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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 1-5706
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METROMEDIA INTERNATIONAL GROUP, INC.
(Exact name of registrant, as specified in its charter)
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DELAWARE 58-0971455
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ONE MEADOWLANDS PLAZA, EAST RUTHERFORD, NEW JERSEY 07073-2137
(Address and zip code of principal executive offices)
(201) 531-8000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common stock, $1.00 par value American Stock Exchange
Pacific Stock Exchange
7.25% Cumulative Convertible Preferred Stock American Stock Exchange
Pacific Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes/X/ No/ /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K.
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant at March 24, 1998 computed by reference to the
last reported sale price of the Common Stock on the composite tape on such date
was $733,380,000.
The number of shares of Common Stock outstanding as of March 24, 1998 was
68,978,294.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be used in connection with the
Registrant's 1998 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
METROMEDIA INTERNATIONAL GROUP, INC.
Metromedia International Group, Inc. ("MMG" or "the Company") is a global
communications and media company engaged in the development and operation of a
variety of communications businesses, including cable television, AM/FM radio
broadcasting, paging, cellular telecommunications, international toll calling,
fixed telephony and trunked mobile radio, in Eastern Europe, the republics of
the former Soviet Union, (the "FSU") and the People's Republic of China
("China") and other selected emerging markets, through its Communications Group
( the "Communications Group").
The Communications Group's investments in communication businesses are made in
two primary geographic areas: Eastern Europe and the FSU, and China. In Eastern
Europe and the FSU, the Communications Group generally owns 50% or more of the
operating Joint Ventures ("Joint Ventures") in which it invests. Currently,
legal restrictions in China prohibit foreign participation in the operations or
ownership in the telecommunications sector. The Communications Group's China
Joint Ventures invest in network construction and development of telephony
networks for China United Telecommunications Incorporated ("China Unicom"). The
completed networks are operated by China Unicom. The China Joint Ventures
receive payments from China Unicom based upon distributable cash flow generated
by the networks, for a cooperation period of 15-25 years for each expansion
phase financed and developed. These payments are in return for the Joint Venture
providing financing, technical advice, consulting and other services.
Hereinafter, all references to the Communications Group's Joint Ventures relate
to the operating Joint Ventures in Eastern Europe and the FSU and the
Communications Group's Joint Ventures in China. Statistical data regarding
subscribers, population, etc. for the Joint Ventures in China relate to the
telephony networks of China Unicom.
During 1997, the Company's Communications Group experienced significant growth.
For example, aggregate subscribers to the Communications Group's Joint Ventures'
various services at the 1997 fiscal year-end was 318,826, representing a growth
of approximately 164% over the 1996 fiscal year-end total of 120,596
subscribers. The Communications Group's financial results for December 31
include the Communications Group's Joint Ventures for the 12 months ending
September 30th.
The Company also owns Snapper, Inc. ("Snapper"), which is a wholly-owned
subsidiary. The Company owned Snapper prior to the November 1 Merger (as defined
below) and the subsequent shift in the Company's business focus to a global
communications and media company. Snapper manufactures
Snapper-Registered Trademark- brand premium-priced power lawnmowers, lawn
tractors, garden tillers, snowthrowers and related parts and accessories.
In November 1995, following the consummation of the November 1 Merger, the
Company publicly announced that it was actively exploring the sale of Snapper
and as a result, for accounting purposes, Snapper was classified as an asset
held for sale and the results of operations for Snapper were not consolidated
with the Company's consolidated results of operations for the period from
November 1, 1995 through October 31, 1996. The Company has decided not to
continue to pursue its previously adopted plan to dispose of Snapper and will
actively manage Snapper to maximize its long-term value. Since November 1, 1996,
the Company has included Snapper's operating results in the consolidated results
of operations of the Company. (see "Business-Snapper").
On July 10, 1997, the Company completed the Entertainment Group Sale (as defined
below), and anticipates completing the sale of Landmark Theatre Group, Inc.
("Landmark"), in April 1998. In addition, the Company owns approximately 39% of
the outstanding common stock of RDM Sports Group, Inc. ("RDM"). On August 29,
1997, RDM and certain of its affiliates filed a voluntary bankruptcy petition
under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court of
the Northern District of Georgia. On February 18, 1998, the Office of the United
States Trustee filed a motion to appoint a
1
ITEM 1. BUSINESS (CONTINUED)
chapter 11 trustee in the United States Bankruptcy Court for the Northern
Division of Georgia. RDM and its affiliates subsequently filed a motion to
convert the chapter 11 cases to cases under chapter 7 of the Bankruptcy Code. On
February 19, 1998, the bankruptcy court granted the United States Trustee's
motion and ordered that a chapter 11 trustee be appointed. On February 25, 1998,
each of the Company's designees on RDM's Board of Directors submitted a letter
of resignation. The chapter 11 trustee is in the process of selling all of its
assets to satisfy its obligations to its creditors and the Company believes that
its equity interest will not be entitled to receive any distributions.
The Company was organized in 1929 under Pennsylvania law and reincorporated in
1968 under Delaware law. On November 1, 1995, as a result of the merger of Orion
Pictures Corporation ("Orion") and Metromedia International Telecommunications,
Inc. ("MITI") with and into wholly-owned subsidiaries of the Company, and the
merger of MCEG Sterling Incorporated ("Sterling") with and into the Company
(collectively, the "November 1 Merger"), the Company changed its name from "The
Actava Group Inc." to "Metromedia International Group, Inc." The Company's
principal executive offices are located at One Meadowlands Plaza, East
Rutherford, New Jersey 07073-2137, telephone: (201) 531-8000.
Certain statements set forth below under this caption constitute
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). See "Special Note
Regarding Forward-Looking Statements" on page 49.
DESCRIPTION OF BUSINESS GROUPS
COMMUNICATIONS GROUP
The Communications Group was founded in 1990 to take advantage of the rapidly
growing demand for modern communications services in Eastern Europe and the FSU,
China and other selected emerging markets and launched its first operating
system in 1992. At December 31, 1997, the Communications Group owned interests
in and participated with partners in the management of Joint Ventures that had
44 operational systems, consisting of 9 cable television systems, 15 AM/FM radio
broadcasting stations, 11 paging systems, 1 international toll calling service,
5 trunked mobile radio systems, 2 GSM cellular telephone systems and 1 Joint
Venture that is building out an operational GSM system and providing financing,
technical assistance and consulting services to the local system operator. In
addition, the Communications Group has interests in and participates with
partners in the management of Joint Ventures that, as of December 31, 1997, had
4 pre-operational systems, consisting of 1 cable television system, 1 wireless
local loop service provider and 2 companies participating in the construction
and development of local telephone networks in China for up to 1 million lines.
The cable system launched operations in January 1998 and the Company believes
that the other three systems will be launched during 1998. The Communications
Group generally owns approximately 50% or more of the Joint Ventures in which it
invests. The Company's objective is to establish the Communications Group as a
major multiple-market provider of modern communications services in Eastern
Europe and the FSU, China and other selected emerging markets.
The Communications Group's Joint Ventures experienced significant growth in
1997. Total subscribers at the end of the 1997 fiscal year-end was 318,826
compared with 120,596 at fiscal year-end 1996, which represents an increase of
approximately 164%. The Company's financial results for December 31 include the
Group's Joint Ventures for the 12 months ending September 30th. Total combined
revenues reported by the Communications Group's consolidated and unconsolidated
Joint Ventures for the years ended December 31, 1997, 1996 and 1995 were $91.2
million, $57.2 million, and $23.9 million, respectively. The Communications
Group invested approximately $104.7 million, $52.2 million and $21.1 million
during the
2
ITEM 1. BUSINESS (CONTINUED)
years ended December 31, 1997, 1996 and 1995, respectively, in the construction
and development of its consolidated and unconsolidated Joint Ventures'
communications networks and broadcasting stations.
The following chart summarizes operating statistics by service type of both the
licensed but pre-operational and operational systems constructed by the
Communications Group's Joint Ventures:
TARGET
MARKETS POPULATION/
OPERATIONAL HOUSEHOLDS
AT (MM)(A) AGGREGATE
PRE-OPERATIONAL DECEMBER AT SUBSCRIBERS AT
MARKETS AT 31, DECEMBER 31, DECEMBER 31,
DECEMBER 31, ----------- ------------- ----------------
COMMUNICATIONS SERVICE 1997 1997 1996 1997 1996 1997 1996
- ---------------------------------------- --------------- ---- ---- ------- ---- ------- -------
Cable Television........................ 1(b) 9 9 9.5 9.5 225,525 69,118
AM/FM Radio Broadcasting................ -- 15 6 10.7 9.9 n/a n/a
Paging(c)............................... -- 11 9 89.5 89.5 57,831 44,836
Telephony:
Cellular Telecommunications............. -- 3(d) -- 13.5 13.4 21,842 n/a
International Toll Calling(e)........... -- 1 1 5.5 5.5 n/a n/a
Trunked Mobile Radio(f)................. -- 5 4 56.2 56.2 13,628 6,642
Fixed Telephony(g)...................... 3 -- -- 41.8(h) 40.8 -- --
--
---- ---- ------- -------
4 44 29 318,826 120,596
--
--
---- ---- ------- -------
---- ---- ------- -------
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(a) Covers both pre-operational markets and operational markets. Target
population is provided for paging, telephony other than fixed telephony and
trunked mobile radio systems, and target households are provided for cable
television systems, radio stations and fixed telephony.
(b) The Communications Group owns 45% of a wireless cable television Joint
Venture in St. Petersburg, Russia that began operations in January 1998.
(c) Target population for the Communications Group's paging Joint Ventures
includes the total population in the jurisdictions where such Joint Ventures
are licensed to provide services. In many markets, however, the
Communications Group's paging system currently only covers the capital city
and is expanding into additional cities.
(d) The Communications Group's operational systems include its Joint Venture
operating a GSM system in Latvia and Georgia and its Joint Venture in Ningbo
City, China, which is participating in the build-out of an operational GSM
system and providing financing, technical assistance and consulting services
to the systems' operators.
(e) Provides international toll calling services between Georgia and the rest of
the world and is the only Intelsat-designated representative in Georgia to
provide such services.
(f) Target population for the Communications Group's trunked mobile radio
systems includes total population in the jurisdictions where such Joint
Ventures are licensed to provide services. In many markets, the
Communications Group's systems are currently only operational in major
cities.
(g) The Communications Group owns 54% interests in two pre-operational Joint
Ventures in China that are participating in the construction and development
of a local telephone network for up to 1 million lines and a 50% interest in
a pre-operational Joint Venture in Kazakstan that is licensed to provide
wireless local loop telephone services throughout Kazakstan.
(h) Indicates population of Sichuan Province and City of Chongqing in China,
where the Communications Group is participating in the construction of a
local network, and Kazakstan where the Communications Group's Joint Venture
is licensed to operate.
3
ITEM 1. BUSINESS (CONTINUED)
BUSINESS STRATEGY
The Communication's Group's markets generally have large populations, with high
density and strong economic potential, but lack reliable and efficient
communications services. The Communications Group believes that most of these
markets have a growing number of persons who desire and can afford high quality
communications services. The Communications Group has assembled a management
team consisting of executives who have significant experience in the
communications services industry and in operating businesses in developing
markets. This management team believes that the Communications Group's systems
can be constructed with relatively low capital investments and focuses on
markets where the Company can provide multiple communications services. The
Company believes that the establishment of a far-reaching communications
infrastructure is crucial to the development of the economies of these
countries, and such development will, in turn, contribute to the growth of the
Communications Group.
The Communications Group believes that the performance of its Joint Ventures has
demonstrated that there is significant demand for its services in its license
areas. While the Communications Group's operating systems have experienced rapid
growth to date, many of the systems are still in early stages of rolling out
their services, and therefore, the Communications Group believes it will
significantly increase its subscriber and customer bases as these systems
mature. In addition, as an early entrant in many markets, the Communications
Group believes that it has developed a reputation for providing quality service
and has formed important relationships with local entities. As a result, the
Company believes it is well positioned to capitalize on opportunities to provide
additional communications services in its markets as new licenses are awarded.
In addition to its existing projects and licenses, the Communications Group
continues to explore a number of investment opportunities in wireless telephony
systems in certain markets in Eastern Europe, including Romania, the FSU,
including Kazakstan, China and other selected emerging markets, and has
installed test systems in certain of these markets. The Communications Group
believes that its wireless local loop telephony technology is a high quality and
cost effective alternative to the existing, often antiquated and overloaded
telephone systems in these markets. The Communications Group also believes that
its system has a competitive advantage in these markets because the equipment
can be installed quickly at a competitive price, as compared to alternative
wireline providers which often take several years to provide telephone service.
In addition, unlike certain other existing wireless telephony systems in the
Communications Group's target markets, the equipment utilized by the
Communications Group includes digital, high-speed technology, which can be used
for high-speed facsimile and data transmission, including Internet access.
The Communications Group's objective is to become the leading multiple-market
provider of communications services in Eastern Europe and the FSU, China and
other selected emerging markets. The Communications Group intends to achieve its
objective and expand its subscriber and customer bases, as well as its revenues
and cash flow, by pursuing the following strategies:
UTILIZE LOW COST WIRELESS TECHNOLOGIES THAT ALLOW FOR RAPID BUILD-OUT. The use
of wireless technologies has allowed and will continue to allow the
Communications Group to build-out its existing and future license areas faster
and at a lower cost than the construction of comparable wired networks. Many
markets where the Communications Group has or is pursuing wireless licenses have
limitations on wireline construction above ground and/or underground.
COMPLETE BUILD-OUT OF EXISTING LICENSE AREAS. Since its formation in 1990, the
Communications Group has been investing in Joint Ventures to obtain
communications licenses in certain emerging markets. During the years ended
December 31, 1997, 1996 and 1995, the Communications Group invested
approximately $104.7 million, $52.2 million and $21.1 million, respectively, in
the construction and
4
ITEM 1. BUSINESS (CONTINUED)
development of its consolidated and unconsolidated Joint Ventures'
communications networks and broadcast stations in existing license areas.
AGGRESSIVELY GROW THE SUBSCRIBER AND ADVERTISER BASE IN EXISTING LICENSE
AREAS. The Communications Group's existing license areas, in the aggregate,
represent a large potential revenue base. The Communications Group is
aggressively marketing its services in these areas and is experiencing
significant increases in its subscriber count and advertising base. The
Communications Group believes it will continue to add subscribers by (i)
targeting each demographic in its markets with customized communications
services, (ii) cross-marketing and bundling communications services to existing
customers, (iii) providing technologically-advanced services and a high level of
customer service, (iv) providing new and targeted programming on its radio
stations to increase advertising revenue, and (v) opportunistically acquiring
additional existing systems in its service areas and in other strategic areas to
increase its subscriber base.
PURSUE ADDITIONAL OPPORTUNITIES IN EXISTING MARKETS. The Communications Group
is pursuing opportunities to provide additional communications services in
regions in which it currently operates. For example, in 1997, the Communications
Group launched cellular telecommunications services in Latvia where it already
provides cable television, paging and radio broadcasting services, and
commercial cellular telecommunications services and radio broadcasting in
Georgia, where it already provides cable television, paging and international
toll calling. This strategy enables the Communications Group to (i) leverage its
existing infrastructure and brand loyalty, (ii) capitalize on marketing
opportunities afforded by bundling its services, and (iii) build brand loyalty
and awareness. The Communications Group believes that it has several competitive
advantages that will enable it to obtain additional licenses and/or agreements
in these markets, including (i) established relationships with local strategic
joint venture partners and local government, (ii) a proven track record of
handling and operating quality systems, and (iii) a fundamental understanding of
the regions' political, economic and cultural climate.
TAKE ADVANTAGE OF ECONOMIES OF SCALE. The Communications Group is actively
pursuing acquisitions and building new systems which enable it to link its
existing networks and take advantage of roaming between its systems. Such
acquisitions also allow the Communications Group to increase efficiencies
through economies of scale. In January 1998, the Communications Group entered
into a definitive agreement to purchase 50% of Mobile Telecom, the largest
provider of paging services in the Russian Federation. The inclusion of Mobile
Telecom in the Communication Group's paging group will provide customers of each
of its paging Joint Ventures significantly greater roaming ability and will
enable the Communications Group to make larger volume equipment purchases which
should translate into lower prices and lower costs for its paging Joint
Ventures.
INVEST IN NEW MARKETS. The Communications Group is actively pursuing
investments in Joint Ventures to obtain new licenses and/or agreements for
wireless communications services in new markets. The Company is targeting
emerging markets with strong economic potential which lack adequate
communications services. In evaluating whether to enter a new market, the
Communications Group assesses, among other factors, the (i) potential demand for
the Communications Group's services and the availability of competitive
services, (ii) strength of local partners, and (iii) political, social and
economic climate. The Communications Group has identified several attractive
opportunities in Eastern Europe and the Pacific Rim. For example, in 1997, the
Communications Group's Joint Ventures began to provide paging services in
Austria and radio broadcasting in Prague, Czech Republic and in Berlin, Germany.
In addition, in February 1997, MITI acquired Asian American Telecommunications
("AAT"), a company which owns interests and participates in the management of
Joint Ventures with agreements to construct and provide financing for cellular
and wired telephony networks in certain provinces in China.
5
ITEM 1. BUSINESS (CONTINUED)
CABLE TELEVISION
OVERVIEW. The Communications Group commenced offering cable television services
in 1992 with the launch by its Joint Ventures' Kosmos TV in Moscow, Russia
("Kosmos"), and Baltcom TV in Riga, Latvia ("Baltcom"). The Communications Group
currently has interests in Joint Ventures which offer cable television services
in 9 markets in Eastern Europe and the FSU that reported 225,525 subscribers at
December 31, 1997, an increase of approximately 226% from 69,118 subscribers at
December 31, 1996. In addition, the Communications Group has a 45% interest in a
Joint Venture which launched commercial cable television service in St.
Petersburg, Russia in January 1998. The Communications Group believes that there
is a growing demand for multi-channel television services in each of the markets
where its Joint Ventures are operating, which demand is being driven by several
factors including: (i) the lack of quality television and alternative
entertainment options in these markets; (ii) the growing demand for Western-
style entertainment programming; and (iii) the increase in disposable income in
each market, which in turn increases the demand for entertainment services.
TECHNOLOGY. Each of the Communications Group's cable television Joint Ventures
utilizes two distribution technologies: microwave multipoint distribution system
("MMDS") and wireline cable. In some markets, a hybrid combination of MMDS and
wireline cable is employed where MMDS is used to deliver programming directly to
customers' homes as well as to act as a backbone to deliver programming to
wireline cable networks for further distribution to the customer. The
Communications Group believes that MMDS is an attractive technology to utilize
for the delivery of multi-channel television services in these markets because
(i) the initial construction costs of a MMDS system generally are significantly
lower than wireline cable or direct-to-home ("DTH") satellite transmission, (ii)
the time required to construct a wireless cable network is significantly less
than the time required to build a standard wireline cable television network
covering a comparably-sized service area, (iii) the high communications tower
typically utilized by the MMDS network combined with the high density of
multi-family dwelling units in these markets gives the MMDS networks very high
line of sight ("LOS") penetration, (iv) the wide bandwidth of the spectrum
typically licensed by each of the Company's Joint Ventures gives each system the
ability to broadcast a wide variety of attractive international and localized
programming, and (v) MMDS is a highly effective means to distribute programming
to wireline cable headends eliminating the need for much of the satellite
receiving equipment at each headend.
In each MMDS system operated by the Communications Group's Joint Ventures,
multichannel signals are broadcast in all directions from a transmission tower
which, in the case of such Joint Ventures' systems, is typically the highest
structure in the city and, as a result, has very high LOS penetration.
Specialized compact receiving antenna systems, installed by the Communications
Group on building rooftops as part of the system or to mini-headends in wireline
systems, receive the multiple channel signals transmitted by the transmission
tower. The signal is then transmitted to each subscriber through a coaxial
cabling system within the building or wireline system. In each city where the
Communications Group provides or expects to provide service, a substantial
percentage of the population (e.g., approximately 90% in Moscow) lives in large,
multi-dwelling apartment buildings. This infrastructure significantly reduces
installation costs and eases penetration of cable television services into a
city because a single MMDS receiving location can bring service to numerous
apartment buildings or wireline cable networks housing a large number of people.
In order to take advantage of such benefits, in many areas, the Company is
wiring buildings and/or neighborhoods so that it can serve all of the residents
in the area through one microwave receiving location. Subscribers to the
Company's premium tiered services typically utilize a set-top converter which
descrambles the signal and are also used as channel selectors. The Company
generally utilizes the same equipment across all of its cable television
systems, which enables it to realize purchasing efficiencies in the build-out of
its networks.
6
ITEM 1. BUSINESS (CONTINUED)
While the Communications Group's cable television systems are generally a
leading provider of multi-channel television services in each of its markets, in
many markets there are several small undercapitalized wireline competitors. The
Communications Group's Joint Ventures in Bucharest, Romania and Chisinau,
Moldova have each acquired existing wireline systems and are in the process of
integrating them into their present systems. The Communications Group believes
that there are additional acquisition/consolidation opportunities in several of
its markets and will pursue the acquisition of select competitors on an
opportunistic basis.
PROGRAMMING. The Communications Group believes that programming is a critical
component in building successful cable television systems. The Communications
Group currently offers a wide variety of programming including English, French,
German and Russian programming, some of which is dubbed or subtitled into the
local language. In order to maximize penetration and revenues per subscriber,
the cable television Joint Ventures generally offer multiple tiers of service
including, at a minimum, a "lifeline" service, a "basic" service and a "premium"
service. The lifeline service generally provides programming of local off-air
channels and an additional two to four channels such as MTV-Europe, Eurosport,
NBC-Europe, VH-1, Cartoon Network, CNN International, SKY News and Discovery
Channel. The basic and premium services generally include the channels which
constitute the lifeline service, as well as an additional number of satellite
channels and a movie channel that offers recent and classic movies. The content
of each programming tier varies from market to market, but generally includes
channels such as MTV, Eurosport, NBC Super Channel, Bloomberg TV, Cartoon
Network/TNT, BBC World, CNN, SKY News and Discovery Channel. Each tier also
offers localized programming.
One of the Communications Group's Joint Ventures offers "pay-per-view" movies in
one of its markets and the Communications Group plans to add similar services to
its program lineups in certain of its other markets. The subscriber pays for
"pay-per-view" services in advance, and the intelligent decoders that the Joint
Venture uses automatically deduct the purchase of a particular service. In
addition, one of the Communications Group's Joint Ventures has created a movie
channel, "TV21," consisting of U.S. and European films dubbed into Russian
language which distributes this channel to most of the Communications Group's
other cable television Joint Ventures. Centralized dubbing and distribution of
this movie channel have enabled the Communications Group to avoid the cost of
separately creating a similar movie channel in its other markets.
MARKETING. While each cable television Joint Venture initially targets its
cable television services toward foreign national households, embassies, foreign
commercial establishments and international and local hotels, each system offers
multiple tiers, at least one of which is targeted toward, and generally within
the economic reach of, a substantial and growing percentage of the local
population in each market. The Communications Group offers several tiers of
programming in each market and strives to price the lowest tier at a level that
is affordable to a large percentage of the population and that generally
compares in price to alternative entertainment products. The Communications
Group believes that a growing number of subscribers to local broadcast services
will demand the superior quality programming and increased viewing choices
offered by its cable television service. Upon launching a particular system, the
Communications Group uses a combination of event sponsorships, billboard, radio
and broadcast television advertising to increase awareness in the marketplace
about its services.
COMPETITION. Each of the Communications Group's cable television systems
competes with off-the-air broadcast television stations. In addition, in many of
its cable television markets there are several existing wireline cable
television providers which are generally undercapitalized, small, local
companies that provide limited programming to subscribers in limited service
areas. In many of its cable television markets, the Communications Group
competes with providers of DTH programming services, which offer subscribers
programming directly from satellite transponders. The Communications Group
believes that it has significant competitive advantages over DTH providers in
its lower cost and its ability to offer localized programming.
7
ITEM 1. BUSINESS (CONTINUED)
AM/FM RADIO BROADCASTING
OVERVIEW. The Communications Group entered the radio broadcasting business in
Eastern Europe through the acquisition of Radio Juventus in Hungary in 1994.
Today, the Company is a leading operator of radio stations in Eastern Europe and
the FSU and owns and operates, through Joint Ventures, 15 radio stations. During
1997, the Communications Group acquired interests in additional Joint Ventures
operating radio stations in Prague, Czech Republic; Berlin, Germany; Tbilisi,
Georgia and Vladivostok, Russian Federation and a Joint Venture operating a
radio network in Estonia. In addition, the Communications Group entered into a
definitive agreement to purchase an additional 25% of its Joint Venture
operating two radio stations in St. Petersburg, Russia.
The Communications Group's radio broadcasting strategy is generally to acquire
underdeveloped properties (i.e., stations with insignificant ratings and little
or no positive cash flow) at attractive valuations. The Communications Group
then installs experienced radio management to improve performance through
increased marketing and focused programming. Management utilizes its programming
expertise to tailor specifically the programming of each station utilizing
sophisticated research techniques to identify opportunities within each market,
and programs its stations to provide complete coverage of a demographic or
format type. This strategy allows each station to deliver highly effective
access to a target demographic and capture a higher percentage of the radio
advertising audience share.
PROGRAMMING. Programming in each of the Communications Group's AM and FM
markets is designed to appeal to the particular interests of a specific
demographic group in such markets. The Communications Group's radio programming
formats generally consist of popular music from the United States, Western
Europe and the local region. News is delivered by local announcers in the
language appropriate to the region, and announcements and commercials are
locally produced. By developing a strong listenership base comprised of a
specific demographic group in each of its markets, the Communications Group
believes it will be able to attract advertisers seeking to reach these
listeners. The Communications Group believes that the technical programming and
marketing expertise that it provides to its Joint Ventures enhances the
performance of the Joint Ventures' radio stations.
MARKETING. Radio station programming is generally targeted towards that segment
which the Communications Group believes to be the most affluent within the
25-to-55-year-old demographic in each of its radio markets. Each station's
format is intended to appeal to the particular listening interests of this
consumer group in its market. This focus is intended to enable each Joint
Venture to present to advertisers with the most desirable market for the
advertiser's products and services, thereby heightening the value of the
station's commercial advertising time. Advertising on these stations is sold to
local and international advertisers.
COMPETITION. While the Communications Group's radio stations are generally
leaders in each of their respective markets, they compete in each market with
stations currently in operation or anticipated to be in service shortly. Other
media businesses, including broadcast television, cable television, newspapers,
magazines and billboard advertising also compete with the Communications Group's
radio stations for advertising revenues.
PAGING
OVERVIEW. The Communications Group commenced offering radio paging services in
1994 with the launch of paging networks serving the countries of Estonia and
Romania. Paging systems are useful as a means for one-way business/personal
communications without the need for a recipient to access a telephone network,
8
ITEM 1. BUSINESS (CONTINUED)
which in many of the Communications Group's markets is often overloaded or
unavailable. At December 31, 1997, the Communications Group's paging Joint
Ventures were licensed to offer paging services in markets containing
approximately 89.5 million persons. The Communications Group's Joint Ventures
generally provide service in the capital or major cities in these countries and
is currently expanding the services of such operations to cover additional
areas. The Communications Group believes that these Joint Ventures are leading
providers of paging services in their respective markets with, as of December
31, 1997, an aggregate of 57,831 subscribers, representing an increase of
approximately 29% from 44,836 subscribers at December 31, 1996.
In January 1998, the Communications Group signed a definitive agreement to
purchase 50% of Mobile Telecom, the largest provider of paging services in the
Russian Federation. Mobile Telecom currently provides paging services in Moscow,
St. Petersburg and many other cities in the Russian Federation and has obtained
frequency and operating authority for more than 90 other of the largest cities
in Russia. The acquisition of Mobile Telecom will enable the Communications
Group to expand the roaming capability of the customers of its other paging
Joint Ventures. The inclusion of Mobile Telecom in the Communications Group will
also enable the Communications Group to make larger volume equipment purchases
which should translate into lower prices and lower costs for its other paging
Joint Ventures.
Management believes that its paging Joint Ventures will continue to experience
rapid subscriber growth due to (i) the low landline telephone penetration that
characterizes each of its markets, (ii) the rapid increase in the number of
individuals, corporations and other organizations desiring communication
services that offer substantial mobility, accessibility and the ability to
receive timely information, and (iii) the continued economic growth in these
markets, which is expected to make paging services relatively more affordable to
the general population, and (iv) introduction of calling party pays service in
Austria, Romania, Estonia and Latvia.
The Communications Group offers several types of pagers. However, substantially
all of the Communications Group's subscribers choose alphanumeric pagers, which
emit a variety of tones and display as many as 63 characters. Subscribers may
also purchase additional services, such as paging priority, group calls and
other options. In 1998, the Communications Group is launching calling party pays
service. Calling party pays service is designed to reach a younger demographic
by providing a pager for little or no monthly fee. The Communications Group
receives a fee from the local provider for each call made to the pager. The
Communications Group provides a choice of pagers, which are typically purchased
by the subscriber or leased for a small monthly fee. The Communications Group
also provides 24-hour operator service with operators who are capable of taking
and sending messages in several languages.
TECHNOLOGY. Paging is a one-way wireless messaging technology which uses an
assigned frequency and a specific pager identifier to contact a paging customer
within a geographic service area. Each customer who subscribes to a paging
service is assigned a specific pager number. Transmitters broadcast the
appropriate signal or message to the subscriber's pager, which has been preset
to monitor a designated radio frequency. Each pager has a unique number
identifier, a "cap code," which allows it to pick up only those messages sent to
that pager. The pager signals the subscriber through an audible beeping signal
or an inaudible vibration and displays the message on the subscriber's pager.
Depending on the market, the Joint Ventures offer alphanumeric pagers which have
Latin and/or Cyrillic (Slavic language) character display.
The effective signal coverage area of a paging transmitter typically encompasses
a radius of between 15 and 20 miles from each transmitter site. Obstructions,
whether natural, such as mountains, or man-made, such as large buildings, can
interfere with the signal. Multiple transmitters are often used to cover large
geographic areas, metropolitan areas containing tall buildings or areas with
mountainous terrain.
9
ITEM 1. BUSINESS (CONTINUED)
Each of the Communications Group's paging Joint Ventures uses either terrestrial
radio frequency ("Rf") control links that originate from one broadcast
transmitter which is controlled by a local paging terminal and broadcast to each
of the transmitters, or a satellite uplink which is controlled by the paging
terminal, and which transmits to a satellite and downlinks to a receiving dish
adjacent to each of the transmitters. Once a message is received by each
transmitter in a simulcast market, each transmitter in turn broadcasts the
paging information using the paging broadcast frequency. The Rf control link
frequency is different from the paging broadcast frequency. For non-contiguous
regional coverage, either telephone lines or microwave communication links are
used in lieu of an Rf control link or satellite link.
MARKETING. Paging services are targeted toward people who spend a significant
amount of time outside of their offices, have a need for mobility or are
business people without ready access to telephones. The Communications Group
targets its paging systems primarily to local businesses, the police, the
military and expatriates. Paging provides an affordable way for local businesses
to communicate with employees in the field and with their customers. Subscribers
are charged a monthly fee which entitles a subscriber to receive an unlimited
number of pages each month.
COMPETITION. The Communications Group believes that its Joint Ventures are
leading providers of paging services in each of their respective markets. In
some of the Communications Group's paging markets, however, the Communications
Group has experienced and expects to continue to experience competition from
existing small, local, paging operators who have limited areas of coverage, and
from, in a few cases, paging operators established by Western European and U.S.
investors with substantial experience in paging. The Communications Group
believes it competes effectively with these companies because of, among other
things, its high quality and reliable 24-hour service. The Communications Group
does not have or expect to have exclusive franchises with respect to its paging
operations and may therefore face more significant competition in its markets in
the future from highly capitalized entities seeking to provide similar services.
TELEPHONY
The Communications Group's telephony line of business consists of cellular
telecommunications, international toll calling, trunked mobile radio and fixed
telephony.
CELLULAR TELECOMMUNICATIONS
OVERVIEW. The Communications Group owns a 21% interest in Baltcom GSM which
operates a nationwide cellular telecommunications system in Latvia. The
Communications Group also owns a 34% interest in Magticom, a Joint Venture that
operates cellular telecommunications systems in certain cities in Georgia and is
licensed to provide nationwide services. Western Wireless International Inc.
("Western Wireless"), a leading U.S. cellular provider, is a partner in each of
these Joint Ventures. The Communications Group believes that there is a large
demand for cellular telephone service in each of Latvia and Georgia due to the
limited supply and poor quality of wireline telephone service in these markets
as well as the rapidly growing demand for the mobility offered by cellular
telephony service. Landline telephone penetration is approximately 25% in Latvia
and 9% in Georgia. The demand for reliable and mobile telephone service is
increasing rapidly and the pace is expected to continue as commerce in these
regions continues to experience rapid growth.
In June 1997, the Communications Group's Latvian GSM Joint Venture, Baltcom GSM
entered into certain agreements with the European Bank for Reconstruction and
Development ("EBRD") pursuant to which the EBRD agreed to lend up to $23.0
million to Baltcom GSM in order to finance its system build-out and operations.
Baltcom GSM's ability to borrow under these agreements is conditioned upon
reaching certain gross revenue targets. The loan has an interest rate equal to
the 3-month LIBOR plus 4%
10
ITEM 1. BUSINESS (CONTINUED)
per annum, with interest payable quarterly. The principal amount must be repaid
in installments starting in March 2002 with final maturity in December 2006. The
shareholders of Baltcom GSM were required to provide $20.0 million to Baltcom
GSM as a condition precedent to EBRD funding the loan. In addition, the
Communications Group and Western Wireless agreed to provide or cause one of the
shareholders of Baltcom GSM to provide an additional $7.0 million in funding to
Baltcom GSM if requested by EBRD.
As part of the financing, the EBRD was also provided a 5% interest in the joint
venture which it can put back to Baltcom GSM at certain dates in the future at a
multiple of Baltcom GSM's earnings before interest, taxes, depreciation and
amortization ("EBITDA"), not to exceed $6.0 million. The Company and Western
Wireless have guaranteed the obligation of Baltcom GSM to pay such amount. All
of the shareholders of Baltcom GSM, including MITI, pledged their respective
shares to the EBRD as security for repayment of the loan. As of December 31,
1997, Baltcom GSM borrowed $15.0 million from the EBRD. Under the ERBD
agreements, amounts payable to the Communications Group are subordinated to
amounts payable to the ERBD.
In April 1997, the Communications Group's Georgian GSM Joint Venture, Magticom,
entered into a financing agreement with Motorola, Inc. ("Motorola") pursuant to
which Motorola agreed to finance 75% of the equipment, software and services it
provides to Magticom up to an amount equal to $15.0 million. Interest on the
financed amount accrues at 6-month LIBOR plus 5% per annum, with interest
payable semi-annually. Repayment of principal with respect to each drawdown
commences twenty-one months after such drawdown with the final payment being due
60 months after such drawdown. All drawdowns must be made within 3 years of the
initial drawdown date. Magticom is obligated to provide Motorola with a security
interest in the equipment provided by Motorola to the extent permitted by
applicable law. As additional security for the financing, the Company has
guaranteed Magticom's repayment obligation to Motorola.
The Communications Group and Western Wireless have funded the balance of the
financing to Magticom through a combination of debt and equity. Repayment of
indebtedness owned to such partners is subordinated to Motorola.
In addition, through AAT, the Communications Group has entered into a Joint
Venture agreement (the "Ningbo JV Agreement") with Ningbo United
Telecommunications Investment Co., Ltd. (the "Ningbo JV") and the Ningbo JV has
entered into a Network System Cooperation Contract with China Unicom (the
"Network System Cooperation Contract") to (i) finance and assist China Unicom in
the construction of an advanced GSM cellular telephone network and (ii) provide
consulting and management support services to China Unicom in its operation of
such network within the City of Ningbo, China. This system, which has an initial
capacity of up to 50,000 subscribers, commenced operations in May 1997. The
Communications Group's Joint Venture is entitled to 73% of the distributed cash
flow, as defined in the Network System Cooperation Contract, from the network
for a 15-year period.
TECHNOLOGY. The Communications Group's cellular telephone networks in Latvia
and Georgia operate on the GSM standard. GSM is the standard for cellular
service throughout Western Europe, which allows the Communications Group's
customers to roam throughout the region. GSM's mobility is a significant
competitive advantage compared to competing Advanced Mobile Phone System
("AMPS") services which cannot offer roaming service in most neighboring
countries in Europe, with the exception of Russia, or Nordic Mobile Telephone
("NMT") services which are based on what the Communications Group believes is an
older and less reliable technology.
MARKETING. The Communications Group targets its cellular telephony services
toward the rapidly growing number of individuals, corporations and other
organizations with a need for mobility, ready access to a high quality voice
transmission service and the ability to conduct business outside of the
workplace or
11
ITEM 1. BUSINESS (CONTINUED)
home. The Communications Group sells cellular phones at a small mark-up to cost.
This pass-through strategy encourages quick market penetration and early
acceptance of cellular telephony as a desirable alternative to fixed land-based
telephony systems.
Management believes that its cellular systems will benefit from several
competitive advantages in each of its markets. The Communications Group intends
to market its cellular telephony service to customers of its existing cable
television and paging services in both Latvia and Georgia. The Communications
Group believes that this database of names will be useful in marketing its
cellular telephony services, as these are customers who have already exhibited
an interest in modern communications services. In addition, these Joint Ventures
intend to market these systems by providing a comprehensive set of packages with
different service features which permit the subscriber to choose the package
that most closely fits his or her needs.
COMPETITION. Baltcom GSM's primary competitor in Latvia is Latvia Mobile
Telecom ("LMT"). LMT commenced service in 1995 and currently has approximately
20,000 subscribers. LMT operates a second system using the older, less efficient
NMT technology that the Communications Group believes will pose less of a
competitive threat than LMT's GSM system. The Communications Group believes that
its primary competitors in Georgia will be Geocell, a Georgian-Turkish Joint
Venture using a GSM system as well as an existing smaller provider of cellular
telephony services which uses the AMPS technology in its network.
While the availability of fixed telephone systems in China is limited in
capacity, the fact that these systems exist and are operated by governmental
authorities means that they are a source of competition for China Unicom's
proposed wireless and fixed telephony operations. In addition, one-way paging
service may be a competitive alternative which is adequate for those who do not
need a two-way service, or it may be a service that reduces wireless telephony
usage among wireless telephony subscribers.
The Communications Group also faces competition from the primary provider of
telephony services in each of its markets, which are the national telephone
systems. However, given the low telephony penetration rates in Latvia and
Georgia and the underdeveloped landline telephone system infrastructure, the
Communications Group believes that cellular telephony provides an attractive
alternative to customers who need fast, reliable and quality telephone service.
INTERNATIONAL TOLL CALLING
OVERVIEW. The Communications Group owns approximately 30% of Telecom Georgia.
Telecom Georgia handles all international calls inbound to and outbound from the
Republic of Georgia. Telecom Georgia has interconnect arrangements with several
international long distance carriers such as Sprint and Telespazio. For every
international call made to the Republic of Georgia, a payment is due to Telecom
Georgia by the interconnect carrier and for every call made from the Republic of
Georgia to another country, Telecom Georgia charges its subscribers and pays a
destination fee to the interconnect carrier.
Since Telecom Georgia commenced operations, long distance traffic in and out of
Georgia has increased dramatically as Telecom Georgia has expanded the number of
available international telephone lines. Incoming call traffic increased from
approximately 200,000 minutes per month in 1993 to the current rate of
approximately 1 million minutes per month, and outgoing call traffic increased
from approximately 100,000 minutes per month in 1993 to the current rate of
approximately 230,000 minutes. Telecom Georgia has instituted several marketing
programs in order to maintain this growth.
COMPETITION. The Communications Group does not currently face any competition
in the international long distance business in Georgia, as Telecom Georgia is
the only entity licensed to handle international call traffic in and out of
Georgia. There can be no assurance that there will not be a competitor in the
future.
12
ITEM 1. BUSINESS (CONTINUED)
TRUNKED MOBILE RADIO
OVERVIEW. The Communications Group currently owns interests in Joint Ventures
which operate 5 trunked mobile radio services in Europe and Kazakstan, servicing
an aggregate of 13,628 subscribers at December 31, 1997 which is an increase of
approximately 105% from 6,642 subscribers at December 31, 1996. Trunked mobile
radio systems are commonly used by construction teams, security services, taxi
companies, service organizations and other groups with a need for significant
internal communications. Trunked mobile radio allows such users to communicate
with members of a closed user group without incurring the expense or delay of
the public switched telephone network, and also provides the ability to provide
dispatch service (i.e., one sender communicating to a large number of users on
the same network). In many cases, the Communications Group's trunked mobile
radio systems are also connected to the public switched telephone network thus
providing some or all of the users the flexibility of communicating outside the
closed user group. The Communications Group believes that lower costs and the
ability to provide dispatch services affords trunked mobile radio significant
advantages over cellular telephony or the public switched telephone network in
fleet applications.
COMPETITION. The Communications Group is a leading provider of trunked mobile
radio in its markets although it faces competition from other trunked mobile
radio service providers and from private networks in all of the markets in which
it operates. Trunked mobile radio also faces competition from cellular
providers, especially for users who need access to the public switched telephone
network for most of their needs, pagers for users who need only one-way
communication and private branch exchanges, where users do not need mobile
communications.
FIXED TELEPHONY
OVERVIEW. The Communications Group is currently exploring a number of
investment opportunities in wireless local loop telephony systems in certain
countries in Eastern Europe and the FSU and other selected emerging markets and
has installed test systems in certain of these markets. The Communications Group
believes that the proposed wireless local loop telephony technology it is using
is a time and cost effective means of improving the communications
infrastructure in such markets. The current telephone systems in these markets
may be antiquated and/or overloaded, and consumers in these markets often must
wait several years to obtain telephone service.
The Company believes that wireless local loop technology is a rapid and cost
effective method to increase the number of subscribers to local telephone
services. Wireless local loop telephony systems can provide telephone access to
a large number of apartment dwellers through a single microwave transceiver
installed on their building. This microwave transceiver sends signals to and
from a receiver located adjacent to a central office of the public switched
telephone network where the signal is routed from or into such network. This
system eliminates the need to build fixed wireline infrastructure between the
central office and the subscribers' building, thus reducing the time and expense
involved in expanding telephone service to customers.
In 1997, the Communications Group's 50% joint venture in Kazakstan, Instaphone,
was licensed to provide wireless local loop telephone services throughout that
country. In order to provide such service, Instaphone has been allocated
frequencies in the 2.3 to 2.5 GHz band in Almaty, the largest city in Kazakstan.
The Communications Group is currently constructing the system necessary to
provide service and negotiating an agreement for interconnection with the local
public switched telephone system. The Communications Group expects Instaphone to
launch commercial service in 1998. The Communications Group has created several
other Joint Ventures that are currently exploring the opportunities to provide
wireless local loop services.
13
ITEM 1. BUSINESS (CONTINUED)
In addition, the Company plans to take advantage of wired telephony
opportunities from time to time. For example, the Communications Group, through
AAT, has entered into joint venture agreements with China Huaneng Technology
Development Corporation in Sichuan Province ("Sichuan JV") and in the city of
Chongqing ("Chongqing JV") to (i) assist China Unicom in the development and
construction of advanced telecommunications systems in the Sichuan Province and
the city of Chongqing, China and (ii) provide telephone consulting and financing
services to China Unicom within Sichuan Province and the city of Chongqing. With
a population of over 110 million and a telephone penetration rate estimated at
less than 2%, the Sichuan Province and the city of Chongqing projects provide a
large potential market for AAT's investments and services. The project involves
a 25-year period of cooperation between the Communications Group's Joint Venture
and China Unicom for the development of a wired local telephone network in the
Sichuan Province and the city of Chongqing with an initial capacity of 50,000
lines. For its services, the Communications Group's Joint Venture is entitled to
78% of the distributable cash flow, defined in the agreement between China
Unicom and the Sichuan JV, from the network for a 25-year period for each phase
of the network developed.
COMPETITION. While the existing wireline telephone systems in Eastern Europe
and the FSU are often antiquated and provide inferior quality service, the fact
that the network infrastructure is already in place means that it is a source of
competition for the Communications Group's proposed wireless telephony
operations. The Communications Group does not have or expect to have exclusive
franchises with respect to its wireless telephony operations and may therefore
face more significant competition in the future from highly capitalized entities
seeking to provide services similar to or competitive with the Communications
Group's services in its markets.
While the availability of fixed telephone systems in China is limited in
capacity, the fact that these systems exist and are operated by governmental
authorities means that they are a source of competition for China Unicom's
proposed wireless and fixed telephony operations. In addition, one-way paging
service may be a competitive alternative which is adequate for those who do not
need a two-way service.
In certain markets, cellular telephone operators exist and represent a
competitive alternative to the Communications Group's proposed wireless local
loop telephony systems. A cellular telephone can be operated in the same manner
as a wireless loop telephone in that either type of service can simulate the
conventional telephone service by providing local and international calling from
a fixed position in its service area. However, while cellular telephony enables
a subscriber to move from one place in a city to another while using the
service, wireless local loop telephony is intended to provide fixed telephone
services which can be deployed as rapidly as cellular telephony but at a lower
cost per line. This lower cost makes wireless local loop telephony a more
attractive telephony alternative to a large portion of the populations in the
Communications Group's markets that do not require mobile communications. In
addition, because the wireless local loop technology which the Communications
Group is using operates at 64 kilobits per second, it can be used for high speed
facsimile and data transmission, including Internet access.
LICENSES
The Communications Group's operations are subject to governmental regulation in
its markets and its operations require certain governmental approvals. There can
be no assurance that the Communications Group will be able to obtain all
necessary approvals to operate additional cable television, wireless telephony
or paging systems or radio broadcasting stations in any of the markets in which
it is seeking to establish additional businesses.
The licenses pursuant to which the Communications Group's businesses operate are
issued for limited periods, including certain licenses which are renewable
annually. Certain of these licenses expire over the
14
ITEM 1. BUSINESS (CONTINUED)
next several years. One of the licenses held by the Communications Group has
expired, although the Communications Group has been permitted to continue
operations while the reissuance is pending. The Communications Group has applied
for a renewal and expects a new license to be issued. Five other licenses held
or used by the Communications Group will expire during 1998, including the
license for Radio Juventus, the Company's radio operation in Hungary. The
failure of such licenses to be renewed may have a material adverse effect on the
Company's results of operations. Additionally, certain of the licenses pursuant
to which the Communications Group's businesses operate contain network build-out
milestone clauses. The failure to satisfy such milestones could result in the
loss of such licenses which may have a material adverse effect on the
Communications Group.
In the case of the licenses other than Radio Juventus, the Company's Joint
Ventures will apply for renewals of their licenses. While there can be no
assurance that these four licenses will be renewed, based on past experience,
the Communications Group expects to obtain such renewals. In the case of Radio
Juventus, the Communications Group plans to cause the venture to participate in
a competitive tender for a regional broadcasting license to cover Budapest and
certain other areas in Hungary. The Company believes that Radio Juventus'
prospects for winning such tender, which will be determined by the strength of
its bid in the tender in comparison to the bids of other participants in the
tender, are good.
JOINT VENTURE OWNERSHIP STRUCTURES/LIQUIDITY ARRANGEMENTS
The following table summarizes the Communications Group's Joint Ventures and
subsidiaries at December 31, 1997, as well as the amounts contributed, amounts
loaned net of repayments and total amounts invested in such Joint Ventures and
subsidiaries at December 31, 1997 (in thousands).
AMOUNT TOTAL INVESTMENT
CONTRIBUTED TO AMOUNT LOANED TO IN
COMPANY JOINT VENTURE/ JOINT VENTURE/ JOINT VENTURE/
JOINT VENTURE (1) OWNERSHIP % SUBSIDIARY SUBSIDIARY SUBSIDIARY (8)
- ------------------------------------------- --------------- --------------- ----------------- ------------------
CABLE TELEVISION
Romsat Cable TV (Bucharest, Romania) (2) 97% $ 612 $ 6,055 $ 6,667
(11).....................................
Viginta (Vilnius, Lithuania) (2)........... 55% 397 2,363 2,760
Kosmos TV (Moscow, Russia)................. 50% 1,093 10,053 11,146
Baltcom TV (Riga, Latvia).................. 50% 819 11,811 12,630
Ayety TV (Tbilisi, Georgia)................ 49% 779 7,025 7,804
Kamalak TV (Tashkent, Uzbekistan).......... 50% 655 3,137 3,792
Sun TV (Chisinau, Moldova)................. 50% 400 5,835 6,235
Alma TV (Almaty, Kazakstan)................ 50% 222 3,547 3,769
Cosmos TV (Minsk, Belarus)................. 50% 400 2,844 3,244
Teleplus (St. Petersburg, Russia) (4)...... 45% 990 103 1,093
15
ITEM 1. BUSINESS (CONTINUED)
AMOUNT TOTAL INVESTMENT
CONTRIBUTED TO AMOUNT LOANED TO IN
COMPANY JOINT VENTURE/ JOINT VENTURE/ JOINT VENTURE/
JOINT VENTURE (1) OWNERSHIP % SUBSIDIARY SUBSIDIARY SUBSIDIARY (8)
- ------------------------------------------- --------------- --------------- ----------------- ------------------
PAGING
Baltcom Paging (Tallinn, Estonia) (2)...... 85% $ 3,715 $ 1,380 $ 5,095
CNM (Romania) (2).......................... 54% 490 4,409 4,899
Paging One Services (Austria) (2).......... 100% 1,036 5,673 6,709
Baltcom Plus (Riga, Latvia)................ 50% 250 2,776 3,026
Paging One (Tbilisi, Georgia).............. 45% 250 1,329 1,579
Raduga Poisk (Nizhny Novgorod, Russia)..... 45% 330 48 378
PT Page (St. Petersburg, Russia)........... 40% 1,102 -- 1,102
Kazpage (Kazakstan) (9).................... 26-41% 520 343 863
Kamalak Paging (Tashkent, Samarkand, 50% 180 1,809 1,989
Bukhara and Andijan, Uzbekistan).........
Alma Page (Almaty and Ust-Kamenogorsk, 50% -- 2,161 2,161
Kazakstan)...............................
Paging Ajara (Batumi, Georgia)............. 35% 43 233 276
RADIO BROADCASTING
Radio Juventus (Budapest, Hungary) (2)..... 100% 8,107 -- 8,107
SAC (Moscow, Russia) (2)................... 83% 631 3,011 3,642
Radio Skonto (Riga, Latvia) (2)............ 55% 302 252 554
Radio One (Prague, Czech Republic) (2)..... 80% 627 213 840
NewsTalk Radio (Berlin,Germany) (2)........ 70% 2,758 1,203 3,961
Radio Vladivostok, (Vladivostok, Russia) 51% 170 -- 170
(10).....................................
Country Radio (Prague, Czech Republic) 85% 2,040 -- 2,040
(10).....................................
Radio Georgia (Tbilisi, Georgia) (10)...... 51% 222 -- 222
Eldoradio (formerly Radio Katusha)(St. 50% 464 930 1,394
Petersburg, Russia) (5)..................
Radio Nika (Socci, Russia)................. 51% 260 43 303
AS Trio LSL (Tallinn, Estonia) (5)......... 49% 1,572 -- 1,572
INTERNATIONAL TOLL CALLING
Telecom Georgia (Tbilisi, Georgia)......... 30% 2,554 -- 2,554
TRUNKED MOBILE RADIO
Protocall Ventures, Ltd. (2) (3)........... 56% 2,550 10,725 13,275
Spectrum (Kazakstan) (12).................. 31% 36 724 760
CELLULAR TELECOMMUNICATIONS
Baltcom GSM (Latvia)....................... 21% 13,483 -- 13,483
Magticom (Tbilisi, Georgia)................ 34% 7,890 -- 7,890
Ningbo Ya Mei Communications (Ningbo City, 41% 9,444 19,306 28,750
China) (6)...............................
FIXED TELEPHONY
Sichuan Tai Li Feng Telecommunications, Co. 54% 11,087 -- 11,087
(Sichuan Province, China) (4) (7)........
Chongqing Tai Le Feng Telecommunication, 54% 7,439 -- 7,439
Co.
(Chongqing City, China) (4) (7)..........
Instaphone (Kazakstan) (4)................. 50% 4 680 684
------- -------- --------
TOTAL................................ $ 85,923 $ 110,021 $ 195,944
------- -------- --------
------- -------- --------
- ------------------------
(1) Each parenthetical notes the area of operations for each operational Joint
Venture or the area for which each pre-operational Joint Venture is
licensed.
16
ITEM 1. BUSINESS (CONTINUED)
(2) Results of operations are consolidated with the Company's financial
statements.
(3) The Communications Group owns its trunked mobile radio ventures through
Protocall, in which it has a 56% ownership interest. Through Protocall, the
Communications Group owns interests in (i) Belgium Trunking (24%), which
provides services in Brussels and Flanders, Belgium, (ii) Radiomovel
Telecommunicacoes (36%), which provides services in Portugal, (iii)
Teletrunk Spain (17-48% depending on the joint venture), which provides
services through 4 Joint Ventures in Madrid, Valencia, Aragon and Catalonia,
Spain and (iv) Spectrum (31%), which operates in Almaty and Aryran,
Kazakstan. A portion of the Communications Group's interest in Spectrum is
held directly. The above amounts include $36,050 contributed to Spectrum
directly by the Company. In March 1998, the Communications Group increased
its ownership of Belgium Trunking to 50%.
(4) Pre-operational systems as of December 31, 1997. In January 1998, Teleplus
began to provide cable television services in St. Petersburg, Russia.
(5) Eldoradio includes two radio stations operating in St. Petersburg, Russia
and AS Trio LSL includes four operating in various cities throughout
Estonia. In December 1997, the Communications Group entered into a
definitive agreement to purchase an additional 25% of Eldoradio, increasing
its ownership percentage to 75%.
(6) Ningbo Ya Mei Communications is participating in the build-out of an
operational GSM system in Ningbo City, China, and providing financing,
technical assistance and consulting services to the systems operator.
(7) Sichuan Tai Li Feng Telecommunications, Co. and Chongqing Tai Le Feng
Telecommunication, Co. are pre-operational Joint Ventures that are
participating in the construction and development of a local telephone
network in the Sichuan Province and the City of Chongqing, China.
(8) The total investment does not include any incurred losses.
(9) Kazpage is comprised of a service entity and 10 paging Joint Ventures that
provide services in Kazakstan. The Company's interest in the Joint Ventures
ranges from 26% to 41% and its interest in the service entity is 51%.
Amounts described as loaned in the above table represent loans to the
service entity which in turn funds the Joint Ventures.
(10) The investment in these Joint Ventures were made in the quarter ended
December 31, 1997. The Joint Ventures' results of operations will be
consolidated with the Company's financial statements in the quarter ended
March 31, 1998.
(11) In March 1998, the Communications Group increased its ownership of Romsat
to 100%.
(12) In March 1998, Spectrum and its shareholders, including the Communications
Group, entered into a subscription agreement with the European Bank for
Reconstruction and Development ("EBRD") and the Fund New Europe ("FNE")
pursuant to which the EBRD will purchase 30% and FNE 3% of the shares of
Spectrum in return for making equity contributions to Spectrum of $181,800
and $18,200, respectively. In connection with such investment, the EBRD has
agreed to make a loan of up to $2,000,000 to Spectrum. The closing of the
share purchase and loan are subject to the satisfaction of the conditions
precident set forth in the subscription agreement.
Generally, the Communications Group owns 50% or more of the equity in a Joint
Venture with the balance of such equity being owned by a local entity, often a
government-owned enterprise. In China, the Communications Group's Joint Ventures
enter into a network system cooperation contract where the Joint Ventures are
responsible for financing, providing technical advice on the construction and
management consulting services on the operation of the relevant networks. In
some cases, the Communications Group
17
ITEM 1. BUSINESS (CONTINUED)
owns or acquires interests in entities (including competitors) that are already
licensed and are providing service. Joint Ventures' day-to-day activities are
managed by a local management team selected by its board of directors or its
shareholders. The operating objectives, business plans and capital expenditures
of a Joint Venture are approved by its board of directors, or in certain cases,
by its shareholders. In most cases, an equal number of directors or managers of
the Joint Venture are selected by the Communications Group and its local
partner. In other cases, a different number of directors or managers of the
Joint Venture may be selected by the Communications Group on the basis of its
percentage ownership interest.
In many cases, the credit agreement pursuant to which the Company loans funds to
a Joint Venture provides the Company with the right to appoint the general
manager of the Joint Venture and to approve unilaterally the annual business
plan of the Joint Venture. These rights continue so long as amounts are
outstanding under the credit agreement. In other cases, such rights may also
exist by reason of the Company's percentage ownership interest in the Joint
Venture or under the terms of the Joint Venture's governing instruments.
The Communications Group's Joint Ventures in Eastern Europe and the FSU are
limited liability entities which are generally permitted to enter into
contracts, acquire property and assume and undertake obligations in their own
names. Because these Joint Ventures are limited liability companies, the Joint
Ventures' equity holders have limited liability to the extent of their
investment. Under the Joint Venture agreements, each of the Communications Group
and the local Joint Venture partner is obligated to make initial capital
contributions to the Joint Venture. In general, a local Joint Venture partner
does not have the resources to make cash contributions to the Joint Venture. In
such cases, the Company has established or plans to establish an agreement with
the Joint Venture whereby, in addition to cash contributions by the Company,
both the Company and the local partner make in-kind contributions (usually
communications equipment in the case of the Company and frequencies, space on
transmitting towers and office space in the case of the local partner), and the
Joint Venture partner signs a credit agreement with the Company pursuant to
which the Company loans the Joint Venture certain funds. Typically, such credit
agreements provide for interest payments to the Company at rates ranging
generally from prime to prime plus 6% and for payment of principal and interest
from 90% of the Joint Venture's available cash flow. Prior to repayment of its
credit agreement, the Joint Ventures are significantly limited or prohibited
from distributing profits to its shareholders. As of December 31, 1997, the
Company had obligations to fund (i) an additional $149,000 to the equity of its
Joint Ventures in Eastern Europe and the FSU (or to complete the payment of
shares purchased by the Company) and (ii) up to an additional $19.0 million with
respect to the various credit lines the Company has extended to its Joint
Ventures in Eastern Europe and the FSU. The Company's funding commitments under
such credit lines are contingent upon its approval of the Joint Ventures'
business plans. To the extent that the Company does not approve a Joint
Venture's business plan, the Company is not required to provide funds to such
Joint Venture under the credit line. The distributions (including profits) from
the Joint Venture to the Company and the local partner are made on a pro rata
basis in accordance with their respective ownership interests.
In addition to loaning funds to the Joint Ventures, the Communications Group
often provides certain services to many of the Joint Ventures for a fee. The
Communications Group often does not require start-up Joint Ventures to reimburse
it for certain services that it provides such as engineering advice, assistance
in locating programming, and assistance in ordering equipment. As each Joint
Venture grows, the Communications Group institutes various payment mechanisms to
have the Joint Venture reimburse it for services where they are provided. The
failure of the Communications Group to obtain reimbursement of such services
will not have a material impact on the Company's results of operations.
Under existing legislation in certain of the Communications Group's markets,
distributions from a Joint Venture to its partners is subject to taxation. The
laws in the Communications Group's markets vary
18
ITEM 1. BUSINESS (CONTINUED)
markedly with respect to the tax treatment of distributions to Joint Venture
partners and such laws have also recently been revised significantly in many of
the Communications Group's markets. There can be no assurance that such laws
will not continue to undergo major changes in the future which could have a
significant negative impact on the Company and its operations.
SNAPPER
GENERAL. Snapper manufactures Snapper-Registered Trademark- brand power lawn
and garden equipment for sale to both residential and commercial customers. The
residential equipment includes self-propelled and push-type walk behind
lawnmowers, rear engine riding lawnmowers, garden tractors, zero turn radius
lawn equipment, garden tillers, snow throwers and related parts and accessories.
The commercial mowing equipment and mid-mount commercial equipment includes
commercial quality self-propelled walk-behind lawnmowers and wide area and
front-mount zero turn radius lawn equipment.
Snapper products are premium-priced, generally selling at retail from $300 to
$10,500. Snapper sells and supports directly a 5,000-dealer network for the
distribution of its products. Snapper also sells its products through foreign
distributors and offers a limited selection of residential walk-behind
lawnmowers and rear-engine riding lawnmowers through approximately 250 Home
Depot locations.
A large percentage of the residential sales of lawn and garden equipment are
made during a 17-week period from early spring to mid-summer. Although some
sales are made to the dealers and distributors prior to this period, the largest
volume of sales is made during this time. The majority of revenues during the
late fall and winter periods are related to snow thrower shipments. Snapper has
an agreement with a financial institution which makes floor-plan financing for
Snapper products available to dealers. This agreement provides financing for
dealer inventories and accelerates cash flow to Snapper. Under the terms of this
agreement, a default in payment by one of the dealers on the program is
non-recourse to Snapper. If there is a default by a dealer Snapper is obligated
to repurchase any equipment recovered from the dealership that is new and
unused. At December 31, 1997 there was approximately $65.7 million outstanding
under this floor-plan financing arrangement. The Company has guaranteed
Snapper's payment obligations under this arrangement.
Snapper also makes available, through General Electric Credit Corporation, a
retail customer revolving credit plan. This credit plan allows consumers to pay
for Snapper products over time. Consumers also receive Snapper credit cards
which can be used to purchase additional Snapper products.
Snapper manufactures its products in McDonough, Georgia at facilities totaling
approximately 1.0 million square feet. Excluding engines and tires, Snapper
manufactures a substantial portion of the component parts to its products. Most
of the parts and material for Snapper's products are commercially available from
a number of sources.
During the three years ended December 31, 1997, Snapper spent an average of $4.4
million per year for research and development. Although it holds several design
and mechanical patents, Snapper is not dependent upon such patents, nor does it
believe that patents play an important role in its business. Snapper does
believe, however, that the registered trademark "Snapper-Registered Trademark-"
is an important asset in its business. Snapper walk-behind mowers are subject to
Consumer Product Safety Commission safety standards and are designed and
manufactured in accordance therewith.
The lawn and garden industry is highly competitive with the competition based
upon price, image, quality, and service. Although no one company dominates the
market, the Company believes that Snapper is a significant manufacturer of lawn
and garden products. A large number of companies manufacture and distribute
products that compete with Snapper's, including The Toro Company, Lawn-Boy (a
product of
19
ITEM 1. BUSINESS (CONTINUED)
The Toro Company), Sears, Roebuck and Co., Deere and Company, Ariens Company,
Honda Corporation, Murray Ohio Manufacturing, American Yard Products, Inc., MTD
Products, Inc. and Simplicity Manufacturing, Inc.
INVESTMENT IN RDM
In December 1994, the Company acquired 19,169,000 shares of RDM common stock,
representing approximately 39% of the outstanding shares of RDM common stock as
of the date thereof, in exchange for all of the issued and outstanding capital
stock of four of its wholly owned subsidiaries (the "Exchange Transaction"). At
the time of the Exchange Transaction, RDM, a New York Stock Exchange ("NYSE")
listed company, through its operating subsidiaries, was a leading manufacturer
of fitness equipment and toy products in the United States.
In connection with the Exchange Transaction, the Company, RDM and certain
officers of RDM entered into a shareholders agreement, pursuant to which, among
other things, the Company obtained the right to designate four individuals to
serve on RDM's Board of Directors, subject to certain reductions.
In June 1997, RDM entered into a $100.0 million revolving credit facility (the
"RDM Credit Facility") with a syndicate of lenders led by Foothill Capital
Corporation (the "Lender") and used a portion of the proceeds of such facility
to refinance its existing credit facility. In order to induce the Lender to
extend the entire amount of the RDM Credit Facility, Metromedia Company
("Metromedia"), a company controlled by John Kluge, the Chairman of the Board of
Directors of the Company and Stuart Subotnick, the Chief Executive Officer of
the Company provided the Lender with a $15.0 million letter of credit (the
"Metromedia Letter of Credit") that could be drawn by the Lender (i) upon five
days notice, if RDM defaulted in any payment of principal or interest or
breached any other convenant or agreement in the RDM Credit Facility and as a
result of such other default the lenders accelerated the amounts outstanding
under the RDM Credit Facility, subject, in each such case, to customary grace
periods, or (ii) immediately, upon the bankruptcy or insolvency of RDM. In
consideration for the Metromedia Letter of Credit, RDM issued to Metromedia
10-year warrants to acquire 3,000,000 shares of RDM common stock, exercisable
after 90 days from the date of issuance at an exercise price of $.50 per share
(the "RDM Warrants"). In accordance with the terms of the agreement entered into
in connection with the RDM Credit Facility, Metromedia offered the Company the
opportunity to substitute its Letter of Credit for the Metromedia Letter of
Credit and to receive the RDM Warrants. On July 10, 1997, the Company's Board of
Directors elected to substitute its Letter of Credit ("Letter of Credit") for
the Metromedia Letter of Credit and the RDM Warrants were assigned to the
Company.
On August 22, 1997, RDM announced that it had failed to make the August 15, 1997
interest payment due on its subordinated debentures and that it had no present
ability to make such payment. As a result, on August 22, 1997, the Lender
declared an Event of Default (as defined under the RDM Credit Facility) and
accelerated all amounts outstanding under such facility. On August 29, 1997, RDM
and certain of its affiliates each subsequently filed voluntary petitions for
relief under chapter 11 of the Bankruptcy Code. Since the commencement of their
respective chapter 11 cases, RDM and its affiliates have proceeded with the
liquidation of their assets and properties and have discontinued ongoing
business operations. As of August 22, 1997, the closing price per share of RDM
common stock was $.50 and the quoted market value of the Company's investment in
RDM was approximately $9.6 million. As a result RDM's financial difficulties and
uncertainties, the NYSE halted trading in the shares of RDM common stock and the
Company believes that it will not receive any compensation for its equity
interest.
After the commencement of the chapter 11 cases, the Lender drew the entire
amount of the Letter of Credit. Consequently, the Company will become subrogated
to the Lender's secured claims against the Company in an amount equal to the
drawing under the Letter of Credit, following payment in full of the
20
ITEM 1. BUSINESS (CONTINUED)
Lender. The Company intends to vigorously pursue its subrogation claims in the
chapter 11 cases. However, it is uncertain whether the Company will succeed in
any such subrogation claims or that RDM's remaining assets will be sufficient to
pay any such subrogations claims.
On February 18, 1998, the Office of the United States Trustee filed a motion to
appoint a chapter 11 trustee in the United States Bankruptcy Court for the
Northern Division of Georgia. RDM and its affiliates subsequently filed a motion
to convert the chapter 11 cases to cases under chapter 7 of the Bankruptcy Code.
On February 19, 1998, the bankruptcy court granted the United States Trustee's
motion and ordered that a chapter 11 trustee be appointed. The bankruptcy court
also ordered that the chapter 11 cases not convert to cases under chapter 7 of
the Bankruptcy Code. On February 25, 1998, each of the Company's designees on
RDM's Board of Directors submitted a letter of resignation.
THE ENTERTAINMENT GROUP SALE
On July 10, 1997, the Company consummated the sale (the "Entertainment Group
Sale") of substantially all of the assets of its Entertainment Group, consisting
of Orion Pictures Corporation ("Orion"), Samuel Goldwyn Company ("Goldwyn") and
Motion Picture Corporation of America ("MPCA") (and their respective
subsidiaries), including its feature film and television library of over 2,200
titles, to P&F Acquisition Corp., the parent company of Metro-Goldwyn-Mayer, for
a gross consideration of $573.0 million. The Company had operated the
Entertainment Group since the November 1 Merger. The Company used $296.4 million
of the proceeds from the Entertainment Group Sale to repay all amounts
outstanding under the Entertainment Group's credit facilities and certain other
indebtedness of the Entertainment Group and $140.0 million of such proceeds to
repay all of its outstanding debentures.
LANDMARK SALE
On December 17, 1997, the Company entered into an agreement (the "Landmark
Agreement") with Silver Cinemas, Inc. ("Silver Cinemas"), pursuant to which the
Company sold to Silver Cinemas (the "Landmark Sale") all of the assets, except
cash and certain of the liabilities of Landmark, for an aggregate cash purchase
price of approximately $62.5 million. The Company anticipates that the Landmark
Sale will be consummated in April 1998.
ENVIRONMENTAL PROTECTION
Snapper's manufacturing plant is subject to federal, state and local
environmental laws and regulations. Compliance with such laws and regulations
has not affected materially nor is it expected to affect materially Snapper's
competitive position. Snapper's capital expenditures for environmental control
facilities, its incremental operating costs in connection therewith and
Snapper's environmental compliance costs were not material in 1997 and are not
expected to be material in future years.
The Company has agreed to indemnify a former subsidiary of the Company for
certain obligations, liabilities and costs incurred by the subsidiary arising
out of environmental conditions existing on or prior to the date on which the
subsidiary was sold by the Company in 1987. Since that time, the Company has
been involved in various environmental matters involving property owned and
operated by the subsidiary, including clean-up efforts at landfill sites and the
remediation of groundwater contamination. The costs incurred by the Company with
respect to these matters have not been material during any year through and
including the year ended December 31, 1997. As of December 31, 1997, the Company
had a remaining reserve of approximately $1.1 million to cover its obligations
to its former subsidiary. During 1996, the Company was notified by certain
potentially responsible parties at a superfund site in Michigan that the former
subsidiary may also be a potentially responsible party at the superfund site.
The former subsidiary's liability, if any, has not been determined, but the
Company believes that such liability will not be material.
21
ITEM 1. BUSINESS (CONTINUED)
The Company, through a wholly owned subsidiary, owns approximately 17 acres of
real property located in Opelika, Alabama (the "Opelika Property"). The Opelika
Property was formerly owned by Diversified Products Corporation ("DP"), a former
subsidiary of the Company that used the Opelika Property as a storage area for
stockpiling cement, sand, and mill scale materials needed for or resulting from
the manufacture of exercise weights. In June 1994, DP discontinued the
manufacture of exercise weights and no longer needed to use the Opelika Property
as a storage area. The Opelika Property was transferred to the Company's wholly
owned subsidiary in connection with the sale of the Company's former sporting
goods subsidiary. In connection with such sale, the Company entered into an
environmental indemnity agreement (the "Environmental Indemnity Agreement")
under which the Company is obligated for costs and liabilities resulting from
the presence on or migration of regulated materials from the Opelika Property.
The Company's obligations under the Environmental Indemnity Agreement with
respect to the Opelika Property are not limited. The Environmental Indemnity
Agreement does not cover environmental liabilities relating to any property now
or previously owned by DP except for the Opelika Property.
On January 22, 1996, the Alabama Department of Environmental Management ("ADEM")
advised the Company that the Opelika Property contains an "unauthorized dump" in
violation of Alabama environmental regulations. The letter from ADEM requires
the Company to present for ADEM's approval a written environmental remediation
plan for the Opelika Property. The Company has retained an environmental
consulting firm to develop an environmental remediation plan for the Opelika
Property. In 1997, the Company received the consulting firm's report. The
Company has conducted a grading and capping in accordance with the remediation
plan and has reported to ADEM that the work was completed and the Company will
undertake to monitor the property on a quarterly basis. The Company believes
that its reserves of approximately $1.6 million will be adequate to cover all
further costs of remediation.
EMPLOYEES
As of March 9, 1998, the Company through its subsidiaries had approximately
1,300 regular employees. Of which, approximately 700 employees were represented
by unions under collective bargaining agreements. In general, the Company
believes that its employee relations are good.
SEGMENT AND GEOGRAPHIC DATA
Business segment data and information regarding the Company's foreign revenues
by country area are included in notes 2, 3 and 14 to the Notes to Consolidated
Financial Statements included in Item 8 hereof.
22
ITEM 2. PROPERTIES
The following table contains a list of the Company's principal properties:
NUMBER OF
------------------------
DESCRIPTION OWNED LEASED LOCATION
- -------------------------------------------------------------- ----------- ----------- --------------------------------
THE COMMUNICATIONS GROUP:
Office space -- 1 Stamford, Connecticut
Office space -- 1 Moscow, Russia
Office space -- 1 Vienna, Austria
Office space -- 2 New York, New York
Office space -- 1 Beijing, People's Republic of
China
GENERAL CORPORATE:
Office space -- 1 East Rutherford, New Jersey
SNAPPER:
Manufacturing plant 1 -- McDonough, Georgia
Distribution facility -- 2 McDonough, Georgia
Distribution facility -- 1 Dallas, Texas
Distribution facility -- 1 Greenville, Ohio
Distribution facility -- 1 Reno, Nevada
The Company's management believes that the facilities listed above are generally
adequate and satisfactory for their present usage and are generally well
utilized.
23
ITEM 3. LEGAL PROCEEDINGS
FUQUA INDUSTRIES, INC. SHAREHOLDER LITIGATION
In re Fuqua Industries, Inc. Shareholder Litigation, Del. Ch., Consolidated C.A.
No. 11974. Plaintiff Virginia Abrams filed this purported class and derivative
action in the Delaware Court of Chancery (the "Court") on February 22, 1991
against Fuqua Industries, Inc. ("Fuqua"), Intermark, Inc. ("Intermark"), the
then-current directors of Fuqua and certain past members of the board of
directors. The action challenged certain transactions which were alleged to be
part of a plan to change control of the board of Fuqua from J.B. Fuqua to
Intermark and sought a judgment against defendants in the amount of $15.7
million, other unspecified money damages, an accounting, declaratory relief and
an injunction prohibiting any business combination between Fuqua and Intermark
in the absence of approval by a majority of Fuqua's disinterested shareholders.
Subsequently, two similar actions, styled Behrens v. Fuqua Industries, Inc. et
al.. Del. Ch., C.A. No. 11988 and Freberg v. Fuqua Industries, Inc. et al. Del.
Ch., C.A. No. 11989 were filed with the Court. On May 1, 1991, the Court ordered
all of the foregoing actions consolidated. On October 7, 1991, all defendants
moved to dismiss the complaint. Plaintiffs thereafter took three depositions
during the next three years.
On December 28, 1995, plaintiffs filed a consolidated second amended derivative
and class action complaint, purporting to assert additional facts in support of
their claim regarding an alleged plan, but deleting their prior request for
injunctive relief. On January 31, 1996, all defendants moved to dismiss the
second amended complaint. After the motion was briefed, oral argument was held
on November 6, 1996. On May 13, 1997, the Court issued a decision on defendants'
motion to dismiss, The Court dismissed all of plaintiffs' class claims and
dismissed all of plaintiffs' derivative claims except for the claims that Fuqua
board members (i) entered into an agreement pursuant to which Triton Group, Inc.
(which was subsequently merged into Intermark, "Triton") was exempted from 8
Del. C. 203 and (ii) undertook a program pursuant to which 4.9 million shares of
Fuqua common stock were repurchased, allegedly both in furtherance of an
entrenchment plan. On January 16, 1998, the Court entered an order implementing
the May 13, 1997 decision. The order also dismissed one of the defendants from
the case with prejudice and dismissed three other defendants without waiver of
any rights plaintiffs might have to reassert the claims if the opinion were to
be vacated or reversed on appeal.
On February 5, 1998, the plaintiffs filed a consolidated third amended
derivative complaint and named as defendants Messrs. J.B. Fuqua, Klamon,
Sanders, Scott, Warner and Zellars. The Complaint alleged that defendants (i)
entered into an agreement pursuant to which Triton was exempted from 8 Del. C.
203 and (2) undertook a program pursuant to which 4.9 million shares of Fuqua
common stock were repurchased, both allegedly in furtherance of an entrenchment
plan. For their relief, plaintiffs seek damages and an accounting of profits
improperly obtained by defendants.
On March 9, 1998, defendants Klamon, Sanders, Zellars, Scott and Warner filed
their answers denying each of the substantive allegations of wrongdoing
contained in the third amended complaint. The Company filed its answer the same
day, submitting itself to the jurisdiction of the Court for a proper resolution
of the claims purported to be set forth by the plaintiffs. On March 10, 1998,
defendant J.B. Fuqua filed his answer denying each of the substantive
allegations of wrongdoing contained in the third amended complaint.
MICHAEL SHORES V. SAMUEL GOLDWYN COMPANY, ET AL.
On May 20, 1996, SHORES V. SAMUEL GOLDWYN COMPANY, ET AL., Case No. BC 150360,
was filed in the Superior Court of the State of California as a purported class
action lawsuit. Plaintiff Michael Shores alleged that, in connection with the
Goldwyn Merger, Goldwyn's directors and majority shareholder breached their
fiduciary duties to the public shareholders of Goldwyn. Plaintiff subsequently
added, in an amended
24
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
complaint, an allegation that the Company aided and abetted the other
defendants' fiduciary breaches. The Company successfully demurred to the amended
complaint on the ground that it did not state a cause of action against the
Company, and plaintiff was given an opportunity to replead. Plaintiff filed a
second amended complaint and alleged, in addition to his other claims, that the
Company negligently misrepresented and/or omitted material facts in the
Company's prospectus issued for the Goldwyn Merger. The Company again
successfully demurred to the second amended complaint, and the court refused to
allow the plaintiff another opportunity to replead the aiding and abetting claim
against the Company, but the plaintiff may replead the negligent
misrepresentation claim. The plaintiff has repleaded the third amended complaint
alleging only the negligent misrepresentation claim. The Company believes it has
meritorious defenses and is vigorously defending such action.
SAMUEL GOLDWYN, JR. V. METRO-GOLDWYN-MAYER INC., ET AL.
On October 29, 1997, Samuel Goldwyn, Jr., the former chairman of Goldwyn, filed
SAMUEL GOLDWYN, JR. V. METRO-GOLDWYN-MAYER INC., ET AL., Case No. BC 180290, in
Superior Court of the State of California, alleging that the Company
fraudulently induced him and the Samuel Goldwyn, Jr. Family Trust (the "Trust")
to enter into various agreements in connection with the Goldwyn Merger; breached
an agreement to guarantee the performance of Goldwyn Entertainment Company's
obligations to the Trust; and is using, without permission, the "Samuel Goldwyn"
trademark. The complaint also alleges that the Company and other defendants
breached Mr. Goldwyn's employment agreement and fiduciary duties owed to him and
the Trust, both before and after the sale of Goldwyn Entertainment Company to
Metro-Goldwyn-Mayer Inc. The Company had demurred on the plaintiff's complaint.
The Company believes it has meritorious defenses and is vigorously defending
such action.
SYDNEY H. SAPOWITZ AND SID SAPSOWITZ & ASSOCIATES, INC. V. JOHN W. KLUGE, STUART
SUBOTNICK, METROMEDIA INTERNATIONAL GROUP, ET AL.
On June 30, 1997, the plaintiffs in SYDNEY H. SAPSOWITZ AND SID SAPSOWITZ &
ASSOCIATES, INC. V. JOHN W. KLUGE, STUART SUBOTNICK, METROMEDIA INTERNATIONAL
GROUP, INC., ORION PICTURES CORPORATION, LEONARD WHITE, ET AL. filed a lawsuit
in Superior Court of the State of California alleging $28.7 million in damages
from the breach of an agreement to pay a finder's fee in connection with the
Entertainment Group Sale. The Company believes it has meritorious defenses and
is vigorously defending such action.
ANTHONY NICHOLAS GEORGIOU, ET AL. V. MOBIL EXPLORATION AND PRODUCING SERVICES,
INC., METROMEDIA INTERNATIONAL TELECOMMUNICATIONS, INC., ET AL.
On January 14, 1998, Anthony Nicholas Georgiou, et al. v. Mobil Exploration and
Producing Services, Inc., Metromedia International Telecommunications, Inc., et
al., Civil Action No. H-98-0098, was filed in the United States District Court
for the Southern District of Texas. Plaintiffs claim that MITI conspired against
and tortiously interfered with plaintiffs' potential contracts involving certain
oil exploration and production contracts in Siberia and telecommunications
contracts in the Russian Federation. Plaintiffs are claiming damages, for which
all defendants could be held jointly and severally liable, of an amount in
excess of $395.0 million. On or about February 27, 1998 MITI filed its answer
denying each of the substantive allegations of wrongdoing contained in the
complaint. The Company believes that it has meritorious defenses and is
vigorously defending this action.
INDEMNIFICATION AGREEMENTS
In accordance with Section 145 of the General Corporation Law of the State of
Delaware, pursuant to the Company's Restated Certificate of Incorporation, the
Company has agreed to indemnify its officers and
25
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
directors against, among other things, any and all judgments, fines, penalties,
amounts paid in settlements and expenses paid or incurred by virtue of the fact
that such officer or director was acting in such capacity to the extent not
prohibited by law.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and certain executive officers of the
Communications Group and their respective ages and positions are as follows:
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
John W. Kluge................... 83 Chairman
Stuart Subotnick................ 56 Vice Chairman, President and Chief Executive Officer
Silvia Kessel................... 47 Executive Vice President, Chief Financial Officer and Treasurer
Arnold L. Wadler................ 54 Executive Vice President, General Counsel and Secretary
Robert A. Maresca............... 63 Senior Vice President
Vincent D. Sasso, Jr............ 39 Vice President
METROMEDIA INTERNATIONAL TELECOMMUNICATIONS
INC.:
Carl C. Brazell................. 56 Co-President
Richard J. Sherwin.............. 55 Co-President
William Manning................. 41 Senior Vice President and Chief Financial Officer
METROMEDIA CHINA
CORPORATION ("MCC"):
Max E. Bobbitt.................. 52 President and Chief Executive Officer
Mark Hauf....................... 49 Executive Vice President and Chief Operating Officer
G. Mont Williams................ 53 Senior Vice President and Chief Technical Officer
SNAPPER, INC.:
Robin G. Chamberlain............ 38 President and Chief Executive Officer
J. Roddy Wells.................. 38 Senior Vice President and Chief Financial Officer
The following is a biographical summary of the experience of the executive
officers of the Company and certain executive officers of the Company's
subsidiaries.
Mr. Kluge has served as Chairman of the Board of Directors of the Company since
the consummation of the November 1 Merger and served as Chairman of the Board of
Orion from 1992 until the Entertainment Group Sale. In addition, Mr. Kluge has
served as Chairman and President of Metromedia and its predecessor-in-interest,
Metromedia, Inc. for over six years. Mr. Kluge is also a director of Metromedia
Fiber Network, Inc., Occidental Petroleum Corporation and Conair Corporation.
Mr. Kluge is Chairman of the Company's Executive Committee and is a member of
the Nominating Committee.
Mr. Subotnick has served as Vice Chairman of the Board of Directors since the
consummation of the November 1 Merger and as President and Chief Executive
Officer of the Company since December, 1996.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
In addition, Mr. Subotnick served as Vice Chairman of the Board of Orion from
November, 1992 until the Entertainment Group Sale. Mr. Subotnick has served as
Executive Vice President of Metromedia Company and its predecessor-in-interest,
Metromedia, Inc., for over six years. Mr. Subotnick is also Chairman of the
Board of Directors of Big City Radio, Inc., and also is a director of Metromedia
Fiber Network, Inc., Carnival Cruise Lines, Inc., and, was a director of RDM
from February 28, 1997 to February 25, 1998. Mr. Subotnick is a member of the
Executive Committee of the Company.
Ms. Kessel has served as Executive Vice President, Chief Financial Officer and
Treasurer since August 29, 1996 and, from November 1, 1995 until that date, as
Senior Vice President, Chief Financial Officer and Treasurer of the Company. In
addition, Ms. Kessel served as Executive Vice President of Orion from January,
1993 until the Entertainment Group Sale, Senior Vice President of Metromedia
since 1994 and President of Kluge & Company since January 1994. Prior to that
time, Ms. Kessel served as Senior Vice President and a Director of Orion from
June 1991 to November 1992 and Managing Director of Kluge & Company (and its
predecessor) from April 1990 to January 1994. Ms. Kessel is also a director of
Metromedia Fiber Network, Inc. and Big City Radio, Inc. and was a director of
RDM from February 28, 1997 to February 25, 1998. Ms. Kessel is a member of the
Nominating Committee of the Company.
Mr. Wadler has served as Executive Vice President, General Counsel and Secretary
since August 29, 1996 and, from November 1, 1995 until that date, as Senior Vice
President, General Counsel and Secretary of the Company. In addition, Mr. Wadler
served as a Director of Orion from 1991 until the Entertainment Group Sale and
as Senior Vice President, Secretary and General Counsel of Metromedia for over
six years. Mr. Wadler is also a director of Metromedia Fiber Network, Inc. and
Big City Radio, Inc. Mr. Wadler is Chairman of the Nominating Committee of the
Company.
Mr. Maresca has served as a Senior Vice President of the Company since November
1, 1995 and has served as a Senior Vice President-Finance of Metromedia for over
six years.
Mr. Sasso has served as the Company's Vice President of Financial Reporting
since July 1996. Prior to that time, Mr. Sasso served in a number of positions
at KPMG Peat Marwick LLP from November 1984 to July 1996, including partner from
July 1994 to June 1996.
Mr. Brazell has served as Co-President and Director of MITI and a predecessor
company since 1993. Prior to that time, Mr. Brazell served as President and
Chief Executive Officer of Command Communications, Inc., an owner of radio
properties, and prior to that served in various capacities in the radio
broadcasting industry, including serving as President of the radio division of
Metromedia, Inc., the predecessor-in-interest to Metromedia Company.
Mr. Sherwin has served as Co-President and Director of MITI and was a founder of
the predecessor company, International, Telcell, Inc., since October 1990. Prior
to that time, Mr. Sherwin served as the Chief Operating Officer of Graphic
Scanning Corp., a leading operator of cellular telephone, radio paging and
wireless cable television in the United States. Prior to his role at Graphic
Scanning Corp., he served in a number of marketing and sales positions with IBM.
Mr. Sherwin has served as Chairman of the Board and a director of the Personal
Communications Industry Association.
Mr. Manning has served as Senior Vice President and Chief Financial Officer of
MITI since 1992. Prior to joining MITI, Mr. Manning was Vice President and Chief
Financial Officer of the Sillerman Companies, a group of companies primarily
focused on the radio broadcasting industry. He has also held a variety of
management positions in companies such as CBS, Inc. and Control Data
Corporation.
Mr. Bobbitt has served as President and Chief Executive Officer of AAT since
January 1996 and of MCC since March 1, 1997. In January 1995, Mr. Bobbitt
retired from ALLTEL Corporation, a leading telecommunications and information
services company. During his twenty-four career with ALLTEL
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
Corporation, Mr. Bobbitt served as a director and held various positions
including President and Chief Operating Officer, Executive Vice President and
Chief Financial Officer. He currently serves as a director of WorldCom, Inc., an
international telecommunications and information services company.
Mr. Hauf joined MCC in September 1996 as Senior Vice President and Chief
Information Officer. He became Executive Vice President and Chief Operating
Officer in July 1997. He was Vice President and Chief Information Officer for
Universal Oil Products from March 1995 to September 1996. He was a founding
partner and Chief Information Officer of Multimedia Sales Agent, Inc. from
September 1993 to March 1995. He held several positions with Wisconsin Bell from
1968 to 1988 and joined Ameritech from 1988 to 1993 and served as Vice
President-Information Technology Services.
Mr. Williams joined MCC in August 1996 as Senior Vice President and Chief
Technology Officer. He was self employed as a Senior Telecommunications
Consultant from 1992 to August 1996. He served as Vice President of Business
Development and other positions for Ameritech from 1988 to 1992. He served as
Vice President of Business Development and other positions with Sprint from 1982
to 1988.
Ms. Chamberlain joined Snapper in 1989. Ms. Chamberlain has served as President
and Chief Executive Officer of the Company since December 1996, prior to that
Ms. Chamberlain was Vice President and Chief Financial Officer of Snapper and
has also served as Vice President and Treasurer, Controller and Assistant
Controller of Snapper.
Mr. Wells joined Snapper in 1995. Mr. Wells has served as Vice President and
Chief Financial Officer of the Company since 1997 and prior to that served as
Controller. Mr. Wells served in a number of positions including Senior
Accounting and Financial Systems Manager of Southeast Paper Manufacturing
Company from 1987 to 1995.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Since November 2, 1995, the Common Stock has been listed and traded on the
American Stock Exchange and the Pacific Stock Exchange (the "AMEX" and "PSE",
respectively) under the symbol "MMG". Prior to November 2, 1995, the Common
Stock was listed and traded on both the NYSE and the PSE under the symbol "ACT".
The following table sets forth the quarterly high and low closing sales prices
per share for the Company's Common Stock as reported by the AMEX.
MARKET PRICE OF COMMON STOCK
----------------------------------------
1997 1996
------------------ ------------------
QUARTERS ENDED HIGH LOW HIGH LOW
- ----------------------------------------------------------------- ------- ------- ------- -------
March 31......................................................... $11 7/8 $ 9 3/16 $14 1/4 $11 1/2
June 30.......................................................... 13 1/16 7 7/16 16 5/8 12 1/4
September 30..................................................... 12 7/8 10 7/8 12 1/2 9 1/2
December 31...................................................... 14 1/4 8 3/4 12 1/8 8 7/8
Holders of Common Stock are entitled to such dividends as may be declared by the
Company's Board of Directors and paid out of funds legally available for the
payment of dividends. The Company has not paid a dividend to