UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTER ENDED JUNE 30, 2002
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-5706
METROMEDIA INTERNATIONAL GROUP, INC.
(Exact name of registrant, as specified in its charter)
| DELAWARE | 58-0971455 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
505 Park Avenue, 21st Floor, New York, New York 10022
(Address and zip code of principal executive offices)
(212) 527-3800
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES ý NO o
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF AUGUST 7, 2002 WAS 94,034,947.
METROMEDIA INTERNATIONAL GROUP, INC.
Index to
Quarterly Report on Form 10-Q
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Page |
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| PART I — FINANCIAL INFORMATION | |||
Item 1. Financial Statements (unaudited) |
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| Consolidated Condensed Statements of Operations | 2 | ||
| Consolidated Condensed Balance Sheets | 3 | ||
| Consolidated Condensed Statements of Cash Flows | 4 | ||
| Consolidated Condensed Statement of Stockholders' Equity and Comprehensive Loss | 5 | ||
| Notes to Consolidated Condensed Financial Statements | 6 | ||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
27 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
54 |
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| PART II — OTHER INFORMATION | |||
| Item 1. Legal Proceedings | 55 | ||
Item 4. Submission of Matters to a Vote of Security Holders |
56 |
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Item 6. Exhibits and Reports on Form 8-K |
57 |
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Signature |
58 |
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1
METROMEDIA INTERNATIONAL GROUP, INC.
Consolidated Condensed Statements of Operations
(in thousands, except per share amounts)
(unaudited)
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Three months ended June 30, |
Six months ended June 30, |
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2002 |
2001 |
2002 |
2001 |
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| Revenues: | ||||||||||||||
| Communications Group | $ | 26,908 | $ | 31,411 | $ | 60,906 | $ | 64,566 | ||||||
| Snapper | 50,339 | 45,073 | 81,878 | 97,011 | ||||||||||
| 77,247 | 76,484 | 142,784 | 161,577 | |||||||||||
| Cost and expenses: | ||||||||||||||
| Cost of sales and operating expenses — Communications Group | 5,865 | 9,840 | 17,446 | 21,009 | ||||||||||
| Cost of sales — Snapper | 34,354 | 28,755 | 55,704 | 62,891 | ||||||||||
| Selling, general and administrative | 36,456 | 32,790 | 69,662 | 67,033 | ||||||||||
| Depreciation and amortization | 8,414 | 15,908 | 17,491 | 31,666 | ||||||||||
| Asset impairment charge for consolidated business ventures | 862 | — | 862 | — | ||||||||||
| Operating loss | (8,704 | ) | (10,809 | ) | (18,381 | ) | (21,022 | ) | ||||||
| Other income (expense): | ||||||||||||||
| Interest expense | (7,345 | ) | (6,242 | ) | (13,271 | ) | (12,410 | ) | ||||||
| Interest income | 886 | 185 | 1,246 | 1,833 | ||||||||||
| Equity in losses of and write-down of investment in unconsolidated investees | (2,337 | ) | (4,096 | ) | (1,827 | ) | (10,604 | ) | ||||||
| Gain on disposition of business | 1,710 | — | 1,710 | — | ||||||||||
| Foreign currency gain (loss) | 91 | 448 | (376 | ) | 114 | |||||||||
| Other (expense) income | (186 | ) | 64 | 415 | 94 | |||||||||
| Loss before income tax expense, minority interest and the cumulative effect of a change in accounting principle | (15,885 | ) | (20,450 | ) | (30,484 | ) | (41,995 | ) | ||||||
| Income tax expense | (1,575 | ) | (1,997 | ) | (3,394 | ) | (4,335 | ) | ||||||
| Minority interest | (972 | ) | 21 | (1,729 | ) | (70 | ) | |||||||
| Loss from operations before the cumulative effect of a change in accounting principle | (18,432 | ) | (22,426 | ) | (35,607 | ) | (46,400 | ) | ||||||
| Cumulative effect of a change in accounting principle | — | — | — | (2,363 | ) | |||||||||
| Net loss | (18,432 | ) | (22,426 | ) | (35,607 | ) | (48,763 | ) | ||||||
| Cumulative convertible preferred stock dividend requirement | (3,752 | ) | (3,752 | ) | (7,504 | ) | (7,504 | ) | ||||||
| Net loss attributable to common stockholders | $ | (22,184 | ) | $ | (26,178 | ) | $ | (43,111 | ) | $ | (56,267 | ) | ||
| Weighted average number of common shares — Basic and diluted | 94,035 | 94,035 | 94,035 | 94,035 | ||||||||||
| Loss per common share — Basic and Diluted: | ||||||||||||||
| Continuing operations | $ | (0.24 | ) | $ | (0.28 | ) | $ | (0.46 | ) | $ | (0.57 | ) | ||
| Cumulative effect of a change in accounting principle | — | — | — | (0.03 | ) | |||||||||
| Net loss attributable to common stockholders | $ | (0.24 | ) | $ | (0.28 | ) | $ | (0.46 | ) | $ | (0.60 | ) | ||
See accompanying notes to consolidated condensed financial statements.
2
METROMEDIA INTERNATIONAL GROUP, INC.
Consolidated Condensed Balance Sheets
(in thousands, except share amounts)
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June 30, 2002 |
December 31, 2001 |
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(unaudited) |
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| ASSETS: | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents (Note 1) | $ | 24,368 | $ | 30,252 | ||||||
| Accounts receivable, net | 31,300 | 35,388 | ||||||||
| Inventories | 50,933 | 63,778 | ||||||||
| Prepaid expenses and other assets | 8,651 | 15,157 | ||||||||
| Total current assets | 115,252 | 144,575 | ||||||||
| Investments in and advances to business ventures | 102,998 | 104,239 | ||||||||
| Property, plant and equipment, net | 118,403 | 125,885 | ||||||||
| Goodwill | 54,648 | 54,770 | ||||||||
| Intangible assets, net | 26,968 | 36,194 | ||||||||
| Other assets | 4,611 | 4,058 | ||||||||
| Total assets | $ | 422,880 | $ | 469,721 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY: | ||||||||||
| Current liabilities: | ||||||||||
| Accounts payable | $ | 25,031 | $ | 19,558 | ||||||
| Accrued expenses | 63,610 | 67,634 | ||||||||
| Current portion of long-term debt | 32,436 | 47,772 | ||||||||
| Total current liabilities | 121,077 | 134,964 | ||||||||
| Long-term debt, less current portion | 211,484 | 206,110 | ||||||||
| Other long-term liabilities | 5,922 | 6,642 | ||||||||
| Total liabilities | 338,483 | 347,716 | ||||||||
| Minority interest | 29,576 | 31,229 | ||||||||
| Commitments and contingencies | ||||||||||
| Stockholders' equity: | ||||||||||
| 71/4% Cumulative Convertible Preferred Stock | 207,000 | 207,000 | ||||||||
| Common Stock, $1.00 par value, authorized 400.0 million shares, issued and outstanding 94.0 million shares | 94,035 | 94,035 | ||||||||
| Paid-in surplus | 1,102,769 | 1,102,769 | ||||||||
| Accumulated deficit | (1,341,486 | ) | (1,305,879 | ) | ||||||
| Accumulated other comprehensive loss | (7,497 | ) | (7,149 | ) | ||||||
| Total stockholders' equity | 54,821 | 90,776 | ||||||||
| Total liabilities and stockholders' equity | $ | 422,880 | $ | 469,721 | ||||||
See accompanying notes to consolidated condensed financial statements.
3
METROMEDIA INTERNATIONAL GROUP, INC.
Consolidated Condensed Statements of Cash Flows
(in thousands)
(unaudited)
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Six months ended June 30, |
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2002 |
2001 |
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| Operating activities: | ||||||||||
| Net loss | $ | (35,607 | ) | $ | (48,763 | ) | ||||
| Items not requiring or providing cash: | ||||||||||
| Depreciation and amortization | 17,491 | 31,666 | ||||||||
| Accretion of debt discount | 5,253 | 9,927 | ||||||||
| Equity in losses of and write-down of investment in unconsolidated investees | 1,827 | 10,604 | ||||||||
| Minority interest | 1,729 | 70 | ||||||||
| Gain on disposal of business | (1,710 | ) | — | |||||||
| Asset impairment charge for consolidated business ventures | 862 | — | ||||||||
| Cumulative effect of a change in accounting principle | — | 2,363 | ||||||||
| Other | 458 | (277 | ) | |||||||
| Changes in: | ||||||||||
| Inventories | 12,844 | (1,895 | ) | |||||||
| Accounts payable and accrued expenses | 11,926 | (19,119 | ) | |||||||
| Other assets and liabilities | (3,342 | ) | 1,306 | |||||||
| Accounts receivable | (1,918 | ) | 3,805 | |||||||
| Cash provided by (used in) operating activities | 9,813 | (10,313 | ) | |||||||
| Investing activities: | ||||||||||
| Proceeds on disposal of business, net | 8,544 | — | ||||||||
| Additions to property, plant and equipment | (6,242 | ) | (9,919 | ) | ||||||
| Distributions from business ventures | 1,575 | 1,462 | ||||||||
| Investments in and advances to business ventures | (976 | ) | (2,657 | ) | ||||||
| Cash paid for acquisitions and additional equity in subsidiaries | — | (3,558 | ) | |||||||
| Cash provided by (used) in investing activities | 2,901 | (14,672 | ) | |||||||
| Financing activities: | ||||||||||
| Net borrowings (payments) on line of credit | (14,310 | ) | 3,024 | |||||||
| Dividends paid to minority interest | (3,382 | ) | — | |||||||
| Payments on debt and capital lease obligations | (906 | ) | (3,225 | ) | ||||||
| Preferred stock dividends paid | — | (3,752 | ) | |||||||
| Cash used in financing activities | (18,598 | ) | (3,953 | ) | ||||||
| Net decrease in cash and cash equivalents | (5,884 | ) | (28,938 | ) | ||||||
| Cash and cash equivalents at beginning of period | 30,252 | 80,236 | ||||||||
| Cash and cash equivalents at end of period | $ | 24,368 | $ | 51,298 | ||||||
See accompanying notes to consolidated condensed financial statements.
4
METROMEDIA INTERNATIONAL GROUP, INC.
Consolidated Condensed Statement of Stockholders' Equity and Comprehensive Loss
(in thousands)
(unaudited)
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71/4% Cumulative Convertible Preferred Stock |
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Common Stock |
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Accumulated Other Comprehensive Income (Loss) |
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Number of Shares |
Amount |
Number of Shares |
Amount |
Paid-in Surplus |
Accumulated Deficit |
Comprehensive Income (Loss) |
Total Stockholders' Equity |
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| Balances at December 31, 2000 | 4,140 | $ | 207,000 | 94,035 | $ | 94,035 | $ | 1,102,769 | $ | (1,053,596 | ) | $ | (6,532 | ) | $ | — | $ | 343,676 | |||||||||
| Net loss | — | — | — | — | — | (46,400 | ) | — | (46,400 | ) | (46,400 | ) | |||||||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | 205 | 205 | 205 | ||||||||||||||||||
| Total comprehensive loss | $ | (46,195 | ) | ||||||||||||||||||||||||
| Dividends on 71/4% cumulative convertible preferred stock | — | — | — | — | — | (3,752 | ) | — | (3,752 | ) | |||||||||||||||||
| Balances at June 30, 2001 | 4,140 | $ | 207,000 | 94,035 | $ | 94,035 | $ | 1,102,769 | $ | (1,103,748 | ) | $ | (6,327 | ) | $ | 293,729 | |||||||||||
| Balances at December 31, 2001 | 4,140 | $ | 207,000 | 94,035 | $ | 94,035 | $ | 1,102,769 | $ | (1,305,879 | ) | $ | (7,149 | ) | $ | — | $ | 90,776 | |||||||||
| Net loss | — | — | — | — | — | (35,607 | ) | — | (35,607 | ) | (35,607 | ) | |||||||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||||||||||||
| Foreign currency translation adjustments | — | — | — | — | — | — | (348 | ) | (348 | ) | (348 | ) | |||||||||||||||
| Total comprehensive loss | $ | (35,955 | ) | ||||||||||||||||||||||||
| Balances at June 30, 2002 | 4,140 | $ | 207,000 | 94,035 | $ | 94,035 | $ | 1,102,769 | $ | (1,341,486 | ) | $ | (7,497 | ) | $ | 54,821 | |||||||||||
See accompanying notes to consolidated condensed financial statements.
5
Metromedia International Group, Inc.
Notes to Consolidated Condensed Financial Statements
1. Basis of Presentation, Going Concern and Recent Developments
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Metromedia International Group, Inc. ("MMG" or the "Company") and its wholly-owned subsidiaries, Metromedia International Telecommunications, Inc. ("MITI") and Snapper, Inc. ("Snapper"). MITI and its subsidiaries, Metromedia China Corporation and PLD Telekom, Inc., are collectively known as the "Communications Group." All significant intercompany transactions and accounts have been eliminated. Certain reclassifications have been made to the consolidated condensed financial statements for prior periods to conform to the current presentation.
The accompanying interim consolidated condensed financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2002, and the results of its operations for the three and six month periods ended June 30, 2002 and 2001, and its cash flows for the six month periods ended June 30, 2002 and 2001, have been included. The results of operations for the interim period are not necessarily indicative of the results which may be realized for the full year.
Going Concern and Recent Developments
The Company is a holding company; accordingly, it does not generate cash flows from operations. As of June 30, 2002 and July 31, 2002, the Company had $17.0 million and $16.2 million, respectively, in cash at its headquarters level. The Company has typically suffered recurring net losses and net operating cash deficiencies and does not presently have sufficient funds on hand to meet its current obligations. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments might include, but would not be limited to, adjustment in the US GAAP carrying value in our businesses if the Company were required to dispose of our business interests at distressed values.
Due to legal and contractual restrictions, a substantial portion of the cash balances in certain of the Company's business ventures and subsidiaries, cannot be readily accessed, if at all, for the Company's liquidity requirements. Based on the Company's current cash balances and projected internally generated funds, the Company does not believe that it will be able to fund its operating, investing and financing cash flows through 2002. In addition, the Company currently projects that its cash flow and existing capital resources, net of operating needs, might not be sufficient, without external funding or cash proceeds from asset sales, or a combination of both, to pay the September 30, 2002 interest payment of $11.1 million on its 101/2% Senior Discount Notes. The principal on the notes (in a fully accreted amount of $210.6 million) comes due in full on September 30, 2007.
Failure on the part of the Company to make any required payment of interest or principal on the 101/2% Senior Discount Notes would represent a default under the notes. A default, if not waived, could result in acceleration of the Company's indebtedness, in which case the full amount of the debt
6
would become immediately due and payable. If this occurs, the Company would not be able to repay the notes and would likely not be able to borrow sufficient funds to refinance them.
Since it is possible that Snapper will not be in compliance with all of its financial covenants under its primary bank credit facility during the next four calendar quarters, the Company has classified, as required under generally accepted accounting principles, all of Snapper's debt to its lenders under the facility in the amount of $31.0 million as a current liability. The Company may be required to seek amendments to certain financial covenants for future fiscal periods, and, although it has obtained similar amendments in the past, cannot assure you that any such amendments will be obtained.
Should Snapper fail to be in compliance with the financial covenants and not obtain a waiver or amendment to the credit facility, it could impair the Company's ability to dispose of Snapper, and, if the lenders under that credit facility elect to accelerate repayment of Snapper's indebtedness, could result in a default under the indenture for the Senior Discount Notes, and could materially and adversely affect the Company's results of operations.
In addition, Snapper sells a significant portion of its products through a network of independent dealers that obtain floor plan financing under an arrangement Snapper has entered into with a financial institution. If, in the future Snapper fails to be in compliance with its covenants under its bank line of credit, it would be in default under its floor plan financing agreement, which could result in the program being terminated or curtailed. If the floor plan program is terminated or curtailed, the Company believes that demand from the independent dealers for Snapper's products would be curtailed which could have a material adverse effect on the Company's results of operations, unless the dealers could find alternative financing.
The Company has sold and continues to explore possible asset sales to raise additional cash and has been attempting to maximize cash distributions by its ventures to the Company.
In March 2002, the Company engaged a financial advisor to manage the sale of its Snapper reporting unit. During the past eight weeks, the Company has spent substantial time negotiating a sale transaction with third parties; however, the Company has not been able to reach a definitive agreement on terms that management and the Board of Directors have determined to provide reasonable and adequate value to the Company. Therefore, management is currently evaluating alternative strategies associated with the Company's investment in Snapper. Accordingly, there can be no assurance that a sale transaction will be consummated in the near term.
In addition, on June 27, 2002, the Company announced that in connection with a change in its strategy to sell certain assets it had hired United Financial Group, a Russian based investment advisor, to assist the Company in evaluating certain offers that it has received for its Russian and Georgian telephony businesses. The Company had previously indicated that selling non-core assets was a goal of the Company to help improve liquidity and narrow the focus of its business. This strategy previously included restructuring the Company to concentrate on its core telephony assets. However, given the rapidly changing dynamics of the Russian telecommunications industry, including mergers and consolidations among the largest telecommunications firms in Russia, and the Company's goal of maximizing shareholder value, the Company has re-examined its core and non-core assets. The Company has determined that all businesses, including telephony, will be considered for possible sale.
As a result of this revised strategy, the Company has held preliminary discussions with certain Russian companies regarding merging its Russian telephony holdings, so far without substantial
7
progress toward a transaction. The Company does not anticipate consummating any major telephony asset sales for at least the next nine to eighteen months.
However, the Company cannot assure you that it will be successful in selling any additional assets or that any such sales will raise enough cash to be able to relieve its liquidity issues. The Company is also subject to legal and contractual restrictions, including those under the indenture for the Senior Discount Notes, on its use of any cash proceeds from sales of its assets or those of its business ventures or subsidiaries.
The Company has had periodic discussions with representatives of its noteholders in an attempt to reach agreement on a restructuring of its indebtedness in conjunction with any proposed asset sales or spinoffs. To date, the noteholders and the Company have not reached any agreement on terms of a restructuring. Discussions between the Company and its noteholders are continuing, however, and the Company continues to examine new restructuring alternatives to present to its noteholders. The Company cannot assure you that these negotiations will result in a restructuring of its indebtedness.
If the Company is not able to favorably resolve the liquidity issues described above, the Company would have to resort to certain other measures, including ultimately seeking the protection afforded under the United States Bankruptcy Code. The Company cannot assure you that it will be successful in meeting its cash requirements or in restructuring its obligations. These factors raise substantial doubt about our ability to continue as a going concern. The consolidated condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty. These adjustments might include, but would not be limited to, adjustment in the US GAAP carrying value in our businesses if the Company were required to dispose of our business interests at distressed values.
2. Accounting Changes
Goodwill and Intangible Assets
On January 1, 2002, we adopted SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 142 eliminates the amortization of goodwill and intangible assets deemed to have indefinite lives and instead requires that such assets be subject to annual impairment tests. Goodwill amortization (including that of goodwill included in Equity in losses of and write-down of investment in unconsolidated subsidiaries) for the three and six month periods ended June 30, 2001 totaled $4.0 million ($0.04 per share) and $8.5 million ($0.09 per share), respectively. In accordance with SFAS No. 142, goodwill was tested for tran