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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 COMMISSION FILE NO. 1-5706 
 METROMEDIA INTERNATIONAL GROUP, INC.  DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
    
    58-0971455
(I.R.S. Employer
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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b of the exchange act). Yes [ ] No [x] The number of shares of common stock outstanding as of June 1, 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 Statement 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
    
    
    26Condensed Balance Sheets
    
    
    27Condensed Statements of Cash Flows
    
    
    28Condensed Statement of Stockholders Equity and Comprehensive (Loss) Income
    
    
    29Notes to Unaudited Condensed Financial Statements
    
    
    30Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    34Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    49Item 4. Controls and Procedures
    
    
    52PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    54Item 3. Defaults upon Senior Securities
    
    
    54Item 6. Exhibits and Reports on Form 8-K
    
    
    55Signatures
    
    
    56Certification of the CEO pursuant to Section 302Certification of the CFO pursuant to Section 302Certification of the CEO pursuant to Section 906Certification of the 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 March 31,2004
    
    2003Revenues
    
    $
    18,563
    
    
    $
    16,654Cost and expenses:Cost of services
    
    
    6,004
    
    
    
    4,979Selling, general and administrative
    
    
    7,669
    
    
    
    14,093Depreciation and amortization
    
    
    5,685
    
    
    
    5,043Operating loss
    
    
    (795
    )
    
    
    (7,461
    )Other income/(expense):Equity in income of unconsolidated investees
    
    
    4,170
    
    
    
    2,992Interest expense
    
    
    (4,092
    )
    
    
    (5,657
    )Interest income
    
    
    76
    
    
    
    169Foreign currency loss
    
    
    (577
    )
    
    
    (414
    )Other expense
    
    
    (125
    )
    
    
    (524
    )Loss before income tax expense, minority interest, discontinued components and
cumulative effect of a change in accounting principle
    
    
    (1,343
    )
    
    
    (10,895
    )Income tax expense
    
    
    (325
    )
    
    
    (1,370
    )Minority interest
    
    
    (1,916
    )
    
    
    (2,233
    )Loss from continuing operations before discontinued components and
cumulative effect of a change in accounting principle
    
    
    (3,584
    )
    
    
    (14,498
    )Income (loss) from discontinued components
    
    
    6,310
    
    
    
    (1,281
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    2,012Net income (loss)
    
    
    2,726
    
    
    
    (13,767
    )Cumulative convertible preferred stock dividend requirement
    
    
    (4,572
    )
    
    
    (4,255
    )Net loss attributable to common stockholders
    
    $
    (1,846
    )
    
    $
    (18,022
    )Weighted average number of common shares  Basic and diluted
    
    
    94,035
    
    
    
    94,035(Loss) income per common share attributable to common stockholders  Basic and diluted:Continuing operations
    
    $
    (0.09
    )
    
    $
    (0.20
    )Income (loss) from discontinued components
    
    
    0.07
    
    
    
    (0.01
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    0.02Net loss per common share attributable to common stockholders
    
    $
    (0.02
    )
    
    $
    (0.19
    )
 See accompanying notes to consolidated condensed financial statements. 2




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Balance Sheets
 (in thousands)
 (unaudited)
 March 31, 2004
    
    December 31, 2003ASSETS:Current assets:Cash and cash equivalents
    
    $
    33,763
    
    
    $
    26,925Accounts receivable, net
    
    
    5,811
    
    
    
    5,915Prepaid expenses and other assets
    
    
    6,791
    
    
    
    6,472Current assets of discontinued components
    
    
    4,769
    
    
    
    5,559Total current assets
    
    
    51,134
    
    
    
    44,871Property, plant and equipment, net
    
    
    86,818
    
    
    
    86,297Investments in and advances to business ventures
    
    
    36,367
    
    
    
    34,707Goodwill
    
    
    28,288
    
    
    
    27,540Intangible assets, net
    
    
    6,244
    
    
    
    7,853Other assets
    
    
    7,737
    
    
    
    5,077Noncurrent assets of discontinued components
    
    
    8,448
    
    
    
    20,085Business ventures held for sale
    
    
    
    
    
    
    536Total assets
    
    $
    225,036
    
    
    $
    226,966LIABILITIES AND STOCKHOLDERS DEFICIENCY:Current liabilities:Accounts payable
    
    $
    3,606
    
    
    $
    4,085Accrued expenses
    
    
    18,985
    
    
    
    24,917Current portion of long-term debt
    
    
    1,376
    
    
    
    1,376Current liabilities of discontinued components
    
    
    4,716
    
    
    
    6,211Total current liabilities
    
    
    28,683
    
    
    
    36,589Long-term debt, less current portion
    
    
    153,005
    
    
    
    153,383Deferred income taxes
    
    
    8,793
    
    
    
    9,426Other long-term liabilities
    
    
    7,210
    
    
    
    7,632Long-term liabilities of discontinued components
    
    
    310
    
    
    
    376Total liabilities
    
    
    198,001
    
    
    
    207,406Minority interest
    
    
    34,205
    
    
    
    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 at March 31, 2004 and December 31, 2003
    
    
    940
    
    
    
    940Paid-in surplus
    
    
    1,195,864
    
    
    
    1,195,864Accumulated deficit
    
    
    (1,401,172
    )
    
    
    (1,403,898
    )Accumulated other comprehensive loss
    
    
    (9,802
    )
    
    
    (13,061
    )Total stockholders deficiency
    
    
    (7,170
    )
    
    
    (13,155
    )Total liabilities and stockholders deficiency
    
    $
    225,036
    
    
    $
    226,966
 See accompanying notes to consolidated condensed financial statements. 3




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Statements of Cash Flows
 (in thousands)
 (unaudited)
 Three months ended March 31,2004
    
    2003Operating activities:Net income (loss)
    
    $
    2,726
    
    
    $
    (13,767
    )(Income) loss from discontinued components
    
    
    (6,310
    )
    
    
    1,281Loss from continuing operations
    
    
    (3,584
    )
    
    
    (12,486
    )Items not requiring cash outlays:Equity in income of unconsolidated investees
    
    
    (4,170
    )
    
    
    (2,992
    )Depreciation and amortization
    
    
    5,685
    
    
    
    5,043Minority interest
    
    
    1,916
    
    
    
    2,233Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (2,012
    )Changes in:Accounts receivable
    
    
    104
    
    
    
    (556
    )Other assets and liabilities
    
    
    (1,720
    )
    
    
    (6,736
    )Accounts payable and accrued expenses
    
    
    (6,411
    )
    
    
    10,414Cash used in operating activities
    
    
    (8,180
    )
    
    
    (7,092
    )Investing activities:Distributions from business ventures
    
    
    3,811
    
    
    
    11,968Additions to property, plant and equipment
    
    
    (2,703
    )
    
    
    (2,144
    )Advance to business venture
    
    
    (2,586
    )
    
    
    Proceeds from sale of businesses, net
    
    
    679
    
    
    
    Purchase of short term investments
    
    
    
    
    
    
    (2,588
    )Other investing activities, net
    
    
    (23
    )
    
    
    Cash (used in) provided by investing activities
    
    
    (822
    )
    
    
    7,236Financing activities:Dividends paid to minority interests
    
    
    (1,015
    )
    
    
    (3,233
    )Payments on debt and capital leases
    
    
    (378
    )
    
    
    (465
    )Cash used in financing activities
    
    
    (1,393
    )
    
    
    (3,698
    )Cash provided by discontinued components, net
    
    
    17,166
    
    
    
    1,131Effect of exchange rate changes on cash
    
    
    67
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    6,838
    
    
    
    (2,423
    )Cash and cash equivalents at beginning of period
    
    
    26,925
    
    
    
    26,467Cash and cash equivalents at end of period
    
    $
    33,763
    
    
    $
    24,044
 See accompanying notes to consolidated condensed financial statements. 4




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Statement of Stockholders Deficiency and Comprehensive (Loss) Income
 (in thousands)
 (unaudited)
 71⁄4% CumulativeConvertiblePreferred Stock
    
    Common Stock
    
    
    
    
    
    AccumulatedOther
    
    
    
    TotalNumber of
    
    
    
    
    
    Number of
    
    
    
    
    
    Paid-in
    
    Accumulated
    
    Comprehensive
    
    Comprehensive
    
    StockholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    Surplus
    
    Deficit
    
    (Loss) Income
    
    (Loss) Income
    
    DeficiencyBalances at December 31, 2002
    
    
    4,140
    
    
    $
    207,000
    
    
    
    94,035
    
    
    $
    94,035
    
    
    $
    1,102,769
    
    
    $
    (1,414,354
    )
    
    $
    (11,948
    )
    
    
    
    
    
    $
    (22,498
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,767
    )
    
    
    
    
    
    $
    (13,767
    )
    
    
    (13,767
    )Other comprehensive loss:Foreign currencytranslation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (178
    )
    
    
    (178
    )
    
    
    (178
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (13,945
    )Balances at March 31, 2003
    
    
    4,140
    
    
    $
    207,000
    
    
    
    94,035
    
    
    $
    94,035
    
    
    $
    1,102,769
    
    
    $
    (1,428,121
    )
    
    $
    (12,126
    )
    
    
    
    
    
    $
    (36,443
    )Balances at December 31, 2003
    
    
    4,140
    
    
    $
    207,000
    
    
    
    94,035
    
    
    $
    940
    
    
    $
    1,195,864
    
    
    $
    (1,403,898
    )
    
    $
    (13,061
    )
    
    
    
    
    
    $
    (13,155
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,726
    
    
    
    
    
    
    $
    2,726
    
    
    
    2,726Other comprehensive income:Foreign currencytranslation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,259
    
    
    
    3,259
    
    
    
    3,259Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,985Balances at March 31, 2004
    
    
    4,140
    
    
    $
    207,000
    
    
    
    94,035
    
    
    $
    940
    
    
    $
    1,195,864
    
    
    $
    (1,401,172
    )
    
    $
    (9,802
    )
    
    
    
    
    
    $
    (7,170
    )
 See accompanying notes to 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 condensed 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 Northwestern Russia and the Republic of Georgia.
For the three months ended March 31, 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
March 31, 2004, the Companys non-core media businesses were comprised of
nineteen radio businesses operating in Finland, Hungary, Bulgaria, Estonia,
Latvia and the Czech Republic and one cable television network, with operations
in Lithuania. 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 March
31, 2004, and the results of its operations and its cash flows for the
three-month periods ended March 31, 2004 and 2003, have been included. The
results of operations for the interim period are not necessarily indicative of
the results which may be realized for the full year. 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, 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. As of May 31, 2004, the Companys remaining non-core media businesses held
for sale consist of eighteen radio broadcast stations operating in Finland,
Hungary, Bulgaria, Estonia, and the Czech Republic and one cable television
network in Lithuania. Sale of these remaining non-core businesses is expected
during the first half of 2004 or promptly thereafter. 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 non-core operations. 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, a cable television provider in
Tbilisi, Georgia, in which the Company 6




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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 March 31, 2004 and May 31, 2004, the Company had
approximately $32.3 million and $30.9 million, respectively, of unrestricted
cash on hand. In addition, as of March 31, 2004, the Companys consolidated
business ventures held $1.5 million of cash. Furthermore, as of March 31,
2004, the Companys unconsolidated business venture had approximately $17.7
million of cash on hand, $17.2 million of which is held in banks in the
Republic of Georgia. The Company continues to actively pursue the sale of remaining non-core
businesses to raise additional cash and has undertaken to maximize cash
distributions from all of its business ventures. The Company projects that its
current corporate cash reserves, anticipated cash proceeds of non-core 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 its
$152.0 million aggregate principal amount (fully accreted) 10
1⁄2% 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 selling any additional non-core businesses
or that these sales, if they occur, will raise sufficient cash 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
operating business venture dividend distributions or cash proceeds from the
remaining non-core media businesses; either of which would further strengthen
our 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. During 2003, the Company engaged in discussions with representatives of
holders of a substantial portion of the Companys Senior Notes concerning a
restructuring of the Senior Notes. To date, no restructuring has been agreed
upon and further restructuring discussions with these substantial Senior Note
holders were suspended. According
to the terms of the Companys 7 1⁄4% cumulative convertible
preferred stock (the Preferred Stock), if the Company does not make six
consecutive dividend payments and thereafter receives a written request from
the holders of 25% of the voting power of the outstanding Preferred Stock, then
the Company is obligated to call a special meeting of the holders of the
Preferred Stock for the purpose of electing two new directors, except that no
special meeting may be called during the period within 60 days immediately
preceding the date fixed for the next annual meeting of the Companys
stockholders. Beginning in late 2003 and continuing into 2004, the Company has
had discussions with several holders of the Companys Preferred Stock regarding
the Preferred Stockholders right to elect two new directors to the Companys
Board of Directors. These discussions have recently resulted in a tentative
agreement, which is expected to be finalized shortly, to appoint two
individuals identified by certain holders of the Preferred Stock to the
Companys Board of Directors for terms that end at the Companys next annual
meeting of stockholders. It is presently expected that, at that time, such
individuals will, in accordance with the terms of the Preferred Stock, stand
for election by a vote of the holders of the Preferred Stock. The Company
believes that this agreement is advantageous to the Company because it
eliminates the need to hold a special meeting, which would be both time
consuming and expensive. Opportunities to restructure the Companys balance sheet, including to
refinance the Senior Notes and Preferred Stock, which had an aggregate
preference claim of $257.4 million as of March 31, 2004 are being pursued, 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 effort will be undertaken or, if undertaken, that such
effort would produce a material improvement in short-run cash flows or equity
valuations. 7




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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 proforma disclosures of
results of operations as if the fair value method had been adopted. Three months ended March 31,2004
    
    2003Net loss attributable to common stockholders as reported
    
    $
    (1,846
    )
    
    $
    (18,022
    )Add: Stock-based employee compensation expense determined under fair value based method
    
    
    (105
    )
    
    
    (172
    )Pro forma net loss
    
    $
    (1,951
    )
    
    $
    (18,194
    )Net loss per share attributable to common stockholders  Basic and Diluted:As reported
    
    $
    (0.02
    )
    
    $
    (0.19
    )Pro forma
    
    $
    (0.02
    )
    
    $
    (0.19
    )
 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 beginning accumulated deficit 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 three months ended March 31, 2003. 8




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The effect of this change on the consolidated statement of operations for
the three months ended March 31, 2003 is as follows (in thousands, except per
share data): Effect of change in year-end for lag ventures Three months
    
    Three
    
    
    
    
    
    Cumulativeended
    
    months
    
    Three months
    
    effect of aMarch 31, 2003,
    
    ended
    
    ended
    
    change in
    
    Three monthsprior to change in
    
    December
    
    March 31,
    
    accounting
    
    ended March 31,accounting policy
    
    31, 2002
    
    2003
    
    principle
    
    2003, as reportedRevenues
    
    $
    16,610
    
    
    $
    (661
    )
    
    $
    705
    
    
    $
    
    
    
    $
    16,654Costs and expenses
    
    
    24,096
    
    
    
    (592
    )
    
    
    611
    
    
    
    
    
    
    
    24,115Operating (loss) income
    
    
    (7,486
    )
    
    
    (69
    )
    
    
    94
    
    
    
    
    
    
    
    (7,461
    )Equity in income of
unconsolidated investees
    
    
    2,659
    
    
    
    (2,886
    )
    
    
    3,219
    
    
    
    
    
    
    
    2,992Other non-operating income and
expenses, net
    
    
    (6,297
    )
    
    
    
    
    
    
    (129
    )
    
    
    
    
    
    
    (6,426
    )(Loss) income before income tax
expense, minority interest,
discontinued components and
cumulative effect of a change in
accounting principle
    
    
    (11,124
    )
    
    
    (2,955
    )
    
    
    3,184
    
    
    
    
    
    
    
    (10,895
    )Income tax expense
    
    
    (1,370
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,370
    )Minority interest
    
    
    (2,570
    )
    
    
    943
    
    
    
    (606
    )
    
    
    
    
    
    
    (2,233
    )(Loss) income from continuing
operations before discontinued
components and cumulative effect
of a change in accounting
principle
    
    
    (15,064
    )
    
    
    (2,012
    )
    
    
    2,578
    
    
    
    
    
    
    
    (14,498
    )Loss from discontinued components
    
    
    (236
    )
    
    
    (503
    )
    
    
    (1,045
    )
    
    
    503
    
    
    
    (1,281
    )Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,012
    
    
    
    2,012Net (loss) income
    
    
    (15,300
    )
    
    
    (2,515
    )
    
    
    1,533
    
    
    
    2,515
    
    
    
    (13,767
    )Preferred dividends
    
    
    (4,255
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,255
    )Net loss attributable to common
stockholders
    
    $
    (19,555
    )
    
    $
    (2,515
    )
    
    $
    1,533
    
    
    $
    2,515
    
    
    $
    (18,022
    )(Loss) income per common per
share attributable to common
stockholders:Continuing operations
    
    $
    (0.21
    )
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    
    
    
    $
    (0.20
    )Discontinued components
    
    
    
    
    
    
    (0.01
    )
    
    
    0.01
    
    
    
    0.01
    
    
    
    (0.01
    )Cumulative effect of a change
in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    0.02Net loss per common share
attributable to common
stockholders
    
    $
    (0.21
    )
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.03
    
    
    $
    (0.19
    )
 Reclassifications Certain reclassifications have been made to prior periods financial
information to conform to the current period presentation. 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 businesses
will be disposed of by June 30, 2004 or promptly thereafter. A summary of such assets that are to be disposed include:  
    
    all remaining radio businesses; and 9




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##### Table of Contents




    
    all remaining cable television businesses with the exception of Ayety TV. 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 (loss)
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 March 31, 2004 are summarized below. ATK On March 26, 2004, the Company announced that it has completed the sale of
its interests in Arkhangelsk Television Company (ATK) to Yuri Firsov, the
General Director of ATK, for net cash proceeds of approximately $1.5 million.
The Company recognized a gain of $0.7 million on the disposition, which was
recorded in discontinued components in the three months ended March 31, 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 has resulted in net cash proceeds of
$16.0 million. The Company recognized a gain of $5.8 million on the
disposition, which was recorded in discontinued components in the three months
ended March 31, 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 held interests in several
Russian telecommunications enterprises including satellite-based transport
operator Teleport-TP. Simultaneous with the sale of Technocom, the Company
entered into agreements intended 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 further expects that the
broad releases, from and among all potential claimants contained in the
settlement agreements, will avoid any further dispute in connection with
Technocom, its subsidiary businesses, or its past or present stakeholders. 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 $2.8 million on the disposition, which was recorded in the three
months ended June 30, 2003. Such gain was included in the results of
discontinued components. 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. 10




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##### Table of Contents



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
$24.6 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. 11




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##### Table of Contents



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 2004. The Company recognized income of $0.5 million in discontinued components
in 2003 related to the cumulative effect of a change in accounting principle
(see Note 2, Summary of Significant Accounting Policies   Accounting
Change). Operating Results The combined operating results of the discontinued radio businesses are as
follows (in thousands): Three months endedMarch 31,2004
    
    2003Revenues
    
    $
    3,226
    
    
    $
    2,548Operating loss
    
    
    (1,184
    )
    
    
    (1,297
    )Net loss
    
    $
    (1,297
    )
    
    $
    (1,192
    )
 The combined operating results of discontinued cable television businesses
are as follows (in thousands): Three months endedMarch 31,2004
    
    2003Revenues
    
    $
    2,080
    
    
    $
    2,937Operating income (loss)
    
    
    387
    
    
    
    (280
    )Net income (loss)
    
    $
    382
    
    
    $
    (527
    )
 The principal balance sheet items included in Discontinued Business
Components are as follows (in thousands): March 31,
    
    December 31,2004
    
    2003Cash and cash equivalents
    
    $
    902
    
    
    $
    1,402Other receivable
    
    
    1,064
    
    
    
    1,064Other current assets
    
    
    2,803
    
    
    
    3,093Current assets
    
    $
    4,769
    
    
    $
    5,559Goodwill
    
    $
    1,863
    
    
    $
    8,748Property, plant and equipment, net
    
    
    1,588
    
    
    
    5,647Intangible assets, net
    
    
    4,306
    
    
    
    4,977Other noncurrent assets
    
    
    691
    
    
    
    713Noncurrent assets
    
    $
    8,448
    
    
    $
    20,085Accounts payable
    
    $
    1,614
    
    
    $
    2,766Accrued expenses
    
    
    3,102
    
    
    
    3,445Current liabilities
    
    $
    4,716
    
    
    $
    6,211Long-term liabilities
    
    $
    310
    
    
    $
    376
 The balance sheet as of March 31, 2004 excludes those ventures disposed of
during the three months ended March 31, 2004 as previously disclosed. 12




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4. Investments in and advances to business ventures Credit Agreements with Business Ventures Advances are 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 $17.5 million in funding of which $6.0 million in funding obligations remain
at March 31, 2004. The Companys funding commitments are contingent on its
approval of the respective business ventures business plans. Due to
dispositions of business ventures during the year ended December 31, 2003,
interest accruals and limited funding by the Company, partially offset by
credit agreement repayments, such commitment has been significantly reduced
from March 31, 2003 to March 31, 2004. In addition, Magticom repaid its
obligation in first quarter of 2003 and such credit agreement was subsequently
terminated. The following table summarizes the credit agreement activity for the three
months ended March 31, 2004 and 2003 (in thousands): Total Contract Amount
    
    Total Available CreditThree months ended
    
    Three months endedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Balance at January 1, 2004 and 2003, respectively
    
    $
    29,929
    
    
    $
    103,963
    
    
    $
    6,251
    
    
    $
    18,388Reductions due to dispositions of businesses
    
    
    (12,450
    )
    
    
    (4,000
    )
    
    
    
    
    
    
    (1,429
    )Reductions due to termination of agreements, net
of increases in agreements
    
    
    
    
    
    
    (1,900
    )
    
    
    (284
    )
    
    
    (54
    )Increase due to payments received and
forgiveness of debt, net of advances given and
interest accrued
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    8,960Balance at March 31, 2004 and 2003, respectively
    
    $
    17,479
    
    
    $
    98,063
    
    
    $
    5,997
    
    
    $
    25,865
 Investments in and Advances to Business Ventures As of March 31, 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 only the Companys 49% equity investment in
Magticom through Telcell Wireless, LLC (Telcell), 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%. The components of the Companys investments in and advances to business
ventures are as follows (in thousands): March 31, 2004
    
    December 31, 2003Equity in net assets acquired
    
    $
    2,450
    
    
    $
    2,450Accumulated income recognized
    
    
    39,342
    
    
    
    35,172Accumulated dividends received
    
    
    (5,172
    )
    
    
    (1,361
    )Equity portion of cumulative translation adjustment
    
    
    (253
    )
    
    
    (1,554
    )Total investments in and advances to business ventures
    
    $
    36,367
    
    
    $
    34,707
 13




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##### Table of Contents



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): Three months ended March 31,2004
    
    2003Balance, at beginning of period
    
    $
    34,707
    
    
    $
    30,720Dividends received
    
    
    (3,811
    )
    
    
    Cash repayments and other
    
    
    
    
    
    
    (11,101
    )Equity ownership in income
    
    
    4,170
    
    
    
    1,951Cumulative effect adjustment on income for lag period
    
    
    
    
    
    
    3,248Equity portion of cumulative translation adjustment
    
    
    1,301
    
    
    
    Balance, at end of period
    
    $
    36,367
    
    
    $
    24,818
 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: 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 Reed, former General Director of the Companys cable business group,
for approximately $0.7 million. As of December 31, 2003, the Company had
presented its investment in Cosmos as Business ventures held for sale in
noncurrent assets. The results of Cosmos are required to be 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 14




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##### Table of Contents



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. 15




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##### Table of Contents



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 for the three months
ended March 31, 2004 and 2003. The results of operations presented below are
before the elimination of intercompany interest (in thousands): Three months ended March 31, 2004Wireless
    
    CableTelephony
    
    Television
    
    TotalRevenues
    
    $
    20,851
    
    
    $
    665
    
    
    $
    21,516Cost of services
    
    
    2,766
    
    
    
    111
    
    
    
    2,877Selling, general and administrative
    
    
    2,544
    
    
    
    278
    
    
    
    2,822Depreciation and amortization
    
    
    3,855
    
    
    
    98
    
    
    
    3,953Operating income
    
    
    11,686
    
    
    
    178
    
    
    
    11,864Interest and other expense, net
    
    
    (495
    )
    
    
    (57
    )
    
    
    (552
    )Income tax expense
    
    
    (2,680
    )
    
    
    
    
    
    
    (2,680
    )Net income
    
    $
    8,511
    
    
    $
    121
    
    
    $
    8,632Capital expenditures
    
    $
    2,518
    
    
    $
    261
    
    
    $
    2,779Equity in income of unconsolidated investees
    
    $
    4,170
    
    
    $
    
    
    
    $
    4,170
 Three months ended March 31, 2003Fixed
    
    Wireless
    
    CableTelephony
    
    Telephony
    
    Television
    
    TotalRevenues
    
    $
    20,613
    
    
    $
    15,387
    
    
    $
    4,725
    
    
    $
    40,725Cost of services
    
    
    9,831
    
    
    
    2,308
    
    
    
    970
    
    
    
    13,109Selling, general and administrative
    
    
    5,895
    
    
    
    1,744
    
    
    
    2,604
    
    
    
    10,243Depreciation and amortization
    
    
    3,898
    
    
    
    3,574
    
    
    
    1,367
    
    
    
    8,839Operating income (loss)
    
    
    989
    
    
    
    7,761
    
    
    
    (216
    )
    
    
    8,534Interest and other income (expense), net
    
    
    (914
    )
    
    
    (1,495
    )
    
    
    1,234
    
    
    
    (1,175
    )Income tax expense
    
    
    (990
    )
    
    
    (2,208
    )
    
    
    (40
    )
    
    
    (3,238
    )Net (loss) income
    
    $
    (915
    )
    
    $
    4,058
    
    
    $
    978
    
    
    $
    4,121Capital expenditures
    
    $
    383
    
    
    $
    1,753
    
    
    $
    442
    
    
    $
    2,578Equity in (losses) income of unconsolidated investees
    
    $
    (394
    )
    
    $
    2,111
    
    
    $
    1,275
    
    
    $
    2,992
 16




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##### Table of Contents



The summarized consolidated balance sheets of Magticom as of March 31,
2004 and December 31, 2003 are as follows (in thousands): Balance SheetsMarch 31,
    
    December 31,2004
    
    2003Assets:Cash
    
    $
    17,662
    
    
    $
    17,858Accounts receivable, net
    
    
    2,425
    
    
    
    1,303Other current assets
    
    
    1,046
    
    
    
    771Property and equipment, net
    
    
    55,395
    
    
    
    54,351Other long-lived assets
    
    
    3,738
    
    
    
    4,245Total assets
    
    $
    80,266
    
    
    $
    78,528Liabilities and Business Ventures Equity:Accounts payable
    
    $
    873
    
    
    $
    696Accrued expenses and other liabilities
    
    
    22,794
    
    
    
    9,06523,667
    
    
    
    9,761Accumulated other comprehensive loss
    
    
    (516
    )
    
    
    (3,170
    )Common stock and retained earnings
    
    
    57,115
    
    
    
    71,937Business ventures equity
    
    
    56,599
    
    
    
    68,767Total liabilities and business ventures equity
    
    $
    80,266
    
    
    $
    78,528
 Cosmos is excluded at December 31, 2003 as such venture was presented as
Business Ventures Held for Sale. 5. 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 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
is subject to certain covenants pertaining to its financing activities. Such
covenants restrict the Company 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 of the
Company (as defined), 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. 6. Stockholders Equity Preferred Stock There are 70.0 million authorized shares of Preferred Stock of which 4.1
million shares have been designated as 71/4 cumulative convertible Preferred
Stock with a liquidation preference of $50.00 per share, all of which were
outstanding as of March 31, 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)
issuance of the Companys common stock or (iii) through a combination thereof.
The dividend requirement for the twelve months ending March 31, 2005 will be
$19.1 million, inclusive of the effects of compounding and assuming no payments
of the dividends. 17




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##### Table of Contents



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 March 31, 2004, total dividends in
arrears are $50.4 million. 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 March 31, 2004, the Company has not redeemed any of
the Preferred Stock. The Preferred Stock is not subject to any sinking fund
provisions. Except
as described in this paragraph, 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 March 31, 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. The holders of the Preferred Stock have no voting rights. According to the
terms of the Preferred Stock, if the Company does not make six consecutive
dividend payments and thereafter receives a written request from the holders of
25% of the voting power of the outstanding Preferred Stock, then the Company is
obligated to call a special meeting of the holders of the Preferred Stock for
the purpose of electing two new directors, except that no special meeting may
be called during the period within 60 days immediately preceding the date fixed
for the next annual meeting of the Companys stockholders. Beginning in late
2003 and continuing into 2004, the Company has had discussions with several
holders of the Companys Preferred Stock regarding the Preferred Stockholders
right to elect two new directors to the Companys Board of Directors. These
discussions have recently resulted in a tentative agreement, which is expected
to be finalized shortly, to appoint two individuals identified by certain
holders of the Preferred Stock to the Companys Board of Directors for terms
that end at the Companys next annual meeting of stockholders. It is presently
expected that, at that time, such individuals will, in accordance with the
terms of the Preferred Stock, stand for election by a vote of the holders of
the Preferred Stock. The Company believes that this agreement is advantageous
to the Company because it eliminates the need to hold a special meeting, which
would be both time consuming and expensive. 7. 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 is to make plan contributions equal to an actuarially
determined amount consistent with federal tax regulations. The funding
objective is to accumulate funds at a relatively stable rate over the
participants working lives so benefits are fully funded at retirement. 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. The Company also provides an unfunded group medical plan and life
insurance coverage for certain former employees subsequent to retirement. The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the Medicare Act) became law in December 2003 and introduced both a Medicare
prescription-drug benefit and a federal subsidy to sponsors of retiree
health-care plans that provide a benefit at least actuarially equivalent to
the Medicare benefit. The Companys Postretirement Medical Benefit Plan does
provide for such prescription-drug benefits. The Company has deferred
recognition of the accounting for the economic effects of the Medicare Act, as
the Company has not yet completed its computations to determine if the benefits
are actuarially equivalent to Medicare Part D as permitted by FASB Staff
Position 106-2. Accordingly, the accumulated benefit obligation or net
periodic postretirement benefit cost do not reflect any amount associated with
the subsidy. Our policy is to contribute annually, at minimum, amounts required by
applicable laws and regulations. However, we may from time to time make
contributions beyond those legally required. The Company expects to contribute
$1.1 million to the defined benefit plans and $0.4 million to other benefit
plans during 2004. 18




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Components of net periodic benefit costs are as follows (in thousands): Defined Pension Benefits
    
    Other BenefitsFor the three months ended
    
    For the three months endedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Interest cost on benefit obligations
    
    $
    279
    
    
    $
    283
    
    
    $
    55
    
    
    $
    58Expected return on plan assets
    
    
    (276
    )
    
    
    (246
    )
    
    
    
    
    
    
    Recognized net actuarial loss
    
    
    54
    
    
    
    69
    
    
    
    12
    
    
    
    11Amortization of transition costs
    
    
    (21
    )
    
    
    (21
    )
    
    
    
    
    
    
    Total
    
    $
    36
    
    
    $
    85
    
    
    $
    67
    
    
    $
    69
 8. Earnings Per Share of Common Stock Basic earnings per common share (EPS) is computed by dividing income
(loss) 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 three months ended March 31, 2004, and 2003. For
the three months ended March 31, 2004 and 2003, 21.2 million and 22.6 million
shares, respectively, attributable to the common stock equivalents 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. 9. Business Segment Data The Company evaluates the performance of its operating segments based on
earnings before interest, taxes, depreciation, and amortization. The segment
information is based on operating income (loss) which includes depreciation and
amortization. Equity in income (losses) of unconsolidated investees reflects
elimination of intercompany interest expense and management fees. The Company has operations in northwestern 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 TV. In addition to these segments, the Company has other operating activities
which are considered discontinued components (See Note 3  Discontinued
Business Components). Further, the Company had other unconsolidated
activities which were disposed of during 2004 and 2003 (See Note 4 
Investments in and advances to business ventures). 19




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##### Table of Contents



The Companys segment information is set forth for the three months ended
March 31, 2004 and 2003 in the following tables (in thousands): Three months ended March 31, 2004Corporate,Fixed
    
    Wireless
    
    Cable
    
    Other andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    17,900
    
    
    $
    
    
    
    $
    663
    
    
    $
    
    
    
    $
    18,563Cost of services
    
    
    5,982
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    6,004Selling, general and administrative
    
    
    3,662
    
    
    
    
    
    
    
    550
    
    
    
    3,457
    
    
    
    7,669Depreciation and amortization
    
    
    5,564
    
    
    
    
    
    
    
    103
    
    
    
    18
    
    
    
    5,685Operating income (loss)
    
    $
    2,692
    
    
    $
    
    
    
    $
    (12
    )
    
    $
    (3,475
    )
    
    $
    (795
    )Equity in income of unconsolidated
investees
    
    $
    
    
    
    $
    4,170
    
    
    $
    
    
    
    $
    
    
    
    $
    4,170
 Three months ended March 31, 2003Corporate,Fixed
    
    Wireless
    
    Cable
    
    Other andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    15,950
    
    
    $
    
    
    
    $
    704
    
    
    $
    
    
    
    $
    16,654Cost of services
    
    
    4,962
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    4,979Selling, general and administrative
    
    
    3,661
    
    
    
    
    
    
    
    518
    
    
    
    9,914
    
    
    
    14,093Depreciation and amortization
    
    
    4,870
    
    
    
    
    
    
    
    75
    
    
    
    98
    
    
    
    5,043Operating income (loss)
    
    $
    2,457
    
    
    $
    
    
    
    $
    94
    
    
    $
    (10,012
    )
    
    
    (7,461
    )Equity in (losses) income of unconsolidated investees
    
    $
    (394
    )
    
    $
    2,111
    
    
    $
    1,275
    
    
    $
    
    
    
    $
    2,992
 Information about the Companys continuing operations by geographic
location for the three months ended March 31, 2004 and 2003 and assets as of
March 31, 2004 and December 31, 2003 is as follows (in thousands): Revenues
    
    AssetsMarch 31,
    
    March 31,
    
    March 31,
    
    December 31,2004
    
    2003
    
    2004
    
    2003Russia
    
    $
    17,900
    
    
    $
    15,950
    
    
    
    136,406
    
    
    $
    127,033Georgia
    
    
    663
    
    
    
    704
    
    
    
    36,871
    
    
    
    35,669$
    18,563
    
    
    $
    16,654
    
    
    $
    173,277
    
    
    $
    162,702
 The Company has cash, other assets and minimal fixed assets at its
corporate headquarters in the United States. 10. Other Consolidated Condensed Financial Statement Information Accounts Receivable The total allowance for doubtful accounts at March 31, 2004 and December
31, 2003 was $2.1 million and $2.0 million, respectively. 20




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Intangible Assets Intangible assets, other than goodwill, at March 31, 2004 and December 31,
2003 consist of the following (in thousands): 2004
    
    2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedCost
    
    Amortization
    
    Net Book Value
    
    Cost
    
    Amortization
    
    Net Book ValueLicenses
    
    $
    37,755
    
    
    $
    (32,885
    )
    
    $
    4,870
    
    
    $
    36,755
    
    
    $
    (30,235
    )
    
    $
    6,520Other intangibles
    
    
    161
    
    
    
    (134
    )
    
    
    27
    
    
    
    138
    
    
    
    (130
    )
    
    
    8Assets not subject to amortization:Numbering capacity
    
    
    1,347
    
    
    
    
    
    
    
    1,347
    
    
    
    1,325
    
    
    
    
    
    
    
    1,325$
    39,263
    
    
    $
    (33,019
    )
    
    $
    6,244
    
    
    $
    38,218
    
    
    $
    (30,365
    )
    
    $
    7,853
 Estimated amortization expense is expected to be $4.9 million in 2004 and
insignificant thereafter. The change in the carrying value of goodwill and other indefinite life
intangibles of $0.8 million from December 31, 2003 to March 31, 2004 is
principally due to foreign currency fluctuations during the period. Accrued Expenses Accrued expenses at March 31, 2004 and December 31, 2003 consist of the
following (in thousands): 2004
    
    2003Accrued professional fees
    
    $
    4,398
    
    
    $
    5,574Self-insurance reserves
    
    
    2,995
    
    
    
    3,149Deferred revenue
    
    
    3,101
    
    
    
    2,874Accrued franchise and other taxes
    
    
    2,777
    
    
    
    3,322Accrued pension and personnel costs
    
    
    2,240
    
    
    
    2,802Accrued interest
    
    
    
    
    
    
    3,991Other accrued expenses
    
    
    3,474
    
    
    
    3,205$
    18,985
    
    
    $
    24,917
 Other Long-Term Liabilities Other long-term liabilities at March 31, 2004 and December 31, 2003
consist of the following (in thousands): 2004
    
    2003Pensions
    
    
    6,027
    
    
    $
    6,204Deferred revenue
    
    
    1,183
    
    
    
    1,428$
    7,210
    
    
    $
    7,632
 Supplemental Disclosure of Cash Flow Information Supplemental disclosure of cash flow information for the three months
ended March 31, 2004 and 2003 (in thousands): 2004
    
    2003Cash paid during the three months for:Interest
    
    $
    8,075
    
    
    $
    152Taxes
    
    $
    1,551
    
    
    $
    885
 11. Commitments and Contingencies 21




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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 three months ended
March 31, 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. 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 expired on July 14, 2003. In
light of Mr. Campbells death, his complaint has been 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 has
been 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. Discovery is ongoing in this case. The Company is not currently 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 has historically self-insured itself for product
liability related claims; however, the Company does have stop-loss coverage for
settlement damages in excess of $3.0 million. The stop-loss coverage does not
apply to any legal fees that the Company may incur to defend itself. 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. The parties anticipate that
the trial in this case can be scheduled by the Court as early as August 2004.
No trial has 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 The Company has received letters from, and corresponded with, two Georgian
individuals involved in the initial formation, approximately eight to ten years
ago, of certain of the Companys business ventures in the Republic of Georgia.
These individuals allege that the Company has not fully complied with its
obligations to them under certain contracts. In addition, the individuals have
alleged that Company personnel may have violated the Foreign Corrupt Practices
Act and possibly engaged in other improper or illegal conduct. However, the
individuals have so far refused to specify details of the alleged violations
and have provided no evidence in support of the allegations that they have
made. The Company had entered into contracts with these Georgian individuals.
The contract with one of these individuals entitles him to 5% of any dividends
the Company receives from Telecom Georgia. The Company believes it has fully
performed its obligations to date under this contract and has so informed the
individual. The Company also believes that the fair value of the continuing
dividend interest that the individual has in Telecom Georgia is not material.
The contract with the other individual entitled him, assuming certain
conditions were satisfied, to up to a 1% portion of the Companys equity
interest in certain of the Companys business ventures in the Republic of
Georgia, which the Company currently believes could only include Telecom
Georgia, Ayety TV and Paging One (a now defunct paging company). In the first
quarter of 2004, the Company terminated the original contract and entered into
a settlement 22




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##### Table of Contents



agreement with the latter individual, who released any claims to equity
interests in any of the Companys business ventures in the Republic of Georgia. Furthermore, nothing presented in the unsupported allegations of improper
or illegal conduct of Company personnel has prompted the Company to amend or
alter the report that it made to the United States Justice Department and the
Securities and Exchange Commission in the first quarter of 2003 regarding
possible violations of foreign and United States laws, including the FCPA. As a
matter of prudence and to ensure the claims of these Georgian individuals were
properly considered, the Companys Board of Directors authorized the Companys
outside counsel to conduct an independent inquiry into both the Companys
obligations under the contracts referred to above and the unspecified
allegations of possible improper or illegal conduct referenced above, as well
to investigate the existence of other contractual obligations that the Company
or its subsidiaries may have with regard to the Companys Georgian business
ventures. 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 has not uncovered any specific factual support for
the allegations regarding alleged improper or illegal conduct, nor has it
uncovered any other contractual obligations that the Company or its
subsidiaries may have with respect to their Georgian business ventures. As
previously disclosed, the Company has settled the contractual dispute with one
of the Georgian individuals by entering into a settlement agreement with him.
Due to the relatively low current fair value of the business subject to the
contract with the second Georgian individual and in view of the unspecific and
unsupported nature of the individuals allegations, the Company believes that
the inquiry will not result in any material adverse effect on the Companys
business, financial condition or results of operations. 12. Related Party Transactions Effective January 1, 2002, Metromedia Company, the Companys largest
shareholder, provided 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
three months ended March 31, 2004 and 2003, the Company paid Metromedia Company
consulting fees of $0.1 million pursuant to the CSA. A significant portion of
the consulting fees paid to Metromedia Company in the first quarter 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 is no longer
providing significant tax consulting services to the Company. 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. 13. Acquisition On March 18, 2004, the Company announced that PeterStar entered into
transactions permitting it to acquire 80% of the outstanding shares of Pskov
City Telephone Network (PGTS), an incumbent local exchange carrier in
Northwest Russia. PGTS, established in 1901, is one of Russias oldest
telecommunications operators and is a Russian public company. The Pskov
district is located in the Northwest region of Russia and borders the Baltic
States and Belarus. PeterStar has entered into several share purchase agreements which in the
aggregate will allow it to acquire 80% of the shares of PGTS and 100% of the
shares of Pskovinterkom, a smaller local exchange carrier in Pskov and a sister
company of PGTS. PeterStar is currently anticipating that the share purchase
transactions will be completed in the second quarter of 2004. As part of the
transaction, PeterStar has extended to PGTS a secured loan of $2.6 million,
which is included in Other assets on the consolidated balance sheet as of
March 31, 2004. The full consideration for this transaction will be financed
directly by PeterStar. In addition, on April 27, 2004, PeterStar completed the
acquisition of the 80% of the shares of PGTS and 89% of the shares of
Pskovinterkom for an estimated purchase price of $1.5 million, subject to
additional due diligence. PeterStar expects to purchase the remaining 11% of
the shares of Pskovinterkom after receipt of regulatory approval. 14. Subsequent Events Magticom Activity 23




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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 interests of Telcell through its wholly-owned subsidiary,
International Telecell Cellular, Inc. (ITC). On April 23, 2004, Magticom issued a dividend of $15.6 million. Telcell,
which is 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. Magticom expects to
declare and 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 second
quarter of 2004 or
promptly thereafter,
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, 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.
The parties anticipate that all transactions contemplated in the memorandum of
understanding will be concluded by end of second quarter 2004 or
promptly thereafter. 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 from ITC in Magticom
after completion of the restructuring of Dr. George 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. Radio Skonto Transaction 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 anticipates recording a gain
of $0.3 million in discontinued components in the three months ended June 30,
2004. Commercial Dispute The Company is in a commercial dispute with its partner in Ayety T.V.,
Mtatsminda Ltd. (Mtatsminda). Mtatsminda holds 15% of the outstanding
interests in Ayety TV and the Company holds the remaining 85% of the
outstanding interests. On June 2, 24




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##### Table of Contents



2004, Mtatsminda sent a letter to the Company in which it addressed four
issues. First, Mtatsminda requested that the Company cause Ayety TV to
renegotiate the terms pursuant to which Ayety TV 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 TV. Fourth, Mtatsminda alleges that the Company may
have violated laws against bribery of foreign officials and possibly engaged in
other improper or illegal conduct. With respect to the broadcast frequencies, Ayety TV has been using the 11
frequencies under an agreement with Mtatsminda, which recently expired. Ayety
TV 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 it. 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 11, 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 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. Preferred Dividend During
the second quarter of 2004, the Companys Board of Directors elected
to not declare a dividend on its Preferred Stock for the quarterly
dividend period ended on June 15, 2004. 25




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MAGTICOM LIMITED 
 CONDENSED STATEMENTS OF INCOME
 (in thousands of US Dollars)
 (unaudited)
 Three months ended March 31,2004
    
    2003Operating revenues:Service revenues
    
    $
    16,328
    
    
    $
    11,118Interconnect and other revenues
    
    
    4,523
    
    
    
    3,253Total operating revenues
    
    
    20,851
    
    
    
    14,371Operating expenses:Cost of services and connection costs
    
    
    2,766
    
    
    
    2,088Selling, general and administrative
    
    
    2,544
    
    
    
    1,513Depreciation and amortization
    
    
    3,855
    
    
    
    3,176Operating income
    
    
    11,686
    
    
    
    7,594Other income and expenses:Interest income
    
    
    160
    
    
    
    80Other income (expense)
    
    
    104
    
    
    
    (519
    )Foreign currency loss
    
    
    (759
    )
    
    
    (49
    )Income before income taxes
    
    
    11,191
    
    
    
    7,106Income taxes
    
    
    2,680
    
    
    
    2,179Net income
    
    $
    8,511
    
    
    $
    4,927
 See accompanying notes to financial statements. 26




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MAGTICOM LIMITED 
 CONDENSED BALANCE SHEETS
 (in thousands of US Dollars)
 (unaudited)
 March 31,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,662
    
    
    $
    17,858Accounts receivable, net
    
    
    2,425
    
    
    
    1,303Inventory
    
    
    105
    
    
    
    117Prepaid expenses and other current assets
    
    
    941
    
    
    
    654Total current assets
    
    
    21,133
    
    
    
    19,932Property, plant and equipment, net
    
    
    55,395
    
    
    
    54,351Other assets
    
    
    3,738
    
    
    
    4,245Total assets
    
    $
    80,266
    
    
    $
    78,528LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    873
    
    
    $
    696Accrued and other current liabilities
    
    
    3,679
    
    
    
    4,981Dividends payable
    
    
    15,555
    
    
    
    Customer deposits and unearned revenue
    
    
    3,560
    
    
    
    4,084Total current liabilities
    
    
    23,667
    
    
    
    9,761Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Common stock
    
    
    3,064
    
    
    
    3,064Paid-in surplus
    
    
    2,446
    
    
    
    2,446Retained earnings
    
    
    51,605
    
    
    
    66,427Accumulated other comprehensive loss
    
    
    (516
    )
    
    
    (3,170
    )Total stockholders equity
    
    
    56,599
    
    
    
    68,767Total liabilities and stockholders equity
    
    $
    80,266
    
    
    $
    78,528
 See accompanying notes to financial statements. 27




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MAGTICOM LIMITED 
 CONDENSED STATEMENTS OF CASH FLOWS
 (in thousands of US Dollars)
 (unaudited)
 Three months ended March 312004
    
    2003Operating activities:Income from continuing operations
    
    $
    8,511
    
    
    $
    4,927Items not requiring cash outlays:Depreciation and amortization
    
    
    3,855
    
    
    
    3,176Provision for doubtful accounts
    
    
    11
    
    
    
    (313
    )Loss from disposition of equipment
    
    
    
    
    
    
    540Other
    
    
    860
    
    
    
    529Changes in:Accounts receivable
    
    
    (1,133
    )
    
    
    35Inventories
    
    
    12
    
    
    
    (162
    )Accounts payable
    
    
    177
    
    
    
    20Other assets and liabilities
    
    
    (2,193
    )
    
    
    (465
    )Cash provided by operating activities
    
    
    10,100
    
    
    
    8,287Cash used in investing activities  Additions
to property, plant and equipment and other
    
    
    (2,518
    )
    
    
    (2,905
    )Financing activities:Dividends paid
    
    
    (7,778
    )
    
    
    Payments on loans payable to shareholder
    
    
    
    
    
    
    (10,926
    )Cash used in financing activities
    
    
    (7,778
    )
    
    
    (10,926
    )Net decrease in cash and cash equivalents
    
    
    (196
    )
    
    
    (5,544
    )Cash and cash equivalents at beginning of period
    
    
    17,858
    
    
    
    7,489Cash and cash equivalents at end of period
    
    $
    17,662
    
    
    $
    1,945
 See accompanying notes to financial statements. 28




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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 StockAccumulatedNumber
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    Totalof
    
    
    
    
    
    Paid-in
    
    Retained
    
    Comprehensive
    
    Comprehensive
    
    StockholdersShares
    
    Amount
    
    Surplus
    
    Earnings
    
    Income (Loss)
    
    Income
    
    EquityBalances at January 1, 2003
    
    
    1,000
    
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    38,098
    
    
    $
    
    
    
    
    
    
    
    $
    43,608Net income and
comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,927
    
    
    
    
    
    
    $
    4,927
    
    
    
    4,927Balances at March 31, 2003
    
    
    1,000
    
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    43,025
    
    
    $
    
    
    
    
    
    
    
    $
    48,535Balances at January 1, 2004
    
    
    1,000
    
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    66,427
    
    
    $
    (3,170
    )
    
    
    
    
    
    $
    68,767Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,511
    
    
    
    
    
    
    $
    8,511
    
    
    
    8,511Other comprehensive loss,
net of tax:Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,654
    
    
    
    2,654
    
    
    
    2,654Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,165Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,333
    )
    
    
    
    
    
    
    
    
    
    
    (23,333
    )Balances at March 31, 2004
    
    
    1,000
    
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    51,605
    

    
    $
    (516
    )
    
    
    
    
    
    $
    56,599
 See accompanying notes to financial statements. 29




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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 (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 51% and TelCell Wireless L.L.C. (Telcell), a company
incorporated in the United States, which owns a 49% interest. Metromedia
International Group, Inc. indirectly owns 70.41% of Telcell with the remaining
29.59% ownership interest being indirectly owned by Western Wireless
International, Inc. 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 the Metromedia International
Group, Inc.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 March 31, 2004, and the results of its operations and its
cash flows for the three-month periods ended March 31, 2004 and 2003, have been
included. The results of operations for the interim period are not necessarily
indicative of the results which may be realized for the full year. 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 U.S. dollars should not be
construed as a representation that GEL amounts could be in the future converted
into U.S. dollars at the exchange rate shown, or at any other exchange rate. Until March 31, 2003, the Companys measurement 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 Georgian Lari.
Consequently, at April 1, 2003, the historical bases of the Companys
non-monetary assets were translated to US Dollars 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 U.S. 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 the functional currency 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.
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 the functional currency are included in
net income. 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 30




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such that it may terminate traffic on other providers 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 providers 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 March
31, 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): March 31, 2004
    
    December 31, 2003Telecommunications equipment
    
    $
    96,486
    
    
    $
    93,233Buildings and leasehold improvements
    
    
    3,906
    
    
    
    2,225Office equipment, furniture and software
    
    
    1,294
    
    
    
    962Computer equipment
    
    
    377
    
    
    
    352Vehicles
    
    
    792
    
    
    
    717102,855
    
    
    
    97,489Accumulated depreciation and amortization
    
    
    (53,960
    )
    
    
    (48,480
    )Assets under construction
    
    
    6,500
    
    
    
    5,342$
    55,395
    
    
    $
    54,351
 4. Loans Payable to Shareholder The Company had an agreement with a shareholder, TelCell Wireless, 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. In the three months ended December 31, 2002, TelCell Wireless agreed to
forgive the interest payable on the interest-bearing note, subject to all
shareholder loans being repaid by February 28, 2003. Accordingly, the Company
recognized $3,120,000 of forgiven interest, net of income taxes of $674,000, as
additional paid-in surplus in the three months ended December 31, 2002. 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 8, on April
23, 2004. 31




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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 $14,031,000 and the other $3,157,000 as of
March 31, 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 Georgia significantly increase the possibility of general
economic distress, civil unrest, terrorism and a collapse of consumer
confidence in 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. The Prosecutor General has publicly
stated that Magticom will not be the only telecommunications business in the
Republic of Georgia whose interconnect arrangements will be reviewed for
compliance 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. As more fully described in Note 8, 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. 7. Related Party Transactions NeoStudia is owned by an affiliate of Dr. George Jokhtaberidze, a
shareholder of the Company. For the three-month periods ended March 31, 2003,
the Company incurred $147,000 in relation to advertising work and services from
NeoStudia. The Company incurred no such fees in 2004. MagtiWin is owned by an affiliate of Dr. George Jokhtaberidze, a
shareholder of the Company. For the three-month periods ended March 31, 2004
and 2003, the Company incurred $33,000 and $15,000, 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-month periods ended March 31,
2004 and 2003, the Company incurred interconnection expenses of $456,000 and
$497,000, respectively. Telecom Georgia is 30% owned by International TelCell
Inc., which is also an indirect majority shareholder of TelCell Wireless LLC.
Also, the interconnect agreements provide a source of revenue for the Company,
which amounted to $579,000 and $783,000 for the three-month periods ended March
31, 2004 and 2003, respectively. 32




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8. Subsequent Events On April 23, 2004, Magticom paid a dividend of $15,555,000. Telcell,
which is 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
declare and 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 second
quarter of 2004 or promptly thereafter,
as part of a business transaction with Dr. Jokhtaberidze. International Telcell Cellular, Inc. (ITC), a wholly owned subsidiary of
Metromedia International Group, Inc. (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
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. MIG will retain the remaining 50.1% majority
ownership of ITC. After completion of all transactions contemplated by this
memorandum of understanding, 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 parties anticipate that all
transactions contemplated in the memorandum of understanding will be concluded
by end of second quarter 2004 or promptly thereafter. The previously announced Georgian Government investigations into past
business and tax payment practices of Magticom have been 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 2, 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. 33




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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 51. 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 Restructuring of business interests and corporate operations has
progressed substantially and will soon be fully completed. As of May 31, 2004,
the Companys remaining non-core media businesses held for sale consist of
eighteen radio broadcast stations operating in Finland, Hungary, Bulgaria,
Estonia and the Czech Republic and one cable television network in Lithuania.
Sale of these remaining non-core businesses is expected during the first half
of 2004 or promptly thereafter. 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 non-core operations. 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, 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) 10 1/2% 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 repayments of
principal and interest under its credit agreements with its business ventures
and on payment of fees for services provided by the Company to certain of its
business ventures, as well as 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. Liquidity Issues As of March 31, 2004 and May 31, 2004, the Company had approximately $32.3
million and $30.9 million, respectively, of unrestricted cash on hand. The
$32.3 million of cash at March 31, 2004 reflects cash held at headquarters
subsequent to the Companys $8.0 million semi-annual interest payment, due on
March 30, 2004, on its Senior Notes. In addition, as of March 31, 2004, the Companys consolidated business
ventures held $1.5 million of cash. Furthermore, as of March 31, 2004, the
Companys unconsolidated business venture had $17.7 million of cash on hand,
$17.2 million of which is held in 34




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banks in the Republic of Georgia. The Company continues to actively pursue the sale of remaining non-core
businesses to raise additional cash and has undertaken to maximize cash
distributions from all of its business ventures. The Company projects that its
current corporate cash reserves, anticipated cash proceeds of non-core 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 on 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 selling any additional non-core businesses or that these sales,
if they occur, will raise sufficient cash 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
operating business venture dividend distributions or cash proceeds from the
sale of the remaining non-core media businesses; either of which would further
strengthen our 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
10 1⁄2% 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 March 31, 2004 there were 4.1 million shares of the
Companys 71⁄4% cumulative convertible preferred stock (the 35




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Preferred Stock), par value $1.00. 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. The dividend requirement for the twelve months ending March 31, 2005
will be $19.1 million, including the effects of compounding and assuming there
are no payments of the dividends. 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 March 31, 2004,
total dividends in arrears were $50.4 million. Except
as described in this paragraph, the holders of the Preferred Stock have no voting rights. According to
the terms of the Preferred Stock, if the Company does not make six consecutive
dividend payments and thereafter receives a written request from the holders of
25% of the voting power of the outstanding Preferred Stock, then the Company is
obligated to call a special meeting of the holders of the Preferred Stock for
the purpose of electing two new directors, except that no special meeting may
be called during the period within 60 days immediately preceding the date fixed
for the next annual meeting of the Companys stockholders. Beginning in late
2003 and continuing into 2004, the Company has had discussions with several
holders of the Companys Preferred Stock regarding the Preferred Stockholders
right to elect two new directors to the Companys Board of Directors. These
discussions have recently resulted in a tentative agreement, which is expected
to be finalized shortly, to appoint two individuals identified by certain
holders of the Preferred Stock to the Companys Board of Directors for terms
that end at the Companys next annual meeting of stockholders. It is presently
expected that, at that time, such individuals will, in accordance with the
terms of the Preferred Stock, stand for election by a vote of the holders of
the Preferred Stock. The Company believes that this agreement is advantageous
to the Company because it eliminates the need to hold a special meeting, which
would be both time consuming and expensive. Business Venture Support and Corporate Overhead Costs In the years ended December 31, 2003 and 2002, the Company expended $30.4
million, and $28.7 million, respectively, on support of its subsidiary business
ventures and corporate overheads. 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; however, the amount of the
reduction cannot be reasonably quantified at this time. However, the Companys
anticipates that its 2004 corporate cash outlays will include $15.8 million for
interest payments on the Senior Notes and an estimated $10.0 million to $14.0
million to fund corporate operations and retire existing corporate obligations
as they come due. For further discussions, see Consolidated Results of
Operations for the quarter ended March 31, 2004 compared to the Consolidated
Results of Operations for the quarter ended March 31, 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, we expect 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,
we expect our 2004 cash funding for the Benefit Plans to be $1.5 million, as
compared to $2.2 million and $0.9 million in 2003 and 2002, respectively.
However, we review our assumptions regularly and the Company may make
contributions beyond those that are currently anticipated. As of March 31,
2004, the Company had contributed $0.3 million of its estimated contributions. As of December 31, 2003, the unfunded status of the Benefit 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. Credit Agreements.The Company has entered into credit agreements with its
business ventures, including those classified as discontinued components, to
provide up to $17.5 million in funding of which $6.0 million in funding
obligations remain at March 31, 2004. The Companys funding commitments are
contingent on its approval of the respective business ventures business plans. 36




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Capital Resources The Companys capital expenditure program for the twelve months ended
December 31, 2004 for its core businesses, inclusive of Magticom, is
anticipated to approximate $25.4 million and 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. The Company currently anticipates that it will fund approximately $1.0
million into certain of its non-core media business ventures through the end of
the first half of 2004 in order for them to meet their working capital
requirements. Discussion of Changes in Financial Position The Companys current ratio, defined as total current assets divided by
total current liabilities, improved to 1.8 from 1.2 as of March 31, 2004 and
December 31, 2003, 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 quarter 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 our cash flows from continuing
operations is as follows (in thousands): Three months ended March 31,2004
    
    2003Cash flows used in operating activities
    
    $
    (8,180
    )
    
    $
    (7,092
    )Cash paid for the acquisition of property, plant and equipment
    
    $
    (2,703
    )
    
    $
    (2,144
    )Cash (used in) provided by investing activities
    
    $
    (822
    )
    
    $
    7,236Cash used in financing activities
    
    $
    (1,393
    )
    
    $
    (3,698
    )
 Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003 Cash Flows from Operating Activities Cash used in operating activities for the three months ended March 31,
2004 was $8.2 million, an increase of $1.1 million from cash used in operating
activities for the three months ended March 31, 2003. The additional use of
cash in 2004 reflects an$11.2 million change in cash flows due to changes in
operating assets and liabilities partially offset by the net impact of an
improvement in cash flows of $8.9 million provided by the results from
continuing operations and a $1.2 million change in non-cash items. The
$ 11.2 million change in cash flows due to changes in operating assets
and liabilities for the three months ended March 31, 2004 as compared to the
three months ended March 31, 2003, is mainly due the timing of payments on
accruals and payables in 2004 as compared to 2003, offset by the fact that cash
was utilized in 2003 to prepay various professional firms in conjunction with
the restructuring of the Company. The net change in cash used for accounts
payable and accrued expenses was $16.8 million. Of this change, approximately
$11.2 million is due to the payment of interest on the Companys Senior Notes.
The 2004 payment was made in March, whereas such amount was not paid prior to
quarter end in 2003. In addition, other accruals and payables were paid on a
more timely basis in the first quarter of 2004, which resulted in the increased
use of cash period over period. In 2003, a significant portion of cash was
used to prepay retainers and other fees in anticipation of sales of business
and other restructuring activities. As a result, prepaids and other current
assets were $3.6 million higher at March 31, 2003 as compared to March 31,
2004. Non-cash items increased by $1.2 million in the three months ended March
31, 2004 as compared to the three months ended March 31, 2003 principally due
to an increased equity in earnings attributable to Magticom of $1.2 million
offset by the cumulative effect of a change in accounting principle of $2.0
million in 2003. Cash Flows from Investing Activities Cash used in investing activities for the three months ended March 31,
2004 was $0.8 million as compared to cash provided by investing activities of
$7.2 million for the three months ended March 31, 2003. The period over period
change is principally attributable to the distributions from equity ventures,
primarily Magticom, which were $3.8 million in 2004 as compared
to $12.0
million in 2003. The distribution from Magticom in 2003 represented a
repayment in full of the outstanding credit line with the Company. In
addition, PeterStar used on hand cash to extend a loan related to an
acquisition and to purchase short-term investments, each of which were $2.6
million, in the three months ended March 31, 2004 and 2003, respectively. The Company expended $2.7 million and $2.1 million in the three months
ended March 31, 2004 and 2003, respectively. Such 37




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##### Table of Contents



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 three months ended March 31,
2004 was $1.4 million as compared to $3.7 million for the three months ended
March 31, 2003. The change in financing cash flows in 2004 is principally due
to less dividends and other distributions to minority shareholders of Telcell
Wireless based on payments received from Magticom. Cash Flows from Discontinued Components Cash
provided by discontinued components increased to $17.2 million for
the three months ended March 31, 2004 as compared to $1.1 million for the three
months ended March 31, 2003. During the three months ended March 31, 2004, the
Company received $16.0 million and $1.5 million related to the sales of Romsat
and ATK, respectively. These proceeds were offset by cash expended to fund the
operations of the discontinued components during the quarter. During the three
months ended March 31, 2003, the net change in the assets and liabilities of
the discontinued components resulted in a net positive cash inflow of
$1.1
million. Results of Operations Overview The Company has operations in Northwestern 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 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 and
BELCEL. The Company disposed of its interests in Tyumenruskom and BELCEL in
September 2003 and July 2002, respectively. Consolidated cable television is comprised of Ayety TV. In addition to these segments, the Company has other operating activities
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. 38




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##### Table of Contents



Segment Information The Companys segment information, including other unconsolidated
operating segments, is set forth for the periods ended March 31, 2004 and 2003
in the following tables (in thousands): Segment Information
Three months ended March 31, 2004
(in thousands) Corporate, OtherFixed
    
    Wireless
    
    Cable
    
    andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    17,900
    
    
    $
    
    
    
    $
    663
    
    
    $
    
    
    
    $
    18,563Cost of services
    
    
    5,982
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    6,004Selling, general and administrative
    
    
    3,662
    
    
    
    
    
    
    
    550
    
    
    
    3,457
    
    
    
    7,669Depreciation and amortization
    
    
    5,564
    
    
    
    
    
    
    
    103
    
    
    
    18
    
    
    
    5,685Operating income (loss)
    
    $
    2,692
    
    
    $
    
    
    
    $
    (12
    )
    
    $
    (3,475
    )
    
    
    (795
    )Unconsolidated Business VenturesRevenues
    
    $
    
    
    
    $
    20,851
    
    
    $
    665Cost of services
    
    
    
    
    
    
    2,766
    
    
    
    111Selling, general and administrative
    
    
    
    
    
    
    2,544
    
    
    
    278Depreciation and amortization
    
    
    
    
    
    
    3,855
    
    
    
    98Operating income
    
    $
    
    
    
    $
    11,686
    
    
    $
    178Net income
    
    $
    
    
    
    $
    8,511
    
    
    $
    121Equity in income of unconsolidated
investees (Note 1)
    
    $
    
    
    
    $
    4,170
    
    
    $
    
    
    
    
    
    
    
    
    4,170Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,092
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (577
    )Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (125
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,916
    )Loss from continuing operations
before discontinued components and
cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,584
    )Income from discontinued components
    
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,310Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,726
 Note 1: Equity in income (losses) of unconsolidated investees reflects
elimination of intercompany interest expense. 39




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##### Table of Contents



Segment Information
Three months ended March 31, 2003
(in thousands) Fixed
    
    Wireless
    
    Cable
    
    Corporate, OtherTelephony
    
    Telephony
    
    Television
    
    and Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    15,950
    
    
    $
    
    
    
    $
    704
    
    
    $
    
    
    
    $
    16,654Cost of services
    
    
    4,962
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    4,979Selling, general and administrative
    
    
    3,661
    
    
    
    
    
    
    
    518
    
    
    
    9,914
    
    
    
    14,093Depreciation and amortization
    
    
    4,870
    
    
    
    
    
    
    
    75
    
    
    
    98
    
    
    
    5,043Operating income (loss)
    
    $
    2,457
    
    
    $
    
    
    
    $
    94
    
    
    $
    (10,012
    )
    
    
    (7,461
    )Unconsolidated Business VenturesRevenues
    
    $
    20,613
    
    
    $
    15,387
    
    
    $
    4,725Cost of services
    
    
    9,831
    
    
    
    2,308
    
    
    
    970Selling, general and administrative
    
    
    5,895
    
    
    
    1,744
    
    
    
    2,604Depreciation and amortization
    
    
    3,898
    
    
    
    3,574
    
    
    
    1,367Operating (loss) income
    
    $
    989
    
    
    $
    7,761
    
    
    $
    (216
    )Net (loss) income
    
    $
    (915
    )
    
    $
    4,058
    
    
    $
    978Equity in (losses) income of
unconsolidated investees (Note 1)
    
    $
    (394
    )
    
    $
    2,111
    
    
    $
    1,275
    
    
    
    
    
    
    
    2,992Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,657
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (414
    )Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (524
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,370
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,233
    )Loss from continuing operations
before discontinued components and
cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,498
    )Loss from discontinued components
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,281
    )Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,012Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (13,767
    )
 Note 1: Equity in income (losses) of unconsolidated investees reflects
elimination of intercompany interest expense. 40




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##### Table of Contents



CONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2004
COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH
31, 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 Metromedia International Group.
Accordingly, the results of PeterStar and BCL have been combined for historical
reporting purposes. Revenues. Fixed telephony
revenues increased by $1.9 million (12%) to $17.9 million for the three months ended
March 31, 2004 as compared to $16.0 million for the three months ended March 31, 2003.
This growth in revenues is driven by a $1.2 million growth in business fixed revenues, a $0.7
million increase in data and internet services, and a $0.2 million increase in regulated
Vasiliesvsky Island residential telephony. Such increases were partially offset by a
$0.2 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 88% of new connections for the three months ended March 31, 2004 utilizing
PeterStar's infrastructure versus 78% of new connections for the three months ended
March 31, 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. Management expects that it will continue to experience
revenue growth for its data and internet product portfolio; however, the rate of growth may
decline due to competitive pressures. 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. In addition, management believes that PeterStar has increased its share
of the market for internet services. Vasilievsky Island represents an area of St. Petersburg where PeterStar provides principally
residential telephony services, where the revenue increase was principally due to an increase
in government regulated tariffs. Transit sales are mainly opportunity based business and
management expects these revenues to remain at consistent levels. Gross margin. Fixed telephony gross margin increased by $0.9 million (8%) to
$11.9 million for the three months ended March 31, 2004 as compared to $11.0
million for the three months ended March 31, 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 67%
for the three months ended March 31, 2004 as compared to 69% for the three months ended
March 31, 2003. The decrease in gross margin percentage is primarily due to 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 remained consistent at $3.7 million for the three
months ended March 31, 2004 and 2003. The significant components of fixed telephony selling, general and
administrative expenses for the three months ended March 31, 2004 and 2003 are
as follows (in thousands): 2004
    
    2003Personnel related costs
    
    $
    1,510
    
    
    $
    1,412Office related costs
    
    
    969
    
    
    
    844Marketing expenses
    
    
    418
    
    
    
    370Taxes other than income
    
    
    278
    
    
    
    342Professional services
    
    
    224
    
    
    
    165Bad debt expense
    
    
    108
    
    
    
    186Other expenses
    
    
    155
    
    
    
    342Total
    
    $
    3,662
    
    
    $
    3,661
 41




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Selling general and administrative costs increased $0.1 million due to
salary raises to personnel, generally in line with inflation; however, this
increase was offset by a decrease of $0.1 million in bad debt expense,
principally due to better collections. The other movements in selling general
and administrative expenses were due to a reduction of certain duplicative
costs, including a reduction in personnel costs and overhead incurred at BCL as
a result of PeterStars acquisition of BCL on October 1, 2003. The Company
expects some overall cost reductions in 2004 as a result of the acquisition;
however, the growth initiatives of PeterStar should result in future period
overhead expenditures exceeding the current levels.Nice way of putting it. AA
In addition, taxes other than income decreased due to a change in the tax laws
lowering road user tax. Depreciation and amortization.Fixed telephony depreciation and
amortization expense increased by $0.7 million to $5.6 million for the three
months ended March 31, 2004 as compared to $4.9 million for the three months
ended March 31, 2003. This includes $1.8 million and $1.6 million of license
amortization for the three months ended March 31, 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. 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 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 TV, a cable television
provider in Tbilisi, Georgia. Revenues.Cable television revenues were essentially unchanged at $0.7
million for the three months ended March 31, 2004 as compared to the three
months ended March 31, 2003. 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. Ayety is taking certain
measures to minimize the loss of such customers. Gross margin.Cable television gross margin decreased by approximately
$0.1 million (7%) to $0.6 million for the three months ended March 31, 2004
from $0.7 million for the three months ended March 31, 2003. The decrease is
due to the overall reduction in the MMDS customers base from 2003 to 2004, as
these customers had a higher ARPU than other subscribers. Selling, general and administrative.Cable television selling, general and
administrative expenses increased by $0.1 million (6%) to $0.6 million for the
three months ended March 31, 2004 compared to $0.5 million for the three months
ended March 31, 2003. 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 was unchanged at $0.1 million for the three months ended
March 31, 2004 as compared to the three months ended March 31, 2003. OTHER CONSOLIDATED RESULTS 42




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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 decreased $6.4 million (65%) to $3.5 million for the
three months ended March 31, 2004 as compared to $9.9 million for the three
months ended March 31, 2003. The significant components of corporate selling, general and
administrative expenses for the three months ended March 31, 2004 and 2003 are
as follows (in thousands): 2004
    
    2003Personnel related costs
    
    $
    1,382
    
    
    $
    3,903Professional services
    
    
    727
    
    
    
    2,546Office related expenses and insurance
    
    
    485
    
    
    
    748Restructuring related professional services
    
    
    
    
    
    
    2,063Other expenses
    
    
    863
    
    
    
    654Total
    
    $
    3,457
    
    
    $
    9,914
 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. Interest expense.Interest expense decreased $1.6 million to $4.1
million for the three months ended March 31, 2004 as compared to $5.7 million
for the three months ended March 31, 2003. Interest expense is principally
attributable to interest of the Senior Notes and debt incurred at PeterStar.
The decrease in interest expense is principally due to the reduction in the
outstanding balance on of the Senior Notes on a period-over-period basis, due
to the Adamant Transaction. Equity in income of unconsolidated investees.Equity in income of
unconsolidated business ventures increased $1.2 million to $4.2 million for the
three months ended March 31, 2004 as compared to $3.0 million for the three
months ended March 31, 2003. The increase is attributable to the equity in the
earnings of the Companys investment in Magticom. Income
tax expense.Income tax expense decreased by $1.1 million to
$0.3 million for the three months ended March 31, 2004 as compared to $1.4
million for the three months ended March 31, 2003. The income tax expense in
2004 and 2003 is principally from foreign income taxes on the operations of
PeterStar. Foreign income taxes are lower in 2004 as compared to 2003
mainly due to changes in non-deductible items period to period.
Further, in the three months ended March 31, 2004, foreign income taxes were
partially offset by a state income tax benefit of $0.6 million recognized during the period.
Additional state benefits are not anticipated in 2004. Minority interest.Minority interest represents the allocation of
income and losses by the Companys majority owned subsidiaries and business
ventures to the minority ownership shareholders. Minority
interest decreased by $0.3 million to $1.9 million for the three
months ended March 31, 2004 as compared to $2.2 million for the three months
ended March 31, 2003. The minority interest amount relates to the operations of
PeterStar and Telcell Wireless (the direct holding company of Magticom). Income (loss) from discontinued components.Income from discontinued
components was $6.3 million for the three months ended March 31, 2004 as
compared to a loss of $1.3 million of the three months ended March 31, 2003.
In addition to the net losses from the operations of the discontinued ventures
of $0.9 million in 2004 and $1.7 million in 2003, as further discussed in the
section titled Results of Discontinued Components Operations for the Quarter
Ended March 31, 2004 compared to the Results of Discontinued Components
Operations for the Quarter Ended March 31, 2003, the Company recognized gains
of $0.7 million and $5.8 million on the dispositions of ATK and Romsat,
respectively, in the three months ended March 31, 2004. The Company also
recognized a gain of $0.5 million related to the settlement of remaining
severance obligations and other liabilities of discontinued components in 2004.
During the three months ended March 31, 2003, the Company recorded income in
discontinued components related to the cumulative effect of a change in
accounting principle of $0.5 million related to bringing certain business
ventures off of a three-month lag to a real time basis. 43




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Cumulative effect of a change in accounting principle.The cumulative
effect of a change in accounting principle of $2.0 million for the three months
ended March 31, 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. 44




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UNCONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2004
COMPARED TO THE UNCONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTER ENDED
MARCH 31, 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 three months ended March 31, 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 Unconsolidated wireless telephony in 2004 is comprised of Magticom located
in Tbilisi, Georgia. However, in 2003 Tyumenruskom located in Tyumen, Russia
was 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 $5.5 million (36%) to
$20.9 million for the three months ended March 31, 2004 as compared to $15.4
million for the three months ended March 31, 2003. This increase was primarily
attributable to Magticom. Revenues at Magticom increased by $6.5 million (45%) to $20.9 million for
the three months March 31, 2004 compared to $14.4 million for the three months
ended March 31, 2003. This increase is driven by subscriber growth and growth
in number of minutes of use per subscriber and an increase in international
traffic, roaming and value added services. Total subscribers were 355 thousand
at March 31, 2004 compared to 264 thousand at March 31, 2003, an increase of
34%. On a comparable currency basis, revenue growth period over period was
37%. Therefore, a portion of the revenue growth was also attributable to
favorable foreign currency fluctuations. Tyumenruskom contributed revenue of $1.0 million for the three months
ended March 31, 2003. Gross margin.Wireless telephony gross margin increased by $5.0 million
(38%) to $18.1 million for the three months ended March 31, 2004 as compared to
$13.1 million for the three months ended March 31, 2003. This increase was due
primarily to the increase in gross margin at Magticom. Gross margin at Magticom increased by $5.8 million (47%), from $12.3
million for the three months ended March 31, 2003 to $18.1 million for the
three months ended March 31, 2004. Gross margin as a percent of revenues
increased 1% to 87% in 2004. The companys position as the 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 $0.8 million for the three months
ended March 31, 2003. Selling, general and administrative.Wireless telephony selling,
general and administrative expenses increased by $0.8 million (46%) to $2.5
million for the three months ended March 31, 2004 as compared to $1.7 million
for the three months ended March 31, 2003. Magticoms selling, general and administrative expenses increased $1.0
million (68%) to $2.5 million for the three months ended March 31, 2004
compared to $1.5 million for the three months ended March 31, 2003. The significant components of selling, general and administrative expenses
for Magticom for the three months ended March 31, 2004 and 2003 are as follows
(in thousands): 2004
    
    2003Personnel related costs
    
    $
    1,247
    
    
    $
    903Taxes other than income
    
    
    860
    
    
    
    501Marketing expenses
    
    
    221
    
    
    
    181Bad debt expense (recovery)
    
    
    68
    
    
    
    (296
    )Other expenses
    
    
    148
    
    
    
    224Total
    
    $
    2,544
    
    
    $
    1,513
 45




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The overall increase in selling, general and administrative expenses was
due primarily to an increase in other taxes of $0.4 million due to the growth
of business; an increase in salaries of $0.3 million due to wage increases
provided to employees effective January 2004. In addition, a $0.3 million bad
debt recovery occurred in the March 2003 quarter, which did not occur in 2004. Tyumenruskom incurred selling, general and administrative expenses of $0.2
million for the three months ended March 31, 2003. Depreciation and amortization.Wireless telephony depreciation and
amortization expense increased by $0.3 million to $3.9 million for the three
months ended March 31, 2004 as compared to $3.6 million for the three months
ended March 31, 2003. Magticoms depreciation and amortization expenses increased by $0.7
million from $3.2 million for the three months ended March 31, 2003 to $3.9
million for the three months ended March 31, 2004 primarily due to an increase
in fixed assets purchased during the period. Gross fixed assets increased $13.3
million or 15% from March 31, 2003 to March 31, 2004. Tyumenruskom incurred depreciation and amortization expense of $0.4
million for the three months ended March 31, 2003. Cable Television Unconsolidated cable television is comprised of Cosmos TV, a cable
television provider in Minsk, Belarus of which the Company owned 50%. During
the three months ended March 31, 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. Revenues.Cable television revenues decreased by $4.0 million (86%) to
$0.7 million for the three months ended March 31, 2004 as compared to $4.7
million for the three months ended March 31, 2003. Such decrease is principally
due to the disposal of Baltcom TV, Kosmos TV and Teleplus. Baltcom TV, Kosmos TV and Teleplus contributed revenue of $2.0 million,
$1.9 million, and $0.1 million, respectively, for the three months ended March
31, 2003. Gross margin.Cable television gross margin decreased by $3.2 million
(85%) to $0.6 million for the three months ended March 31, 2004 as compared to
$3.8 million for the three months ended March 31, 2003. Such decrease is
principally due to the disposal of Baltcom TV, Kosmos TV and Teleplus. Baltcom TV and Kosmos TV contributed gross margins of $1.5 million each
and Teleplus contributed gross margin of $0.1 million for the three months
ended March 31, 2003. Selling, general and administrative.Cable television selling, general
and administrative expenses decreased by $2.3 million (89%) to $0.3 million for
the three months ended March 31, 2004 as compared to $2.6 million for the three
months ending March 31, 2003. Such decrease is principally due to the disposal
of Baltcom TV, Kosmos TV and Teleplus. Baltcom TV, Kosmos TV and Teleplus incurred selling, general and
administrative expenses of $1.0 million, $1.2 million and $0.1 million,
respectively, for the three months ended March 31, 2003. Depreciation and amortization.Cable television depreciation and
amortization decreased by $1.3 million to $0.1 million for the three months
ended March 31, 2004 as compared to $1.4 million for the three months ended
March 31, 2003. Such decrease is principally due to the disposal of Baltcom TV,
Kosmos TV and Teleplus. Baltcom TV, Kosmos TV and Teleplus incurred depreciation and amortization
expenses of $0.3 million, $0.7 million and $0.1 million, respectively, for the
three months ended March 31, 2003. 46




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Discontinued Business Components Radio Broadcasting On September 30, 2003, the Board of Directors formally approved
managements plan to dispose of the remaining non-core Radio businesses. The combined results of operations of the discontinued radio businesses
are as follows (in thousands): Three months ended March 31,2004
    
    2003Revenues
    
    $
    3,226
    
    
    $
    2,548Selling, general and administrative
    
    
    3,894
    
    
    
    3,420Depreciation and amortization
    
    
    516
    
    
    
    425Operating loss
    
    $
    (1,184
    )
    
    $
    (1,297
    )Net loss
    
    $
    (1,297
    )
    
    $
    (1,192
    )
 Revenues.Radio broadcasting revenues increased by $0.7 million (27%) to
$3.2 million for the three months ended March 31, 2004 as compared to $2.5
million for the three months ended March 31, 2003. The increase is primarily
attributable to Metromedia Finland and Radio Juventus as the remaining stations
experienced small growth in the comparable periods. Revenues at Metromedia Finland increased by $0.3 million (93%) to $0.7
million for the three months ended March 31, 2004 as compared to $0.4 million
for the three months ended March 31, 2003. The increase is a direct result of
the addition of two radio stations during 2003. Revenues at Radio Juventus increased by $0.3 million (22%) to $1.4 million
for the three months ended March 31, 2004 as compared to $1.1 million for the
three months ended March 31, 2003. Of the increase period over period,
approximately one-half of the growth is attributable to favorable foreign
currency appreciation with the remainder due to the acquisition of two stations
in 2003 and overall increases in advertising revenue. Selling, general and administrative.Radio broadcasting selling, general
and administrative expenses increased by $0.5 million (14%) to $3.9 million for
the three months ended March 31, 2004 as compared to $3.4 million for the three
months ended March 31, 2003. The increase is principally attributed to
Metromedia Finland. Selling, general and administrative expenses at Metromedia Finland
increased by $0.4 million (62%) to $1.0 million for the three months ended
March 31, 2004 as compared to $0.6 million for the three months ended March 31,
2003. Of the increase, approximately $0.1 million is due to currency
appreciation, with the remainder due to higher salaries, advertising and
programming costs associated with the stations acquired in 2003. Depreciation and amortization.Radio broadcasting depreciation and
amortization increased by $0.1 million to $0.5 million for the three months
ended March 31, 2004 as compared to $0.4 million for the three months ended
March 31, 2003 mainly due to the amortization of licenses acquired with the
Metromedia Finland acquisitions. 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 TV. 47




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The combined results of operations of the discontinued Cable television
businesses are as follows (in thousands): Three months ended March 31,2004
    
    2003Revenues
    
    $
    2,080
    
    
    $
    2,937Cost of services
    
    
    450
    
    
    
    689Selling, general and administrative
    
    
    873
    
    
    
    1,780Depreciation and amortization
    
    
    370
    
    
    
    748Operating income (loss)
    
    $
    387
    
    
    $
    (280
    )Net loss
    
    $
    382
    
    
    $
    (527
    )
 Revenues.Cable television revenues decreased by $0.8 million (29%) to
$2.1 million for the three months ended March 31, 2004 as compared to $2.9
million for the three months ended March 31, 2003. The decrease is principally
attributed to the sale of Sun TV on November 12, 2003 and Romsat on March 4,
2004. Sun TV contributed revenue of $0.5 million for the three months ended
March 31, 2003 and Romsat contributed incremental revenue of $0.4 million for
the three months ended March 31, 2003 as compared to the same period in 2004. Gross margin. Cable television gross margin decreased by $0.6 million
(27%) to $1.6 million for the three months ended March 31, 2004 as compared to
$2.2 million for the three months ended March 31, 2003. The decrease is
principally attributed to the sale of Sun TV and Romsat. Sun TV contributed gross margin of $0.4 million for the three months ended
March 31, 2003 and Romsat contributed incremental gross margin of $0.3 million
for the three months ended March 31, 2003 as compared to the same period in
2004. Selling, general and administrative. Cable television selling, general and
administrative expenses decreased by $0.9 million (51%) to $0.9 million for the
three months ended March 31, 2004 as compared to $1.8 million for the three
months ended March 31, 2003. The decrease is principally attributed to the
sale of Sun TV and Romsat. Sun TV incurred selling, general and administrative expenses of $0.3
million for the three months ended March 31, 2003 and Romsat incurred
incremental selling, general and administrative expenses of $0.6 million for
the three months ended March 31, 2003 as compared to the same period in 2004. Depreciation and amortization. Cable television depreciation and
amortization decreased by $0.3 million to $0.4 million for the three months
ended March 31, 2004 as compared to $0.7 million for the three months ended
March 31, 2003. The decrease is principally attributed to the sale of Sun TV
and Romsat. Sun TV incurred depreciation and amortization of $0.2 million for the
three months ended March 31, 2003 and Romsat incurred incremental depreciation
and amortization of $0.1 million for the three months ended March 31, 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 and product
liability 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 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 condition 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. Useful lives of property, plant and equipment are depreciated over
periods generally ranging from two to ten years. 48




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Any reduction or increase in the estimated useful lives for a
particular category of fixed assets could have material effect on our
future results of operations. The Company holds minority interests in its business ventures. 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 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 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, using various discounted cash flow techniques. The Companys business ventures telephony operations recognize
revenues in the period the service is provided. Installation fees for
cable television services are recognized as revenues upon subscriber
hook-up to the extent direct selling costs are incurred. Installation
fees in excess of direct selling costs are deferred and recognized
over the expected life of the customer relationship. Installation
fees for telephony operations are deferred together with the related
costs and amortized over the estimated term of a customer
relationship. Installation costs in excess of installation fees are
recognized as expense in the period incurred. The Company performs goodwill impairment testing annually as of
December 31 or whenever impairment indicators exist. This test
requires a significant degree of judgment about the future events and
comparison of the fair value with the carrying amount of each
reporting unit. Based on the discounted cash flow valuations
performed in 2003, the Company concluded that for all reporting
units, the fair value is in excess of the respective carrying
amounts. 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 as either equity method or
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. The Company recognizes liabilities for estimated future pension
obligations. Such liabilities are based upon actuarial analysis
which is influenced by a variety of estimates including mortality
rates, estimated returns on investments, and a discount rate for
future liabilities. We believe the accuracy of such estimates is
appropriate. New Accounting Pronouncements In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities(FIN No. 46). FIN No. 46 defines the concept of variable
interest and requires existing unconsolidated variable interest entities to be
consolidated into the financial statements of their primary beneficiaries if
the variable interest entities do not effectively disperse risks among the
parties involved. FIN No. 46 applies immediately to variable interest entities
created after January 31, 2003. In December 2003, the FASB revised certain
provisions of FIN No. 46. The revised interpretation (FIN No. 46R)
substantially retained the requirements of immediate application of FIN No. 46
to variable interest entities created after January 31, 2003. There were no
such entities created after January 31, 2003. With respect to older entities,
the consolidation requirements under FIN No. 46R became effective in the
quarter ended March 31, 2004. The Company has determined that its investment in
Magticom and Telecom Georgia will not be consolidated under this interpretation
and therefore the adoption of FIN No. 46R did not have an impact on the
consolidated financial position or results of operations. 
 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-U.S. dollar denominated assets and liabilities, other examples
of risk include collectibility of accounts receivable and significant
political, economic and social risks inherent in doing business in emerging
markets such as Russia and the Republic of Georgia. 49




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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
downward 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 U.S. dollars. The Company does not
believe that the Companys debt not denominated in U.S. 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. 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. However, the Companys ability to
minimize such amount is limited by the fact that certain expenses are
denominated in foreign currencies and many countries in which the Company does
business have strict foreign currency regulations. The Companys strategy is to minimize its foreign currency risk. Whenever
possible, the Company bills and collects revenues in U.S. 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. 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, U.S. 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 first
quarter of 2004 relative to the first quarter of 2003 exchange rate, for
example, would have resulted in a decrease to the Companys net income of $0.1
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 U.S.
dollar accounts to service their U.S. 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. 50




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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. March 31, 2004
    
    December 31, 2003CURRENT ASSETSCash and cash equivalents
    
    $
    1,180
    
    
    $
    1,233Accounts receivable, net
    
    
    4,334
    
    
    
    893Prepaids and other assets
    
    
    752
    
    
    
    447CURRENT LIABILITIESAccrued expenses
    
    
    358
    
    
    
    206Closing foreign currency exchange rate
    
    
    28.49
    
    
    
    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 March 31, 2004 and
December 31, 2003 totaled $36.4 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. 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 consummate sales of its non-core businesses;  
    
    the ability to obtain the requisite consents for any sales of Company 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, particularly in Northwestern Russia and the
Republic of Georgia, which may affect the Companys results of
operations;  
    
    developing legal structures in Northwestern 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 Northwestern Russia and the Republic
of Georgia, which may affect the Companys results of operations; 51




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
    
    exchange rate fluctuations;  
    
    license renewals for the Companys communications
investments in Northwestern 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;  
    
    timely completion of construction projects for new
systems for the business ventures in which the Company has
invested, which may impact the cost of such projects;  
    
    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 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. Based on that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the presence of the matters described below
constitute material weaknesses as defined under the standards of the Public
Company Accounting Oversight Board (United States). A material weakness is a
significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. In the fourth quarter of 2003, it was determined that the Companys
consolidated statements of operations for fiscal 2002, and the first two
quarters of fiscal 2003, would need to be restated as a result of an error
discovered in the computation of its unpaid dividends on its 7-1/4% cumulative
convertible Preferred Stock. The error was a result of the failure by Company
personnel to correctly apply compounding to the unpaid dividends. The Company
has determined that deficiencies in its internal review processes resulted in
this error not being detected on a timely basis. As a result of the Companys
relocation to Charlotte, NC, management of the Company reassessed its finance
organizational structure and has recruited the necessary personnel to improve
its internal control and review processes. In addition, during the fourth quarter of 2003 and early 2004, it was
determined that the Companys consolidated statements of operations for fiscal
2002, and the first two quarters of fiscal 2003, would need to be restated as a
result of errors regarding the reporting of certain tax refunds. Most of these
refunds were received because the Company became eligible to carry back certain
losses and recover taxes previously paid to various taxing authorities five or
more years ago. One of these refunds resulted from a change in tax laws. The
Company has determined that not having full-time in-house tax personnel
resulted in these refunds not being recorded on a timely basis. In an effort to
prevent these errors from occurring again, the Company hired a tax director to
oversee the preparation of tax filings and deferred tax computations. In
addition, the Company has implemented a more stringent review process over the
filing of tax returns and preparation of its deferred tax computations on a
prospective basis. The Company has failed to file its most recent Form 10-K and Form 10-Qs
with the SEC on a timely basis. Such delays in filings have been due to
extenuating circumstances surrounding the Companys liquidity issues and
relocation of its corporate headquarters. The Company believes that the
recruitment of the individuals as noted above, should result in more timely
filings in accordance with 52




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SEC rules. As of the date of this Report, the Company has implemented procedures that
will reduce the likelihood that material weaknesses or similar errors could
occur in the future. To specifically respond to this matter, and in general to
meet our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, the
Company has taken the actions described above. There were no other changes
during the first quarter ended March 31, 2004 that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over
financial reporting except as described above. 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. 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. Furthermore, 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. 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. 53




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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 its partner in Ayety T.V.,
Mtatsminda Ltd. (Mtatsminda). Mtatsminda holds 15% of the outstanding
interests in Ayety TV and the Company holds the remaining 85% of the
outstanding interests. 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 TV to renegotiate the terms pursuant to which Ayety TV
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 TV. Fourth, Mtatsminda
alleges that the Company may have violated laws against bribery of foreign
officials and possibly engaged in other improper or illegal conduct. With respect to the broadcast frequencies, Ayety TV has been using the 11
frequencies under an agreement with Mtatsminda, which recently expired. Ayety
TV 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 it. The Company
believes that the amount of tax due is, if any, relatively low and it will not result in
any material adverse effect on the Companys business, financial condition or
results of operations. 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. 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 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. 
 Item 3. Defaults Upon Senior Securities (a) None (b) The Company has 4.1 million shares of its $1.00 par value, 7-1/4%
cumulative convertible preferred stock that has a liquidation preference of
$50.00 per share. 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. The dividend requirements for the twelve months ending March 31, 2005
will be $19.1 million, including the effects of compounding and assuming there
are no payments of the dividends. 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 March 31, 2004, total dividends in
arrears were $50.4 million. Except
as described in this paragraph, the holders of the Preferred Stock have no voting rights. According to the
terms of the Preferred Stock, if the Company does not make six consecutive
dividend payments and thereafter receives a written request from the holders of
25% of the voting power of the outstanding Preferred Stock, then the Company is
obligated to call a special meeting of the holders of the Preferred Stock for
the purpose of electing two new directors, except that no special meeting may
be called during the period within 60 days immediately preceding the date fixed
for the next annual meeting of the Companys stockholders. Beginning in late
2003 and continuing into 2004, the Company has had discussions with several
holders of the Companys Preferred Stock regarding the Preferred Stockholders
right to elect two new directors to the Companys Board of Directors. These
discussions have recently resulted in a tentative 54




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agreement, which
is expected to be finalized shortly, to appoint two individuals identified by
certain holders of the Preferred Stock to the Companys Board of Directors for
terms that end at the Companys next annual meeting of stockholders. It is
presently expected that, at that time, such individuals will, in accordance
with the terms of the Preferred Stock, stand for election by a vote of the
holders of the Preferred Stock. The Company believes that this agreement is
advantageous to the Company because it eliminates the need to hold a special
meeting, which would be both time consuming and expensive. 
 Item 6. Exhibits and Reports on Form 8-K ExhibitNumber
    
    Description(a)
    
    Exhibits31.1*
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act31.2*
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act32.1*
    
    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act32.2*
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 (b) Reports on Form 8-K On January 13, 2004, the Company filed a current report on Form 8-K (Items
5 and 7), on March 5, 2004 the Company filed a current report on Form 8-K
(Items 5 and 7), on March 26, 2004 the Company furnished a current report on
Form 8-K (Items 7 and 9) and on March 31, 2004, the Company furnished a current
report on Form 8-K (Items 7 and 9). *Filed herewith 55




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SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. METROMEDIA INTERNATIONAL GROUP, INC.By:
    
    /s/ HAROLD F. PYLE, IIIHarold F. Pyle, IIIExecutive Vice President Finance,Chief Financial Officer and Treasurer(Principal Financial Officer)Date: June 17, 2004By:
    
    /s/ B. DEAN ELLEDGEB. Dean ElledgeVice President Finance andChief Accounting Officer(Principal Accounting Officer)Date: June 17, 2004
 56




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EXHIBIT INDEX ExhibitNumber
    
    Description(a)
    
    Exhibits31.1*
    
    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act31.2*
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act32.1*
    
    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act32.2*
    
    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
 57