actions to
substantially down-size the Companys corporate headquarters personnel
beginning in the first quarter of 2003. The reduction in restructuring and
related professional services costs, on a period-over-period basis, is
attributable to the Companys decision to cease using professional advisors for
its restructuring related initiatives in the beginning of the third quarter of
2003. The reduction in professional services costs, on a period-over-period
basis, is principally attributable to reduced legal fees. The reduction
in other expenses primarily reflects a decrease in travel and other related
expenses due to the reduced headcount. Interest expense, net.Net interest expense for the six months ended
June 30, 2004 decreased by $1.8 million to $7.9 million for the six months
ended June 30, 2004 as compared to $9.7 million for the six months ended June
30, 2003. The decrease is principally due to the reduction of outstanding
Senior Notes. Equity in income of unconsolidated investees.Equity in income of
unconsolidated investees increased by $3.1 million to $10.0 million for the six
months ended June 30, 2004 as compared to $6.9 million for the six months ended
June 30, 2003. For further information on the ventures reported under the
equity method, refer to the unconsolidated results discussion below. Gain on retirement of debt.On April 24, 2003, the Company completed an
exchange with Adamant of certain business ventures for $58.6 million of the
Senior Notes. The Company recognized a gain of $24.1 million related to the
early extinguishment of the exchanged Senior Notes. Income tax expense.Income tax expense increased by $0.3 million to
$3.8 million for the six months ended June 30, 2004 as compared to $3.5
million for the six months ended June 30, 2003. The income tax expense is
principally from foreign income taxes on PeterStars operations. Further, in
the six months ended June 30, 2004, foreign income taxes were partially offset
by a state income tax benefit of $0.6 million during the period. Additional
benefits are not anticipated in 2004. In addition, the Company incurred
withholding taxes of $1.9 million and $0.6 million on its dividends from
Magticom and PeterStar during the six months ended June 30, 2004 and 2003,
respectively. Minority interest.Minority interest represents the allocation of
income and losses by the Companys majority owned subsidiaries and joint
ventures to its minority ownership interest. Minority interest increased by
$0.1 million to $4.1 million for the six months ended June 30, 2004 as compared
to $4.0 million for the six months ended June 30, 2003. The minority interest
amount relates principally to PeterStars and Magticoms operations. Income from discontinued components.Income from discontinued components
was $6.8 million for the six months ended June 30, 2004 as compared to income
of $9.8 million of the six months ended June 30, 2003. In addition to the net
losses from the operations of the discontinued ventures of $0.7 million in 2004
and $1.1 million in 2003, as further discussed in the section titled Results
of Discontinued Components, the Company recognized gains on the disposition of
Radio Skonto, ATK and Romsat of $0.3 million, $0.7 million and $5.8 million,
respectively, in the six months ended June 30, 2004. In addition, during the
six months ended June 30, 2003, the Company recognized a gain of $0.5 million
related to the settlement of remaining severance obligations and other
liabilities of discontinued components. During the six months ended June 30,
2003, the Company recognized gains of $2.9 million, $7.0 million and $0.7
million related to the disposition of Technocom, the disposition of various
business ventures in connection with the Adamant exchange and the final
settlement related to the sale of Snapper, respectively. Cumulative effect of a change in accounting principle.The cumulative
effect of a change in accounting principle of $2.0 million for the six months
ended June 30, 2003 represents the effect of the Company changing its
accounting policy to bring certain business ventures off of a three-month lag
to a real time basis. 51




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RESULTS OF UNCONSOLIDATED OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004
COMPARED TO THE RESULTS OF UNCONSOLIDATED OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 2003 Fixed Telephony Unconsolidated fixed telephony is comprised of the Companys 30% minority
ownership interest in Telecom Georgia, which is an international and long
distance telephony provider in the Republic of Georgia. Since the Companys US
GAAP investment is zero and as there is no obligation to fund operations, the
Company has not recorded any share of the losses for Telecom Georgia and does
not deem Telecom Georgias current financial performance to be material. During the six months ended June 30, 2003, fixed telephony was also
comprised of Comstar, MTR Svyaz and Teleport-TP. The Company disposed of its
interests in Comstar on April 24, 2003 and its interests in MTR Svyaz and
Teleport-TP on June 25, 2003. Wireless Telephony Revenues.Wireless telephony revenues increased by $10.7 million (32%)
to $43.9 million for the six months ended June 30, 2004 as compared to $33.2
million for the six months ended June 30, 2003. This growth in revenues was
primarily attributable to Magticom. Revenues at Magticom increased by $12.7 million (41%) to $43.9 million for
six months ended June 30, 2004 as compared to $31.2 million for six months
ended June 30, 2003. This increase in revenues is due to strong growth in the
subscriber base. Total subscribers were 362 thousand at June 30, 2004 compared
to 284 thousand at June 30, 2003, an increase of 28%. On a comparable currency
basis, revenue growth from traffic, period-over-period, was 32% and the minutes
of use growth was 33%. Accordingly, a portion of revenue growth was
attributable to favorable foreign exchange fluctuation. Tyumenruskom, which was sold in September 2003 contributed revenues of
$2.0 million for the six months ended June 30, 2003. Gross margin.Wireless telephony gross margin increased by $10.2
million (37%) to $38.3 million for the six months ended June 30, 2004 as
compared to $28.1 million for the six months ended June 30, 2003. This increase
was due primarily to the increase in gross margin at Magticom. Gross margin at Magticom increased by $11.8 million (44%) to $38.3 million
for the six months ended June 30, 2004 as compared to $26.5 million for the six
months ended June 30, 2003. Total gross margin dollars increased due to the
strong increase in revenue. Gross margin as a percentage of revenues increased
two percentage points to 87% in 2004 due to higher network utilization. As a
result, the overall fixed costs of services as a percentage of revenue has
decreased. In addition, interconnection revenue outpaced interconnection costs. Tyumenruskom contributed gross margin of $1.5 million for the six months
ended June 30, 2003. Selling, general and administrative.Wireless telephony selling,
general and administrative expenses increased by $0.8 million (19%) to $5.0
million for the six months ended June 30, 2004 as compared to $4.2 million for
the six months ended June 30, 2003. The significant components of selling, general and administrative expenses
for Magticom for the six months ended June 30, 2004 and 2003 are as follows (in
thousands): 2004
    
    2003Personnel related costs
    
    $
    2,557
    
    
    $
    1,819Taxes other than income
    
    
    1,604
    
    
    
    1,303Marketing expenses
    
    
    535
    
    
    
    425Bad debt expense (recovery)
    
    
    18
    
    
    
    (298
    )Other expenses
    
    
    325
    
    
    
    419Total
    
    $
    5,039
    
    
    $
    3,668
 The increase in selling, general and administrative expenses is primarily
due an increase in personnel costs of $0.7 million due to an overall increase
in headcount at Magticom and wage increases provided to employees effective
January 2004. In addition, an increase in bad debt expense of $0.3 million is
due to a recovery that occurred in 2003 that did not occur in 2004. Tyumenruskom incurred $0.5 million of selling, general and administrative
expenses during the six months ended June 30, 2003. Depreciation and amortization.Wireless telephony depreciation and
amortization expense was unchanged at $7.1 million for the six months ended
June 30, 2004 and 2003. Tyumenruskom incurred $0.8 million of depreciation and
amortization for the six months ended June 30, 2003. This reduction was offset
by an increase in depreciation and amortization expense at Magticom due to
fixed asset additions during the period. 52




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Cable Television Unconsolidated cable television was comprised of Cosmos TV, a cable
television provider in Minsk, Belarus of which the Company owned 50%. During
the six months ended June 30, 2003, cable television was also comprised of
Baltcom TV, Kosmos TV and Teleplus. The Company disposed of its interest in
Kosmos TV in April 2003, its interest in Baltcom TV in August 2003, its
interest in Teleplus in November 2003 and its interest in Cosmos TV in March
2004. The combined companies generated revenues and operating income of $7.7
million and $0.1 million, respectively, in the six months ended June 30, 2003,
whereas Cosmos TV generated revenues and operating income of $0.7 million, and
$0.2 million, respectively, in the six months ended June 30, 2004. RESULTS OF DISCONTINUED BUSINESS COMPONENTS Radio Broadcasting On April 24, 2003 the Company completed an exchange with Adamant Advisory
Services, a British Virgin Islands company, of its ownership in certain of its
business units in Russia for approximately $58.6 million, face value, of the
Companys Senior Notes held by Adamant. As part of this transaction, the
Company conveyed to Adamant its ownership interests in its Russian radio
stationsZAO SAC in Moscow and ZAO Radio Katusha in St. Petersburg. In addition, on May 5, 2003 the Company completed the sale of its
ownership interests in Radio Georgia. On September 30, 2003, the Board of
Directors formally approved managements plan to dispose of the remaining
non-core Radio businesses. As a result, on April 28, 2004, the Company
disposed of its interests in Radio Skonto. On July 8, 2004, the Company
entered into an agreement to sell all but one of its remaining radio businesses
during the third quarter of 2004. The combined results of operations of the discontinued radio businesses
are as follows (in thousands): Six months ended June 30,2004
    
    2003Revenues
    
    $
    7,535
    
    
    
    6,552Operating expenses
    
    
    8,360
    
    
    
    8,162Operating loss
    
    $
    (825
    )
    
    
    (1,610
    )Net loss
    
    $
    (1,117
    )
    
    
    (1,287
    )
 Revenues.Radio broadcasting revenues increased by $1.0 million to $7.5
million for the six months ended June 30, 2004 as compared to $6.5 million for
the six months ended June 30, 2003. A total of $0.8 million of the revenue
increase was due to local currency appreciation to the US dollar, principally
in Hungary, Finland and Estonia. On a comparable currency basis, several
ventures had consistent performance in the comparable periods. The increase in
revenue at Metroradio Finland was offset with decreases at Radio Juventus
(Hungary) and Country Radio (Czech Republic). The disposal of Radio Skonto
also impacted the period comparisons. On a comparable currency basis, revenues in Metroradio Finland increased
by $0.4 million, primarily as a result of two acquired radio stations as well
as the launch of an in-house sales house. The new stations, Suomi Plus and
Classic Radio, were launched in May 2003 and November 2003, respectively, and
the sales house was established from October 2003. The sales house enables the
Company to better serve advertisers needs by selling tailor-made advertising on
individual stations and/or clusters of stations. Revenues at Juventus Radio decreased by $0.2 million as a consequence of
increased rate competition by national competitors and a general decline in the
national radio advertising market. In addition, one of the ventures key
clients temporarily halted advertising during the three months ended June 30,
2004 due to a change in the clients ownership. Revenues at Country Radio decreased by $0.1 million on a comparable
currency basis for the six months ended June 30, 2004 due to a change in the
sales arrangement at the sales house, coupled with a shortfall in direct
revenues. The annual agency sales agreement for 2004 is based on a fixed
guarantee instead of a minimum guarantee, as was the case in 2003. The fixed
guarantee for the year will result in consistent sales on an annual basis.
Direct sales have decreased year on year primarily due to rate competition. Radio Skonto contributed incremental revenue of $0.1 million for the six
months ended June 30, 2003 as compared to the six months ended June 30, 2004. Operating expenses.Radio broadcasting operating expenses increased by
$0.2 million to $8.4 million for the six months ended June 30, 2004 as compared
to $8.2 million for the six months ended June 30, 2003. The increase reflects
an increase due to currency fluctuations partially offset by cost savings. The
increase in the net movement in operating expenses attributable to local
currency 53




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appreciation was $0.8 million. On a comparable currency basis, a decrease of
$0.3 million was realized over the prior year period. The comparable currency
basis decrease in operating expenses for the six months ended June 30, 2004 was
primarily due to a decrease at Juventus partially offset by an increase at
Metroradio Finland. The disposal of Radio Skonto also impacted the
period-over-period comparison. The comparable currency basis decrease in operating expenses of $0.8
million at Juventus was primarily due to the successful outcome of Juventus
negotiations with the Hungarian media regulators to reduce broadcast license
fees from July 2003, as well as cost savings in other expenses resulting from
restructuring and streamlining operations at Juventus radio broadcasting. The comparable currency basis increase in operating expenses of $0.5
million at Metroradio Finland was due to increased operational as well as
sales-related expenses due to the launch of the two additional stations. In
addition to an increase in sales-related expenses including sales commissions
and royalties, operating expenses for salaries, advertising, transmitter rent
and programming increased as a result of operating two additional stations in
the 2004 period. Radio Skonto incurred incremental operating expenses of $0.1 million for
the six months ended June 30, 2003 as compared to the six months ended June 30,
2004. Discontinued Business Components  Cable Television On September 30, 2003, the Board of Directors formally approved
managements plan to dispose the remaining non-core cable businesses, with the
exception of Ayety. As a result, the Company disposed of its interests in Sun
TV, Romsat and ATK on November 12, 2003, March 4, 2004 and March 26, 2004,
respectively. The combined results of operations of the discontinued Cable television
businesses up to their respective dates of sale are as follows (in thousands): Six months ended June 30,2004
    
    2003Revenues
    
    $
    2,080
    
    
    
    6,111Cost of services
    
    
    450
    
    
    
    1,388Operating expenses
    
    
    1,243
    
    
    
    4,634Operating income
    
    $
    387
    
    
    
    89Net income
    
    $
    382
    
    
    
    154
 Revenues.Cable television revenues decreased by $4.0 million to $2.1
million for the six months ended June 30, 2004 as compared to $6.1 million for
the six months ended June 30, 2003. Sun TV contributed revenue of $1.1 million
for the six months ended June 30, 2003 and Romsat and ATK contributed
incremental revenue of $2.1 million and $0.5 million, respectively, for the six
months ended June 30, 2003 as compared to the same period in 2004. Gross margin. Cable television gross margin decreased by $3.1 million to
$1.6 million for the six months ended June 30, 2004 as compared to $4.7 million
for the six months ended June 30, 2003. Sun TV contributed gross margin of
$0.9 million for the six months ended June 30, 2003 and Romsat and ATK
contributed incremental gross margin of $1.6 million and $0.4 million,
respectively, for the six months ended June 30, 2003 as compared to the same
period in 2004. Operating expenses. Cable television operating expenses decreased by $3.4
million to $1.2 million for the six months ended June 30, 2004 as compared to
$4.6 million for the six months ended June 30, 2003. Sun TV incurred operating
expenses of $1.0 million for the six months ended June 30, 2003 and Romsat and
ATK incurred incremental operating expenses of $1.8 million and $0.4 million,
respectively, for the six months ended June 30, 2003 as compared to the same
period in 2004. Critical Accounting Policies The Company reviews all significant estimates affecting its consolidated
financial statements on a recurring basis and records the effect of any
necessary adjustment prior to their publication. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of financial
statements; accordingly, it is possible that actual results could differ from
those estimates and changes to estimates could occur in the near term. The
preparation of the Companys financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of the contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates and judgments are used when accounting
for the allowance for doubtful accounts, inventory obsolescence, long-lived
assets, intangible assets, recognition of revenue, assessing control over
operations of business ventures, self-insured workers compensation claims,
depreciation and amortization, employee benefit plans, income taxes and
contingencies, among others. The Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of its consolidated 54




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financial statements: The Company maintains allowances for doubtful accounts for estimated
losses resulting from the failure of its customers to make required
payments. If the financial conditions of the Companys customers were to
deteriorate, resulting in an impairment of their ability to make payments,
or customers otherwise do not pay, additional allowances may be required. The Company holds minority interests in business ventures and the Company
accounts for such interests under the equity method. Future adverse
changes in market conditions or poor operating results of underlying
investments could result in losses or an inability to recover the carrying
value of the investments that may not be reflected in an investments
current carrying value, thereby possibly requiring an impairment charge in
the future. The Company assesses the impairment of identifiable
intangibles, long-lived assets and related goodwill and enterprise level
goodwill whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors the Company considers
important which could trigger an impairment review include the following,
(i) significant underperformance relative to expected historical or
projected future operating results; (ii) significant changes in the manner
of our use of the acquired assets or the strategy for our overall
business; and/or (iii) significant negative industry or economic trends.
When the Company determines that the carrying value of the intangibles,
long-lived assets and related goodwill and enterprise level goodwill may
not be recoverable based upon the existence of one or more of the
indicators of impairment, the Company measures any impairment using
estimated market value if a value is determinable and if not, weighting
various possible scenarios for managements assessment of probability of
occurrence and discounting the probability-weighted cash flows at an
appropriate rate. The Company assesses its level of control over the operating and financial
decisions of its business ventures when determining whether to account for
their operations at cost, or using the equity method or as consolidated
entities. The assessment considers all relevant facts including the
Companys voting interests and the existence of protective or
participating rights of other parties. The Company monitors changes in its
level of control due to changes in ownership percentages as well as
external factors that may affect its influence or control and responds
accordingly. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk In the normal course of business, the financial position of the Company is
routinely subjected to a variety of risks. In addition to the market risk
associated with interest rate movements on outstanding debt and currency rate
movements on non-US dollar denominated assets and liabilities, other examples
of risk include collectibility of accounts receivable and significant
political, economic and social risks inherent in doing business in emerging
markets such as Russia and the Republic of Georgia. Interest Rate The majority of the Companys debt obligations and those of its operating
businesses are fixed rate obligations, and are therefore not exposed to market
risk from upward changes in interest rates. Although market risk exists for
changes in interest rates, the Companys fixed interest rate of 101⁄2% on its
Senior Notes would likely approximate or be lower than a hypothetical rate on
similar variable rate obligations, thereby limiting the risk. Furthermore, the
Companys long-term debt and that of its operating businesses are denominated
in or tied to US dollars. The Company does not believe that the Companys debt
not denominated in US dollars exposes the Company to a material market risk
from changes in foreign exchange rates. Inflation and Foreign Currency The effects of inflation in the respective markets that the Companys
business ventures operate, is reflected with the Companys business ventures
financial results as effects of foreign currency fluctuations. The Company does not currently hedge against foreign exchange rate risks.
In the majority of countries that the Companys business ventures operate, the
currencies (such as the Russian Ruble and Georgian Lari) are non-convertible
outside the country, so the Companys ability to hedge against devaluation by
converting to other currencies is significantly limited or cost prohibitive. In
these countries, a sophisticated or reliable market for the trade of derivative
instruments in order to allow the Company to hedge foreign currency risk does
not currently exist. Accordingly, the Company seeks to maintain the minimal
amount of foreign currency on hand to reduce its exposure. The Companys strategy is to minimize its foreign currency risk. Whenever
possible, the Company bills and collects revenues in US dollars or an
equivalent local currency amount adjusted on a monthly basis for exchange rate
fluctuations. However, due to the strengthening of the Russian Ruble, effective
September 1, 2003 PeterStar began billing and collecting in Russian Rubles;
provided that, included within the terms of the majority of contracts with
businesses, PeterStar has retained the right to change the billing currency
should PeterStar deem the circumstances warrant such a change. As a result,
PeterStar changed its functional currency to the Russian Ruble effective
October 1, 2003. In addition, due to changes in its principal liabilities,
Magticom changed its functional currency to the Georgian Lari effective April
1, 2003. 55




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The Company is exposed to foreign exchange price risk in that a
substantial portion of its operations are located outside of the United States.
In remeasuring the financial statements stated in the local currency into the
reporting currency, US dollars, a cumulative translation adjustment may result.
In Russia, where the Company has the majority of its operations in consolidated
subsidiaries, a 10% devaluation of the Russian Ruble in the six months ended
June 30, 2004, for example, would have resulted in a increase to the Companys
net loss of $0.2 million, with all other variables held constant. In addition,
certain of the Companys business ventures accounted for under the equity
method could be exposed to foreign exchange price risk. The Companys exposure
to these risks is limited by its less significant ownership interest. The Companys business ventures are generally permitted to maintain US
dollar accounts to service their US dollar denominated debt and current account
obligations, thereby reducing foreign currency risk. As the Companys
subsidiaries and business ventures expand their operations and become more
dependent on local currency based transactions, the Company expects that its
foreign currency exposure will increase. The following table provides information about our principal financial
instruments denominated in Russian Rubles and presents such information in US
dollar equivalents (in thousands). The table summarizes information on
instruments that are sensitive to foreign currency exchange rates: June 30, 2004
    
    December 31, 2003CURRENT ASSETSCash and cash equivalents
    
    $
    515
    
    
    $
    1,233Accounts receivable, net
    
    
    4,253
    
    
    
    893Prepaids and other assets
    
    
    573
    
    
    
    447CURRENT LIABILITIESAccrued expenses
    
    
    690
    
    
    
    206Closing foreign currency exchange rate
    
    
    29.03
    
    
    
    29.45
 In addition to the above exposure to changes in the exchange rate of the
Russian Ruble, the Company is exposed for its investments in the Republic of
Georgia, principally Magticom, for changes in the exchange rate of the Georgian
Lari. The Companys net investment in Magticom as of June 30, 2004 and December
31, 2003 totaled $35.2 million and $34.7 million, respectively. Item 2: Managements Discussion and Analysis of Financial Conditions and
Results of Operations contains additional information on risks associated with
the Companys investments in Russia and the Republic of Georgia. 56




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Special Note Regarding Forward-Looking Statements Any statements in this document about the Companys expectations, beliefs,
plans, objectives, assumptions or future events or performance are not
historical facts and are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are often but not always made through the use of words or phrases like
believes, expects, may, will, should or anticipates or the negative
of these words or phrases or other variations on these words or phrases or
comparable terminology, or by discussions of strategy that involves risks and
uncertainties. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the Companys actual results,
performance or achievements or industry results to be materially different from
any future results, performance or achievements expressed or implied by these
forward-looking statements. These risks, uncertainties and other factors
include, among others:  
    
    liquidity issues facing the Company, and the restructuring of the Company;
    
    the ability of the Company to complete the sale of its non-core businesses;
    
    the ability to obtain the requisite consents for any sales of the Companys businesses;
    
    the timing and structure of any sale of the Companys businesses;
    
    the consideration or values obtained by the Company for any businesses that are sold;
    
    general economic and business conditions, which will,
among other things, impact demand for the Companys products and
services;
    
    competition from other communications companies or
companies engaged in related businesses, which may affect the
Companys ability to enter into or acquire new businesses, or
generate revenues;
    
    political, social and economic conditions and changes
in laws, rules and regulations or their administration or
interpretation in Russia and the Republic of Georgia, including
the effect of the new law On Telecommunications in Russia and
the proposed changes to the Tax Code in the Republic of Georgia,
which may affect the Companys results of operations;
    
    timely completion of construction projects for new
systems for the business ventures in which the Company has
invested, which may impact the costs of these projects;
    
    developing legal structures in Russia and the
Republic of Georgia, which may affect the Companys ability to
enforce its legal rights;
    
    cooperation of local partners in the Companys
communications investments in Russia and the Republic of
Georgia, which may affect the Companys results of operations;
    
    exchange rate fluctuations;
    
    license renewals for the Companys communications investments in Russia and the Republic of Georgia;
    
    the loss of any significant customers, or the deterioration of credit quality of the Companys customers;
    
    changes in business strategy or development plans;
    
    the quality of management;
    
    the availability of qualified personnel;
    
    changes in or the failure to comply with government regulation or actions of regulatory bodies, and
    
    other factors referenced in this document. Accordingly, any forward-looking statement is qualified in its entirety by
reference to these risks, uncertainties and other factors 57




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and you should not place any undue reliance on them. Furthermore, any
forward-looking statement speaks only as of the date on which it is made. New
factors emerge from time to time and it is not possible for the Company to
predict which will arise. In addition, the Company cannot assess the impact of
each factor on its business or the extent to which any factor, or combination
of factors, may cause actual results to differ materially from those contained
in any forward-looking statements. 
 Item 4. Controls and Procedures Disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports that it files or
submits, is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commissions (SEC) rules and
forms. An evaluation was performed by the Companys management, with the
participation of the Chief Executive Officer and Chief Financial Officer, of
the Companys disclosure controls and procedures as of the end of the period
covered by this quarterly report. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were not effective. The principal basis for the
Officers conclusion is attributable to the fact that the Company is a holding
company with shareholder interests in business ventures that conduct their
operations in Northwest Russia and the Republic of Georgia. Specific factors
contributing to this conclusion include:  
    
    The effective oversight by the Company of the business managers who
are responsible for managing the daily business matters of the Companys
business ventures, both consolidated and unconsolidated, may be
encumbered due to business practice common within the geographic area of
the business operations, the degree of the Companys historic and
current participation as a shareholder within the respective businesses
and resource constraints imposed by the Companys current liquidity
situation;  
    
    The Company does not control and may be limited in its participation
in management of its unconsolidated business ventures. Thus, its
disclosure controls and procedures with respect to such business
ventures are necessarily more limited than those it maintains with
respect to its consolidated business ventures; and  
    
    In addition, the Company has experienced, and may continue to
experience, difficulty and significant cost in the timely collection of
financial data with respect to certain of its business ventures. The
emerging market countries in which the Company operates lack standard
Western management, accounting, reporting and business operations
processes. As a result, the timely collection of financial data and
preparation of consolidated financial statements in accordance with
accounting standards generally accepted in the United States, based on
the books of account and corporate records of those business ventures,
has required significant resources of the Company. There were no changes during the second quarter ended June 30, 2004 that
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. The Company continues to use both financial and personnel resources to
improve its management, accounting, reporting and business operations
processes. However, the Companys liquidity has, and could continue to limit
managements ability to implement improvements to its management and
accounting, reporting and business operations processes. In addition, certain
structural complexities of the Companys business may impact the effectiveness
of disclosure controls and procedures and internal control over financial
reporting. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and may not be detected. 
 PART IIOTHER INFORMATION 
 Item 1. Legal Proceedings See Item 3 of the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 for information on outstanding litigation and environmental
matters. In addition to the matters described in the Companys Annual Report on
Form 10-K, the Company is involved in the matter described below: Commercial Dispute The Company is in a commercial dispute with Mtatsminda, the owner of a 15%
minority interest in Ayety. 58




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On June 2, 2004, Mtatsminda sent a letter to the Company in which it
addressed four issues. First, Mtatsminda requested that the Company cause
Ayety to renegotiate the terms pursuant to which Ayety is using 11 broadcast
frequencies which belong to Mtatsminda. Second, Mtatsminda alleges that the
Company has an obligation to pay property taxes on the buildings owned by an
affiliate of the Company in Tbilisi and that the Company has failed to meet
this obligation. Third, Mtatsminda disputes the amount of certain loans made
by the Company to Ayety. Fourth, Mtatsminda alleges that the Company may have
violated laws against bribery of foreign officials and possibly engaged in
other improper or illegal conduct. As previously discussed, with respect to the broadcast frequencies, Ayety
has been using the 11 frequencies under an agreement with Mtatsminda which
recently expired. Ayety is intending to enter into negotiations with
Mtatsminda to secure continued long-term use of these frequencies. The Company
believes that the risk of Mtatsminda withdrawing the right to use its
frequencies is remote. With respect to the property tax issue, the Company is
currently investigating this allegation and has retained outside legal counsel
to assist with this investigation. The Company believes that the amount of tax
due, if any, is relatively low and it has been advised by outside legal counsel
that the risk of a tax assessment is remote. Further, the Company believes
that the allegations related to the amount of the loans made to Ayety are
unfounded and intends to vigorously defend itself on this issue. The Company believes that the fourth allegation is substantially similar
to those raised previously by certain Georgian individuals and described in
Note 12, Commitments and Contingencies  Georgian Matters. The Companys
Board of Directors authorized the Companys outside counsel to conduct an
independent inquiry into the allegations of possible improper or illegal
conduct made by the Georgian individuals. The investigation has been completed
and the results have been reported by the Companys outside counsel to the
Board of Directors of the Company. The investigation did not uncover any
specific factual support for the allegations regarding violations of laws
against bribery of foreign officials, including the Foreign Corrupt Practices
Act, or other alleged improper or illegal conduct. The Audit Committee of the
Companys Board of Directors has reviewed the June 2, 2004 letter sent by
Mtatsminda and believes that the allegations made with respect to violations of
laws and other improper or illegal conduct are substantially similar to those
previously investigated by the Companys outside counsel. For this reason, the
Audit Committee has determined not to re-open the investigation. At the request of Mtatsminda, the Company agreed to participate in a
meeting of Ayety shareholders on June 28, 2004. At that meeting, the Companys
intent was to address matters raised in Mtasmindas letter to the Company dated
June 2, 2004 and to also address matters relative to the poor financial
performance of Ayety, including the Companys decision to remove and appoint a
new General Director of the business. However, at such meeting, Mtatsminda
notified the Company that in March 2003, a new charter of Ayety was prepared
and filed in the Georgian courts (which are responsible for company
registration in Georgia). Pursuant to the terms of the New Charter, unanimous
shareholder approval is required for certain key decisions, including the
removal and appointment of a new General Director; whereas previously only a
75% vote was required. Further, at the meeting, Mtatsminda informed the
Company that it would not vote for the Companys proposal regarding the
removal of Ayetys General Director. In addition, Mtatsminda also informed the
Company representatives that they believed the Company, through its control of
Ayety, had disadvantaged Mtatsminda by ensuring that Ayetys business performed
poorly. The Company believes that the legality of the changes to the charter are
questionable and can be disputed by the Company on the basis that the New
Charter was adopted in a manner that was not in compliance with applicable law.
However, since the New Charter has already been filed and accepted by the
Georgian courts, the New Charter is valid until successfully challenged. Management is attempting to buy-out Mtatsmindas interest in
Ayety. If this course of action fails, the Company might either attempt to
resolve the commercial dispute with Mtatsminda, while simultaneously seeking to
nullify the New Charter, or the Company may dispose of its interest in Ayety. Although the Company believes that it retains the legal right to control
Ayety, the Company was unable to execute its desired objectives at the June 28,
2004 Ayety shareholders meeting. Based on these events, management has
concluded that it no longer controls the day-to-day business affairs of Ayety.
Accordingly, effective June 30, 2004, the Company will no longer account for
its ownership interest in Ayety following the consolidation method of
accounting but will follow the equity method of accounting. Campbell Litigation On March 31, 2003, Mr. James Campbell filed a complaint in the Circuit
Court of Walker County, Alabama against Turtle Shell, Inc., formerly known as
Snapper, Inc. (a wholly owned subsidiary of the Company) for damages related to
injuries allegedly sustained by him while operating a Snapper lawnmower. In
November 2002, the Company disposed of all assets and most liabilities of
Snapper, Inc. but retained certain liabilities, including any obligations that
may arise out of this litigation. Mr. Campbell died on July 14, 2003. In light
of Mr. Campbells death, his complaint was amended to include a wrongful death
claim and a claim of damages for any pain and suffering incurred by Mr.
Campbell from the time of injury until death. Mr. Campbells estate was
substituted as the plaintiff in this action. Also named as a defendant in this
case is Briggs & Stratton, the Company that manufactured the engine of the
lawnmower. On August 3, 2004, a settlement agreement was reached between the
estate of Mr. James Campbell and the other co-defendants, including the
Company, with respect to this litigation. All claims against the Company have
been released. 59




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Pension Benefit Guaranty Corporation In a letter dated August 6, 2004, the Company was informed by the Pension
Benefit Guaranty Corporation that they do not intend to take any action with
respect to the matter addressed in the Companys June 23, 2003 notice to them,
as more fully described in Item 3. Legal Proceedings Report to the Pension
Benefit Guaranty Corporation, included within the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2003. 
 Item 3. Defaults Upon Senior Securities (a)None (b) Preferred Stock The Company has authorized 70.0 million shares of preferred stock of which
4.1 million shares have been designated as Preferred Stock with a liquidation
preference of $50.00 per share, all of which were outstanding as of June 30,
2004 and December 31, 2003. Dividends on the Preferred Stock are cumulative from the date of issuance
and payable quarterly, in arrears. The Company may make any payments due on the
Preferred Stock, including dividend payments and redemptions (i) in cash; (ii)
through issuance of the Companys common stock or (iii) through a combination
thereof. Through March 15, 2001, the Company paid its quarterly dividends in cash.
The Company has elected not to declare a dividend for any quarterly dividend
periods ending after June 15, 2001. As of June 30, 2004, total dividends in
arrears on the Preferred Stock are $55.1 million. The dividend requirement for
the twelve months ending June 30, 2005 will be $19.5 million, inclusive of the
effects of compounding and assuming no payments of the dividends. Except as described in this paragraph, the holders of the Preferred Stock
have no voting rights. In June 2004, the Company entered into the Board of
Director Nominee Agreement with certain holders of the Preferred Stock who
represented to the Company that they held discretionary authority (including
the power to vote) with regard to 2.4 million shares or approximately 58% of
the outstanding 4.1 million shares of Preferred Stock. Under the terms of the
Board of Director Nominee Agreement, the Participating Preferred Stock Holders
irrevocably waived the right to request a special meeting of holders of
Preferred Stock to elect directors or take any action to request such a meeting
until immediately after the next annual meeting of the Companys stockholders.
In consideration of this waiver, Messrs. Gale and Henderson, who were
identified by the Participating Preferred Stock Holders as director candidates,
were elected as Class III Directors by the Companys Board of Directors. Their
terms will expire at the Companys next annual meeting of stockholders. At the
next annual meeting, the holders of Preferred Stock will have the right to vote
separately as a class for the election of two directors. It is expected that
Messrs. Gale and Henderson will be nominated for election by the holders of
Preferred Stock to fill these two directorships. The execution of the Board of Director Nominee Agreement was the result of
several discussions, which began in late 2003, that the Company had with
several holders of the Companys Preferred Stock. According to the terms of
the Preferred Stock, in the event the Company did not make six (6) consecutive
dividend payments on the Preferred Stock, holders of 25% of the voting power of
the outstanding Preferred Stock became entitled to compel the Company to call a
special meeting of the holders of the Preferred Stock for the purpose of
electing two new directors. The Company believes that the Board of Director
Nominee Agreement was advantageous to the Company because it eliminated the
need to hold a special meeting, which would have been both time consuming and
expensive. 60




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Item 6. Exhibits and Reports on Form 8-K ExhibitNumber
    
    
    
    Description(a)
    
    
    
    Exhibits31.1
    
    *
    
    Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    *
    
    Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    *
    
    Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    *
    
    Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(b)
    
    
    
    Reports on Form 8-K
 On April 5, 2004, the Company filed a current report on Form 8-K (Items 7
and 9), on April 26, 2004 the Company filed a current report on Form 8-K (Items
7 and 9), on May 7, 2004 the Company furnished a current report on Form 8-K
(Items 7 and 9), on May 18, 2004, the Company furnished a current report on
Form 8-K (Items 7 and 9) and on June 25, 2004, the Company furnished a current
report on Form 8-K (Item 9).   *
    
    Filed herewith 61




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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 amendment to be
signed on its behalf by the undersigned, thereunto duly authorized. METROMEDIA INTERNATIONAL GROUP, INC.By:
    
    /s/ HAROLD F. PYLE, IIIHarold F. Pyle, IIIExecutive Vice President Finance, Chief Financial Officer,and Treasurer
 Dated: August 23, 2004 By:
    
    /s/ B. DEAN ELLEDGEB. Dean ElledgeVice President Finance, Chief Accounting Officer,and Assistant Treasurer
 Dated: August 23, 2004 62




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INDEX TO EXHIBITS ExhibitNumber
    
    
    
    Description31.1
    
    *
    
    Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    *
    
    Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    *
    
    Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    *
    
    Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Filed herewith