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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 10-Q (MARK ONE) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 COMMISSION FILE NUMBER 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. YESxNOo Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YESoNOx The number of shares of common stock outstanding as of November 30, 2004
was 94,034,947.




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METROMEDIA INTERNATIONAL GROUP, INC.
Index to
Quarterly Report on Form 10-Q PagePART I-FINANCIAL INFORMATIONItem 1a.
    
    Financial Statements of Metromedia International Group, Inc. (unaudited)Consolidated Condensed Statements of Operations
    
    
    2Consolidated Condensed Balance Sheets
    
    
    3Consolidated Condensed Statements of Cash Flows
    
    
    4Consolidated Condensed Statements of Stockholders Equity (Deficiency)
and Comprehensive Income (Loss)
    
    
    5Notes to Unaudited Consolidated Condensed Financial Statements
    
    
    6Item 1b.
    
    Financial Statements of Magticom Limited (unaudited)Condensed Statements of Income
    
    
    31Condensed Balance Sheets
    
    
    32Condensed Statements of Cash Flows
    
    
    33Condensed Statements of Stockholders Equity and Comprehensive (Loss) Income
    
    
    34Notes to Unaudited Condensed Financial Statements
    
    
    35Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    39Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    58Item 4.
    
    Controls and Procedures
    
    
    61PART II-OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    62Item 3.
    
    Defaults Upon Senior Securities
    
    
    63Item 6.
    
    Exhibits
    
    
    65Signatures
    
    
    66Certification of PEO Pursuant to Section 302Certification of PFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  1




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Statements of Operations
 (in thousands, except per share amounts)
 (unaudited)
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    20,040
    
    
    $
    18,633
    
    
    $
    57,915
    
    
    $
    53,089Cost and expenses:Cost of services
    
    
    6,913
    
    
    
    6,248
    
    
    
    18,658
    
    
    
    17,014Selling, general and administrative
    
    
    6,471
    
    
    
    10,200
    
    
    
    22,085
    
    
    
    35,425Depreciation and amortization
    
    
    5,693
    
    
    
    5,040
    
    
    
    17,382
    
    
    
    15,255Operating income (loss)
    
    
    963
    
    
    
    (2,855
    )
    
    
    (210
    )
    
    
    (14,605
    )Other (expense) income:Equity in income of unconsolidated investees
    
    
    6,811
    
    
    
    3,558
    
    
    
    16,785
    
    
    
    10,417Interest expense, net
    
    
    (4,076
    )
    
    
    (4,058
    )
    
    
    (11,952
    )
    
    
    (13,755
    )Minority interest
    
    
    (3,192
    )
    
    
    (2,342
    )
    
    
    (7,334
    )
    
    
    (6,330
    )Foreign currency (loss) income
    
    
    (292
    )
    
    
    (62
    )
    
    
    (365
    )
    
    
    (466
    )Gain on retirement of debt
    
    
    
    
    
    
    465
    
    
    
    
    
    
    
    24,582Gain on disposition of businesses
    
    
    
    
    
    
    12,031
    
    
    
    
    
    
    
    12,031Other (expense) income, net
    
    
    (80
    )
    
    
    66
    
    
    
    (114
    )
    
    
    5Income (loss) before income tax expense, discontinued components and the
cumulative effect of a change in accounting principle
    
    
    134
    
    
    
    6,803
    
    
    
    (3,190
    )
    
    
    11,879Income tax expense
    
    
    (1,164
    )
    
    
    (1,766
    )
    
    
    (4,986
    )
    
    
    (5,249
    )(Loss) income before discontinued components and the cumulative effect of a
change in accounting principle
    
    
    (1,030
    )
    
    
    5,037
    
    
    
    (8,176
    )
    
    
    6,630Income (loss) from discontinued components
    
    
    928
    
    
    
    (1,588
    )
    
    
    7,756
    
    
    
    8,251Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,012Net (loss) income
    
    
    (102
    )
    
    
    3,449
    
    
    
    (420
    )
    
    
    16,893Cumulative convertible preferred stock dividend requirement
    
    
    (4,739
    )
    
    
    (4,410
    )
    
    
    (13,965
    )
    
    
    (12,997
    )Net (loss) income attributable to common stockholders
    
    $
    (4,841
    )
    
    $
    (961
    )
    
    $
    (14,385
    )
    
    $
    3,896(Loss) income per common share attributable to common stockholders-Basic
and Diluted:Continuing operations
    
    $
    (0.06
    )
    
    $
    0.01
    
    
    $
    (0.23
    )
    
    $
    (0.07
    )Discontinued components
    
    
    0.01
    
    
    
    (0.02
    )
    
    
    0.08
    
    
    
    0.09Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02Net (loss) income per common share attributable to common stockholders-Basic
and Diluted
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.15
    )
    
    $
    0.04Weighted average common shares  Basic and Diluted
    
    
    94,035
    
    
    
    94,035
    
    
    
    94,035
    
    
    
    94,035
 See accompanying notes to unaudited consolidated condensed financial statements. 2




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\

METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Balance Sheets
 (in thousands, except share amounts)
 September 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    41,204
    
    
    $
    26,925Accounts receivable, net
    
    
    5,871
    
    
    
    5,915Prepaid expenses and other assets
    
    
    7,429
    
    
    
    5,981Current assets of discontinued components
    
    
    338
    
    
    
    5,559Total current assets
    
    
    54,842
    
    
    
    44,380Property, plant and equipment, net of accumulated depreciation of $86,972 and $81,551,
respectively
    
    
    90,901
    
    
    
    86,305Investments in and advances to business ventures
    
    
    35,640
    
    
    
    34,707Goodwill
    
    
    29,465
    
    
    
    27,540Intangible assets, net
    
    
    2,424
    
    
    
    7,845Other assets
    
    
    5,350
    
    
    
    6,104Noncurrent assets of discontinued components
    
    
    
    
    
    
    20,085Total assets
    
    $
    218,622
    
    
    $
    226,966LIABILITIES AND STOCKHOLDERS DEFICIENCYCurrent liabilities:Accounts payable
    
    $
    2,304
    
    
    $
    4,085Accrued expenses
    
    
    19,604
    
    
    
    23,941Current portion of long-term debt
    
    
    1,696
    
    
    
    1,376Current liabilities of discontinued components
    
    
    594
    
    
    
    7,187Total current liabilities
    
    
    24,198
    
    
    
    36,589Long-term debt, less current portion
    
    
    153,866
    
    
    
    153,383Deferred income taxes
    
    
    10,111
    
    
    
    9,426Other long-term liabilities
    
    
    1,452
    
    
    
    7,632Long-term liabilities of discontinued components
    
    
    
    
    
    
    376Total liabilities
    
    
    189,627
    
    
    
    207,406Minority interest
    
    
    35,492
    
    
    
    32,715Stockholders deficiency:71⁄4% cumulative convertible preferred stock
    
    
    207,000
    
    
    
    207,000Common stock, $0.01 par value, authorized 400.0 million shares, issued and outstanding
94.0 million shares
    
    
    940
    
    
    
    940Paid-in surplus
    
    
    1,195,864
    
    
    
    1,195,864Accumulated deficit
    
    
    (1,404,318
    )
    
    
    (1,403,898
    )Accumulated other comprehensive loss
    
    
    (5,983
    )
    
    
    (13,061
    )Total stockholders deficiency
    
    
    (6,497
    )
    
    
    (13,155
    )Total liabilities and stockholders deficiency
    
    $
    218,622
    
    
    $
    226,966
 See accompanying notes to unaudited consolidated condensed financial statements. 3




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Statements of Cash Flows
 (in thousands)
 (unaudited)
 Nine months endedSeptember 30,2004
    
    2003Operating activities:Net (loss) income
    
    $
    (420
    )
    
    $
    16,893Income from discontinued components
    
    
    (7,756
    )
    
    
    (8,251
    )(Loss) income from continuing operations
    
    
    (8,176
    )
    
    
    8,642Items not requiring cash outlays:Depreciation and amortization
    
    
    17,382
    
    
    
    15,255Equity in income of unconsolidated investees
    
    
    (16,785
    )
    
    
    (10,417
    )Minority interest
    
    
    7,334
    
    
    
    6,330Deferred income tax credit
    
    
    (1,178
    )
    
    
    Gain on retirement of debt
    
    
    
    
    
    
    (24,582
    )Gain on disposition of businesses
    
    
    
    
    
    
    (12,031
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    (2,012
    )Changes in:Accounts receivable
    
    
    488
    
    
    
    (1,145
    )Prepaid expenses and other assets
    
    
    (193
    )
    
    
    3,991Other long-term assets and liabilities
    
    
    138
    
    
    
    (1,642
    )Accounts payable and accrued expenses
    
    
    (13,710
    )
    
    
    (4,170
    )Cash used in operating activities
    
    
    (14,700
    )
    
    
    (21,781
    )Investing activities:Distributions from business ventures
    
    
    19,056
    
    
    
    12,287Additions to property, plant and equipment and other
    
    
    (10,106
    )
    
    
    (11,309
    )Business acquisitions, net of cash acquired
    
    
    (5,816
    )
    
    
    Proceeds from sale of businesses, net
    
    
    679
    
    
    
    15,700Purchase of short term investments
    
    
    
    
    
    
    (500
    )Cash provided by investing activities
    
    
    3,813
    
    
    
    16,178Financing activities:Dividends paid to minority interests
    
    
    (5,102
    )
    
    
    (6,500
    )Payments on debt and capital lease obligations
    
    
    (1,129
    )
    
    
    (1,481
    )Cash used in financing activities
    
    
    (6,231
    )
    
    
    (7,981
    )Cash provided by discontinued components, net
    
    
    31,379
    
    
    
    13,760Effect of exchange rate changes on cash
    
    
    18
    
    
    
    Net increase in cash and cash equivalents
    
    
    14,279
    
    
    
    176Cash and cash equivalents at beginning of period
    
    
    26,925
    
    
    
    26,467Cash and cash equivalents at end of period
    
    $
    41,204
    
    
    $
    26,643
 See accompanying notes to unaudited consolidated condensed financial statements. 4




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METROMEDIA INTERNATIONAL GROUP, INC. 
 Consolidated Condensed Statements of Stockholders Equity (Deficiency) and Comprehensive Income (Loss)
 (in thousands)
 (unaudited)
 71⁄4%
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalCumulative
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    StockholdersConvertible
    
    
    
    
    
    Paid-in
    
    Accumulated
    
    Other Comprehensive
    
    Equity
    
    ComprehensivePreferred Stock
    
    Common Stock
    
    Surplus
    
    Deficit
    
    Income (Loss)
    
    (Deficiency)
    
    Income (Loss)Balances at January 1, 2003
    
    $
    207,000
    
    
    $
    94,035
    
    
    $
    1,102,769
    
    
    $
    (1,414,354
    )
    
    $
    (11,948
    )
    
    $
    (22,498
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,893
    
    
    
    
    
    
    
    16,893
    
    
    $
    16,893Other comprehensive loss, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,039
    )
    
    
    (2,039
    )
    
    
    (2,039
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,854Balances at September 30, 2003
    
    $
    207,000
    
    
    $
    94,035
    
    
    $
    1,102,769
    
    
    $
    (1,397,461
    )
    
    $
    (13,987
    )
    
    $
    (7,644
    )Balances at January 1, 2004
    
    $
    207,000
    
    
    $
    940
    
    
    $
    1,195,864
    
    
    $
    (1,403,898
    )
    
    $
    (13,061
    )
    
    $
    (13,155
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (420
    )
    
    
    
    
    
    
    (420
    )
    
    $
    (420
    )Other comprehensive income,
net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,078
    
    
    
    7,078
    
    
    
    7,078Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,658Balances at September 30, 2004
    
    $
    207,000
    
    
    $
    940
    
    
    $
    1,195,864
    
    
    $
    (1,404,318
    )
    
    $
    (5,983
    )
    
    $
    (6,497
    )
 See accompanying notes to unaudited consolidated condensed financial statements. 5




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Metromedia International Group, Inc. 
 Notes to Unaudited Consolidated Condensed Financial Statements 1. Basis of Presentation, Description of Business, Recent Developments and Going Concern Basis of Presentation and Description of Business The accompanying consolidated financial statements include the accounts of
Metromedia International Group, Inc. (the Company) and its consolidated
subsidiaries. All significant intercompany transactions and accounts have been
eliminated. The Company is a holding company with ownership interests in telephony and
cable television businesses in Northwest Russia and the Republic of Georgia.
For the nine months ended September 30, 2004, the telephony businesses
generated substantially all of the Companys consolidated revenues.
Substantially all of the Companys assets are located and revenues are
generated outside of the United States (U.S.). On September 30, 2003, the Board of Directors formally approved
managements plan of disposing its remaining non-core media businesses. As of
September 30, 2004, the Company had entered into agreements for the disposition
of all of its non-core media businesses that were classified as discontinued
components. These consolidated financial statements also include the results
of the Companys discontinued business components (see Note 11, 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 in the U.S. (U.S. GAAP) 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 September 30, 2004, and the results of its
operations for the three and nine month periods ended September 30, 2004 and
2003 and its cash flows for the nine month periods ended September 30, 2004 and
2003, have been included. The results of operations for the interim period are
not necessarily indicative of the results of operations that may be realized
for the full year. Certain reclassifications have been made to prior periods financial
information to conform to the current period presentation. The Company reassessed its accounting and presentation of the withholding
taxes that were remitted to foreign governments on dividends distributed by its
business ventures located outside the U.S. Historically, the Company included
such amounts within its selling, general and administrative expenses. The
Company will prospectively present such withholding tax amounts as a component
of income taxes. In addition, the historical withholding tax amounts have been
reclassified in the current period presentation for consistent presentation
purposes and the following table identifies those historical withholding tax
amounts, for selected historical periods (in thousands): Three Months Ended2002
    
    2003
    
    2004March 31
    
    $
    
    
    
    $
    
    
    
    $
    381June 30
    
    
    518
    
    
    
    607
    
    
    
    September 30
    
    
    
    
    
    
    
    
    
    
    December 31
    
    
    
    
    
    
    190
    
    
    
    
 Such amounts do not have an impact on earnings per share in prior period
financial results or result in an adjustment to the Companys accumulated
deficit. Recent Developments and Going Concern Proposed Merger On November 4, 2004, the Company announced that it had entered into
exclusive negotiations with an investor group (the Investor Group) composed
of Emergent Telecom Ventures (Emergent), First National Holding (First
National), Capital International Private Equity Fund IV, L.P. (Capital
International) and Baring Vostok Capital Partners (Cyprus) Limited (Baring
Vostok) concerning the Investor Groups preliminary proposal to acquire the
Company by merger (the Proposed Merger). The Investor Groups proposal assigns an aggregate preliminary enterprise value
to the Company of $300.0 million, which amount would be payable in cash and
allocated as follows:  
    
    Approximately $152.0 million would be allocated to the
retirement, following the closing of the acquisition of the Company
by the Investor Group, of the Companys outstanding aggregate
principal amount and fully accreted 101⁄2%
Senior Discount Notes due 2007 (the Senior Notes);  
    
    An additional amount, estimated to be in the range of approximately
$11.7 million to $16.5 million, would be used to fulfill certain
contractual obligations to the Companys senior executives. These
contractual arrangements are currently being finalized between the
Companys Board of Directors and the respective senior
executives, and the Company intends to update its public filings with
the modified senior executive contractual arrangements when complete; and  
    
    The remainder would be allocated between the Companys preferred
and common stockholders in a manner determined by the Companys Board
of Directors prior to the execution of the definitive merger agreement and paid out to the stockholders in connection with the consummation of the Proposed Merger. 6




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The proposal contains a number of conditions,
including without limitation, the Investor Groups successful completion of due
diligence during a limited exclusivity period, the Investor Group obtaining
commitments for all financing contemplated in its acquisition proposal, the
Company meeting currently projected corporate cash balance and liability
levels, and negotiation and execution of definitive transaction agreements.
The Company has granted the Investor Group exclusivity until January 17, 2005
to pursue a due diligence review of the Company and negotiate a definitive
merger agreement, subject to earlier termination under certain circumstances. If undertaken, the Proposed Merger would result in the Company being
merged with and into an entity wholly-owned by the Investor Group. The
Companys current common and preferred stockholders would not become
stockholders of the post-merger entity and would receive cash consideration for
their stock holdings in an amount dependent on the aforementioned
Board-determined allocation. The Proposed Merger will require approval by a
majority of the Companys common stock. This approval will be solicited via a
proxy statement that will include further details of the Proposed Merger, the
Board of Directors recommendation, and other information customarily contained
in merger proxy statements. Preparation of a proxy statement and solicitation
of a common stockholder vote would follow signing of definitive agreements with
the Investor Group. The Company anticipates that a common stockholder vote on
the Proposed Merger will not occur before the end of the first quarter 2005.
Although no vote of the Companys preferred stockholders is required to approve
the Proposed Merger, as a practical matter discussions with significant holders
of the Companys preferred stock concerning disposition of merger proceeds are
likely to occur prior to concluding any definitive merger agreement. The Company has been actively assessing for some time practical financial
restructuring alternatives and business development opportunities available to
the Company. This work included assessment of current core business valuations
and a pragmatic assessment of the opportunities and risks associated with
continued pursuit and development of the Companys core businesses on an as
currently organized basis. In connection with this work, the Company also
received and carefully considered several third party merger and acquisition
proposals and various opportunities to refinance the Companys Senior Notes.
The Board of Directors has concluded that the Proposed Merger, if consummated,
offers the best opportunity reasonably available to maximize value for the
Companys stakeholders. There can be no assurances that any transaction with the Investor Group or
any other party will take place nor can any assurance be given with respect to
the timing or terms of any such transaction. Details of the terms of a final
agreement, if any, will be disclosed upon signing of definitive agreements.
The preliminary proposal made by the Investor Group is non-binding and the
Company has agreed, under certain circumstances, to reimburse the Investor
Group for a limited amount of its out-of-pocket expenses incurred in connection
with its due diligence review and negotiation of definitive agreements. Restructuring 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. Cash proceeds from these sales have
mitigated short-term corporate liquidity concerns and reduced the Companys
dependence upon cash distributions from its core businesses and thus provided
additional cash reserves to the core businesses to enable them to further
pursue their respective business development initiatives. In connection with
the Restructuring, the Company also substantially downsized its corporate
headquarters staff and undertook actions with the intended objective of
significantly decreasing its corporate overhead cash-burn rate. The Company
had substantially completed all of the initiatives attributable to the
Restructuring at the end of the third quarter of 2004, and as such, exited the
Restructuring with the intent, prior to engaging in the Proposed Merger, to
focus on the continued development of its core telephony businesses in
Northwest Russia and the Republic of Georgia. 7




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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 PeterStar and Magticom are currently self-financed and hold leading
positions in their respective markets. Furthermore, the Company also currently
intends to retain its ownership in Ayety LLC (Ayety), 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. In addition, as of September 30, 2004 the Company has
one radio broadcast station and one cable television network which are subject
to pending sales agreements with prospective acquirers, which are reflected at
the lower of cost, less accumulated losses or estimated net proceeds. Prior to
engaging in the Proposed Merger, the Company intended 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
Senior Notes. Corporate Liquidity The Company is a holding company; accordingly, it does not generate cash
flows from operations. As a result, the Company is dependent on the earnings
of its subsidiaries and equity investees and the distribution or other payment
of these earnings to it to meet its long term corporate cash outlay
requirements (the Long Term Corporate Cash Outlay Requirements), in addition
to making any cash distributions to its stockholders. The Companys Long Term
Corporate Cash Outlay Requirements consist of cash outlays for its corporate
overhead expenditure requirements, extinguishment of its Historic Corporate
Liabilities, and interest payment obligations associated with its Senior Notes.
As such, the Companys Long Term Corporate Cash Outlay Requirements do not
include funding necessary to retire or repay its outstanding Senior Notes. 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. The Company has legacy liabilities as a result of the Companys prior U.S.
based business operating activities, principally attributable to the business
activities when the Company operated under the names of The Actava Group,
Inc. and Fuqua Industries, Inc., which include, but are not limited to,
employee benefit obligations to former employees (pension obligations and
provisions for medical and life insurance), self-insurance reserves
attributable to product liability and workers compensation claims and
environmental claims (collectively, the Historic Corporate Liabilities). As of September 30, 2004 and November 30, 2004, the Company had $40.5
million and $34.7 million, respectively, of unrestricted cash on hand, which is
principally held in banks in the U.S. In addition, as of September 30, 2004,
the Companys consolidated business ventures held $0.7 million of cash on hand,
which is held in banks in Russia. Furthermore, as of September 30, 2004, the
Companys unconsolidated business ventures had $13.4 million of cash on hand,
which is held in banks in the Republic of Georgia. The Company projects that its anticipated continuing dividends from its
core business operations and its current corporate cash reserves will be
sufficient for the Company to meet on a timely basis its Long Term Corporate
Cash Outlay Requirements through September 30, 2007, the maturity date
of the Senior Notes. However, the Company cannot provide assurance that its
core businesses will perform to expectations and therefore generate the
forecasted cash flows for dividend distribution purposes, or that the core
businesses free cash flows or their available cash reserves will be
distributed as shareholder dividends in accordance with the Companys current
expectations. Therefore, the Company cannot provide assurance that it will be
able to meet its Long Term Corporate Cash Outlay Requirements through at least
September 30, 2007. 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, as of today, it has sufficient
corporate cash on hand to support the Companys planned Long Term Corporate
Cash Outlay Requirements through at least March 31, 2005, including the
Companys $8.0 million semi-annual interest payment on its Senior Notes due on
March 31, 2005 and its planned cash outlays between now and March 31, 2005
attributable to the extinguishment of certain of the Companys Historic
Corporate Liabilities as related to employee benefit obligations (see Note 15,
Subsequent Events  Employee Benefits). This projection does not include
cash inflows that might reasonably arise from cash proceeds realized from
dividend distributions from either PeterStar or Magticom, which would further
strengthen the Companys liquidity position. 8




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##### Table of Contents



However, the Company does not believe that, as of today, it has sufficient
corporate cash on hand to support the Companys planned Long Term Corporate
Cash Outlay Requirements through September 30, 2005, including the Companys
$8.0 million semi-annual interest payment on its Senior Notes due on September
30, 2005, its planned cash outlays between now and September 30, 2005
attributable to the extinguishment of certain of the Companys Historic
Corporate Liabilities as related to employee benefit obligations and the cash
outlays attributable to the restructuring of Dr. Jokhtaberidzes ownership
interest in Magticom, of $18.2 million, (as discussed in further detail in Note
14, Acquisitions and Other Transactions  Magticom
Activity). As previously indicated, the outstanding principal on the Senior Notes
becomes due in full on September 30, 2007 and the Company does not currently
anticipate that it can retire the Senior Notes with internally generated cash
flows, without the sale of either its interest in PeterStar or its interests in
both PeterStar and Magticom. In addition, failure on the part of the Company
to make any required payment of interest on the Senior Notes would represent a
default under the Senior Notes. A default, if not waived, could result in
acceleration of the Companys indebtedness, in which case the full amount of
the Senior Notes would become immediately due and payable. If an uncured
default were to occur, the Company does not currently anticipate that it can
retire the Senior Notes with internally generated cash flows without the sale
of either its interest in PeterStar or its interests in both PeterStar and
Magticom. Furthermore, the Company has not been successful with past refinancing
initiatives associated with the Senior Notes, and as such, the Company might
not be able to borrow sufficient funds to remedy a situation where its
obligated to retire the Senior Notes, either due to a uncured default situation
or as a result of the ultimate maturity of the Senior Notes. If the Company is not able to satisfactorily address the corporate
liquidity issues described above, the Company may have to resort to certain
other measures, including ultimately seeking the protection afforded under the
U.S. Bankruptcy Code. The Company cannot provide assurances at this time that
it will be successful in avoiding such measures. Additionally, the Company has
a stockholders deficit and has suffered recurring operating losses and
operating cash deficiencies. The factors discussed above raise substantial doubt about the Companys
ability to continue as a going concern. The condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. In June 2004, the Company reached an agreement (the Board of Director
Nominee Agreement) with certain holders of the Companys
71⁄4% cumulative
convertible preferred stock (the Preferred Stock) who represented to the
Company that they held discretionary authority (including the power to vote)
with regard to 2.4 million shares or approximately 58% of the outstanding 4.1
million shares of Preferred Stock (the Participating Preferred Stockholders).
Under the terms of the Board of Director Nominee Agreement, the Participating
Preferred Stockholders irrevocably waived the right to request a special
meeting of holders of Preferred Stock to elect directors or take any action to
request such a meeting; such waiver to remain effective until immediately after
the next annual meeting of the Companys stockholders is held. In
consideration of this waiver, Messrs. Gale and Henderson, who were identified by
the Participating Preferred Stock Holders as director candidates, were elected as Class III Directors
by the Companys Board of Directors. Their terms will expire at the Companys
next annual meeting of stockholders. At the next annual meeting, the holders
of Preferred Stock will have the right to vote separately as a class for the
election of two directors. It is expected that Messrs. Gale and Henderson will
be nominated for election by the holders of Preferred Stock to fill these two
directorships. The execution of the Board of Director Nominee Agreement was the
culmination of several discussions that the Company had with several holders of
the Companys Preferred Stock, which began in late 2003 and had originated due
to the fact that the Company had not made six consecutive dividend payments on
the Preferred Stock. According to the terms of the Preferred Stock, holders of
25% of the voting power of the outstanding Preferred Stock became entitled to
compel the Company to call a special meeting of the holders of the Preferred
Stock for the purpose of electing two new directors. The Company believes that
the Board of Director Nominee Agreement was advantageous to the Company because
it eliminated the need to hold a special meeting, which would have been both
time consuming and expensive. 9




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2. Summary of Significant Accounting Policies Stock Option Plans The Company has elected to use the intrinsic value-based method 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 disclose the pro forma effects on results of operations as if
the fair value method had been adopted to account for its stock-based employee
compensation plans. Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net (loss) income attributable to common stockholders,
as reported
    
    $
    (4,841
    )
    
    $
    (961
    )
    
    $
    (14,385
    )
    
    $
    3,896Deduct:Stock-based employee
compensation expense
determined under fair
value based method
    
    
    (95
    )
    
    
    (149
    )
    
    
    (284
    )
    
    
    (540
    )Pro forma net (loss) income
    
    $
    (4,936
    )
    
    $
    (1,110
    )
    
    $
    (14,669
    )
    
    $
    3,356Net (loss) income per share attributable to common
stockholders-Basic and diluted:As reported
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.15
    )
    
    $
    0.04Pro forma
    
    $
    (0.05
    )
    
    $
    (0.01
    )
    
    $
    (0.16
    )
    
    $
    0.04
 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 business
ventures should be reported on a real-time basis. As a result of this change,
a $2.5 million decrease to the accumulated deficit as of January 1, 2003 was
recorded, of which $2.0 million is reflected as income related to the
cumulative effect of a change in accounting principle and the remaining $0.5
million is included as a cumulative effect of a change in accounting principle
in income from discontinued components for the nine months ended September 30,
2003. 10




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The effect of this change on the consolidated statement of operations for
the nine months ended September 30, 2003 is as follows (in thousands, except
per share data): Effect of change in year-end for lag venturesNine monthsendedSeptember 30,
    
    Three months
    
    Three months
    
    Cumulative effect2003, prior to
    
    ended
    
    ended
    
    of a change in
    
    Nine months endedchange in
    
    December 31,
    
    September 30,
    
    accounting
    
    September 30, 2003,accounting policy
    
    2002
    
    2003
    
    principle
    
    as reportedRevenues
    
    $
    53,131
    
    
    $
    (661
    )
    
    $
    619
    
    
    $
    
    
    
    $
    53,089Costs and expenses
    
    
    67,695
    
    
    
    (592
    )
    
    
    591
    
    
    
    
    
    
    
    67,694Operating (loss) income
    
    
    (14,564
    )
    
    
    (69
    )
    
    
    28
    
    
    
    
    
    
    
    (14,605
    )Equity in income of unconsolidated
investees
    
    
    8,854
    
    
    
    (2,886
    )
    
    
    4,449
    
    
    
    
    
    
    
    10,417Minority interest
    
    
    (5,931
    )
    
    
    943
    
    
    
    (1,342
    )
    
    
    
    
    
    
    (6,330
    )Other non-operating income and
expenses, net
    
    
    22,399
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    22,397Income (loss) before income tax
expense, discontinued components and
cumulative effect of a change in
accounting principle
    
    
    10,758
    
    
    
    (2,012
    )
    
    
    3,133
    
    
    
    
    
    
    
    11,879Income tax expense
    
    
    (5,249
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,249
    )Income (loss) before discontinued
components and cumulative effect of
a
change in accounting principle
    
    
    5,509
    
    
    
    (2,012
    )
    
    
    3,133
    
    
    
    
    
    
    
    6,630Income (loss) from discontinued
components
    
    
    8,829
    
    
    
    (503
    )
    
    
    (578
    )
    
    
    503
    
    
    
    8,251Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,012
    
    
    
    2,012Net income (loss)
    
    
    14,338
    
    
    
    (2,515
    )
    
    
    2,555
    
    
    
    2,515
    
    
    
    16,893Preferred dividends
    
    
    (12,997
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,997
    )Net income (loss) attributable to
common stockholders
    
    $
    1,341
    
    
    $
    (2,515
    )
    
    $
    2,555
    
    
    $
    2,515
    
    
    $
    3,896Income (loss) per common per share
attributable to common stockholders:Continuing operations
    
    $
    (0.08
    )
    
    $
    (0.02
    )
    
    $
    0.03
    
    
    $
    
    
    
    $
    (0.07
    )Discontinued components
    
    
    0.09
    
    
    
    (0.01
    )
    
    
    
    
    
    
    0.01
    
    
    
    0.09Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.02
    
    
    
    0.02Net income (loss) per common share
attributable to common stockholders
    
    $
    0.01
    
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.04
 3. Change in Basis of Presentation The Company is in a commercial dispute with Mtatsminda Ltd.
(Mtatsminda), the Companys 15% minority partner in its Ayety business
venture. On June 2, 2004, Mtatsminda sent a letter to the Company in which it
addressed four issues. First, Mtatsminda requested that the Company cause Ayety
to renegotiate the terms pursuant to which Ayety is using 11 broadcast
frequencies which belong to Mtatsminda. Second, Mtatsminda alleges that the
Company has an obligation to pay property taxes on the buildings owned by an
affiliate of the Company in Tbilisi and that the Company has failed to meet
this obligation. Third, Mtatsminda disputes the validity of loans made by the
Company to Ayety. Fourth, Mtatsminda alleges that the Company may have violated
laws against bribery of foreign officials and possibly engaged in other
improper or illegal conduct. These issues were again raised by Mtatsminda in a
letter addressed to the Company, dated June 25, 2004. With respect to the broadcast frequencies, Ayety has been using the 11
frequencies under an agreement with Mtatsminda which recently expired. Ayety is
intending to enter into negotiations with Mtatsminda to secure continued
long-term use of these frequencies. The Company believes that the risk of
Mtatsminda withdrawing the right to use its frequencies is remote. With respect
to the property tax issue, the Company has investigated this allegation and it
believes that the amount of tax due, if any, is negligible 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 loans made to
Ayety are unfounded and intends to vigorously defend itself on this issue. The Company believes that the fourth allegation is substantially similar
to those raised previously by certain Georgian individuals and described in
Note 12, Commitments and Contingencies  Georgian Matters. The Companys
Board of Directors 11




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authorized the Companys outside counsel to conduct an independent inquiry
into the allegations of possible improper or illegal conduct made by the
Georgian individuals. The investigation has been completed and the results have
been reported by the Companys outside counsel to the Board of Directors of the
Company. The investigation did not uncover any specific factual support for the
allegations regarding violations of laws against bribery of foreign officials,
including the Foreign Corrupt Practices Act, or other alleged improper or
illegal conduct. The Audit Committee of the Companys Board of Directors has
reviewed the June 2, 2004 letter sent by Mtatsminda and believes that the
allegations made with respect to violations of laws and other improper or
illegal conduct are substantially similar to those previously investigated by
the Companys outside counsel. For this reason, the Audit Committee has
determined not to re-open the investigation. At the request of Mtatsminda, the Company agreed to participate in a
meeting of Ayety shareholders on June 28, 2004. At that meeting, the Companys
intent was to address matters raised in Mtatsmindas letter to the Company
dated June 2, 2004 and to also address matters relative to the poor financial
performance of Ayety, including the Companys decision to remove and appoint a
new General Director of the business. However, at such meeting, Mtatsminda
notified the Company that in March 2003, a new charter of Ayety was prepared
and filed in the Georgian courts (which are responsible for company
registration in Georgia) (the New Charter). Mtatsminda represented that,
pursuant to the terms of the New Charter, unanimous shareholder approval is
required for certain key decisions, including the removal and appointment of a
new General Director; whereas previously only a 75% vote was required. Further,
at the meeting, Mtatsminda informed the Company that it would not vote for
the Companys proposal regarding the removal of Ayetys General Director. The
Company believes that the legality of the changes to the New Charter is
questionable and can be disputed by the Company on the basis that the New
Charter was adopted in a manner that was not in compliance with applicable law.
However, since the New Charter has already been filed and accepted by the
Georgian courts, the New Charter is valid until successfully challenged. Mtatsminda did not present a registered copy of the New Charter at the
June 28, 2004 meeting of Ayety shareholders or subsequently, nor had the
Company previously received any such copy from Ayety. Nonetheless, the
Companys representatives concluded from that meeting that Mtatsminda had
secured practical control over Ayety; both by virtue of its claims with respect
to the New Charter and through its direct associations with the General
Director of Ayety. The Company is pursuing legal remedies with respect to the
New Charter and continues to seek removal of Ayetys General Director.
However, management has concluded that, based on these events, the Company does
not at present control the day-to-day business affairs of Ayety. Accordingly,
effective June 30, 2004, the Company no longer accounts for its ownership
interest in Ayety following the consolidation method of accounting but follows
the equity method of accounting. As discussed in further detail in Note 12, Commitments and
Contingencies, on July 25, 2004, Mtatsminda filed a claim in the courts within
the Republic of Georgia against International Telcell SPS, Inc. (ITSPS), a
subsidiary of the Company, Ayety and Zurab Chigogidze, the General Director of
Ayety, for damages in the amount of GEL 185,000 (US $90,000), GEL 23,000 (US
$13,000) and GEL 258,000 (US $130,000), respectively. In its complaint,
Mtatsminda alleges that it suffered damages because Ayety had used its cash
resources to make payments to ITSPS in repayment of a credit facility between
Ayety and ITSPS. Mtatsminda also claims that Ayety has not authorized the
credit facility. Mtatsminda further alleges that Ayetys funds should have
been used to make dividend payments to Mtatsminda. The Company disputes these
claims and has filed a counter-suit in the Georgian courts. Based on the
information available and due to the relatively low amounts of damages claimed,
the Company believes that these matters will not result in any material adverse
effect on the Companys business financial condition or results of operations. 12




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Summarized results of operations of the Companys consolidated financial
statements and proforma results of operations of the Company with Ayety
unconsolidated for all periods presented are as follows (in thousands): Three Months Ended September 30, 2003As Presented
    
    ProformaRevenues
    
    $
    18,633
    
    
    $
    18,014Cost of services
    
    
    6,248
    
    
    
    6,246Selling, general and administrative
    
    
    10,200
    
    
    
    9,746Depreciation and amortization
    
    
    5,040
    
    
    
    4,940Operating loss
    
    $
    (2,855
    )
    
    $
    (2,918
    )Equity in income of unconsolidated investees
    
    $
    3,558
    
    
    $
    3,565Net income
    
    $
    3,449
    
    
    $
    3,449
 Nine months ended September 30, 2004
    
    Nine Months Ended September 30, 2003As Presented
    
    Proforma
    
    As Presented
    
    ProformaRevenues
    
    $
    57,915
    
    
    $
    56,544
    
    
    $
    53,089
    
    
    $
    51,147Cost of services
    
    
    18,658
    
    
    
    18,613
    
    
    
    17,014
    
    
    
    16,989Selling, general and administrative
    
    
    22,085
    
    
    
    20,874
    
    
    
    35,425
    
    
    
    34,073Depreciation and amortization
    
    
    17,382
    
    
    
    17,169
    
    
    
    15,255
    
    
    
    14,857Operating loss
    
    $
    (210
    )
    
    $
    (112
    )
    
    $
    (14,605
    )
    
    $
    (14,772
    )Equity in income of unconsolidated investees
    
    $
    16,785
    
    
    $
    16,721
    
    
    $
    10,417
    
    
    $
    10,229Net (loss) income
    
    $
    (420
    )
    
    $
    (420
    )
    
    $
    16,893
    
    
    $
    16,893
 Summarized balance sheet information of the Companys consolidated
financial statements and proforma balance sheet information of the Company as
if Ayety had been unconsolidated as of December 31, 2003 are as follows (in
thousands): December 31, 2003As Presented
    
    ProformaCurrent assets
    
    $
    44,380
    
    
    $
    44,316Investments in and advances to business ventures
    
    
    34,707
    
    
    
    34,759Property, plant and equipment, net
    
    
    86,305
    
    
    
    85,386Other long-term assets
    
    
    61,574
    
    
    
    61,574Total assets
    
    $
    226,966
    
    
    $
    226,035Current liabilities
    
    
    36,589
    
    
    
    35,658Total liabilities
    
    $
    207,406
    
    
    $
    206,475Minority interest
    
    
    32,715
    
    
    
    32,715Total stockholders deficit
    
    
    (13,155
    )
    
    
    (13,155
    )Total liabilities and stockholders deficit
    
    $
    226,966
    
    
    $
    226,035
 13




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4. Investments In and Advances to Business Ventures Credit Agreements with Business Ventures The Company had historically entered into credit agreements with its
business ventures and subsidiaries, including those classified as discontinued
operations, and had made advances to the 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 and subsidiaries have ranged from prime
rate to prime rate plus 6%. The credit agreements generally provided for the
payment of principal and interest from 90% of the business ventures and
subsidiaries available cash flow, as defined, prior to any substantial
distributions of dividends to the business venture partners. As of September
30, 2004, the credit agreement with Ayety, with an aggregate outstanding
balance of $15.9 million, was the sole remaining credit line outstanding, which has been fully provided for. As
discussed in further detail in Note 3, Change in Basis of Presentation and
Note 12, Commitments and Contingencies, the Company has been involved in
several commercial disputes with Mtatsminda, the Companys 15% minority partner
in its Ayety business venture, and one of the claims being made by Mtatsminda
is that the $15.9 million credit agreement between the Company and Ayety is not
valid. In its complaint, Mtatsminda alleges that it suffered damages because
Ayety had used its cash resources to make payments to ITSPS in repayment of a
credit facility between Ayety and ITSPS. Mtatsminda also claims that Ayety has
not authorized the credit facility. Mtatsminda further alleges that Ayetys
funds should have been used to make dividend payments to Mtatsminda. The
Company disputes these claims and has filed a counter-suit in the Georgian
courts. The Company believes that these matters will not result in any material
adverse effect on the Companys consolidated business financial conditions or
results of operations, due to accumulated losses recognized related to the
Companys investment in Ayety. All other credit agreements between the Company and its business ventures
have either been repaid or terminated/assigned pursuant to the terms and
conditions of the sale agreements associated with the disposition of the
respective business ventures. Investments In and Advances to Business Venture As of September 30, 2004 and December 31, 2003, the Companys investment
in and advances to business ventures balance included within the Companys
consolidated balance sheet reflects the Companys 49% equity investment in
Magticom through Telcell Wireless, LLC, a 70.41% owned subsidiary holding
company for which the Company follows the consolidation method of accounting.
The Companys effective ownership of Magticom is 34.5%. As further described in Note 3, Change in Basis of Presentation, and as
reflected below, the Companys investment in and advances to business
ventures balance also includes activity associated with the Companys net
investment in Ayety, effective June 30, 2004. The components of the Companys investments in and advances to business
ventures are as follows (in thousands): September 30, 2004
    
    December 31, 2003Equity in net assets acquired
    
    $
    2,450
    
    
    $
    2,450Accumulated income recognized, net
    
    
    51,984
    
    
    
    35,172Accumulated dividends received
    
    
    (20,417
    )
    
    
    (1,361
    )Equity portion of cumulative translation adjustment
    
    
    1,623
    
    
    
    (1,554
    )Total investments in and advances to business ventures
    
    $
    35,640
    
    
    $
    34,707
 As of September 30, 2004, the Companys investments in and advances to
business venture balance reflects only the Companys investment in Magticom,
since the Companys U.S. GAAP investment carrying balance (net of accumulated
losses and currency translation adjustments) in both Telecom Georgia and Ayety
is zero. 14




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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): Nine months ended September 30,2004
    
    2003Balances, at beginning of period
    
    $
    34,707
    
    
    $
    30,720Dividends received
    
    
    (19,056
    )
    
    
    (1,361
    )Cash repayments and other
    
    
    
    
    
    
    (11,101
    )Equity ownership in income
    
    
    16,785
    
    
    
    9,986Cumulative effect adjustment on income for lag period
    
    
    
    
    
    
    3,248Equity portion of cumulative translation adjustment
    
    
    3,177
    
    
    
    (1,789
    )Conversion from consolidation to equity method for Ayety
    
    
    27
    
    
    
    Balances, at end of period
    
    $
    35,640
    
    
    $
    29,703
 Certain cable and telephony business ventures in which the Company
disposed of its interests were accounted for using the equity method of
accounting. Such ventures principally included: Date of DispositionFixed Telephony businesses Comstar
    
    April 24, 2003 MTR Svyaz
    
    June 25, 2003 Teleport-TP
    
    June 25, 2003Wireless Telephony businesses Tyumenruskom
    
    September 24, 2003Cable television businesses Baltcom TV
    
    August 1, 2003 Cosmos TV
    
    March 26, 2004 Kosmos TV
    
    April 24, 2003 Teleplus
    
    November 21, 2003
 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 (see Note 11, Discontinued Business Components). The remaining
transactions are as follows: Cosmos TV Transaction On March 26, 2004, the Company announced that it had completed the sale of
its interests in various cable ventures, including Cosmos TV (Cosmos), to
Star Broadband Limited, a British Virgin Islands company, which is controlled
by Dominic Reid, former General Director of the Companys cable business group,
for $0.7 million. The Company recorded neither a gain nor a loss on the sale
of Cosmos, due to the fact that the Company had written down its investment in
Cosmos in the fourth quarter of 2003 to the estimated fair value less costs to
sell, and as such, recorded a $1.5 million impairment charge. Teleplus Transaction On November 21, 2003, the Company sold all of its interest in the St.
Petersburg, Russia cable television company, Teleplus, to a Russian company
Svyaz-Kapital and AVT Systems Ltd., a company organized under the laws of
Cayman Islands, for cash consideration of $0.9 million. The Company recognized
a gain of $0.7 million on the disposition in the three months ended December
31, 2003. Tyumenruskom Transaction On September 24, 2003, the Company sold its interest in the Russian mobile
phone company Tyumenruskom to a Russian company for cash consideration of $1.2
million. In addition, the Company was released from its guarantee of
Tyumenruskoms debt by a vendor. The Company had previously recorded a reserve
related to this guarantee that totaled $1.4 million on the date of the 15




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##### Table of Contents



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 condensed financial information for the
Companys operating unconsolidated business ventures, including those disposed,
up to the date of disposition, as of and for the three and nine months ended
September 30, 2004 and 2003. The results of operations presented below are
before the elimination of intercompany interest (in thousands): Three months ended September 30, 2004Wireless
    
    CableTelephony
    
    Television
    
    TotalRevenues
    
    $
    27,559
    
    
    $
    748
    
    
    $
    28,307Cost of services
    
    
    3,481
    
    
    
    11
    
    
    
    3,492Selling, general and administrative
    
    
    2,824
    
    
    
    642
    
    
    
    3,466Depreciation and amortization
    
    
    3,374
    
    
    
    126
    
    
    
    3,500Operating income (loss)
    
    
    17,880
    
    
    
    (31
    )
    
    
    17,849Interest and other income (expense), net
    
    
    389
    
    
    
    (226
    )
    
    
    163Income tax expense
    
    
    (4,358
    )
    
    
    
    
    
    
    (4,358
    )Net income (loss)
    
    $
    13,911
    
    
    $
    (257
    )
    
    $
    13,654Capital expenditures
    
    $
    3,940
    
    
    $
    56
    
    
    $
    3,996Equity in income (losses) of unconsolidated investees
    
    $
    6,816
    
    
    $
    (5
    )
    
    $
    6,811
 Three months ended September 30, 2003Wireless
    
    CableTelephony
    
    Television
    
    TotalRevenues
    
    $
    20,530
    
    
    $
    969
    
    
    $
    21,499Cost of services
    
    
    2,777
    
    
    
    134
    
    
    
    2,911Selling, general and administrative
    
    
    2,691
    
    
    
    478
    
    
    
    3,169Depreciation and amortization
    
    
    3,147
    
    
    
    212
    
    
    
    3,359Operating income
    
    
    11,915
    
    
    
    145
    
    
    
    12,060Interest and other expense, net
    
    
    (115
    )
    
    
    (217
    )
    
    
    (332
    )Income tax expense
    
    
    (2,354
    )
    
    
    
    
    
    
    (2,354
    )Net income (loss)
    
    $
    9,446
    
    
    $
    (72
    )
    
    $
    9,374Capital expenditures
    
    $
    4,347
    
    
    $
    316
    
    
    $
    4,663Equity in income (losses) of unconsolidated investees
    
    $
    4,628
    
    
    $
    (1,070
    )
    
    $
    3,558
 16




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##### Table of Contents



Nine months ended September 30, 2004Wireless
    
    CableTelephony
    
    Television
    
    TotalRevenues
    
    $
    71,480
    
    
    $
    1,413
    
    
    $
    72,893Cost of services
    
    
    9,112
    
    
    
    122
    
    
    
    9,234Selling, general and administrative
    
    
    7,863
    
    
    
    920
    
    
    
    8,783Depreciation and amortization
    
    
    10,451
    
    
    
    224
    
    
    
    10,675Operating income
    
    
    44,054
    
    
    
    147
    
    
    
    44,201Interest and other income (expense) , net
    
    
    996
    
    
    
    (283
    )
    
    
    713Income tax expense
    
    
    (10,785
    )
    
    
    
    
    
    
    (10,785
    )Net income (loss)
    
    $
    34,265
    
    
    $
    (136
    )
    
    $
    34,129Capital expenditures
    
    $
    9,865
    
    
    $
    317
    
    
    $
    10,182Equity in income (losses) of unconsolidated investees
    
    $
    16,790
    
    
    $
    (5
    )
    
    $
    16,785
 Nine months ended September 30, 2003Fixed
    
    Wireless
    
    CableTelephony
    
    Telephony
    
    Television
    
    TotalRevenues
    
    $
    25,270
    
    
    $
    53,708
    
    
    $
    8,625
    
    
    $
    87,603Cost of services
    
    
    12,807
    
    
    
    7,905
    
    
    
    1,617
    
    
    
    22,329Selling, general and administrative
    
    
    6,814
    
    
    
    6,932
    
    
    
    4,686
    
    
    
    18,432Depreciation and amortization
    
    
    4,414
    
    
    
    10,268
    
    
    
    2,095
    
    
    
    16,777Operating income
    
    
    1,235
    
    
    
    28,603
    
    
    
    227
    
    
    
    30,065Interest and other (expense) income, net
    
    
    (1,123
    )
    
    
    (1,679
    )
    
    
    1,514
    
    
    
    (1,288
    )Income taxes
    
    
    (990
    )
    
    
    (6,581
    )
    
    
    (352
    )
    
    
    (7,923
    )Net (loss) income
    
    $
    (878
    )
    
    $
    20,343
    
    
    $
    1,389
    
    
    $
    20,854Capital expenditures
    
    $
    1,798
    
    
    $
    16,562
    
    
    $
    1,404
    
    
    $
    19,764Equity in (losses) income of unconsolidated investees
    
    $
    (468
    )
    
    $
    10,157
    
    
    $
    728
    
    
    $
    10,417
 Combined Balance Sheets The condensed balance sheets of Magticom and Ayety as of September 30,
2004 and the condensed balance sheet of Magticom as of December 31, 2003 are as
follows (in thousands): September 30, 2004
    
    December 31, 2003Assets:Cash
    
    $
    13,440
    
    
    $
    17,858Accounts receivable, net
    
    
    3,567
    
    
    
    1,303Other current assets
    
    
    1,678
    
    
    
    771Property, plant and equipment, net
    
    
    64,378
    
    
    
    57,256Other long-lived assets
    
    
    1,474
    
    
    
    1,340Total assets
    
    $
    84,537
    
    
    $
    78,528Liabilities and Business Ventures Equity:Accounts payable
    
    $
    2,715
    
    
    $
    696Accrued expenses and other liabilities
    
    
    10,759
    
    
    
    8,414Amounts due under Company credit facilities and other intercompany balances
    
    
    16,404
    
    
    
    Other long-term liabilities
    
    
    448
    
    
    
    651Total liabilities
    
    
    30,326
    
    
    
    9,761Common stock and retained earnings
    
    
    50,870
    
    
    
    71,937Accumulated other comprehensive income (loss)
    
    
    3,341
    
    
    
    (3,170
    )Business ventures equity
    
    
    54,211
    
    
    
    68,767Total liabilities and business ventures equity
    
    $
    84,537
    
    
    $
    78,528
 17




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##### Table of Contents



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 Senior Notes bear interest at a rate of
101⁄2% per annum, payable semiannually on
March 31st and September 30th,
respectively. Under the terms of the indenture governing the Senior Notes, the Company
and certain of its subsidiaries are subject to certain covenants pertaining to
its financing activities. Such covenants restrict the Company and certain of
its subsidiaries from paying dividends, acquiring its capital stock, prepaying
subordinated indebtedness, investing in and selling assets and subsidiary
stock, and incurring additional indebtedness, among other activities. In
addition, upon the occurrence of a change of control 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, unless the Company provides a redemption notice to the holders
of the Senior Notes prior to the holders of the Senior Notes exercising their
change of control right. In the event of the Company issuing a redemption
notice, the Company would repurchase all Senior Notes at a cash purchase price
of 100% 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 Advisory
Services (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
(See Note 11, Discontinued Business Components  Adamant Transaction"). With
the completion of this transaction, the outstanding principal balance on the
Senior Notes was reduced to $152.0 million. 6. Stockholders Equity Common Stock On September 24, 2003, the Companys equity securities were removed from
quotation on the OTC Bulletin Board trading system (OTCBB) because the
Company was not then in compliance with NASD Rule 6530. As a result, the
Companys common stock and Preferred Stock were then quoted on the Pink Sheets.
On June 18, 2004, the Company filed its first quarter 2004 Form 10-Q, and
became compliant with OTCBB trading eligibility requirements. As such, on
August 6, 2004, the Companys Common Stock (OTCBB: MTRM.OB) began trading on
the OTC Bulletin Board after a market maker had successfully filed a petition
with the NASD seeking their permission for the Companys common stock to be
quoted on the OTCBB. The Companys Preferred Stock (OTCPK: MTRMP) remains
quoted on the Pink Sheets. 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 September 30, 2004 and December 31, 2003. Dividends on the Preferred Stock are cumulative from the date of issuance
and payable quarterly, in arrears. The Company may make any payments due on the
Preferred Stock, including dividend payments and redemptions (i) in cash; (ii)
through issuance of the Companys common stock or (iii) through a combination
thereof. Through March 15, 2001, the Company paid its quarterly dividends in cash.
The Company has elected not to declare a dividend for any quarterly dividend
periods ending after June 15, 2001. As of September 30, 2004, total dividends
in arrears are $59.8 million. The dividend requirement for the twelve months
ending September 30, 2005 will be $19.8 million, inclusive of the effects of
compounding and assuming no payments of the dividends. The Preferred Stock is redeemable at any time, in whole or in part, at the
discretion of the Company, initially at a price of $52.5375 per share in the
year 2000 and thereafter at prices declining to $50.00 per share on or after
September 15, 2007, plus in each case all accrued and unpaid dividends as of
the redemption date. As of September 30, 2004, the Company has not redeemed any
of the Preferred Stock. The Preferred Stock is not subject to any sinking fund
provisions. The Preferred Stock is convertible at any time at the option of the
holders into shares of common stock of the Company. The rate used to determine
the number of shares of common stock is a function of the liquidation
preference, any accrued and unpaid dividends and the initial conversion price
of $15.00. As of September 30, 2004, no shares of Preferred Stock have been
converted into shares of common stock. In the event of any voluntary or
involuntary dissolution, liquidation or winding up of the Company, the holders
of the Preferred Stock will be entitled to be paid out of the Companys assets
available for distribution to its stockholders, 18




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##### Table of Contents



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. Under the terms of
the Certificate of Designation governing the Preferred Stock the Proposed
Merger would not be deemed a voluntary or involuntary liquidation, dissolution
or winding up of the Company. Except as described below, the holders of the
Preferred Stock have no voting rights. In June 2004, the Company entered into the Board of Director Nominee
Agreement with certain holders of the Preferred Stock who represented to the
Company that they held discretionary authority (including the power to vote)
with regard to 2.4 million shares or approximately 58% of the outstanding 4.1
million shares of Preferred Stock. Under the terms of the Board of Director
Nominee Agreement, the Participating Preferred Stock Holders irrevocably waived
the right to request a special meeting of holders of Preferred Stock to elect
directors or take any action to request such a meeting; such waiver to remain
effective until immediately after the next annual meeting of the Companys
stockholders is held. In consideration of this waiver, Messrs. Gale and
Henderson, who were identified by the Participating Preferred Stock Holders as director candidates,
were elected as Class III Directors by the Companys Board of Directors. Their
terms will expire at the Companys next annual meeting of stockholders. At the
next annual meeting, the holders of Preferred Stock will have the right to vote
separately as a class for the election of two directors. It is expected that
Messrs. Gale and Henderson will be nominated for election by the holders of
Preferred Stock to fill these two directorships. The execution of the Board of Director Nominee Agreement was the result of
several discussions that the Company had with several holders of the Companys
Preferred Stock, which began in late 2003, and had originated due to the fact
that the Company had not made six consecutive dividend payments on the
Preferred Stock. According to the terms of the Preferred Stock, holders of 25%
of the voting power of the outstanding Preferred Stock became entitled to
compel the Company to call a special meeting of the holders of the Preferred
Stock for the purpose of electing two new directors. The Company believes that
the Board of Director Nominee Agreement was advantageous to the Company because
it eliminated the need to hold a special meeting, which would have been both
time consuming and expensive. See Note 1, Basis of Presentation, Description
of Business, Recent Developments and Going Concern  Proposed Merger, for
further discussion related to the effect of a merger of the Company with regard
to the Preferred Stockholders 7. Employee Benefit Plans Until the third quarter of 2004, the Company sponsored two tax-qualified
defined benefit pension plans in the U.S. These plans covered certain former
employees of the Company and one of its subsidiaries. The plan covering Company
personnel was amended effective December 31, 1995 and plan benefits were frozen
as of that date. The plan covering the former subsidiarys personnel was
amended effective December 31, 2002 and plan benefits were frozen as of that
date. The plans were merged at the end of September 2004 to reduce
administrative and related expenditures (the Merged Plan). The Merged Plan
is a noncontributory defined benefit pension plan, under which pension benefits
are calculated based on years of service and participants compensation. As of
September 30, 2004, the unfunded status of the Merged Plan was approximately
$3.3 million as compared with $3.8 million as of December 31, 2003. The
Companys policy is to contribute annually, at a minimum, the amounts required
by the Internal Revenue Code and the Employee Retirement Income Security Act of
1974, as amended (ERISA). However, the Company may from time to time make
contributions in amounts that are larger than those legally required. The
Company expects to contribute $1.5 million to the Merged Plan in 2004, of which
$0.7 million is in excess of the minimum funding requirements set forth in
ERISA and the Internal Revenue Code. Furthermore, as disclosed in further
detail in Note 15, Subsequent Events, on October 7, 2004, the Board of
Directors of the Company approved managements recommendation to terminate the
Merged Plan, pursuant to a standard termination in accordance with provisions
of Section 4041 of the ERISA, which will result in additional contributions,
beyond the ERISA mandated minimums in 2005. The Company also maintains a nonqualified, unfunded supplemental
retirement plan (SERP) for certain former executives based in the U.S. The
plan is a noncontributory defined benefit pension plan, under which pension
benefits are calculated based on a formula incorporating years of service and
participants compensation. In addition, the Company also provides an unfunded
group medical plan and life insurance coverage for certain former employees
subsequent to retirement (the Retiree Medical Plan). As of September 30,
2004, the unfunded status of the SERP and Retiree Medical Plan was
approximately $3.7 million as compared with $3.8 million as of December 31,
2003. The Company anticipates that it will distribute approximately $0.4
million in 2004 to participants of the SERP and Retiree Medical Plan. As
disclosed in further detail in Note 15, Subsequent Events, the Companys
intent is to settle its legal obligation with regard to the benefits
attributable to the SERP and the Retiree Medical Plan within the next twelve
months. 19




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##### Table of Contents



Components of net periodic benefit costs are as follows (in thousands): Defined Pension Benefits
    
    Other BenefitsFor the nine months ended
    
    For the nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest cost on benefit obligations
    
    $
    836
    
    
    $
    849
    
    
    $
    164
    
    
    $
    174Expected return on plan assets
    
    
    (829
    )
    
    
    (736
    )
    
    
    
    
    
    
    Recognized net actuarial loss
    
    
    161
    
    
    
    206
    
    
    
    35
    
    
    
    34Amortization of transition costs
    
    
    (62
    )
    
    
    (62
    )
    
    
    
    
    
    
    Total
    
    $
    106
    
    
    $
    257
    
    
    $
    199
    
    
    $
    208
 The components of net periodic benefit costs for the three months ended
September 30, 2004 and 2003 are not considered significant. 8. Earnings Per Share of Common Stock Basic earnings per common share (EPS) are computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue Company common stock
were exercised or converted into Company common stock. The weighted average
number of common shares outstanding for computing basic and diluted EPS was
94.0 million for each of the periods ended September 30, 2004 and 2003. For the
periods ended September 30, 2004 and 2003, 21.1 million and 21.9 million
shares, respectively, attributable to the exercise of outstanding options,
warrants and convertible Preferred Stock were excluded from the calculation of
diluted EPS because the effect was antidilutive. 9. Business Segment Data The Company has continuing operations in northwest Russia and the Republic
of Georgia. The Companys reporting segments are comprised of (i) fixed
telephony, (ii) wireless telephony and (iii) cable television. The Company
evaluates the performance of its operating segments based on operating income
and earnings before income taxes. Equity in income (losses) of unconsolidated
investees reflects elimination of intercompany interest expense and management
fees. In 2004, consolidated fixed telephony is comprised solely of PeterStar.
In 2003, consolidated fixed telephony was comprised of both PeterStar and
Baltic Communications Ltd. (BCL), a former wholly-owned subsidiary that
provided telecommunication services in St. Petersburg, Russia. On October 1,
2003, PeterStar acquired the Companys ownership rights in BCL. In 2004, unconsolidated wireless telephony is comprised of Magticom. In
2003, unconsolidated wireless telephony was comprised of both Magticom and
Tyumenruskom. The Company disposed of its interest in Tyumenruskom in
September 2003. Consolidated cable television through June 30, 2004 is comprised of Ayety.
As discussed in further detail in Note 3, Change in Basis of Presentation,
subsequent to June 30, 2004, Ayetys results are presented in equity in losses
of unconsolidated investees. In addition to these business segments, the Company had other operating
activities that were carried out in business ventures which are considered
discontinued components (See Note 11, Discontinued Business Components).
Further, the Company had other unconsolidated activities that were carried out
in business ventures, which were disposed of during 2004 and 2003 (See Note 4,
Investments in and Advances to Business Ventures). 20




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##### Table of Contents



The Companys segment information is set forth for the three and nine
months ended September 30, 2004 and 2003 in the following tables (in
thousands): Three months ended September 30, 2004Fixed
    
    
    
    
    
    
    
    
    
    Corporate andTelephony
    
    Wireless Telephony
    
    Cable Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    20,040
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20,040Cost of services
    
    
    6,913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,913Selling, general and administrative
    
    
    3,385
    
    
    
    
    
    
    
    
    
    
    
    3,086
    
    
    
    6,471Depreciation and amortization
    
    
    5,678
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    5,693Operating income (loss)
    
    
    4,064
    
    
    
    
    
    
    
    
    
    
    
    (3,101
    )
    
    
    963Other income (expense):Equity in income (losses) of unconsolidated investees
    
    
    
    
    
    
    6,816
    
    
    
    (5
    )
    
    
    
    
    
    
    6,811Interest expense, net
    
    
    (244
    )
    
    
    
    
    
    
    
    
    
    
    (3,832
    )
    
    
    (4,076
    )Gain on retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Foreign currency (loss) gain
    
    
    (296
    )
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    (292
    )Other (expense) income, net
    
    
    (103
    )
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    (80
    )Minority interest
    
    
    (1,175
    )
    
    
    (2,017
    )
    
    
    
    
    
    
    
    
    
    
    (3,192
    )Income (loss) before income tax expense, discontinued
components and the cumulative effect of a change in
accounting principle
    
    $
    2,246
    
    
    $
    4,799
    
    
    $
    (5
    )
    
    $
    (6,906
    )
    
    $
    134
 Three months ended September 30, 2003Fixed
    
    
    
    
    
    
    
    
    
    Corporate andTelephony
    
    Wireless Telephony
    
    Cable Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    18,014
    
    
    $
    
    
    
    $
    619
    
    
    $
    
    
    
    $
    18,633Cost of services
    
    
    6,246
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    6,248Selling, general and administrative
    
    
    3,764
    
    
    
    
    
    
    
    454
    
    
    
    5,982
    
    
    
    10,200Depreciation and amortization
    
    
    4,862
    
    
    
    
    
    
    
    100
    
    
    
    78
    
    
    
    5,040Operating income (loss)
    
    
    3,142
    
    
    
    
    
    
    
    63
    
    
    
    (6,060
    )
    
    
    (2,855
    )Other income (expense):Equity in income (losses) of unconsolidated investees
    
    
    
    
    
    
    4,628
    
    
    
    (1,070
    )
    
    
    
    
    
    
    3,558Interest expense, net
    
    
    (45
    )
    
    
    
    
    
    
    (226
    )
    
    
    (3,787
    )
    
    
    (4,058
    )Gain on retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    465
    
    
    
    465Gain on disposition of businesses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,031
    
    
    
    12,031Foreign currency (loss) gain
    
    
    (54
    )
    
    
    
    
    
    
    (112
    )
    
    
    104
    
    
    
    (62
    )Other income (expense), net
    
    
    241
    
    
    
    
    
    
    
    
    
    
    
    (175
    )
    
    
    66Minority interest
    
    
    (984
    )
    
    
    (1,358
    )
    
    
    
    
    
    
    
    
    
    
    (2,342
    )Income (loss) before income tax expense, discontinued
components and the cumulative effect of a change in
accounting principle
    
    $
    2,300
    
    
    $
    3,270
    
    
    $
    (1,345
    )
    
    $
    2,578
    
    
    $
    6,803
 Nine months ended September 30, 2004Fixed
    
    
    
    
    
    
    
    
    
    Corporate andTelephony
    
    Wireless Telephony
    
    Cable Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    56,544
    
    
    $
    
    
    
    $
    1,371
    
    
    $
    
    
    
    $
    57,915Cost of services
    
    
    18,613
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    18,658Selling, general and administrative
    
    
    11,487
    
    
    
    
    
    
    
    1,211
    
    
    
    9,387
    
    
    
    22,085Depreciation and amortization
    
    
    17,117
    
    
    
    
    
    
    
    213
    
    
    
    52
    
    
    
    17,382Operating income (loss)
    
    
    9,327
    
    
    
    
    
    
    
    (98
    )
    
    
    (9,439
    )
    
    
    (210
    )Other income (expense):Equity in income (losses) of unconsolidated investees
    
    
    
    
    
    
    16,790
    
    
    
    (5
    )
    
    
    
    
    
    
    16,785Interest expense, net
    
    
    (280
    )
    
    
    
    
    
    
    (460
    )
    
    
    (11,212
    )
    
    
    (11,952
    )Foreign currency (loss) gain
    
    
    (399
    )
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    (365
    )Other (expense) income, net
    
    
    (138
    )
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    (114
    )Minority interest
    
    
    (2,930
    )
    
    
    (4,404
    )
    
    
    
    
    
    
    
    
    
    
    (7,334
    )Income (loss) before income tax expense, discontinued
components and the cumulative effect of a change in
accounting principle
    
    $
    5,580
    
    
    $
    12,386
    
    
    $
    (529
    )
    
    $
    (20,627
    )
    
    $
    (3,190
    )
 21




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##### Table of Contents



Nine months ended September 30, 2003Fixed
    
    
    
    
    
    
    
    
    
    Corporate andTelephony
    
    Wireless Telephony
    
    Cable Television
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    51,147
    
    
    $
    
    
    
    $
    1,942
    
    
    $
    
    
    
    $
    53,089Cost of services
    
    
    16,989
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    17,014Selling, general and administrative
    
    
    10,692
    
    
    
    
    
    
    
    1,352
    
    
    
    23,381
    
    
    
    35,425Depreciation and amortization
    
    
    14,680
    
    
    
    
    
    
    
    398
    
    
    
    177
    
    
    
    15,255Operating income (loss)
    
    
    8,786
    
    
    
    
    
    
    
    167
    
    
    
    (23,558
    )
    
    
    (14,605
    )Other income (expense):Equity in (losses) income of unconsolidated investees
    
    
    (468
    )
    
    
    10,157
    
    
    
    728
    
    
    
    
    
    
    
    10,417Interest income (expense), net
    
    
    36
    
    
    
    
    
    
    
    (702
    )
    
    
    (13,089
    )
    
    
    (13,755
    )Gain on retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,582
    
    
    
    24,582Gain on disposition of business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,031
    
    
    
    12,031Foreign currency (loss) gain
    
    
    (415
    )
    
    
    
    
    
    
    (79
    )
    
    
    28
    
    
    
    (466
    )Other (expense) income, net
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    5Minority interest
    
    
    (3,371
    )
    
    
    (2,959
    )
    
    
    
    
    
    
    
    
    
    
    (6,330
    )Income before income tax expense, discontinued
components and the cumulative effect of a change in
accounting principle
    
    $
    4,532
    
    
    $
    7,198
    
    
    $
    114
    
    
    $
    35
    
    
    $
    11,879
 Information about the Companys continuing operations by geographic
location, is as follows (in thousands): Revenues
    
    AssetsNine months ended September 30,
    
    September 30,
    
    December 31,2004
    
    2003
    
    2004
    
    2003Russia
    
    $
    56,544
    
    
    $
    51,147
    
    
    $
    137,111
    
    
    $
    127,033Georgia
    
    
    1,371
    
    
    
    1,942
    
    
    
    35,640
    
    
    
    35,669$
    57,915
    
    
    $
    53,089
    
    
    $
    172,751
    
    
    $
    162,702
 The Company no longer conducts operating business activities within the
U.S. As such, the Company does not have significant assets within the U.S.,
with the exception of its unrestricted corporate cash that is held in banks
within the U.S., which aggregated $40.2 million as of September 30, 2004. 10. Other Consolidated Condensed Financial Statement Information Accounts Receivable The total allowance for doubtful accounts at September 30, 2004 and
December 31, 2003 was $1.5 million and $2.0 million, respectively. Intangible Assets and Goodwill Intangible assets at September 30, 2004 and December 31, 2003 consist of
the following (in thousands): 2004
    
    2003Accumulated
    
    Net Book
    
    
    
    
    
    Accumulated
    
    Net BookCost
    
    Amortization
    
    Value
    
    Cost
    
    Amortization
    
    ValueLicenses
    
    $
    36,809
    
    
    $
    (35,622
    )
    
    $
    1,185
    
    
    $
    36,755
    
    
    $
    (30,235
    )
    
    $
    6,520Assets not subject to amortization:Numbering capacity
    
    
    1,239
    
    
    
    
    
    
    
    1,239
    
    
    
    1,325
    
    
    
    
    
    
    
    1,325$
    38,048
    
    
    $
    (35,622
    )
    
    $
    2,424
    
    
    $
    38,080
    
    
    $
    (30,235
    )
    
    $
    7,845
 Estimated amortization expense is expected to be $1.2 million for the
remainder of 2004 and insignificant thereafter. The change in the carrying value of goodwill of $1.9 million from December
31, 2003 to September 30, 2004 is principally due to acquisitions of businesses
by PeterStar. 22




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##### Table of Contents



Accrued Expenses Accrued expenses at September 30, 2004 and December 31, 2003 consist of
the following (in thousands): September 30,
    
    December 31,2004
    
    2003Accrued pension and personnel costs
    
    $
    7,627
    
    
    $
    2,802Deferred revenue
    
    
    2,664
    
    
    
    2,874Accrued franchise and other taxes
    
    
    2,392
    
    
    
    3,322Accrued professional fees
    
    
    2,074
    
    
    
    4,598Self insurance reserves
    
    
    1,963
    
    
    
    3,149Accrued interest
    
    
    
    
    
    
    3,991Other accrued expenses
    
    
    2,884
    
    
    
    3,205$
    19,604
    
    
    $
    23,941
 Other Long-term Liabilities Other long-term liabilities at September 30, 2004 and December 31, 2003
consist of the following (in thousands): 2004
    
    2003Deferred revenue
    
    $
    1,452
    
    
    $
    1,428Pensions
    
    
    
    
    
    
    6,204$
    1,452
    
    
    $
    7,632
 Accumulated Other Comprehensive Loss The accumulated balances for each classification of other comprehensive
loss at September 30, 2004 and 2003 are as follows (in thousands): Foreign Currency
    
    MinimumTranslation Adjustments
    
    Pension Liability
    
    Other Comprehensive Loss2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Balances at January 1
    
    $
    5,619
    
    
    $
    5,042
    
    
    $
    7,442
    
    
    $
    6,906
    
    
    $
    13,061
    
    
    $
    11,948Adjustment recognized due to changes in
functional currency at subsidiaries
    
    
    
    
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,250Realized losses as a result of dispositions
    
    
    (4,635
    )
    
    
    (377
    )
    
    
    
    
    
    
    
    
    
    
    (4,635
    )
    
    
    (377
    )Net period change
    
    
    (2,443
    )
    
    
    1,166
    
    
    
    
    
    
    
    
    
    
    
    (2,443
    )
    
    
    1,166Balances at September 30
    
    $
    (1,459
    )
    
    $
    7,081
    
    
    $
    7,442
    
    
    $
    6,906
    
    
    
    5,983
    
    
    $
    13,987
 Supplemental Disclosure of Cash Flow Information Supplemental disclosure of cash paid for the nine months ended September
30, 2004 and 2003 (in thousands): 2004
    
    2003Interest
    
    $
    16,354
    
    
    $
    16,431Income taxes
    
    $
    5,451
    
    
    $
    3,584
 11. 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. As of September 30, 2004, the Company has entered into agreements for
the disposition of all non-core media businesses. 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 corporate liquidity position. In light of these events, the Company
concluded that certain business ventures met 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 23




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##### Table of Contents



consolidated financial statements. Accordingly, the income statement of the Company for current and prior
periods has presented the results of operations of the discontinued components,
including any gain or loss recognized on such disposition, in income from
discontinued components and the balance sheets present the assets and
liabilities of such operations as assets and liabilities of discontinued
components. The significant dispositions of such businesses from January 1, 2003 to
September 30, 2004 are summarized below. Radio Group Transaction In September 2004, the Company entered into a stock purchase agreement
pursuant to which it sold its wholly-owned radio business unit, Metromedia
International, Inc. (MII) to Communicorp Group Limited (Communicorp) for an
aggregate cash purchase price of approximately $14.25 million, subject to
further adjustment. MII held the Companys interests in seventeen of the Companys remaining
eighteen radio businesses, which operate in Bulgaria, the Czech Republic,
Estonia, Finland and Hungary. Under the stock purchase agreememt, Communicorp
acquired the outstanding stock of MII for payments of approximately $13.54
million, which has already been received by the Company, with the remaining
approximately $0.71 million to be received six months after closing subject to
Communicorp not having incurred actual damages within the six month period
after closing as a result of MIGs breach of any of the warranties it made to
Communicorp in the stock purchase agreement. In the unlikely event of any such
damages being incurred by Communicorp in this manner, the second payment to the
Company will be reduced by the amount of such damages. The agreement also
provides for an adjustment to the purchase price, if the consolidated net
assets of MII at closing differ by more than two percent (2%) from the
projected amount the Company had provided to Communicorp (the Net Asset
Adjustment). The Company anticipates that it will need to fund approximately
$0.4 million to Communicorp, during the fourth quarter of 2004, as a result of
the settlement of the Net Asset Adjustment. The sale of MII resulted in the preliminary recognition of a gain of $1.2
million, which has been presented in discontinued operations for the nine
months ended September 30, 2004. Radio Skonto On April 28, 2004, the Company sold its 55% interest in Radio Skonto
(Skonto) to A/S Multibanka, a stock company registered in Latvia already
owning 10% of Skonto. In addition, the Company assigned its right to collect
from Skonto unpaid management fees to A/S Multibanka or A/S Multibankas
designee. Total consideration for the ownership rights and assigned receivable
was $0.5 million. The Company recognized a gain on the disposition of $0.3
million in discontinued components in the nine months ended September 30, 2004. ATK On March 26, 2004, the Company announced that it completed the sale of its
interests in Arkhangelsk Television Company (ATK) to Yuri Firsov, the General
Director of ATK, for net cash proceeds of $1.5 million. The Company recognized
a gain on the disposition of $0.7 million, which has been presented in
discontinued components for the nine months ended September 30, 2004. Romsat On March 4, 2004, the Company announced that it had completed the sale of
its interests in FX Communications S.R.L. (aka Romsat Cable TV) and FX Internet
S.R.L., to a consortium of buyers that includes Romania Cable Systems S.A. and
Astral Telecom S.A. in a transaction that resulted in net cash proceeds of
$16.0 million. The Company recognized a gain on the disposition of $5.8
million, which has been presented in discontinued components for the nine
months ended September 30, 2004. Sun TV On November 12, 2003, the Company sold its interest in the Moldovan cable
television company Sun TV and Sun Constructie S.R.L., a Moldovan trading
company to Lekert Management, Ltd., a company organized under the laws of
British Virgin Islands for cash consideration of $2.1 million. Lekert
Management, Ltd. is an affiliate of Neocom S.R.L., which owned 35% of Sun TV
prior to the transaction. The Company recorded a charge to earnings in the
three months ended September 30, 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 Transaction On June 25, 2003, the Company sold its wholly owned subsidiary, Technocom
Limited (Technocom) for $4.5 million. 24




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##### Table of Contents



Technocom holds interests in several Russian telecommunications
enterprises including satellite-based transport operator Teleport-TP.
Simultaneous with the sale of Technocom, the Company entered into agreements to
settle all historical claims concerning Technocom-related businesses, including
claims arising from litigation in Guernsey that Technocom initiated in 2002
concerning its majority-owned subsidiary Roscomm and from arbitration
proceedings initiated in 2003 in connection with that Guernsey litigation. The Company received cash proceeds of $4.5 million and incurred closing
costs of $0.6 million, principally legal fees and severance costs, resulting in
a gain of $2.9 million on the disposition, which was recorded in the nine
months ended September 30, 2003. Adamant Transaction On April 24, 2003, the Company completed an exchange with Adamant of its
ownership in certain of its business units in Russia for $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 Discount Notes being
exchanged. The consideration was determined by arms length negotiations between
the Company and Adamant. The Company recorded a gain related to this transaction of $31.6 million
in the nine months ended September 30, 2003, which is comprised of a $24.6
million gain related to the early extinguishment of the exchanged Senior
Discount Notes and a $7.0 million gain on the transfer of the Companys
interests in the Radio Businesses. Such gain on debt 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 extinguishment was
reflected in the Companys income from continuing operations in the nine months
ended September 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 nine months ended September 30, 2003. Other Non-Core Activities The Company recognized a gain of $0.5 million related to the settlement of
remaining severance obligations and other liabilities of discontinued
components in the nine months ended September 30, 2004. The Company recognized income of $0.5 million in discontinued components
in the nine months ended September 30, 2003 related to the cumulative effect of
a change in accounting principle (see Note 2, Summary of Significant
Accounting Policies - Accounting Change). The Company recognized a gain of $0.7 million in discontinued components
in the three months ended September 30, 2003 related to the final accounting of
the sale of Snapper in November 2002. Operating Results The combined results of operations of the discontinued radio businesses
are as follows (in thousands): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    2,476
    
    
    $
    3,038
    
    
    $
    10,012
    
    
    $
    9,590Operating loss
    
    
    (109
    )
    
    
    (768
    )
    
    
    (934
    )
    
    
    (2,378
    )Net loss
    
    $
    (120
    )
    
    $
    (741
    )
    
    $
    (1,237
    )
    
    $
    (2,028
    )
 The combined results of operations of the discontinued cable television
businesses are as follows (in thousands): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    
    
    
    $
    2,619
    
    
    $
    2,080
    
    
    $
    8,730Operating (loss) income
    
    
    (227
    )
    
    
    (867
    )
    
    
    160
    
    
    
    (778
    )Net (loss) income
    
    $
    (227
    )
    
    $
    (1,059
    )
    
    $
    155
    
    
    $
    (905
    )
 25




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##### Table of Contents



The principal balance sheet balances included in Discontinued Business
Components are as follows (in thousands): September 30, 2004
    
    December 31, 2003Cash and cash equivalents
    
    $
    2
    
    
    $
    1,402Other receivables
    
    
    336
    
    
    
    1,064Other current assets
    
    
    
    
    
    
    3,093Current assets
    
    $
    338
    
    
    $
    5,559Goodwill
    
    $
    
    
    
    $
    8,748Property, plant and equipment, net
    
    
    
    
    
    
    5,647Intangible assets, net
    
    
    
    
    
    
    4,977Other noncurrent assets
    
    
    
    
    
    
    713Noncurrent assets
    
    $
    
    
    
    $
    20,085Accounts payable
    
    $
    43
    
    
    $
    2,766Accrued expenses
    
    
    551
    
    
    
    4,421Current liabilities
    
    $
    594
    
    
    $
    7,187Long-term liabilities
    
    $
    
    
    
    $
    376
 12. Commitments and Contingencies Risks Associated with the Companys Investments The ability of the Company and its business ventures to establish and
maintain profitable operations is subject to, among other things, significant
political, economic and social risks inherent in doing business in Russia and
the Republic of Georgia. These include matters arising out of government
policies, economic conditions, imposition of or changes in government
regulations or policies, imposition of or changes to taxes or other similar
charges by government bodies, exchange rate fluctuations and controls, civil
disturbances, deprivation or unenforceability of contractual rights, and taking
of property without fair compensation. Escrowed Severance As a condition to the sale, in November 2002, of Snapper Inc.s assets,
the Company was required to escrow monies owed to former employees under their
respective severance arrangements. Such amounts outstanding totaled $1.0
million as of December 31, 2003. During the first quarter of 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 died on July 14, 2003. In light
of Mr. Campbells death, his complaint was amended to include a wrongful death
claim and a claim of damages for any pain and suffering incurred by Mr.
Campbell from the time of injury until death. Mr. Campbells estate was
substituted as the plaintiff in this action. Also named as a defendant in this
case is Briggs & Stratton, the company that manufactured the engine of the
lawnmower. On August 3, 2004, a settlement agreement was reached among Mr.
Campbells estate, the Company and the other co-defendant. All claims against
the Company have been released. In January 2004, a complaint was filed against the Company in the Court of
Chancery of the State of Delaware. In the complaint Mr. McLaughlin, the
plaintiff, is seeking to enforce his rights as a shareholder of the Company to
inspect and copy certain books and records of the Company. The Company believes
that the request made by the plaintiff is overly broad and lacks proper purpose
and is preparing to defend its position in court. However, in order to minimize
costs of a potential trial, the Company has entered into discussions with the
plaintiff regarding the nature of information sought by him and has provided
certain requested documents as appropriate. No trial has 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. 26




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##### Table of Contents



The Company is involved in other various legal and regulatory proceedings.
While the results of any litigation or regulatory issue contain an element of
uncertainty, management believes that the outcome of any of these known,
pending or threatened legal proceedings will not have a material effect on the
Companys consolidated financial position and results of operations, except as
noted above. Georgian Matters As previously disclosed, the Company has received letters from, and
corresponded with, two Georgian individuals involved in the initial formation
of certain of the Companys business ventures in the Republic of Georgia. These
individuals 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 (FCPA)
and possibly engaged in other improper or illegal conduct. Concerning the
allegations of improper or illegal conduct, including FCPA allegations, an
investigation conducted by the Companys outside counsel failed to uncover any
specific factual support for these allegations. With respect to the
contractual claims, the Company entered into a settlement agreement with one of
the individuals. Upon investigation, the Company determined that the second
individuals allegations of contractual breach had no merit. Mtatsminda Litigation As discussed previously in Note 3, Change in Basis of Presentation, the
Company has been involved in several commercial disputes with Mtatsminda, the
Companys 15% minority partner in its Ayety business venture. These commercial
disagreements have resulted in Mtatsminda filing a claim, on July 25, 2004,
against International Telcell SPS, Inc. (ITSPS), a subsidiary of the Company,
Ayety and Zurab Chigogidze, the General Director of Ayety, for damages in the
amount of GEL 185,000 (US $90,000), GEL 23,000 (US $13,000) and GEL 258,000 (US
$130,000), respectively. The claim was filed in the Mtatsminda District Court
in Tbilisi, Republic of Georgia. In its complaint, Mtatsminda alleges that it
suffered damages because Ayety TV had used its cash resources to make payments
to ITSPS in repayment of a credit facility between Ayety and ITSPS. Mtatsminda
also claims that Ayety has not authorized the credit facility. Mtatsminda
further alleges that Ayetys funds should have been used to make dividend
payments to Mtatsminda. On September 15, 2004, ITSPS filed a counterclaim
stating that all of Mtatsmindas claims are groundless. ITSPS also challenged
Mtatsmindas standing in the case due to expiration of the statute of
limitations, non-payment of court duty and other procedural matters. ITSPS is
prepared to defend its position in court. Based on the information available
and due to the relatively low amounts of damages claimed, the Company believes
that these matters will not result in any material adverse effect on the
Companys business, financial condition or results of operations. Pension Benefit Guaranty Corporation In the second quarter of 2004, the Company engaged in discussions with the
Pension Benefit Guaranty Corporation (PBGC) regarding the Companys June 23,
2003 notice to the PBGC that highlighted (i) that the Company may have
historically failed to timely satisfy certain minimum funding requirements with
respect to one of its defined benefit pension plans, (ii) that the sale of
corporate assets by a subsidiary of the Company may have triggered certain PBGC
reporting, bonding and/or escrow requirements with respect to another one of
its defined benefit pension plans, (iii) that the Company had recently added
extra contributions to one of its defined benefit pension plans to remedy a
previous period funding shortfall situation, and (iv) that the Company believes
that there are no further corrective actions required with respect to either
defined benefit pension plan. In a letter dated August 6, 2004, the Company
was informed by the PBGC that the PBGC does not intend to take any action with
respect to the matter addressed in the Companys June 23, 2003 notice. 13. Related Party Transactions Metromedia Company, a significant common shareholder of the Company,
provides certain consulting services to the Company on an hourly basis as
requested by the Company in the areas of tax, legal and investor relations
pursuant to a Consulting Services Agreement (the CSA). For the nine months
ended September 30, 2004 and 2003, the Company incurred consulting fees of $0.2
million and $0.3 million, respectively, pursuant to the CSA. A significant
portion of the consulting fees incurred under the CSA in the first half of 2004
and 2003 is principally related to tax consulting related services with the
remainder for executive managerial, legal and other services. The Company
anticipates that future services by Metromedia Company will be principally
related to executive managerial services, since Metromedia Company ceased
providing significant tax consulting services to the Company in May 2004. Services provided by Metromedia Company pursuant to the CSA have been
provided as requested by the Company and have been invoiced to the Company at
agreed-upon hourly rates. There is no minimum required level of services. The
Company is also obligated to reimburse Metromedia Company for all of its
out-of-pocket costs and expenses incurred and advances paid by Metromedia
Company in connection with services performed by it under the CSA. Pursuant to
the CSA, the Company agreed to indemnify and hold Metromedia Company harmless
from and against any and all damages, liabilities, losses, claims, actions,
suits, proceedings, fees, costs or expenses (including reasonable attorneys
fees and other costs and expenses incident to any suit, proceeding 27




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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
provide written notice of termination to the other party, whereupon the CSA
will terminate immediately. 14. Acquisitions and Other Transactions PeterStar Acquisitions ADM-Murmansk On September 1, 2004, PeterStar acquired 100% of the outstanding shares of
ASPOL-Diamant Murmansk (ADM-Murmansk), an alternative telephone operator in
the Murmansk region of northwest Russia. Through its telephony network,
utilizing fiber-optic links and digital radio systems, ADM-Murmansk is among
the three largest alternative telephone operators in the Murmansk region,
focusing on the provision of voice, data and Internet services. The Murmansk
region is among Russias top regions with a very high Internet penetration
rate, ranking third just after Moscow and St. Petersburg, and borders Finland
and the Barents Sea (Arctic Ocean). The aggregate cash consideration of $2.1
million for this transaction was fully financed by PeterStar cash reserves. PGTS On April 27, 2004, PeterStar completed the acquisition of 80% of the
outstanding shares of Pskov City Telephone Network (PGTS), an incumbent local
exchange carrier in Northwest Russia, and 89% of the shares of Pskovinterkom a
smaller local exchange carrier in Pskov and a sister company of PGTS. The
Pskov district is located in the northwest region of Russia and borders the
Baltic States and Belarus. Total consideration for the transactions was $4.1
million, which was fully financed by PeterStar cash reserves. PeterStar
purchased the remaining 11% of the shares of Pskovinterkom subsequent to June
30, 2004 for nominal consideration. Based on a preliminary analysis of the fair value of the net assets
acquired, $1.9 million of goodwill has been recognized in respect of these
acquisitions. The Company is currently in the process of analyzing the
preliminary assigned fair values. In addition, these newly acquired companies contributed revenues of $1.7
million and incurred a net loss of $0.2 million for the nine months ended
September 30, 2004. The impact of these acquisitions on the
operating results of the Company for the nine months ended
September 30, 2004 and 2003, if presented on a pro-forma
basis, are not readily determinable, nor deemed material. Magticom Activity On February 20, 2004, Dr. George Jokhtaberidze, co-founder and majority
owner of Magticom and son-in-law of former Georgian president Shevardnadze, was
detained in the Republic of Georgia without any charges having been filed
against him. As reported by various media sources, Dr. Jokhtaberidze was being
held in connection with the continuing investigation of various tax-related
matters. On April 26, 2004, the Georgian Government investigations into past
business and tax payment practices of Magticom were completed with no adverse
findings. In addition, the prosecution by the Georgian Government of Dr.
Jokhtaberidze was dropped without finding any wrong-doing and Dr. Jokhtaberidze
was released from the investigative detention on April 26, 2004. The Company
believes that no further investigations or prosecutions of Magticom, Magticom
personnel or Dr. Jokhtaberidze with respect to past business or tax payment
practices will be undertaken by the Georgian Government. The Companys interest in Magticom is held through Telcell, a joint
venture with Western Wireless Corporation. The Company owns 70.41% of the
outstanding equity interests of Telcell through its wholly-owned subsidiary,
International Telcell Cellular, Inc. (ITC). On April 23, 2004, Magticom issued a dividend of $15.6 million. Telcell,
which was entitled to $6.9 million of this dividend, net of taxes, agreed to
loan this amount to Dr. Jokhtaberidze by redirecting its share of the dividend
distribution to him. As security for the loan, Dr. Jokhtaberidze assigned to
Telcell his right to receive future dividends from Magticom until the loan,
which was to mature on December 31, 2004, was paid in full. Such loan was
repaid by Dr. Jokhtaberidze during the third quarter of 2004. On May 1, 2004, the Company, the equity holders of Telcell, and Dr.
Jokhtaberidze entered into a binding memorandum of understanding
(Jokhtaberidze MOU), 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 cash
consideration of approximately $18.2 million. The Company will retain the
remaining 50.1% majority ownership of ITC. After completion of all transactions
contemplated by the Jokhtaberidze MOU, 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. Completion of the transactions
contemplated by the Jokhtaberidze MOU has been delayed pending outcome of the
recently announced Proposed Merger (See Note 1, Basis of Presentation,
Description of Business, Recent Developments and Going Concern  Proposed
Merger). The Company believes that these transactions will be completed
during the second quarter of 28




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2005, either independently or as a part of concluding the Proposed Merger. Also, on May 1, 2004, ITC entered into a memorandum of understanding with
the Georgian Government (the Georgian Government MOU) providing for issuance
by ITC of an assignable option (the Option) to purchase a 20% ownership
interest from ITC in Magticom. The Option has a limited exercise period of 12
months from the date of issuance, and such issuance will not occur until the
completion of the restructuring of Dr. Jokhtaberidzes ownership interest in
Magticom, pursuant to the Jokhtaberidze MOU, 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 Georgian Government MOU (a Qualified Holder),
provided that the transfer of the Option to a Qualified Holder that 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. As of September 30, 2004,
utilizing Magticoms four most recent fiscal quarter EBITDA amounts, the
exercise of the option would provide the Company approximately $17.5 million of
cash. 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. If the Option is exercised, ITC will retain a 31% direct ownership in
Magticom (after the transactions contemplated by the Jokhtaberidze MOU) and ITC
will also have a 34.5% indirect ownership in Magticom through Telcell, and as a
result, the Companys aggregate ownership interest in Magticom will be 32.8%.
In addition, the Company would continue to have the largest effective ownership
interest in Magticom and would continue to be able to exert operational control
over Magticom because it would be the majority stockholder of ITC and the
managing member of Telcell. Issuance of the Option to the Georgian Government
is dependent upon the completion of the transactions contemplated by the
Jokhtaberidze MOU; which, as stated earlier, the Company does not anticipate
will occur until the second quarter of 2005. 15. Subsequent Events Vilsat Disposition On October 12, 2004, the Company sold its 85% ownership interests in UAB
Viginta (Vilsat) to the minority owner of Vilsat for cash consideration of
$0.7 million. The Company received an initial deposit of $25,000 on September
24, 2004 and finalized the terms and received final settlement on October 12,
2004. The Company recorded a charge to earnings in the third quarter 2004 in
the amount of $0.2 million to reflect its investment in Vilsat at the lower of
cost or fair value less cost to sell. The impairment charge was presented in
the results of discontinued components. Szeged Disposition On September 9, 2004, the Company entered into an agreement to sell its
ownership interests in Juventus Radio 100.2 Mûsorszolgáltató Kft. (Szeged) to
Fes-Media 2004 Kft. for aggregate cash consideration of approximately HUF 150
million (Hungarian Forints), or approximately $0.75 million. The Company
received an initial deposit of $50 thousand and expects to complete the
disposition in the fourth quarter of 2004. If the disposition is concluded
based on the executed terms and conditions, the Company anticipates recognizing
a nominal gain on the final disposition. Termination of Employee Benefit Plans The Company is currently taking steps to settle and resolve certain
benefit obligations to former U.S. based employees of the Company. These
initiatives are being implemented to both reduce the Companys overhead cash
burn-rate and resolve certain of its long-standing Historical Corporate
Liabilities. The Company currently anticipates that the Merged Plan, SERP and
Retiree Medical Plan obligations will be settled within the next twelve months. Specifically, as previously discussed in Note 7, Employee Benefit Plans,
the Companys Board of Directors approved managements recommendation to
terminate the Merged Plan, pursuant to a standard termination in accordance
with the provisions of Section 4041 of ERISA. In connection therewith, the
Company notified the participants in the Merged Plan, on October 25, 2004, of
the Companys intent to terminate the Merged Plan on the proposed termination
date of December 31, 2004. The Merged Plan is required, at termination, to
have assets with a value that is sufficient to provide for all retiree benefit
liabilities under the Merged Plan within the meaning of Section 4041 of ERISA.
As of September 30, 2004, the unfunded status of the Merged Plan was
approximately $3.3 million as compared with $3.8 million as of December 31,
2003. The Company has engaged an outside actuary to determine the additional
amount that the Company must contribute to the Merged Plan to satisfy all
benefit liabilities, to the extent that the value of the assets of the Merged
Plan at termination are not sufficient to provide them; however, at present the
Company is not certain of the ultimate cash outlay required to settle this
obligation. The Company intends to purchase an annuity contract for the
benefit of the Merged Plan participants to satisfy this obligation. In
addition, the Company is currently preparing the necessary analysis needed to 29




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engage in negotiations with participants in the SERP and the Retiree
Medical Plan regarding the settlement of the Companys obligations to such
employees; however, at present the Company is not certain of the ultimate cash
outlay required to settle the SERP and Retiree Medical Plan obligations. 30




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MAGTICOM LIMITED 
 CONDENSED STATEMENTS
OF INCOME
(in thousands of US Dollars)
 (unaudited)
 Three months ended September 30,
    
    Nine months ended September 30,2004
    
    2003
    
    2004
    
    2003Operating revenues:Service revenues
    
    $
    21,145
    
    
    $
    15,913
    
    
    $
    55,780
    
    
    $
    40,179Interconnect and other revenues
    
    
    6,414
    
    
    
    4,617
    
    
    
    15,700
    
    
    
    11,601Total operating revenues
    
    
    27,559
    
    
    
    20,530
    
    
    
    71,480
    
    
    
    51,780Operating expenses:Cost of services and connection costs
    
    
    3,481
    
    
    
    2,777
    
    
    
    9,112
    
    
    
    7,491Selling, general and administrative
    
    
    2,824
    
    
    
    2,691
    
    
    
    7,863
    
    
    
    6,361Depreciation and amortization
    
    
    3,374
    
    
    
    3,147
    
    
    
    10,451
    
    
    
    9,466Operating income
    
    
    17,880
    
    
    
    11,915
    
    
    
    44,054
    
    
    
    28,462Other income (expense):Interest income
    
    
    405
    
    
    
    
    
    
    
    708
    
    
    
    81Foreign currency (loss) income
    
    
    (22
    )
    
    
    (147
    )
    
    
    175
    
    
    
    (236
    )Other income (expense), net
    
    
    6
    
    
    
    32
    
    
    
    113
    
    
    
    (499
    )Income before income tax
    
    
    18,269
    
    
    
    11,800
    
    
    
    45,050
    
    
    
    27,808Income tax expense
    
    
    4,358
    
    
    
    2,354
    
    
    
    10,785
    
    
    
    5,698Net income
    
    $
    13,911
    
    
    $
    9,446
    
    
    $
    34,265
    
    
    $
    22,110
 See accompanying notes to unaudited condensed financial statements. 31




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MAGTICOM LIMITED 
 CONDENSED BALANCE SHEETS
 (in thousands of US Dollars)
 September 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,433
    
    
    $
    17,858Accounts receivable, net
    
    
    3,487
    
    
    
    1,303Inventory
    
    
    396
    
    
    
    117Prepaid expenses and other current assets
    
    
    1,282
    
    
    
    654Total current assets
    
    
    18,598
    
    
    
    19,932Property, plant and equipment, net
    
    
    63,443
    
    
    
    57,256Intangible assets, net
    
    
    1,474
    
    
    
    1,340Total assets
    
    $
    83,515
    
    
    $
    78,528LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,022
    
    
    $
    696Accrued and other current liabilities
    
    
    6,159
    
    
    
    4,636Dividends payable
    
    
    206
    
    
    
    Customer deposits and deferred revenue
    
    
    4,079
    
    
    
    3,778Total current liabilities
    
    
    12,466
    
    
    
    9,110Deferred revenue, less current portion
    
    
    448
    
    
    
    651Stockholders equity:Common stock
    
    
    3,064
    
    
    
    3,064Paid-in surplus
    
    
    2,446
    
    
    
    2,446Retained earnings
    
    
    61,804
    
    
    
    66,427Accumulated other comprehensive income (loss)
    
    
    3,287
    
    
    
    (3,170
    )Total stockholders equity
    
    
    70,601
    
    
    
    68,767Total liabilities and stockholders equity
    
    $
    83,515
    
    
    $
    78,528
 See accompanying notes to unaudited condensed financial statements 32




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MAGTICOM LIMITED 
 CONDENSED STATEMENTS OF CASH FLOWS
 (in thousands of US Dollars)
 (unaudited)
 Nine months ended September 30,2004
    
    2003Operating activities:Net income
    
    $
    34,265
    
    
    $
    22,110Items not requiring cash outlays:Depreciation and amortization
    
    
    10,451
    
    
    
    9,466Deferred income tax benefit
    
    
    (232
    )
    
    
    Provision for doubtful accounts
    
    
    31
    
    
    
    (311
    )Loss from disposition of equipment
    
    
    
    
    
    
    1,214Changes in:Accounts receivable
    
    
    (2,258
    )
    
    
    (946
    )Inventories
    
    
    (279
    )
    
    
    (18
    )Accounts payable
    
    
    1,326
    
    
    
    1,021Other assets and liabilities
    
    
    818
    
    
    
    781Cash provided by operating activities
    
    
    44,122
    
    
    
    33,317Cash used in investing activities  Additions to property, plant and equipment and other
    
    
    (9,865
    )
    
    
    (16,562
    )Financing activities:Dividends paid
    
    
    (38,682
    )
    
    
    (2,778
    )Payments on loans payable to shareholder
    
    
    
    
    
    
    (10,926
    )Cash used in financing activities
    
    
    (38,682
    )
    
    
    (13,704
    )Net (decrease) increase in cash and cash equivalents
    
    
    (4,425
    )
    
    
    3,051Cash and cash equivalents at beginning of period
    
    
    17,858
    
    
    
    7,489Cash and cash equivalents at end of period
    
    $
    13,433
    
    
    $
    10,540
 See accompanying notes to unaudited condensed financial statements. 33




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MAGTICOM LIMITED 
 Condensed Statements of Stockholders Equity and Comprehensive (Loss) Income
 (in thousands of US Dollars, except share data)
 (unaudited)
 Accumulated Other
    
    TotalPaid-in
    
    
    
    
    
    Comprehensive
    
    Stockholders
    
    ComprehensiveCommon Stock
    
    Surplus
    
    Retained Earnings
    
    Income (Loss)
    
    Equity
    
    (Loss) IncomeBalances at January 1, 2003
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    38,098
    
    
    $
    
    
    
    $
    43,608Net income
    
    
    
    
    
    
    
    
    
    
    22,110
    
    
    
    
    
    
    
    22,110
    
    
    $
    22,110Other comprehensive loss, net of tax:Adjustment recognized due to change in
functional currency
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,966
    )
    
    
    (3,966
    )
    
    
    (3,966
    )Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318
    
    
    
    318
    
    
    
    318Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18,462Dividends
    
    
    
    
    
    
    
    
    
    
    (2,830
    )
    
    
    
    
    
    
    (2,830
    )Balances at September 30, 2003
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    57,378
    
    
    $
    (3,648
    )
    
    $
    59,240Balances at January 1, 2004
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    66,427
    
    
    $
    (3,170
    )
    
    $
    68,767Net income
    
    
    
    
    
    
    
    
    
    
    34,265
    
    
    
    
    
    
    
    34,265
    
    
    $
    34,265Other comprehensive income, net of tax:Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,457
    
    
    
    6,457
    
    
    
    6,457Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    40,722Dividends
    
    
    
    
    
    
    
    
    
    
    (38,888
    )
    
    
    
    
    
    
    (38,888
    )Balances at September 30, 2004
    
    $
    3,064
    
    
    $
    2,446
    
    
    $
    61,804
    
    
    $
    3,287
    
    
    $
    70,601
 See accompanying notes to unaudited condensed financial statements. 34




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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 a 51% interest, and TelCell Wireless L.L.C. (Telcell), a
company incorporated in the United States, which owns a 49% interest.
Metromedia International Group, Inc. (MIG) owns 100% of International Telcell
Cellular, Inc. (ITC), which is the managing member of Telcell with a 70.41%
ownership interest in Telcell. The remaining 29.59% ownership interest of
Telcell is indirectly owned by Western Wireless International, Inc. 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. Accordingly, operating in the
Republic of Georgia involves risks, which do not typically exist in more mature
and developed market economies. See Note 6, Commitments and Contingencies -
Risks Associated with the Republic of Georgia. 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. Basis of Presentation The accompanying interim condensed financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and
related footnotes included in MIGs Annual Report on Form 10-K for the year
ended December 31, 2003. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position of the Company as of September 30, 2004, and the results
of its operations for the three and nine-month periods ended September 30, 2004
and 2003 and its cash flows for the nine-month periods ended September 30, 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. Certain reclassifications have been made to prior periods financial
information to conform to current period presentation. 2. Summary of Significant Accounting Policies Foreign Currency Translation The currency of the Republic of Georgia is the Georgian Lari (GEL). The
GEL is not a convertible currency outside the Republic of Georgia and,
accordingly, any conversion of GEL amounts to US dollars should not be
construed as a representation that GEL amounts could be in the future converted
into US dollars at the exchange rate shown, or at any other exchange rate. Until March 31, 2003, the Companys functional currency was the US Dollar
because it reflected the economic substance of the underlying events and
circumstances of the Company. On April 1, 2003, the Company determined that the
repayment of all loans, which were US Dollar denominated, required it to
reevaluate its operations and, as a result, it concluded that as of that date,
the functional currency should change from the US Dollar to the GEL.
Consequently, at April 1, 2003, the historical bases of the Companys
non-monetary assets were translated 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- 35




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monetary assets using the GEL as functional currency for the period from
January 1, 1999 to April 1, 2003 resulted in a decrease in property, plant and
equipment of $3,367,000 and an addition of $850,000 to deferred taxes resulting
from the temporary differences between the historical bases and the tax bases
of the non-monetary assets, which were recorded as a cumulative translation
adjustment in equity. The US dollar remains the Companys reporting currency. In accordance with the Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation(SFAS 52), foreign currency denominated monetary
assets and liabilities are translated into 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 had historically interconnected with a competing mobile
telephone provider in the Republic of Georgia (the Competitor) pursuant to an
arrangement by which Magticom and the Competitor each terminated traffic
originating on the others network without explicit charges. Revenues and
costs were not reflected in the financial statements of the Company for this
exchange of traffic with the Competitor. The Company and the Competitor
adopted this historical arrangement in view of the roughly balanced levels of
originating and terminating traffic exchanged between them. The arrangement
was not accounted for within the Companys financial statements as neither the
fair value of the Companys nor the Competitors capacity was readily
determinable within a reasonable limit. In October 2003, the Company and the
Competitor adopted a refinement of their historical interconnection
arrangement; either party is entitled to a payment only if its net traffic
volume (incoming less outgoing) exceeds a certain threshold level. Under this
agreement, the Company would recognize only the incremental revenue or cost
connected with net traffic volumes in excess of the threshold level. Through September 30, 2004, net traffic thresholds were not exceeded.
Consequently, no payments have been exchanged between the parties and the
Company has not recognized any revenue or cost pursuant to the October 2003
arrangement. The 2003 interconnect arrangement expired on September 30, 2004
and effective October 1, 2004, the Company will issue a monthly invoice to the
Competitor reflecting its termination of all Competitor traffic on the
Companys network, and the Company will receive a monthly invoice from the
Competitor reflecting all of the termination of the Companys traffic on the
Competitors network. The parties have agreed that for billing purposes, they
will utilize the Georgian Governments regulatory approved tariff rates for
interconnect traffic termination. Therefore, beginning with the Companys
fourth quarter 2004 financial statements, the Company will recognize revenue
for termination of the Competitors traffic and cost of sales for the
Competitors termination of the Companys traffic. 3. Property, Plant and Equipment Property, plant and equipment consisted of the following (in thousands): September 30, 2004
    
    December 31, 2003Telecommunications equipment
    
    $
    106,558
    
    
    $
    93,233Buildings and leasehold improvements
    
    
    4,874
    
    
    
    2,225Office equipment, furniture and software
    
    
    2,082
    
    
    
    962Vehicles
    
    
    1,265
    
    
    
    717Computer equipment
    
    
    458
    
    
    
    352Assets under construction
    
    
    13,363
    
    
    
    8,247128,600
    
    
    
    105,736Accumulated depreciation and amortization
    
    
    (65,157
    )
    
    
    (48,480
    )$
    63,443
    
    
    $
    57,256
 4. Loans Payable to Shareholder The Company had an agreement with a shareholder, Telcell, to provide
financing. The shareholder financing was initially a $2,000,000 non-interest
bearing loan, but was expanded by 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 bore
interest at LIBOR plus 5% and the $11,000,000 line of credit bore interest at
LIBOR plus 3.5%. Such balances were fully repaid on February 21, 2003. 36




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5. Common Stock On February 17, 2004, the Company declared dividends to its shareholders
totaling $23,333,000 ($23,333 per share) of which, $7,778,000 was paid on
February 27, 2004 and the balance as more fully described in Note 7, Related
Party Transactions was paid on April 23, 2004. On April 8, 2004, the Company declared dividends to its shareholders
totaling $15,555,000 ($15,555 per share) of which, $15,349,000 was paid on
September 28, 2004 and the balance, $206,000 on October 1, 2004. 6. Commitments and Contingencies Concentration of Cash Balances The Company has on deposit the majority of its available cash, principally
U.S. dollars, with two Georgian banks, of which one held $8,413,000 and the
other held $4,544,000 as of September 30, 2004. Risks Associated with the Republic of Georgia The ability of the Company to establish and maintain profitable operations
is subject to, among other things, significant political, economic and social
risks inherent in doing business in the Republic of Georgia. These include
matters arising out of government policies, economic conditions, imposition of
or changes in government regulations or policies, imposition of or changes to
taxes or other similar charges by government bodies, exchange rate fluctuations
and controls, civil disturbances, deprivation or unenforceability of
contractual rights, and taking of property without fair compensation. Events in the Republic of Georgia arising from widespread discontent over
elections held in late 2003, resulting in the premature resignation of
President Eduard Shevardnadze and the election of Mikhail Saakashvili, have
significantly increased the level of political uncertainty. This condition,
which is expected to extend into the foreseeable future, increases the level of
economic and legal risks that the Company faces with respect to its operations.
Present conditions in the Republic of Georgia significantly increase the
possibility of general economic distress, civil unrest, civil war, foreign
intervention, terrorism and declines in consumer confidence in the Republic of
Georgia, each of which could have a material adverse effect on the Companys
operations. The Georgian Tax Inspectorate has performed a review of certain
interconnect arrangements that the Company has with other telecommunications
businesses within the Republic of Georgia to determine whether the Company
complied with Georgian tax regulations. In addition, at the request of the
Prosecutor Generals Office of the Republic of Georgia, the Center for
Expertise and Special Inquiries of the Ministry of Justice of Georgia (the
Representatives of the New Georgian Government) has completed an additional
review of interconnect arrangements to determine whether the Company has
complied with Georgian tax regulations. No adverse finding has been issued
against the Company as a result of either investigation. On February 20, 2004, Dr. George Jokhtaberidze, co-founder and majority
owner of Magticom and son-in-law of former Georgian president Shevardnadze, was
detained in the Republic of Georgia without any charges having been filed
against him. As reported by various media sources, Dr. Jokhtaberidze was being
held in connection with continuing investigation of various tax-related
matters. On April 26, 2004, the Georgian Government investigations into past
business and tax payment practices of Magticom were completed with no adverse
findings. In addition, the prosecution by the Georgian Government of Dr.
Jokhtaberidze was dropped without finding any wrong-doing and Dr. Jokhtaberidze
was released from the investigative detention on April 26, 2004. New Draft Tax Code On June 13, 2004, the Georgian Government presented a new draft Tax Code
for public discussion. The draft code is expected to be in effect from January
1, 2005. From twenty-one currently existing taxes in the Republic of Georgia,
there are only nine left in the new draft code: social, income, profit, VAT,
excise, property, gambling, land and tax on usage of natural resources.
According to the draft code, several tax rates are to decrease: the social tax
- from 33% to 20%, income tax  from 20% to 12%, VAT  from 20% to 18%. The
final Tax Code may differ significantly from the draft Tax Code. 7. Related Party Transactions NeoStudia is a public relations firm that is owned by an affiliate of Dr.
George Jokhtaberidze, a shareholder of the Company. For the three and
nine-month periods ended September 30, 2004, the Company incurred $184,000 and
$494,000, respectively, and for the three and nine-month periods ended
September 30, 2003, the Company incurred $36,000 and $648,000, respectively, in
relation to advertising work and services from NeoStudia. MagtiWin is a window and furniture manufacturing company that is owned by
an affiliate of Dr. George Jokhtaberidze, a shareholder of the Company. For
the three and nine-month periods ended September 30, 2004, the Company incurred
$207,000 and 37




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$686,000, respectively, and for the three and nine-month periods ended
September 30, 2003, the Company incurred $248,000 and $302,000, respectively,
in relation to remodeling costs of the Companys main offices in Tbilisi. Telecom Georgia provides long distance, inter-CIS and local interconnect
telephone services to the Company. For the three and nine-month periods ended
September 30, 2004, the Company incurred interconnection expenses of $467,000
and $1,422,000, respectively. For the three and nine-month periods ended
September 30, 2003, the Company incurred interconnection expenses of $363,000
and $1,429,000, respectively. Telecom Georgia is 30% owned by ITC., which is
also an indirect majority shareholder of Telcell. Also, the interconnect
agreements provide a source of revenue for the Company, which amounted to
$213,000 and $1,500,000 for the three and nine-month periods ended September
30, 2004, respectively and $673,000 and $2,571,000 for the three and nine-month
periods ended September 30, 2003, respectively. On April 23, 2004, Magticom paid a dividend of $15,555,000. Telcell,
which was entitled to $6,860,000 of this dividend, net of taxes, agreed to loan
this amount to Dr. Jokhtaberidze by redirecting its share of the dividend
distribution to him. As security for the loan, Dr. Jokhtaberidze assigned to
Telcell his right to receive future dividends from Magticom until the loan,
which matures on December 31, 2004, is paid in full. The loan was fully repaid
by Dr. Jokhtaberidze on September 28, 2004, when Dr. Jokhtaberidze redirected
his portion of the dividend paid on that date by the Company to Telcell. On May 1, 2004, ITC, a wholly owned subsidiary of MIG, is the managing
member of Telcell. MIG, Telcells other member and Dr. Jokhtaberidze entered
into a binding memorandum of understanding (the Jokhtaberidze MOU), providing
for, upon execution of definitive agreements and satisfaction of certain
conditions, Dr. Jokhtaberidze to convey his 51% interest in Magticom to ITC in
exchange for a 49.9% interest in ITC plus certain cash consideration. MIG will
retain the remaining 50.1% majority ownership of ITC. After completion of all
transactions contemplated by the Jokhtaberidze MOU, 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. Completion of the transactions
contemplated by the Jokhtaberidze MOU has been delayed pending outcome of MIGs
recently announced proposed merger. The Company believes that these
transactions will be completed during the second quarter of 2005, whether or
not MIG completes its proposed merger. The previously announced Georgian Government investigations into past
business and tax payment practices of Magticom were completed with no adverse
findings. The previously announced prosecution by the Georgian Government of
Dr. Jokhtaberidze has been dropped without finding any wrong-doing and Dr.
Jokhtaberidze has been released from the investigative detention in which he
had been held since February 20, 2004. The Company believes that no further
investigations or prosecutions of Magticom, Magticom personnel or Dr.
Jokhtaberidze with respect to past business or tax payment practices will be
undertaken by the Georgian Government. Also, on May 1, 2004, ITC entered into a memorandum of understanding with
the Georgian Government (the Georgian Government MOU) providing for issuance
by ITC of an assignable option (the Option) to purchase a 20% ownership
interest from ITC in Magticom. The Option has a limited exercise period of 12
months from the date of issuance, and such issuance will not occur until the
completion of the restructuring of Dr. Jokhtaberidzes ownership interest in
Magticom, pursuant to the Jokhtaberidze MOU. 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. Issuance of the Option to
the Georgian Government is dependent upon the completion of the transactions
contemplated within the Jokhtaberidze MOU; which, as stated earlier, the
Company does not anticipate will occur until the second quarter of 2005. 38




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Item 2. Managements Discussion and Analysis of Financial Conditions and Results of Operations Certain statements set forth below in this Form 10-Q constitute
Forward-looking Statements within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange
Act of 1934, as amended. See Special Note Regarding Forward-Looking
Statements on page 60. Liquidity and Capital Resources The Company Overview.On November 4, 2004, the Company announced that it had entered
into exclusive negotiations with an investor group (the Investor Group)
composed of Emergent Telecom Ventures (Emergent), First National Holding
(First National), Capital International Private Equity Fund IV, L.P.
(Capital International) and Baring Vostok Capital Partners (Cyprus) Limited
(Baring Vostok) concerning the Investor Groups preliminary proposal to
acquire the Company by merger (the Proposed Merger).
The Investor Groups proposal assigns an aggregate preliminary enterprise value
to the Company of $300.0 million, which amount would be payable in cash and
allocated as follows:  
    
    Approximately $152.0 million would be allocated to the retirement, following
the closing of the acquisition of the Company by the Investor Group,
of the Companys outstanding aggregate principal amount and
fully accreted 10 1/2%
Senior Discount Notes due 2007 (the Senior Notes);
    
    An additional amount, estimated to be in the range of approximately
$11.7 million to $16.5 million, would be used to fulfill certain
contractual obligations to the Companys senior executives. These
contractual arrangements are currently being finalized between the
Companys Board of Directors and the respective senior
executives, and the Company intends to update its public filings
with the modified senior executive contractual arrangements when
complete; and
    
    The remainder would be allocated between the Companys preferred
and common stockholders in a manner determined by the Companys Board
of Directors prior to the execution of the definitive merger agreement
and paid out to the Stockholders in connection with the consummation of the Proposed Merger. The proposal contains a number of conditions,
including without limitation, the Investor Groups successful completion of due
diligence during a limited exclusivity period, the Investor Group obtaining
commitments for all financing contemplated in its acquisition proposal, the
Company meeting currently projected corporate cash balance and liability
levels, and negotiation and execution of definitive transaction agreements.
The Company has granted the Investor Group exclusivity until January 17, 2005
to pursue a due diligence review of the Company and negotiate a definitive
merger agreement, subject to earlier termination under certain circumstances. If undertaken, the Proposed Merger would result in the Company being
merged with and into an entity wholly-owned by the Investor Group. The
Companys current common and preferred stockholders would not become
stockholders of the post-merger entity and would receive cash consideration for
their stock holdings in an amount dependent on the aforementioned
Board-determined allocation. The Proposed Merger will require approval by a
majority of the Companys common stock. This approval will be solicited via a
proxy statement that will include further details of the Proposed Merger, the
Board of Directors recommendation, and other information customary contained in
merger proxy statements. Preparation of a proxy statement and solicitation of
a common stockholder vote would follow signing of definitive agreements with
the Investor Group. The Company anticipates that a common stockholder vote on
the Proposed Merger will not occur before the end of the first quarter 2005.
Although no vote of the Companys preferred stockholders is required to approve
the Proposed Merger, as a practical matter discussions with significant holders
of the Companys preferred stock concerning disposition of merger proceeds are
likely to occur prior to concluding any definitive merger agreement. The Company has been actively assessing for some time the practical
financial restructuring alternatives and business development opportunities
that are available. This work has involved the realistic assessment of current
valuations of the Companys core businesses and a pragmatic assessment of the
opportunities and risks associated with continued pursuit and development of
the Companys core businesses on an as currently organized basis. In
connection with this work, the Company also received and carefully considered
several third party merger and acquisition proposals and various opportunities
to refinance the Companys Senior Notes. The Board of Directors has concluded
that the Proposed Merger, if consummated, offers the best opportunity
reasonably available to maximize value for the Companys stakeholders. There can be no assurances that any transaction with the Investor Group or
any other party will take place nor can any assurance be given with respect to
the timing or terms of any such transaction. Details of the terms of a final
agreement, if any, will be disclosed upon signing of definitive agreements.
The preliminary proposal made by the Investor Group is non-binding and the
Company has agreed, under certain circumstances, to reimburse the Investor
Group for a limited amount of its out-of-pocket expenses incurred in connection
with its due diligence review and negotiation of definitive agreements. 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. Cash proceeds from these sales have
mitigated short-term corporate liquidity concerns and reduced the Companys
dependence upon cash distributions from its core businesses and thus provided
additional cash reserves to the core businesses to enable them to further
pursue their respective business development initiatives. In connection with 39




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the Restructuring, the Company also substantially downsized its corporate
headquarters staff and undertook actions with the intended objective of
significantly decreasing its corporate overhead cash-burn rate. The Company
had substantially completed all of the initiatives attributable to the
Restructuring at the end of the third quarter of 2004, and as such, exited the
Restructuring with the intent, prior to engaging in the Proposed Merger, to
focus on the continued development of its core telephony businesses in
Northwest Russia and the Republic of Georgia. 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 PeterStar and Magticom are currently self-financed and hold leading
positions in their respective markets. Furthermore, the Company also currently
intends to retain its ownership in Ayety LLC (Ayety), 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. In addition, as of September 30, 2004 the Company has one
radio broadcast station and one cable television network which are subject to
pending sales agreements with prospective acquirers, which are reflected at the
lower of cost, less accumulated losses or estimated net proceeds. Prior to
engaging in the Proposed Merger, the Company intended to use its corporate cash
reserves to provide for the development of these core businesses, with the
expectation that their future dividend distributions will be sufficient to
meet, on a timely basis, the Companys corporate overhead requirements and
indebtedness interest payment obligations, including those associated with its
$152.0 million aggregate principal (full accreted) 101/2% Senior Notes, due
2007 (the Senior Notes). Liquidity Issues The Company is a holding company; accordingly, it does not generate cash
flows from operations. As a result, the Company is dependent on the earnings
of its subsidiaries and equity investees and the distribution or other payment
of these earnings to it to meet its long term corporate cash outlay
requirements (the Long Term Corporate Cash Requirements), in addition to
making any cash 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. The Companys Long Term Corporate Cash
Outlay Requirements consist of cash outlays for its corporate overhead
expenditure requirements, extinguishment of its Historic Corporate Liabilities,
and interest payment obligations associated with its Senior Notes. As such,
the Companys Long Term Corporate Cash Outlay Requirements do not include
funding necessary to retire its outstanding Senior Notes. 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. The Company has legacy liabilities as a result of the Companys prior U.S.
based business operating activities, principally attributable to the business
activities when the Company operated under the names of The Actava Group,
Inc. and Fuqua Industries, Inc., which include, but are not limited to,
employee benefit obligations to former employees (pension obligations and
provisions for medical and life insurance), self-insurance reserves
attributable to product liability and workers compensation claims and
environmental claims (collectively, the Historic Corporate Liabilities). As of September 30, 2004 and November 30, 2004, the Company had $40.5
million and $34.7 million, respectively, of unrestricted cash on hand, which is
principally held in banks in the U.S. In addition, as of September 30, 2004,
the Companys consolidated business ventures held $0.7 million of cash on hand,
which is held in banks in Russia. Furthermore, as of September 30, 2004, the
Companys unconsolidated business ventures had $13.4 million of cash on hand,
which is held in banks in the Republic of Georgia. The Company projects that its anticipated continuing dividends from its
core business operations and its current corporate cash reserves will be
sufficient for the Company to meet on a timely basis its corporate cash outlay
requirements through September 30, 2007, the maturity date of the
Senior Notes. However, the Company cannot provide assurance that its core
businesses will perform to expectations and therefore generate the forecasted
cash flows for dividend distribution purposes, or that the core businesses
free cash flows or its available cash reserves will distributed as shareholder
dividends in accordance with the Companys current expectations. Therefore,
the Company cannot provide assurance that it will be able to meet its Long Term
Corporate Cash Outlay Requirements through at least September 30, 2007. 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. 40




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Separately, the Company projects that, as of today, it has sufficient
corporate cash on hand to support the Companys planned Long Term Corporate
Cash Outlay Requirements through at least March 31, 2005, including the
Companys $8.0 million semi-annual interest payment on its Senior Notes due on
March 31, 2005 and its planned cash outlays between now and March 31, 2005
attributable to the extinguishment of certain of the Companys Historic
Corporate Liabilities as related to employee benefit obligations (see Note 16,
Subsequent Events  Employee Benefits). This projection does not include
cash inflows that might reasonably arise from cash proceeds realized from
dividend distributions from either PeterStar or Magticom, which would further
strengthen the Companys liquidity position. However, the Company does not believe that, as of today, it has sufficient
corporate cash on hand to support the Companys planned Long Term through
September 30, 2005, including the Companys $8.0 million semi-annual interest
payment on its Senior Notes due on September 30, 2005, its planned cash outlays
between now and September 30, 2005 attributable to the extinguishment of
certain of the Companys Historic Corporate Liabilities as related to employee
benefit obligations and the cash outlays attributable to the restructuring of
Dr. Jokhtaberidzes ownership interest in Magticom, of $18.2 million. As previously indicated, the outstanding principal on the Senior Notes
becomes due in full on September 30, 2007 and the Company does not currently
anticipate that it can retire the Senior Notes with internally generated cash
flows, without the sale of either its interest in PeterStar or its interests in
both PeterStar and Magticom. In addition, failure on the part of the Company
to make any required payment of interest on the Senior Notes would represent a
default under the Senior Notes. A default, if not waived, could result in
acceleration of the Companys indebtedness, in which case the full amount of
the Senior Notes would become immediately due and payable. If an uncured
default were to occur, the Company does not currently anticipate that it can
retire the Senior Notes with internally generated cash flows, without the sale
of either its interest in PeterStar or its interests in both PeterStar and
Magticom. Furthermore, the Company has not been successful with past refinancing
initiatives associated with the Senior Notes, and as such, the Company might
not be able to borrow sufficient funds to remedy a situation where its
obligated to retire the Senior Notes, either due to a uncured default situation
or as a result of the ultimate maturity of the Senior Notes. If the Company is not able to satisfactorily address the corporate
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. Senior Notes In connection with the acquisition of PLD Telekom, the Company issued
$210.6 million in aggregate principal amount at maturity of its Senior Notes in
exchange for PLD Telekoms then outstanding senior notes and convertible
subordinated notes. The Senior Notes accrue interest at the rate of
101⁄2%
per year, payable semi-annually in cash. On April 24, 2003, the Company
completed an exchange with Adamant Advisory Services, a British Virgin Islands
company (Adamant), in which the Company conveyed its ownership interest in
certain of its businesses in Russia in exchange for, among other things,
approximately $58.6 million face value of the Companys Senior Notes held by
Adamant. With the completion of this transaction, the outstanding principal
balance on the Senior Notes was reduced to $152.0 million. The Senior Notes are general senior unsecured obligations of the Company,
rank senior in right of payment to all existing and future subordinated
indebtedness of the Company, rank equal in right of payment to all existing and
future senior indebtedness of the Company and will be effectively subordinated
to all existing and future secured indebtedness of the Company to the extent of
the assets securing such indebtedness and to all existing and future
indebtedness of the Companys subsidiaries, whether or not secured. The Senior Notes are redeemable at the sole option of the Company only at
a redemption price equal to their principal amount plus accrued and unpaid
interest, if any, up to but excluding the date of redemption. Upon the occurrence of a change of control of the Company (as such term is
defined in the indenture for the Senior Notes (the Indenture)), the holders
of the Senior Notes will be entitled to require the Company to repurchase their
Senior Notes at a purchase price equal to 101% of the face value of the Senior
Notes plus accrued interest as of the date of repurchase, unless the Company
provides a redemption notice to the holders of the Senior Notes prior to the
holders of the Senior Notes exercising their change of control right. In the
event of the Company issuing a redemption notice, the Company would repurchase
all Senior Notes at a cash purchase price of 100% of the face value of the
Senior Notes plus accrued interest as of 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 41




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assets and also contains limitations on restrictions on distributions from its
subsidiaries. Convertible Preferred Stock As of September 30, 2004, there were 4.1 million shares of the Companys
Preferred Stock, par value $1.00 issued and outstanding. Each share has a
liquidation preference of $50.00 plus accrued and unpaid dividends thereon. Dividends on the Preferred Stock are cumulative from the date of issuance
and payable quarterly, in arrears. The Company may make any payments due on the
Preferred Stock, including dividend payments and redemptions (i) in cash; (ii)
through issuance of the Companys common stock or (iii) through a combination
thereof. Through March 15, 2001, the Company paid its quarterly dividends on the
Preferred Stock in cash. The Company has elected not to declare dividend for
any quarterly dividend periods ending after June 15, 2001. As September 30,
2004, total dividends in arrears were $59.8 million. The dividend requirement
for the twelve months ending September 30, 2005 will be $19.8 million,
including the effects of compounding and assuming there are no payments of the
dividends. Except as described in this paragraph, the holders of the Preferred Stock
have no voting rights. In June 2004, the Company entered into the Board of
Director Nominee Agreement with certain holders of the Preferred Stock who
represented to the Company that they held discretionary authority (including
the power to vote) with regard to 2.4 million shares or approximately 58% of
the outstanding 4.1 million shares of Preferred Stock. Under the terms of the
Board of Director Nominee Agreement, the Participating Preferred Stock Holders
irrevocably waived the right to request a special meeting of holders of
Preferred Stock to elect directors or take any action to request such a
meeting; such waiver to remain effective until immediately after the next
annual meeting of the Companys stockholders is held. In consideration of this
waiver, Messrs. Gale and Henderson, who were identified by the Participating
Preferred Stock Holders as director candidates, were elected as Class III Directors by the Companys
Board of Directors. Their terms will expire at the Companys next annual
meeting of stockholders. At the next annual meeting, the holders of Preferred
Stock will have the right to vote separately as a class for the election of two
directors. It is expected that Messrs. Gale and Henderson will be nominated for
election by the holders of Preferred Stock to fill these two directorships. The execution of the Board of Director Nominee Agreement was the
culmination of several discussions, which began in late 2003, that the Company
had with several holders of the Companys Preferred Stock. According to the
terms of the Preferred Stock, in the event the Company did not make six (6)
consecutive dividend payments on the Preferred Stock, holders of 25% of the
voting power of the outstanding Preferred Stock became entitled to compel the
Company to call a special meeting of the holders of the Preferred Stock for the
purpose of electing two new directors. The Company believes that the Board of
Director Nominee Agreement was advantageous to the Company because it
eliminated the need to hold a special meeting, which would have been both time
consuming and expensive. Business Venture Support and Corporate Overhead Costs In the years ended December 31, 2003 and 2002, the Company expended $29.3
million, and $28.2 million, respectively on support of its subsidiary business
ventures and headquarters overheads. The Company provides business development
and financial reporting services to its operating units through its
wholly-owned subsidiary Metromedia International Telecommunications, Inc.
(MITI). 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 associated
administrative costs (insurance and regulatory compliance costs). The Company anticipates that its 2004 corporate overhead expenses will be
significantly lower than that incurred in 2003. As a result of the pending
Proposed Merger and the Companys current initiatives to settle certain of its
Historic Corporate Liabilities as related to employee benefit obligations, the
Company is currently unable to provide clear guidance as to its expected
corporate overhead expenses and respective corporate cash outlays over the next
twelve months. For further discussion of the Companys corporate overhead
expenses, see Consolidated Results of Operations for the nine months ended
September 30, 2004 compared to the Consolidated Results of Operations for the
nine months ended September30, 2003, Other Consolidated Results. 42




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Commitments Employee Benefit Plans The Company is currently taking steps to settle and resolve certain
benefit obligations to former U.S. based employees of the Company. These
initiatives are being implemented to both reduce the Companys overhead cash
burn-rate and to resolve certain of its long-standing Historical Corporate
Liabilities. Until the third quarter of 2004, the Company sponsored two tax-qualified
defined benefit pension plans in the U.S. These plans were merged at the end
of September 2004 to reduce administrative and related expenditures (the
Merged Plan). As of September 30, 2004, the unfunded status of the Merged
Plan was approximately $3.3 million as compared with $3.8 million as of
December 31, 2003. The improvement in the unfunded status from December 31,
2003 to September 30, 2004, is attributable to actual return on plan assets and
employer contributions being in excess of benefits paid to participants. The
Company expects to contribute $1.5 million to the Merged Plan in 2004. In the
third quarter of 2004, the Company initiated a process whereby the Merged Plan
would be terminated pursuant to a standard termination, in accordance with the
provisions of 4041 of the Employee Retirement Income Security Act of 1974, as
amended (ERISA), which will result in additional contributions, beyond the
ERISA mandated minimums in 2005. The Merged Plan will be required, at
termination, to have assets sufficient in value to provide for all retiree
benefit liabilities under the Merged Plan within the meaning of Section 4041 of
ERISA. The Company has engaged an outside actuary to determine the additional
amount that the Company must contribute to the Merged Plan to satisfy all
benefit liabilities, to the extent that the value of the assets of the Merged
Plan at termination are sufficient to provide them; however, at present the
Company is not certain of the ultimate cash outlay that will be required to
settle this obligation. The Company intends to purchase an annuity contract
for the benefit of the Merged Plan participants to satisfy this obligation. In addition, the Company also maintains a nonqualified, unfunded
supplemental retirement plan (SERP) for certain former executives based in
the U.S and also has an unfunded group medical plan and life insurance coverage
for certain former employees subsequent to retirement (Retiree Medical
Plan). As of September 30, 2004, the unfunded status of the SERP and Retiree
Medical Plan was approximately $3.7 million as compared with $3.8 million as of
December 31, 2003. The Company anticipates that it will distribute
approximately $0.4 million in 2004 to participants of the SERP and Retiree
Medical Plan. In addition, the Company currently anticipates that the SERP and
Retiree Medical Plan legal obligations will be settled within the next twelve
months. To that end, the Company is currently preparing the necessary analysis
needed to engage in negotiations with participants in the SERP and the Retiree
Medical Plan regarding the settlement of the Companys obligation to such
employees; however, at present the Company is not certain of the ultimate cash
outlay required to settle the SERP and Retiree Medical Plan obligations. Capital Resources The Companys capital expenditure program for the twelve months ended
September 30, 2005 for its core businesses, inclusive of Magticom, is
anticipated to approximate $30.7 million. The Company does not anticipate that
corporate headquarters cash resources will be required to fund this program;
that is, the Company believes that this amount will be funded by the cash
reserves and operating cash flows of the respective business ventures. Discussion of Changes in Financial Position The Companys current ratio, defined as total current assets divided by
total current liabilities, improved from 1.2 to 2.3 as of December 31, 2003 and
September 30, 2004, respectively. The improvement in the current ratio is a
result of the net positive cash-flow influence due to the disposition of
non-core media businesses during the first nine months of 2004, positive cash
flows at PeterStar and the impact of cash dividends from Magticom in the
period. The receipt of these proceeds has allowed the Company to continue to
fund its operations to meet its current obligations on a timely basis while
maintaining an overall positive current ratio. Such increase in current ratio
was partially offset by a reclassification of $5.7 million of employee benefit
plan related obligations from long-term to current as of September 30, 2004.
Such reclassification is due to managements intentions to settle such
obligations within the next twelve months. Without such reclassification, the
Companys current ratio would have improved to 3.0. A summary of cash flows
from continuing operations is as follows (in thousands): Nine months endedSeptember 30,2004
    
    2003Cash flows used in operating activities
    
    $
    (14,700
    )
    
    $
    (21,781
    )Cash paid for the acquisition of property, plant and equipment and other
    
    $
    (10,106
    )
    
    $
    (11,309
    )Cash provided by investing activities
    
    $
    3,813
    
    
    $
    16,178Cash used in financing activities
    
    $
    (6,231
    )
    
    $
    (7,981
    )Cash provided by discontinued components, net
    
    $
    31,379
    
    
    $
    13,760
 43




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##### Table of Contents



Nine Months Ended September 30, 2004 Compared to Nine Months Ended September
30, 2003 Cash Flows from Operating Activities Cash used in operating activities for the nine months ended September 30,
2004 was $14.7 million as compared to cash used in operating activities of
$21.8 million for the nine months ended September 30, 2003. The $7.1 million decrease in cash used in operating activities due to a $17.4 million decrease
in cash used in continuing operations, net of items not requiring
cash outlays (as defined in the statements of cash flows) partially offset by a $10.3 million decrease
in working capital items. The $17.4 million increase in cash inflows from continuing operations, net
of items not requiring cash outlays, primarily reflects a favorable change in
the Companys operating income (loss) from continuing operations of $16.8
million. The reduction of the operating loss was principally driven by a
reduction in selling, general and administrative expenses. Selling, general and
administrative expenses decreased by $13.3 million which had a significant
impact on cash, as the majority of the reduction was in salaries and benefits
as well as overall professional fees, both of which are typically paid in the
period in which the expense is incurred. In addition, the Company had a
reduction in non-cash items included in operating results of $34.2 million.
Such reductions in non-cash items are principally the gains of $24.6 million
and $12.0 million recognized on retirement of debt and dispositions of
businesses in 2003 that were not repeated in 2004. An additional reduction of
non-cash items included a gain of $2.0 million recognized on the cumulative
effect of a change in accounting principle recognized in 2003, upon the
elimination of a three-month lag in reporting for certain business ventures. The $10.3 million increase in the use of cash working capital items primarily reflects the pay down in 2004 of liabilities, including
amounts for professional fees and pension liabilities, as well as an overall
reduction in trade accounts payable on a period-over-period basis. Based on
the Companys overall improved corporate cash position during 2004, trade
payables and other legal obligations have been settled more timely than in the
comparable period in 2003. Cash Flows from Investing Activities Cash provided by investing activities for the nine months ended September
30, 2004 was $3.8 million as compared to $16.2 million for the nine months
ended September 30, 2003. The period-over-period change is principally
attributable to the proceeds from the sale of businesses, primarily the Baltcom
TV transaction, which occurred in August 2003. Baltcom TV was sold for cash
consideration of $14.5 million. The Company received $6.8 million in additional distributions from
Magticom during 2004 in excess of the $12.3 million received in 2003. The
Company expended $10.1 million and $11.3 million in the nine months ended
September 30, 2004 and 2003, respectively for capital improvements. Such
capital expenditures were principally to fund the growth of PeterStar and the
efforts of PeterStar to provide a highspeed digital fiber network, in lieu of
traditional copper telephone infrastructure. During 2004, PeterStar expended $5.8 million of cash to fund business
acquisitions. In 2003, PeterStar used $0.5 million of cash to purchase
short-term investments. Cash Flows from Financing Activities Cash used in financing activities for the nine months ended September 30,
2004 was $6.2 million as compared to $8.0 million for the nine months ended
September 30, 2003. The reduction in cash used in financing activities in 2004
is principally due to dividends paid to the Companys minority shareholder in
PeterStar in 2003 of $2.9 million in 2003, while no dividends have been paid in
2004. Such reduction is partially offset by an increase in dividends paid to
the Companys minority shareholder in Telcell of $1.5 million. Cash Flows from Discontinued Components Cash provided by discontinued components increased to $31.4 million for
the nine months ended September 30, 2004 as compared to $13.8 million for the
nine months ended September 30, 2003. During the nine months ended September
30, 2004, the Company received $13.5 million, $16.0 million, $1.5 million and
$0.5 million related to the dispositions of the Companys interests in MII,
Romsat, ATK and Radio Skonto, respectively. During the nine months ended
September 30, 2003, the Company received net cash of $3.9 million and $5.0
million from the disposition of Technocom and from the Adamant Transaction,
respectively. The Company also received $6.0 million in the nine months ended
September 30, 2003 in relation to the final payment from Simplicity for the
sale of Snapper that occurred in November 2002. These cash inflows were
partially offset by cash used to fund the operations of discontinued components
in 2003. 44




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##### Table of Contents



Results of Operations Overview The Company has continuing operations in northwestern Russia and the
Republic of Georgia. The Companys reporting segments are (i) fixed telephony,
(ii) wireless telephony and (iii) cable television. In 2004, consolidated fixed telephony is comprised solely of PeterStar. In
2003, consolidated fixed telephony was comprised of PeterStar and Baltic
Communications Ltd. (BCL) a former wholly owned subsidiary of the Company.
On October 1, 2003, PeterStar acquired the ownership rights of BCL. In 2004, unconsolidated wireless telephony is comprised of Magticom. In
2003, unconsolidated wireless telephony was comprised of both Magticom and
Tyumenruskom. The Company disposed of its interest in Tyumenruskom in
September 2003. Consolidated cable television through June 30, 2004 is comprised of Ayety.
Subsequent to June 30, 2004, Ayetys results are presented in unconsolidated
cable television. In addition to these business segments, the Company had other consolidated
operating activities that were considered discontinued components. Further,
the Company had unconsolidated activities that were carried out in business
ventures accounted for under the equity method of accounting, which were
disposed of during 2004 and 2003. As the Companys consolidated operations are predominantly located in
Russia and the Company adopted the Russian Ruble as the functional currency of
PeterStar as of October 1, 2003, the Companys results of operations are
influenced by the movement of the exchange rate between the U.S. dollar and the
Ruble. Furthermore, as the Companys unconsolidated operations are
predominantly located in the Republic of Georgia and the Company adopted the
Georgian Lari as the functional currency of Magticom as of April 1, 2003, the
Companys results of operations from equity method investments are influenced
by the movement of the exchange rate between the U.S. dollar and the Georgian
Lari. Accordingly, the Companys overall results of operations will be
influenced by fluctuations in the respective exchange rates. Through the nine months ended September 30, 2004, the Russian Ruble remained relatively
stable. The average Ruble exchange rate against the US dollar for the nine months ended September
30, 2004 increased by 7% compared to the average exchange rate for
the nine months ended September
30, 2003. For the three months ended September 30, 2004, the average Ruble exchange rate increased
by 4% against the US dollar compared to the three months ended September 30, 2003. Through the nine months ended September 30, 2004, the Georgian Lari strengthened against the
U.S. dollar by 11%. The average Lari exchange rate against the US dollar for the nine months ended
September 30, 2004 increased by 9% compared to the average
exchange rate for the nine months ended
September 30, 2003. For the three months ended September 30, 2004 the average Lari exchange rate
increased by 13% against the US dollar compared to the three months ended September 30, 2003
Accordingly, Magticoms results of operations were influenced by such exchange rate changes. In the
accompanying discussion, management has identified those items that would significantly differ when
reviewing the results in the functional currency as opposed to reviewing the reporting currency
results of operations. Segment Information The Companys segment information, including other unconsolidated
operating segments, is set forth for the three and nine months ended September
30, 2004 and 2003 in the following tables (in thousands): Segment Information
Three months ended September 30, 2004
(in thousands) Corporate,Fixed
    
    Wireless
    
    Cable
    
    Other andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    20,040
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20,040Cost of services
    
    
    6,913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,913Selling, general and administrative
    
    
    3,385
    
    
    
    
    
    
    
    
    
    
    
    3,086
    
    
    
    6,471Depreciation and amortization
    
    
    5,678
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    5,693Operating income (loss)
    
    $
    4,064
    
    
    $
    
    
    
    $
    
    
    
    $
    (3,101
    )
    
    
    963Unconsolidated Business VenturesRevenues
    
    $
    
    
    
    $
    27,559
    
    
    $
    748Costs of services
    
    
    
    
    
    
    3,481
    
    
    
    11Selling, general and administrative
    
    
    
    
    
    
    2,824
    
    
    
    642Depreciation and amortization
    
    
    
    
    
    
    3,374
    
    
    
    126Operating income (loss)
    
    $
    
    
    
    $
    17,880
    
    
    $
    (31
    )Net income (loss)
    
    $
    
    
    
    $
    13,911
    
    
    $
    (257
    )Equity in income (loss) of unconsolidated investees
    
    $
    
    
    
    $
    6,816
    
    
    $
    (5
    )
    
    
    
    
    
    
    6,811Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,076
    )Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (292
    )Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,192
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,164
    )Loss before discontinued components and the
cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,030
    )Income from discontinued components
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    928Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (102
    )
 45




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##### Table of Contents



Segment Information
Three months ended September 30, 2003
(in thousands) Corporate,Fixed
    
    Wireless
    
    Cable
    
    Other andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    18,014
    
    
    $
    
    
    
    $
    619
    
    
    $
    
    
    
    $
    18,633Cost of services
    
    
    6,246
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    6,248Selling, general and administrative
    
    
    3,764
    
    
    
    
    
    
    
    454
    
    
    
    5,982
    
    
    
    10,200Depreciation and amortization
    
    
    4,862
    
    
    
    
    
    
    
    100
    
    
    
    78
    
    
    
    5,040Operating income (loss)
    
    $
    3,142
    
    
    $
    
    
    
    $
    63
    
    
    $
    (6,060
    )
    
    
    (2,855
    )Unconsolidated Business VenturesRevenues
    
    $
    
    
    
    $
    20,530
    
    
    $
    969Costs of services
    
    
    
    
    
    
    2,777
    
    
    
    134Selling, general and administrative
    
    
    
    
    
    
    2,691
    
    
    
    478Depreciation and amortization
    
    
    
    
    
    
    3,147
    
    
    
    212Operating income
    
    $
    
    
    
    $
    11,915
    
    
    $
    145Net income (loss)
    
    $
    
    
    
    $
    9,446
    
    
    $
    (72
    )Equity in income (loss) of unconsolidated investees
    
    $
    
    
    
    $
    4,628
    
    
    $
    (1,070
    )
    
    
    
    
    
    
    3,558Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,058
    )Gain on retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    465Gain on disposition of businesses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,031Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,342
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,766
    )Income before discontinued components and the
cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,037Loss from discontinued components
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,588
    )Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,449
 46




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##### Table of Contents



Segment Information
Nine months ended September 30, 2004
(in thousands) Corporate,Fixed
    
    Wireless
    
    Cable
    
    Other andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    56,544
    
    
    $
    
    
    
    $
    1,371
    
    
    $
    
    
    
    $
    57,915Cost of services
    
    
    18,613
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    18,658Selling, general and administrative
    
    
    11,487
    
    
    
    
    
    
    
    1,211
    
    
    
    9,387
    
    
    
    22,085Depreciation and amortization
    
    
    17,117
    
    
    
    
    
    
    
    213
    
    
    
    52
    
    
    
    17,382Operating income (loss)
    
    $
    9,327
    
    
    $
    
    
    
    $
    (98
    )
    
    $
    (9,439
    )
    
    
    (210
    )Unconsolidated Business VenturesRevenues
    
    $
    
    
    
    $
    71,480
    
    
    $
    1,413Costs of services
    
    
    
    
    
    
    9,112
    
    
    
    122Selling, general and administrative
    
    
    
    
    
    
    7,863
    
    
    
    920Depreciation and amortization
    
    
    
    
    
    
    10,451
    
    
    
    224Operating income
    
    $
    
    
    
    $
    44,054
    
    
    $
    147Net income (loss)
    
    $
    
    
    
    $
    34,265
    
    
    $
    (136
    )Equity in income (loss) of unconsolidated investees
    
    $
    
    
    
    $
    16,790
    
    
    $
    (5
    )
    
    
    
    
    
    
    16,785Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,952
    )Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (365
    )Other expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (114
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,334
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,986
    )Loss before discontinued components and the
cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,176
    )Income from discontinued components
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,756Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (420
    )
 47




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##### Table of Contents



Segment Information
Nine months ended September 30, 2003
(in thousands) Corporate,Fixed
    
    Wireless
    
    Cable
    
    Other andTelephony
    
    Telephony
    
    Television
    
    Eliminations
    
    ConsolidatedConsolidatedRevenues
    
    $
    51,147
    
    
    $
    
    
    
    $
    1,942
    
    
    $
    
    
    
    $
    53,089Cost of services
    
    
    16,989
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    17,014Selling, general and administrative
    
    
    10,692
    
    
    
    
    
    
    
    1,352
    
    
    
    23,381
    
    
    
    35,425Depreciation and amortization
    
    
    14,680
    
    
    
    
    
    
    
    398
    
    
    
    177
    
    
    
    15,255Operating income (loss)
    
    $
    8,786
    
    
    $
    
    
    
    $
    167
    
    
    $
    (23,558
    )
    
    
    (14,605
    )Unconsolidated Business VenturesRevenues
    
    $
    25,270
    
    
    $
    53,708
    
    
    $
    8,625Costs of services
    
    
    12,807
    
    
    
    7,905
    
    
    
    1,617Selling, general and administrative
    
    
    6,814
    
    
    
    6,932
    
    
    
    4,686Depreciation and amortization
    
    
    4,414
    
    
    
    10,268
    
    
    
    2,095Operating income
    
    $
    1,235
    
    
    $
    28,603
    
    
    $
    227Net (loss) income
    
    $
    (878
    )
    
    $
    20,343
    
    
    $
    1,389Equity in (loss) income of unconsolidated investees
    
    $
    (468
    )
    
    $
    10,157
    
    
    $
    728
    
    
    
    
    
    
    
    10,417Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,755
    )Gain on retirement of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,582Gain on disposition of businesses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,031Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (466
    )Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,330
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,249
    )Income before discontinued components and the
cumulative effect of a change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,630Income from discontinued components
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,251Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,012Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,893
 48




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CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2004 COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2003 Fixed Telephony Consolidated fixed telephony is comprised of PeterStar, the leading
competitive local exchange carrier in St. Petersburg, Russia. On October 1,
2003, PeterStar acquired the ownership rights of BCL, a local and long distance
telephony operator in St. Petersburg, Russia. Prior to October 1, 2003, BCL was
an indirect wholly owned subsidiary of the Company. Accordingly, the results of
PeterStar and BCL have been combined for historical reporting purposes. Revenues.Fixed telephony revenues increased by $2.0 million (11%) to
$20.0 million for the three months ended September 30, 2004 as compared to
$18.0 million for the three months ended September 30, 2003. This growth in year-over-year revenues is driven by a $0.9 million (21%)
increase in data and Internet services and a $0.7 million (7%) increase in
business fixed revenues. In addition, Pskov City Telephone Network (PGTS),
which was acquired on April 27, 2004, contributed incremental revenue of $1.0
million during the three months ended September 30, 2004. Such increases were
partially offset by a $0.5 million decrease in transit carrier revenues. The increase in data and Internet services is principally due to the
growing demand for leased lines and dial up services within the St. Petersburg
market. Management believes that PeterStar has increased its share of the St.
Petersburg Internet services market. Further, although management expects that
it will continue to experience revenue growth for its data and Internet product
portfolio, the rate of growth will most likely decline due to competitive
pressures. 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 93% of new connections for the three months ended
September 30, 2004 utilizing PeterStars infrastructure versus 88% of new
connections for the three months ended September 30, 2003. Management
anticipates that such connections will continue to remain at such proportionate
levels. As a result, PeterStar has effectively increased its customer base for
other high band-width intensive products. Vasilievsky Island, which represents an area of St. Petersburg where
PeterStar provides principally residential telephony services, revenues
remained flat at $1.0 million in each period. The revenues related to
Vasilisevsky Island are based on fixed government regulated tariffs. Such
tariffs have not increased during the period; however, the Company expects a
nominal increase in such revenues effective October 1, 2004. Gross margin.Fixed telephony gross margin increased by $1.3 million
(12%) to $13.1 million for the three months ended September 30, 2004 as
compared to $11.8 million for the three months ended September 30, 2003. Gross
margin as a percentage of revenues was 66% for the three months ended September
30, 2004 as compared to 65% for the three months ended September 30, 2003. Gross margin remained stable in spite of lower margins on long distance
traffic and higher PSTN interconnect and local unbundling costs, which were
offset by the growth of the business fixed and date and internet revenues. The
increase in gross margin percentage is primarily due to higher margins in
revenues at PGTS than those historically recognized at PeterStar. Selling, general and administrative.Fixed telephony selling, general
and administrative expenses decreased by $0.4 million (10%) to $3.4 million for
the three months ended September 30, 2004 as compared to $3.8 million for the
three months ended September 30, 2003. The significant components of selling, general and administrative expenses
for PeterStar for the three months ended September 30, 2004 and 2003 are as
follows (in thousands): 2004
    
    2003Personnel related costs
    
    $
    1,920
    
    
    $
    1,438Office related costs
    
    
    1,317
    
    
    
    849Bad debt expense (recovery)
    
    
    (508
    )
    
    
    354Marketing expenses
    
    
    322
    
    
    
    112Professional services
    
    
    183
    
    
    
    157Taxes other than income
    
    
    24
    
    
    
    241Other expenses
    
    
    127
    
    
    
    613Total
    
    $
    3,385
    
    
    $
    3,764
 49




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##### Table of Contents



Selling, general and administrative costs decreased on a year-over-year
basis due to the Companys release of a provision of $0.6 million during the
three months ended September 30, 2004. Such release was related to the
Companys periodic reassessment of collectibility of certain receivables.
During the three months ended September 30, 2004, the Company determined that
certain receivables previously provided for as being uncollectible are expected
to be collected. Accordingly, the Company released such provision during the
current period, which resulted in a favorable impact over prior year of $0.9
million. Such decrease was partially offset due to the inclusion of PGTS
selling, general and administrative costs of $0.7 million in the quarter,
salary raises to existing personnel of $0.1 million, $0.1 million due to
headcount growth and higher office costs due to the addition of office space at
PeterStars main office and the opening of a Moscow branch office at the end of
2003. Depreciation and amortization.Fixed telephony depreciation and
amortization expense increased by $0.8 million to $5.7 million for the three
months ended September 30, 2004 as compared to $4.9 million for the three
months ended September 30, 2003. 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 prior year. 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 was comprised of Ayety, a cable television
provider in Tbilisi, Georgia. Effective June 30, 2004, until certain
governance issues are resolved, the Company no longer accounts for its
ownership interest in Ayety following the consolidation method of accounting,
but follows the equity method of accounting. OTHER CONSOLIDATED RESULTS Other consolidated results include the activities of the corporate
headquarters, which relate to executive, administrative, logistical and
business venture support activities. Selling, general and administrative.Selling, general and
administrative expenses at the corporate level decreased from $6.0 million in
the three months ended September 30, 2003 to $3.1 million for the three months
ended September 30, 2004. The significant components of corporate selling, general and
administrative expenses for the three months ended September 30, 2004 and 2003
are as follows (in thousands): 2004
    
    2003Personnel related costs
    
    $
    1,158
    
    
    $
    2,263Professional services
    
    
    1,250
    
    
    
    2,403Office related expenses and insurance
    
    
    252
    
    
    
    573Restructuring related professional services
    
    
    
    
    
    
    117Other expenses
    
    
    426
    
    
    
    626Total
    
    $
    3,086
    
    
    $
    5,982
 The significant reduction in selling, general and administrative expenses,
on a period-over-period basis, is attributable to Companys initiatives to
reduce its corporate overhead burn-rate. The reduction in personnel related
costs, on a period-over-period basis, is due to the Companys actions to
substantially down-size the Companys corporate headquarters personnel
beginning in the first quarter of 2003. The reduction in restructuring and
related professional services costs, on a period-over-period basis, is
attributable to the Companys decision to cease using professional advisors for
its restructuring related initiatives in the beginning of the third quarter of
2003. The reduction in professional services costs, on a period-over-period
basis, is principally attributable to reduced legal fees. The decrease in
office related expenses and insurance is primarily due to overall lower office
expenses such as rent and utilities. Equity in income of investment in unconsolidated investees.Equity in
income of unconsolidated investees increased by $3.2 million to income of $6.8
million for the three months ended September 30, 2004 as compared to $3.6
million for the three months ended September 30, 2003. Interest expense, net.Interest expense remained consistent at $4.1
million for the three months ended September 30, 2004 and 2003. Gain on disposition of businesses.On September 24, 2003, the Company
sold its interest in Tyumenruskom and recognized a gain of $2.6 million.
Additionally, on August 1, 2003, the Company sold its interests in Baltcom TV
and recognized a gain of $9.3 million. 50




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##### Table of Contents



Minority interest.Minority interest represents the allocation of
income and losses by majority owned subsidiaries and business ventures to its
minority ownership interest. Minority interest increased by $0.9 million to
$3.2 million for the three months ended September 30, 2004 as compared to $2.3
million for the three months ended September 30, 2003. The minority interest
amount principally relates to PeterStars and Telcell Wirelesss business
operations. Telcell Wireless is a 70% owned holding company, which in turn
holds a 49% ownership in Magticom. Income tax expense.Income tax expense decreased by $0.6 million to
$1.2 million for the three months ended September 30, 2004 as compared to $1.8
million for the three months ended September 30, 2003. The income tax expense
in 2003 and 2002 is principally from foreign taxes on PeterStars operations. Income (loss) from discontinued components.Income from discontinued
components was $1.0 million for the three months ended September 30, 2004 as
compared to a loss of $1.6 million for the three months ended September 30,
2003. In addition to the net loss from the operations of the discontinued
ventures of $0.3 million in 2004 and the net loss of $1.8 million in 2003, as
further discussed in the section titled Results of Discontinued Components,
the Company recognized a preliminary gain of $1.2 million on the disposition of
its wholly-owned radio business unit, Metromedia International Inc. (MII) in
2004. UNCONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2004 COMPARED TO THE UNCONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2003 Fixed Telephony Unconsolidated fixed telephony is comprised of the Companys 30% minority
ownership interest in Telecom Georgia, which is an international and long
distance telephony provider in the Republic of Georgia. Since the Companys
U.S. GAAP investment in Telecom Georgia is zero and the Company has no
obligation to fund its 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. Wireless Telephony Unconsolidated wireless telephony is comprised of Magticom in Tbilisi,
Georgia and Tyumenruskom in Tyumen, Russia. 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.Revenues at Magticom increased by $7.1 million (34%) to $27.6
million for the three months ended September 30, 2004 compared to $20.5 million
for the three months ended September 30, 2003. This increase is driven by
subscriber growth, and an increase in domestic and international traffic,
interconnection and value added services. The three-month average subscribers
were 365 thousand at September 30, 2004 compared to 307 thousand at September
30, 2003, an increase of 19%. On a comparable currency basis, revenue growth
period over period was 16%.
Therefore, a portion of revenue growth was attributed to favorable foreign
exchange fluctuation. In addition, minutes of use growth was 21%. Magticoms forecasted growth rate, when compared to prior periods will be
favorably impacted by a change in a contractual arrangement and subsequent
accounting treatment as related to an interconnect arrangement with another
mobile telephone service provider in the Republic of Georgia. Effective
October 1, 2004, the Company will process an invoice, on a monthly basis, to
the mobile telephone service provider based on its termination of traffic on
the Companys telecommunication network. Prior to October 1, 2004, the
Companys arrangement with the mobile telephone service provider provided that
the termination of traffic on each others network would be at no cost, unless
certain net traffic volume thresholds were exceeded. Gross margin.Gross margin at Magticom increased by $6.3 million (36%) to
$24.1 million for the three months ended September 30, 2004 as compared to
$17.8 million for the three months ended September 30, 2003. Total gross
margin dollars increased mostly due to the strong increase in revenue. Gross
margin as a percentage of revenue increased a percentage point to 87% in 2004
due to higher network utilization. The comparable currency basis
margins experienced a similar 1% increase as well. As a result, the overall fixed costs of
services as a percentage of revenue has decreased. In addition, interconnection
revenue outpaced interconnection costs. Magticoms position as a market leader
has allowed it to maintain its margins. Magticom does not anticipate a
significant change in its future period gross margins as a result of the change
in a contractual arrangement and subsequent accounting treatment as related to
an interconnect arrangement with another mobile telephone service provider in
the Republic of Georgia, since the favorable revenue growth will be principally
offset by an unfavorable increase in the Companys cost of sales for its
termination of traffic on the other mobile telephone service providers
telecommunications network. 51




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Selling, general and administrative.The significant components of
selling, general and administrative expenses for Magticom for the three months
ended September 30, 2004 and 2003 are as follows (in thousands): 2004
    
    2003Personnel related expenses
    
    $
    1,557
    
    
    $
    977Taxes other than income
    
    
    600
    
    
    
    829Marketing expenses
    
    
    517
    
    
    
    617Other expenses
    
    
    150
    
    
    
    268TOTAL
    
    $
    2,824
    
    
    $
    2,691
 The increase in selling, general and administrative expenses is primarily
due to an increase in personnel costs of $0.6 million due to a 15% increase in
overall headcount at Magticom during 2004 and wage increases provided to
employees effective January 2004. The increase in personnel related costs was
partially offset by lower other taxes during comparable periods due to the
elimination of entrepreneur and road taxes and by lower marketing expenses due
to a reduction in the quantity of quarterly magazines printed. Depreciation and amortization.Magticoms depreciation and amortization
expense increased by $0.3 million (7%) from $3.1 for the three months ended
September 30, 2003 to $3.4 million for the three months ended September 30,
2004. On a comparable currency basis, Magticoms depreciation
decreased by 8% due to fixed assets becoming fully depreciated. Such
decrease is offset by the appreciation of the Georgian Lori to the
U.S. dollar. Cable Television Unconsolidated cable television is comprised of the Companys 85%
ownership interest in Ayety, which prior to June 30, 2004 was accounted for
following the consolidation method of accounting. Since the Companys U.S.
GAAP investment in Ayety is zero and the Company has no obligation to fund its
operations, the Company does not deem Ayetys current financial performance to
be material. CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
COMPARED TO THE CONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 Fixed Telephony Revenues.Fixed telephony revenues increased by $5.4 million (11%) to
$56.5 million for the nine months ended September 30, 2004 as compared to $51.1
million for the nine months ended September 30, 2003. This growth in year-over-year revenues is driven by a $2.7 million (23%)
increase in data and Internet services, a $2.1 million (8%) increase in
business fixed revenues and a $0.3 million increase in regulated Vasiliesvsky
Island residential telephony. In addition, PGTS, which was acquired on April
27, 2004, contributed incremental revenue of $1.6 million during the nine
months ended September 30, 2004. Such increases were partially offset by a $1.0
million decrease in transit carrier revenues and a $0.2 million decrease in
equipment sales. The increase in data and Internet services is principally due to the
growing demand for leased lines and dial up services within the St. Petersburg
market. Management believes that PeterStar has increased its share of the St.
Petersburg Internet services market. Further, management expects that it will
continue to experience revenue growth for its data and Internet product
portfolio; however, the rate of growth will most likely decline due to
competitive pressures. The increase in business fixed revenues was principally due to PeterStars
efforts to market its highspeed digital fiber network, in lieu of traditional
copper telephone infrastructure, to its business customers. These marketing
efforts have also resulted in 92% of new connections for the nine months ended
September 30, 2004 utilizing PeterStars infrastructure versus 84% of new
connections for the nine months ended September 30, 2003. Management
anticipates that such connections will continue to remain at such proportionate
levels. As a result, PeterStar has effectively increased its customer base for
other high band-width intensive products. Vasilievsky Island represents an area of St. Petersburg where PeterStar
provides principally residential telephony services. The revenue increase at
Vasilisevsky Island was principally due to an increase in the fixed government
regulated tariffs during 2003. Transit carrier revenues are mainly an
opportunity based revenue stream and management does not currently anticipate
revenue growth in future periods. Gross margin.Fixed telephony gross margin increased by $3.7 million
(11%) to $37.9 million for the nine months ended September 30, 2004 as compared
to $34.2 million for the nine months ended September 30, 2003. Fixed telephony
gross margin as a percentage of revenues remained flat at 67% for the nine
months ended September 30, 2004 and 2003. 52




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The trend in the gross margin is primarily due to better utilization of
the PeterStar telecommunications network and reduction of lower margin transit
carrier revenues on a year-over-year basis. In addition, the revenues at PGTS
are at higher margins than those historically recognized at PeterStar. Such
increases in the margin percentages were fully offset by lower margins on long
distance traffic, which is traditionally low margin. Even though long distance
traffic volume is increasing, the margin percentages are contracting due to
competitive pressures on tariffs charged to customers. Furthermore, PeterStars
interconnection costs have also increased, which is another factor that has
caused PeterStars gross margin percentage to decline. As discussed previously,
PeterStar has had success in marketing the use of its digital fiber network to
its customer base, which management expects will halt the erosion of its gross
margin in the short-term as PeterStar should be able to reduce its payments of
third-party access fees associated with its historical reliance upon leased
copper line telephone infrastructure. Selling, general and administrative.Fixed telephony selling, general
and administrative expenses increased by $0.8 million (7%) to $11.5 million for
the nine months ended September 30, 2004 as compared to $10.7 million for the
nine months ended September 30, 2003. The significant components of selling, general and administrative expenses
for PeterStar for the nine months ended September 30, 2004 and 2003 are as
follows (in thousands): 2004
    
    2003Personnel related costs
    
    $
    5,098
    
    
    $
    4,231Office related costs
    
    
    3,431
    
    
    
    2,528Marketing expenses
    
    
    1,034
    
    
    
    737Taxes other than income
    
    
    610
    
    
    
    828Professional services
    
    
    568
    
    
    
    449Bad debt expense
    
    
    43
    
    
    
    697Other expenses
    
    
    703
    
    
    
    1,222Total
    
    $
    11,487
    
    
    $
    10,692
 Selling general and administrative costs increased on a year-over-year
basis due to the inclusion of PGTS selling, general and administrative expenses
of $1.0 million, salary raises to existing personnel of $0.2 million, $0.1
million of additional personnel costs due to headcount growth and higher office
costs due to the addition of office space at PeterStars main office and the
opening of a Moscow branch office at the end of 2003. Such increases were
partially offset due to the Companys release of a provision of $0.1 million
during the nine months ended September 30, 2004. Such release was related to
the Companys periodic reassessment of collectibility of certain receivables.
During the nine months ended September 30, 2004, the Company determined that
certain receivables provided for as being uncollectible as of December 31, 2003
are expected to be collected. Accordingly, the Company released such provision
during the current period, which resulted in a favorable impact over prior year
of $0.7 million. Depreciation and amortization.Fixed telephony depreciation and
amortization expense increased by $2.4 million to $17.1 million for the nine
months ended September 30, 2004 as compared to $14.7 million for the nine
months ended September 30, 2003. 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 nine 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
nine months. With the exception of the allocated license amortization of $5.3 million,
management expects that such trend will continue in the foreseeable future.
During the fourth quarter of 2004, the allocated license will be fully
amortized and the Company projects that the amortization expense for the
allocated license will be $6.7 million in 2004. Cable Television Ayety had been accounted for following the consolidation method of
accounting through June 30, 2004. However, until certain governance issues are
resolved, the Company accounts for its ownership interest in Ayety following
the equity method of accounting. As such, any year-over-year analysis of Cable
Television results would be affected by this change in accounting. Furthermore,
the Company does not deem its Cable Television financial performance to be
material. OTHER CONSOLIDATED RESULTS Selling, general and administrative.Selling, general and
administrative expenses at the corporate level decreased from $23.4 million in
the nine months ended September 30, 2003 to $9.4 million for the nine months
ended September 30, 2004. 53




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The significant components of corporate selling, general and
administrative expenses for the nine months ended September 30, 2004 and 2003
are as follows (in thousands): 2004
    
    2003Personnel related costs
    
    $
    3,591
    
    
    $
    9,493Professional services
    
    
    3,005
    
    
    
    7,282Office related expenses and insurance
    
    
    1,505
    
    
    
    2,003Restructuring related professional services
    
    
    
    
    
    
    2,400Other expenses
    
    
    1,286
    
    
    
    2,203Total
    
    $
    9,387
    
    
    $
    23,381
 The significant reduction in selling, general and administrative expenses,
on a period-over-period basis, is attributable to Companys initiatives to
reduce its corporate overhead burn-rate. The reduction in personnel related
costs, on a period-over-period basis, are due to the Companys actions to
substantially down-size the Companys corporate headquarters personnel
beginning in the first quarter of 2003. The reduction in restructuring and
related professional services costs, on a period-over-period basis, is
attributable to the Companys decision to cease using professional advisors for
its restructuring related initiatives in the beginning of the third quarter of
2003. The reduction in professional services costs, on a period-over-period
basis, is principally attributable to reduced legal fees. The reduction in
other expenses primarily reflects a decrease in travel and other related
expenses due to the reduced headcount. Equity in income of investment in unconsolidated investees.Equity in
income of and write-down of investment in unconsolidated investees increased by
$6.4 million to $16.8 million for the nine months ended September 30, 2004 as
compared to $10.4 million for the nine months ended September 30, 2003. Interest expense, net.Interest expense decreased by $1.8 million to
$12.0 million for the nine months ended September 30, 2004 as compared to $13.8
million for the nine months ended September 30, 2003. The decrease is
principally due to the reduction of outstanding Senior Notes. Gain on retirement of debt.On April 24, 2003, the Company completed an
exchange with Adamant of certain business ventures for $58.6 million of the
Companys Senior Notes. The Company recognized a gain of $24.6 million related
to the early extinguishment of the exchanged Senior Notes. Gain on disposition of businesses.On September 24, 2003, the Company
sold its interest in Tyumenrusrom and recognized a gain of $2.6 million.
Additionally, on August 1, 2003, the Company sold its interests in Baltcom TV
and recognized a gain of $9.3 million. Minority interest.Minority interest represents the allocation of
income and losses by the Companys majority owned subsidiaries and business
ventures to its minority ownership interest. Minority interest increased by
$1.0 million to $7.3 million for the nine months ended September 30, 2004 as
compared to $6.3 million for the nine months ended September 30, 2003. The
minority interest amount principally relates to PeterStars and Telcell
Wirelesss operations. Telcell Wireless is a 70% owned holding company, which
in turn holds a 49% investment in Magticom. Income tax expense.Income tax expense decreased by $0.2 million to
$5.0 million for the nine months ended September 30, 2004 as compared to $5.2
million for the nine months ended September 30, 2003. The income tax expense in
2004 and 2003 is principally from foreign income taxes on PeterStars
operations. Income from discontinued components.Income from discontinued components
was $7.8 million for the nine months ended September 30, 2004 as compared to
income of $8.3 million of the nine months ended September 30, 2003. In addition
to the net loss from the operations of the discontinued ventures of $1.1
million in 2004 and net loss of $2.9 million in 2003, as further discussed in
the section titled Results of Discontinued Components, the Company recognized
gains on the disposition of MII (preliminary), Radio Skonto, ATK and Romsat of
$1.2 million (preliminary), $0.3 million, $0.7 million and $5.8 million,
respectively, in the nine months ended September 30, 2004. In addition, during
2004, the Company recognized a gain of $0.5 million related to the settlement
of remaining severance obligations and other liabilities of discontinued
components. During the nine months ended September 30, 2003, the Company
recognized gains of $2.9 million, $7.0 million and $0.7 million related to the
disposition of Technocom, the disposition of various business ventures in
connection with the Adamant exchange and the final settlement related to the
sale of Snapper, respectively. In addition, during 2003, the Company recognized
income from the cumulative effect of a change in accounting principle related
to the financial results of discontinued businesses historically reported on a
three-month lag. Cumulative effect of a change in accounting principle.The cumulative
effect of a change in accounting principle of $2.0 million for the nine months
ended September 30, 2003 represents the effect of the Company changing its
accounting policy to bring certain business ventures off of a three-month lag
to a real time basis. 54




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UNCONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2004 COMPARED TO THE UNCONSOLIDATED RESULTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2003 Fixed Telephony Unconsolidated fixed telephony is comprised of the Companys 30% minority
ownership interest in Telecom Georgia, which is an international and long
distance telephony provider in the Republic of Georgia. Since the Companys
U.S. GAAP investment is $0 and as there is no obligation to fund operations,
the Company does not record any share of the losses for Telecom Georgia.
Therefore, the Company does not deem Telecom Georgias current financial
performance to be material. During the nine months ended September 30, 2003, fixed telephony was also
comprised of Comstar, MTR Svyaz and Teleport-TP. The Company disposed of its
interests in Comstar on April 24, 2003 and its interests in MTR Svyaz and
Teleport-TP on June 25, 2003. Wireless Telephony Unconsolidated wireless telephony is comprised of Magticom in Tbilisi,
Georgia and Tyumenruskom in Tyumen, Russia. 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 $17.8 million (33%)
to $71.5 million for the nine months ended September 30, 2004 as compared to
$53.7 million for the nine months ended September 30, 2003. This growth in
revenues is primarily attributable to Magticom, partially offset by the sale of
Tyumenruskom. Revenues at Magticom increased by $19.7 million (38%) to $71.5 million for
the nine months ended September 30, 2004 compared to $51.8 million for the nine
months ended September 30, 2003. This increase is driven by subscriber growth,
and an increase in domestic and international traffic, interconnection and
value added services. The nine-month average subscribers were 356 thousand at
September 30, 2004 compared to 281 thousand at September 30, 2003, an increase
of 27%. On a comparable currency basis, revenue growth period over
period was 25%. Therefore, a portion of
revenue growth was attributed to favorable foreign exchange
fluctuation. In addition, minutes of use growth was 28%. Magticoms forecasted growth rate, when compared to prior periods will be
favorably impacted by a change in a contractual arrangement and subsequent
accounting treatment as related to an interconnect arrangement with another
mobile telephone service provider in the Republic of Georgia. Effective
October 1, 2004, the Company will process an invoice, on a monthly basis, to
the mobile telephone service provider based on its termination of traffic on
the Companys telecommunication network. Prior to October 1, 2004, the
Companys arrangement with the mobile telephone service provider provided that
the termination of traffic on each others network would be at no cost, unless
certain net traffic volume thresholds were met. Tyumenruskom, which was sold in September 2003, contributed revenues of
$1.9 million for the nine months ended September 30, 2003. Gross margin.Wireless telephony gross margin increased by $16.6
million (36%) to $62.4 million for the nine months ended September 30, 2004 as
compared to $45.8 million for the nine months ended September 30, 2003. This
increase is due primarily to the increase in gross margin at Magticom. Gross margin at Magticom increased by $18.1 million (41%) to $62.4 million
for the nine months ended September 30, 2004 as compared to $44.3 million for
the nine months ended September 30, 2003. Gross margin dollars increased due
the strong increase in revenue in the comparable periods. The gross margin as a
percentage of revenue increased a percentage point from 86% for the nine months
ended September 30, 2003 to 87% for the nine months ended September 30, 2004
due to higher network utilization. The comparable currency basis
margins experienced a similar 1% increase as well. As a result, the overall fixed costs of
services as a percentage of revenue has decreased. In addition, interconnection
revenue outpaced interconnection costs. Magticom does not anticipate a
significant change in its future period gross margins as a result of the change
in a contractual arrangement and subsequent accounting treatment as related to
an interconnect arrangement with another mobile telephone service provider in
the Republic of Georgia, since the favorable revenue growth will be principally
offset by an unfavorable increase in the Companys cost of sales for its
termination of traffic on the other mobile telephone service providers
telecommunications network. Tyumenruskom contributed gross margin of $1.5 million for the nine months
ended September 30, 2003. Selling, general and administrative.Wireless telephony selling,
general and administrative expenses increased by 55




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$1.0 million (13%) to $7.9 million for the nine months ended September 30,
2004 as compared to $6.9 million for the nine months ended September 30, 2003. The significant components of selling, general and administrative expenses
for Magticom for the nine months ended September 30, 2004 and 2003 are as
follows (in thousands): 2004
    
    2003Personnel related expenses
    
    $
    4,114
    
    
    $
    2,797Taxes other than income
    
    
    2,204
    
    
    
    2,132Marketing expenses
    
    
    1,052
    
    
    
    1,069Insurance
    
    
    225
    
    
    
    224Bad debt expense (recovery)
    
    
    24
    
    
    
    (299
    )Other expenses
    
    
    244
    
    
    
    438TOTAL
    
    $
    7,863
    
    
    $
    6,361
 The increase in selling, general and administrative expenses is primarily
due to an increase in personnel costs of $1.3 million due to a 15% increase in
overall headcount at Magticom during 2004 and wage increases provided to
employees effective January 2004. In addition, an increase in bad debt expense
of $0.3 million is due to a recovery that occurred in 2003 that did not occur
in 2004. Depreciation and amortization.Wireless telephony depreciation and
amortization expense increased by $0.2 million to $10.5 million for the nine
months ended September 30, 2004 as compared to $10.3 million for the nine
months ended September 30, 2003. Magticoms depreciation and amortization expense increased by $1.0 million
(10%) from $9.5 million for the nine months ended September 30, 2003 to $10.5
million for the nine months ended September 30, 2004. On a
comparable currency basis, Magticom's depreciation remained flat.
However, due to the appreciation of the Georgian Lari to the U.S.
dollar, depreciation increased accordingly. Tyumenruskom incurred depreciation and amortization expense of $0.8
million for the nine months ended September 30, 2003. Cable Television Unconsolidated cable television in 2004 is comprised of the Companys 50%
ownership interest in Cosmos TV, a cable television provider in Minsk, Belarus
and its 85% ownership interest in Ayety, which prior to June 30, 2004 was
accounted for following the consolidation method of accounting. The Company
disposed of its interest in Cosmos TV in March 2004. Further, since the
Companys U.S. GAAP investment in Ayety is zero and the Company has no
obligation to fund its operations, the Company does not deem Ayetys current
financial performance to be material. Unconsolidated cable television in 2003 was comprised of the Companys
ownership interest in Cosmos TV, 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 and its interest in Teleplus in November 2003. DISCONTINUED BUSINESS COMPONENTS Radio Businesses On April 24, 2003 the Company completed an exchange with 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. As part of
this transaction, the Company conveyed to Adamant its ownership interests in
its Russian radio stationsZAO SAC in Moscow and ZAO Radio Katusha in St.
Petersburg. In addition, on May 5, 2003, the Company completed the sale of its
ownership interests in Radio Georgia. Further, on September 30, 2003, the Board
of Directors formally approved managements plan to dispose of the remaining
non-core Radio businesses. As a result, on April 28, 2004, the Company disposed
of its interests in Radio Skonto and on September 7, 2004, the Company sold all
but one of its remaining radio businesses. 56




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The combined results of operations of the discontinued radio businesses up
to their respective dates of sale are as follows (in thousands): Nine months ended September 30,2004
    
    2003Revenues
    
    $
    10,012
    
    
    $
    9,590Operating expenses
    
    
    10,946
    
    
    
    11,968Operating loss
    
    $
    (934
    )
    
    $
    (2,378
    )Net loss
    
    $
    (1,237
    )
    
    $
    (2,028
    )
 Revenues.Radio broadcasting revenues increased by $0.4 million to $10.0
million for the nine months ended September 30, 2004 as compared to $9.6
million for the nine months ended September 30, 2003. Revenues in Metroradio Finland increased by $0.7 million, primarily as a
result of two acquired radio stations as well as the launch of an in-house
sales house. The new stations, Suomi Plus and Classic Radio, were launched in
May 2003 and November 2003, respectively, and the sales house was established
from October 2003. The sales house enables the Company to better serve
advertisers needs by selling tailor-made advertising on individual stations
and/or clusters of stations. Revenues at Juventus Radio decreased by $0.3 million as a consequence of
increased rate competition by national competitors and a general decline in the
national radio advertising market. In addition, one of the ventures key
clients temporarily halted advertising during 2004 due to a change in the
clients ownership. Revenues at Country Radio decreased by $0.2 million for the nine months
ended September 30, 2004 due to a change in the sales arrangement at the sales
house, coupled with a shortfall in direct revenues. The annual agency sales
agreement for 2004 is based on a fixed guarantee instead of a minimum
guarantee, as was the case in 2003. The fixed guarantee for the year will
result in consistent sales on an annual basis. Direct sales have decreased year
on year primarily due to rate competition. Radio Skonto contributed incremental revenue of $0.2 million for the nine
months ended September 30, 2003 as compared to the nine months ended September
30, 2004. Operating expenses.Radio broadcasting operating expenses decreased by
$1.0 million to $11.0 million for the nine months ended September 30, 2004 as
compared to $12.0 million for the nine months ended September 30, 2003. The decrease in operating expenses of $1.4 million at Juventus was
primarily due to the successful outcome of Juventus negotiations with the
Hungarian media regulators to reduce broadcast license fees from July 2003, as
well as cost savings in other expenses resulting from restructuring and
streamlining operations at Juventus radio broadcasting. Radio Skonto incurred incremental operating expenses of $0.2 million for
the nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2004. Such decreases were partially offset by a $0.8 million increase at
Metroradio Finland, due to increased operational as well as sales-related
expenses due to the launch of the two additional stations. In addition to an
increase in sales-related expenses including sales commissions and royalties,
operating expenses for salaries, advertising, transmitter rent and programming
increased as a result of operating two additional stations in the 2004 period. Cable Businesses 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 Aytey TV. As a result, the Company disposed of its interests in
Sun TV, Romsat and ATK on November 12, 2003, March 4, 2004 and March 26, 2004,
respectively. The combined results of operations of the discontinued Cable television
businesses up to their respective dates of sale are as follows (in thousands): Nine months ended September 30,2004
    
    2003Revenues
    
    $
    2,080
    
    
    $
    8,730Cost of services
    
    
    450
    
    
    
    1,938Operating expenses
    
    
    1,470
    
    
    
    7,570Operating income (loss)
    
    $
    160
    
    
    $
    (778
    )Net income (loss)
    
    $
    155
    
    
    $
    (905
    )
 Revenues.Cable television revenues decreased by $6.6 million to $2.1
million for the nine months ended September 30, 2004 as compared to $8.7
million for the nine months ended September 30, 2003. Sun TV contributed
revenue of $1.1 million for the nine 57




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months ended September 30, 2003 and Romsat and ATK contributed incremental
revenue of $3.8 million and $1.0 million, respectively, for the nine months
ended September 30, 2003 as compared to the same period in 2004. Gross margin. Cable television gross margin decreased by $5.2 million to
$1.6 million for the nine months ended September 30, 2004 as compared to $6.8
million for the nine months ended September 30, 2003. Sun TV contributed gross
margin of $0.9 million for the nine months ended September 30, 2003 and Romsat
and ATK contributed incremental gross margin of $3.0 million and $0.8 million,
respectively, for the nine months ended September 30, 2003 as compared to the
same period in 2004. Operating expenses. Cable television operating expenses decreased by $6.1
million to $1.5 million for the nine months ended September 30, 2004 as
compared to $7.6 million for the nine months ended September 30, 2003. Sun TV
incurred operating expenses of $1.4 million for the nine months ended September
30, 2003 and Romsat and ATK incurred incremental operating expenses of $2.7
million and $1.7 million, respectively, for the nine months ended September 30,
2003 as compared to the same period in 2004. Critical Accounting Policies The Company reviews all significant estimates affecting its consolidated
financial statements on a recurring basis and records the effect of any
necessary adjustment prior to their publication. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of financial
statements; accordingly, it is possible that actual results could differ from
those estimates and changes to estimates could occur in the near term. The
preparation of the Companys financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of the contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Estimates and judgments are used when accounting
for the allowance for doubtful accounts, inventory obsolescence, long-lived
assets, intangible assets, recognition of revenue, assessing control over
operations of business ventures, self-insured workers compensation and product
liability claims, depreciation and amortization, employee benefit plans, income
taxes, 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 was to
deteriorate, resulting in an impairment of their ability to make payments,
or customers otherwise do not pay, additional allowances may be required.The Company holds a minority interest in Magticom. 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, weighting various possible
scenarios for managements assessment of probability of occurrence and
discounting the probability-weighted cash flows at an appropriate rate.The Company assesses its level of control over the operating and financial
decisions of its business ventures and subsidiaries 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. 
 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. 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 58




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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 countries that the Companys business ventures operate, the currencies
(the Russian Ruble and Georgian Lari) are non-convertible outside the country,
so the Companys ability to hedge against devaluation by converting to other
currencies is significantly limited or cost prohibitive. In these countries, a
sophisticated or reliable market for the trade of derivative instruments in
order to allow the Company to hedge foreign currency risk does not currently
exist. Accordingly, the Company seeks to maintain the minimal amount of foreign
currency on hand to reduce its exposure. However, the Companys ability to
minimize such amount is limited by the fact that certain expenses are
denominated in foreign currencies and the 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 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 nine months ended September 30,
2004, for example, would have resulted in a decrease to the Companys net
income of $0.5 million, with all other variables held constant. In addition,
Magticom which is 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. The following table provides information about our principal financial
instruments denominated in Russian Rubles and presents such information in U.S.
dollar equivalents (in thousands). The table summarizes information on
instruments that are sensitive to foreign currency exchange rates: September 30, 2004
    
    December 31, 2003CURRENT ASSETSCash and cash equivalents
    
    $
    584
    
    
    $
    1,233Accounts receivable, net
    
    
    4,697
    
    
    
    893Prepaids and other assets
    
    
    1,031
    
    
    
    447CURRENT LIABILITIESAccounts payable
    
    
    795
    
    
    
    Accrued expenses
    
    
    372
    
    
    
    206Closing foreign currency exchange rate
    
    
    29.22
    
    
    
    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 September 30, 2004 and
December 31, 2003 totaled $35.6 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. 59




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Special Note Regarding Forward-Looking Statements Any statements in this document about the Companys expectations, beliefs,
plans, objectives, assumptions or future events or performance are not
historical facts and are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements
are often but not always made through the use of words or phrases like
believes, expects, may, will, should or anticipates or the negative
of these words or phrases or other variations on these words or phrases or
comparable terminology, or by discussions of strategy that involves risks and
uncertainties. These forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the Companys actual results,
performance or achievements or industry results to be materially different from
any future results, performance or achievements expressed or implied by these
forward-looking statements. These risks, uncertainties and other factors
include, among others:  
    
    ability of the Company to complete the Proposed Merger;
    
    liquidity issues facing the Company, and the restructuring of the Company;
    
    obtaining the requisite consents for any proposed restructuring of the Company;
    
    general economic and business conditions, which will, among
other things, impact demand for the Companys products and services;
    
    industry capacity, which tends to increase during strong years of the business cycle;
    
    changes in public taste, industry trends and demographic changes;
    
    competition from other communications companies or companies
engaged in related businesses, which may affect the Companys ability
to enter into or acquire new businesses, or generate revenues;
    
    political, social and economic conditions and changes in laws,
rules and regulations or their administration or interpretation, in
Russia and the Republic of Georgia, including the effect of the new
law On Telecomminucations in Russia and the proposed changes to the
Tax Code in the Republic of Georgia, which may affect the Companys
results of operations;
    
    timely completion of construction projects for new systems for
the business ventures in which the Company has invested, which may
impact the costs of these projects;
    
    developing legal structures in Russia and the Republic of
Georgia, which may affect the Companys ability to enforce its legal
rights;
    
    cooperation of local partners in the Companys communications
investments in Russia and the Republic of Georgia, which may affect
the Companys results of operations;
    
    exchange rate fluctuations;
    
    license renewals for the Companys communications investments in Russia and the Republic of Georgia;
    
    the loss of any significant customers, or the deterioration of credit quality of the Companys customers;
    
    changes in business strategy or development plans;
    
    the quality of management;
    
    the availability of qualified personnel;
    
    changes in or the failure to comply with government regulation or actions of regulatory bodies, and
    
    other factors referenced in this document. 60




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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. The principal basis for the
Officers conclusion is attributable to the fact that the Company is a holding
company with shareholder interests in business ventures that conduct their
operations in Northwest Russia and the Republic of Georgia. Specific factors
contributing to this conclusion include:  
    
    The effective oversight by the Company of the business managers who
are responsible for managing the daily business matters of the
Companys business ventures, both consolidated and unconsolidated, may
be encumbered due to business practice common within the geographic
area of the business operations, the degree of the Companys historic
and current participation as a shareholder within the respective
businesses and resource constraints imposed by the Companys current
liquidity situation;
    
    The Company does not control and may be limited in its
participation in management of its unconsolidated business ventures.
Thus, its disclosure controls and procedures with respect to such
business ventures are necessarily more limited than those it maintains
with respect to its consolidated business ventures; and
    
    In addition, the Company has experienced, and may continue to
experience, difficulty and significant cost in the timely collection of
financial data with respect to certain of its business ventures. The
emerging market countries in which the Company operates lack standard
Western management, accounting, reporting and business operations
processes. As a result, the timely collection of financial data and
preparation of consolidated financial statements in accordance with
accounting standards generally accepted in the United States, based on
the books of account and corporate records of those business ventures,
has required significant resources of the Company. There were no changes during the third quarter ended September 30, 2004
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. The Company continues to use both financial and personnel resources to
improve its management, accounting, reporting and business operations
processes. However, the Companys liquidity has, and could continue to limit
managements ability to implement improvements to its management and
accounting, reporting and business operations processes. In addition, certain
structural complexities of the Companys business may impact the effectiveness
of disclosure controls and procedures and internal control over financial
reporting. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and may not be detected. 61




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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 matters described below: Commercial Dispute The Company is also involved in a commercial dispute with Mtatsminda the
owner of a 15% minority interest in Ayety. On June 2, 2004, Mtatsminda sent a letter to the Company in which it
addressed four issues. First, Mtatsminda requested that the Company cause Ayety
to renegotiate the terms pursuant to which Ayety is using 11 broadcast
frequencies which belong to Mtatsminda. Second, Mtatsminda alleges that the
Company has an obligation to pay property taxes on the buildings owned by an
affiliate of the Company in Tbilisi and that the Company has failed to meet
this obligation. Third, Mtatsminda disputes the amount of certain loans made by
the Company to Ayety. Fourth, Mtatsminda alleges that the Company may have
violated laws against bribery of foreign officials and possibly engaged in
other improper or illegal conduct. These issues were again raised by
Mtatsminda in a letter addressed to the Company, dated June 25, 2004. With respect to the broadcast frequencies, Ayety has been using the 11
frequencies under an agreement with Mtatsminda which recently expired. Ayety is
intending to enter into negotiations with Mtatsminda to secure continued
long-term use of these frequencies. The Company believes that the risk of
Mtatsminda withdrawing the right to use its frequencies is remote. With respect
to the property tax issue, the Company has investigated this allegation and it
believes that the amount of tax due, if any, is negligible and it has been
advised by outside legal counsel that the risk of a tax assessment is remote.
Further, the Company believes that the allegations related to the amount of the
loans made to Ayety are unfounded and intends to vigorously defend itself on
this issue. The Company believes that the fourth allegation is substantially similar
to those raised previously by certain Georgian individuals and described in
Note 12, Commitments and Contingencies  Georgian Matters. The Companys
Board of Directors authorized the Companys outside counsel to conduct an
independent inquiry into the allegations of possible improper or illegal
conduct made by the Georgian individuals. The investigation has been completed
and the results have been reported by the Companys outside counsel to the
Board of Directors of the Company. The investigation did not uncover any
specific factual support for the allegations regarding violations of laws
against bribery of foreign officials, including the Foreign Corrupt Practices
Act, or other alleged improper or illegal conduct. The Audit Committee of the
Companys Board of Directors has reviewed the June 2, 2004 letter sent by
Mtatsminda and believes that the allegations made with respect to violations of
laws and other improper or illegal conduct are substantially similar to those
previously investigated by the Companys outside counsel. For this reason, the
Audit Committee has determined not to re-open the investigation. At the request of Mtatsminda, the Company agreed to participate in a
meeting of Ayety shareholders on June 28, 2004. At that meeting, the Companys
intent was to address matters raised in Mtatsmindas letter to the Company
dated June 2, 2004 and to also address matters relative to the poor financial
performance of Ayety, including the Companys decision to remove and appoint a
new General Director of the business. However, at such meeting, Mtatsminda
notified the Company that in March 2003, a new charter of Ayety was prepared
and filed in the Georgian courts (which are responsible for company
registration in Georgia) (the New Charter). Mtatsminda represented that,
pursuant to the terms of the New Charter, unanimous shareholder approval is
required for certain key decisions, including the removal and appointment of a
new General Director; whereas previously only a 75% vote was required. Further,
at the meeting, Mtatsminda informed the Company that it would not vote for
the Companys proposal regarding the removal of Ayetys General Director. The
Company believes that the legality of the change to the New Charter are
questionable and can be disputed by the Company on the basis that the New
Charter was adopted in a manner that was not in compliance with applicable law.
However, since the New Charter has already been filed and accepted by the
Georgian courts, the New Charter is valid until successfully challenged. Mtatsminda did not present a registered copy of the New Charter at the
June 28, 2004 meeting of Ayety shareholders or subsequently, nor had the
Company previously received any such copy from Ayety. Nonetheless, the
Companys representatives concluded from that meeting that Mtatsminda had
secured practical control over Ayety; both by virtue of its claims with respect
to the New Charter and through its direct associations with the General
Director of Ayety. The Company is pursuing legal remedies with respect to the
New Charter and continues to seek removal of Ayetys General Director.
However, management has concluded that, based on these events, the Company does
not at present control the day-to-day business affairs of Ayety. Accordingly,
effective June 30, 2004, the Company no longer accounts for its ownership
interest in Ayety following the consolidation method of accounting but follows
the equity method of accounting. 62




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Mtatsminda Litigation On July 25, 2004, Mtatsminda filed a claim against International Telcell
SPS, Inc. (ITSPS), a subsidiary of the Company, Ayety and Zurab Chigogidze,
the General Director of Ayety, for damages in the amount of GEL 185,000 (US
$90,000), GEL 23,000 (US $13,000) and GEL 258,000 (US $130,000), respectively.
The claim was filed in the Mtatsminda District Court in Tbilisi, Republic of
Georgia. In its complaint, Mtatsminda alleges that it suffered damages because
Ayety TV had used its cash resources to make payments to ITSPS in repayment of
a credit facility between Ayety and ITSPS. Mtatsminda also claims that Ayety
has not authorized the credit facility. Mtatsminda further alleges that
Ayetys funds should have been used to make dividend payments to Mtatsminda.
On September 15, 2004, ITSPS filed a counterclaim stating that all of
Mtatsmindas claims are groundless. ITSPS also challenged Mtatsmindas
standing in the case due to expiration of the statute of limitations,
non-payment of court duty and other procedural matters. ITSPS is prepared to
defend its position in court. Based on the information available and due to
the relatively low amounts of damages claimed, the Company believes that these
matters will not result in any material adverse effect on the Companys
business, financial condition or results of operations. Campbell Litigation On March 31, 2003, Mr. James Campbell filed a complaint in the Circuit
Court of Walker County, Alabama against Turtle Shell, Inc., formerly known as
Snapper, Inc. (a wholly owned subsidiary of the Company) for damages related to
injuries allegedly sustained by him while operating a Snapper lawnmower. In
November 2002, the Company disposed of all assets and most liabilities of
Snapper, Inc. but retained certain liabilities, including any obligations that
may arise out of this litigation. Mr. Campbell died on July 14, 2003. In light
of Mr. Campbells death, his complaint was amended to include a wrongful death
claim and a claim of damages for any pain and suffering incurred by Mr.
Campbell from the time of injury until death. Mr. Campbells estate was
substituted as the plaintiff in this action. Also named as a defendant in this
case is Briggs & Stratton, the Company that manufactured the engine of the
lawnmower. On August 3, 2004, a settlement agreement was reached between the
estate of Mr. James Campbell and the other co-defendants, including the
Company, with respect to this litigation. All claims against the Company have
been released. Pension Benefit Guaranty Corporation In a letter dated August 6, 2004, the Company was informed by the Pension
Benefit Guaranty Corporation (the PBGC) that it does not intend to take any
action with respect to the matter addressed in the Companys June 23, 2003
notice to PBGC, as more fully described in Item 3. Legal Proceedings Report to
the Pension Benefit Guaranty Corporation, included within the Companys Annual
Report on Form 10-K for the fiscal year ended December 31, 2003. 
 Item 3. Defaults Upon Senior Securities (a)None (b) Preferred Stock The Company has authorized 70.0 million shares of preferred stock of which
4.1 million shares have been designated as Preferred Stock with a liquidation
preference of $50.00 per share, all of which were outstanding as of September
30, 2004 and December 31, 2003. Dividends on the Preferred Stock are cumulative from the date of issuance
and payable quarterly, in arrears. The Company may make any payments due on the
Preferred Stock, including dividend payments and redemptions (i) in cash; (ii)
through issuance of the Companys common stock or (iii) through a combination
thereof. Through March 15, 2001, the Company paid its quarterly dividends in cash.
The Company has elected not to declare a dividend for any quarterly dividend
periods ending after June 15, 2001. As of September 30, 2004, total dividends
in arrears on the Preferred Stock are $59.8 million. The dividend requirement
for the twelve months ending September 30, 2005 will be $19.8 million,
inclusive of the effects of compounding and assuming no payments of the
dividends. Except as described in this paragraph, the holders of the Preferred Stock
have no voting rights. In June 2004, the Company entered into the Board of
Director Nominee Agreement with certain holders of the Preferred Stock who

represented to the Company that they held discretionary authority (including
the power to vote) with regard to 2.4 million shares or approximately 58% of
the outstanding 4.1 million shares of Preferred Stock. Under the terms of the
Board of Director Nominee Agreement, the Participating Preferred Stock Holders
irrevocably waived the right to request a special meeting of holders of
Preferred Stock to elect directors or take any action to request such a
meeting; such waiver to remain effective until immediately after the next
annual meeting of the Companys stockholders is held. In consideration of this
waiver, Messrs. Gale and Henderson, who were identified by the Participating
Preferred Stock Holders as director candidates, were elected as Class III Directors by the Companys
Board of Directors. Their terms will expire at the Companys next annual
meeting of stockholders. At the next annual meeting, the holders of Preferred
Stock will have the 63




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right to vote separately as a class for the election of two directors. It
is expected that Messrs. Gale and Henderson will be nominated for election by
the holders of Preferred Stock to fill these two directorships. The execution of the Board of Director Nominee Agreement was the result of
several discussions, which began in late 2003, that the Company had with
several holders of the Companys Preferred Stock. According to the terms of the
Preferred Stock, in the event the Company did not make six (6) consecutive
dividend payments on the Preferred Stock, holders of 25% of the voting power of
the outstanding Preferred Stock became entitled to compel the Company to call a
special meeting of the holders of the Preferred Stock for the purpose of
electing two new directors. The Company believes that the Board of Director
Nominee Agreement was advantageous to the Company because it eliminated the
need to hold a special meeting, which would have been both time consuming and
expensive. 64




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Item 6. Exhibits ExhibitNumber
    
    DescriptionExhibits31.1*
    
    Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Filed herewith 65




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this 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 PresidentChief Financial Officer and TreasurerBy:
    
    /s/ B. DEAN ELLEDGEB. Dean ElledgeVice President andChief Accounting Officer
 Dated: December 7, 2004 66




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INDEX TO EXHIBITS Exhibits31.1*
    
    Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Filed herewith