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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, 1998
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 Identification
of incorporation or organization) No.)
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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. X
The aggregate market value of voting stock of the registrant held by
nonaffiliates of the registrant at March 25, 1999 computed by reference to the
last reported sale price of the Common Stock on the composite tape on such date
was $273,340,000.
The number of shares of Common Stock outstanding as of March 25, 1999 was
69,123,841.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be used in connection with the
Registrant's 1999 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 company engaged in the development and operation of a variety of
communications businesses, including cellular telecommunications, fixed
telephony, international and long distance telephony, cable television, paging
and radio broadcasting, 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 wholly owned subsidiary Metromedia
International Telecommunications, Inc. ("MITI") and its majority owned
subsidiary Metromedia China Corporation ("MCC"), which together with MITI is
defined as the "Communications Group."
The year of 1998 was one of significant change and challenges in the business
environment in which the Company operates. The Company announced numerous
expansions and improvements to its networks, despite the economic downturn in
the FSU and much of Eastern Europe and slower growth in China. The Company
continuously monitors and reviews the performance of its operations to maximize
value to its shareholders. During 1998, the Company continued to focus its
growth on opportunities in communications businesses. The convergence of cable
television and telephony and the relationship of each business to Internet
access has provided the Company a unique opportunity. However, as the Company
has seen in the current year, the quick pace of technological, regulatory and
political change can effectively limit the opportunities for the Company in some
of the businesses in which it operates.
During 1997 and 1998, the Company completed the sales of its entertainment
assets, which has provided significant funds for the Company's expansion in
communications businesses. The Company saw limited growth opportunities in
trunked mobile radio and in July 1998 sold its investment in Protocall Ventures.
The Company still owns an interest in one trunked mobile radio venture and is
currently evaluating how best to maximize its value to the Company. With the
sale of these non-strategic assets the Company can focus on its core business of
providing affordable modern digital voice, data and multimedia communications
capabilities at the lowest possible capital cost in order to generate the
highest feasible return on investment.
The Company's strategy is as follows: Install modern wireless and wireline
technologies in combination to achieve the best mix of economy, performance and
accessibility to consumers. Then, market intensively a steadily expanding array
of value-added services including local telephone and cable service, specialized
cable programming, long-distance telephone service, cellular telephone service,
mobile telephone service and, ultimately, the Internet and high bandwidth
digital information and entertainment services.
The Company feels it can accomplish this goal by actively pursuing investments,
new licenses and agreements for communications services in new markets. The
Company continues to target emerging markets with strong economies which lack
adequate communications services. The Company will continue to pursue growth
opportunities through acquisitions.
The Company's businesses operate in an environment with significant competing
technologies and political and economic challenges. The Communications Group's
paging business is experiencing increasing competition from cellular telephony
in some of the markets in which it operates. There is an expectation of similar
competition in the future in other markets where the Communications Group has
paging operations. Despite a number of operating and marketing initiatives to
diminish the effects of the increased competition, including calling party pays,
the paging operations continued to generate operating losses in 1998. In the
current environment, the potential for growth in most of the markets the
Communications Group's paging operations competes in are limited in the near
term. Consistent
1
ITEM 1. BUSINESS (CONTINUED)
with the Company's strategy to maximize its greatest value for the capital
employed, the Communications Group has developed a revised operating plan to
stabilize its paging operations. Under the revised plan, the Communications
Group intends to manage its paging business to a level that will not require
significant additional funding for its operations. The Company anticipates that
under the revised plan, the paging business's operating loss will decrease
significantly. As a result of the revised plan, the Company has taken a
non-cash, nonrecurring charge on its paging assets of $49.9 million, which
includes a $35.9 million write off of goodwill and other intangibles. The
non-cash, nonrecurring charge adjusted the carrying value of goodwill and other
intangibles, fixed assets and investments in and advances to Joint Ventures and
wrote down inventory.
The Company believes that there is an inherent value to delivery of data via
wireless transmission and the increased demand for data transmission may create
a valuable business for the use of its paging frequencies. The Company will
continue to explore these areas and other opportunities for the paging business.
During 1998, a number of the countries in which the Communications Group
operates experienced economic and financial difficulties. Adverse economic
conditions in the Russian Federation resulted in a national liquidity crisis,
devaluation of the rouble, higher interest rates and reduced opportunity for
refinancing or refunding of maturing debts. Although the Russian Federation
government announced policies intended to address the structural weakness in the
Russian economy and financial sector, it is unclear if such policies will
improve the economic situation.
The financial crisis and the government's response may result in reduced
economic activity, a reduction in the availability of credit and the ability to
service debt, further increases in interest rates, an increased rate of
inflation or hyperinflation, further devaluation of the rouble, restrictions on
convertibility of the rouble and movements of hard currency and an increase in
the number of bankruptcies of entities, including bank failures, labor unrest
and strikes.
If the economic and financial situation in the Russian Federation and other
emerging markets does not improve, the reduced level of economic activity and
the opportunity to obtain financing in these markets could have a material
adverse effect on the operations of the Communications Group. If such factors
should materialize the Company expects such factors to affect its cable
television, paging and radio broadcasting businesses in Russia, Belarus and
other emerging countries.
Current Chinese law and regulation prohibit foreign companies and joint ventures
in which they participate from providing telephony services to customers in
China and generally limit the role that foreign companies or their joint
ventures may play in the telecommunications industry. As a result, the
Communications Group's investments in Joint Ventures in China have been made
through a structure known as the Sino-Sino-Foreign ("SSF") joint venture, a
widely used method for foreign investment in the Chinese telecommunications
industry, in which the SSF venturer is a provider of telephony equipment,
financing and technical services to telecommunications operators and not a
direct provider of telephone service.
Since mid-1998, there has been uncertainty regarding possible significant
changes in the regulation of and policy concerning foreign participation in and
financing of the telecommunications industry in China, including the continued
viability of the SSF structure and associated service and consulting
arrangements with China United Telecommunications Incorporated ("China Unicom"),
the operator of telephony services with which the Communication's Group Joint
Ventures have contracted. There has been no official policy statement or new
regulations as yet announced, and the Company has not received any official
notice regarding new policy or regulation. The Communications Group is not now
holding discussions regarding new projects in the Chinese telephony sector. The
Company believes that
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ITEM 1. BUSINESS (CONTINUED)
no such discussions can be productive until more definitive information is
available. In light of the current regulatory uncertainty, the Company is unable
to estimate the impact such changes in policy or regulation, if any, would have
on the Communications Group's Chinese Joint Ventures ability to generate
significant revenue, cash flow or net income.
The foregoing factors relating to economic and financial conditions in the
Russian Federation and other emerging markets, and to Chinese law and regulation
relating to foreign investment in the telecommunications industry, have not had
a significant effect on the Company's financial condition or results of
operations as of and for the year ended December 31, 1998. As is noted above,
the Company cannot yet predict the impact that such factors may have on its
future financial condition or results of operations. In addition, the Company
reports the results of the operations of the Communications Group's operations
in Eastern Europe and the republics of the former Soviet Union, and the
distributable cash flow generated by the telephony systems to which the
Company's Joint Ventures provide funding and services, on a three month lag and
therefore the impact of such factors, if any, are not yet fully reflected in the
Company's results of operations.
During 1998, the Company's Communications Group continued to experience
significant subscriber growth. Aggregate subscribers to the Communications
Group's Joint Ventures various services at the 1998 fiscal year-end was 520,182,
representing a growth of approximately 70% over the 1997 fiscal year-end total
of 305,198 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 company. Snapper manufactures Snapper-Registered Trademark- brand
premium-priced power lawnmowers, lawn tractors, garden tillers, snowthrowers and
related parts and accessories.
The Company owns approximately 39% of the outstanding common stock of RDM Sports
Group, Inc. ("RDM"). In August 1997, RDM and certain of its affiliates filed a
voluntary bankruptcy petition under chapter 11 of the Bankruptcy Code. The
chapter 11 trustee is in the process of selling all of RDM's 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 also
holds certain claims in the RDM proceeding, although there can be no assurance
that the Company will receive any distribution with respect to such claims.
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 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 in this Form 10-K 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 70.
3
ITEM 1. BUSINESS (CONTINUED)
DESCRIPTION OF BUSINESS GROUPS
COMMUNICATIONS GROUP
The Communications Group invests in communication businesses 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 operation or
ownership in the telecommunications sector. The Communications Group's China
Joint Ventures invest in telephony system construction and development for China
Unicom. The completed telephony systems are operated by China Unicom. The China
Joint Ventures receive payments from China Unicom based upon distributable cash
flow generated by the systems, 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 systems of China Unicom with respect to which such Joint
Ventures provide funding and services.
At December 31, 1998, the Communications Group owned interests in and
participated with partners in the management of Joint Ventures that had 46
operational systems, consisting of 11 cable television systems, 2 GSM cellular
telephone systems, 1 Joint Venture building out an operational GSM system and
providing financing, technical assistance and consulting services to the local
system operator, 1 international and long distance telephony provider, 1
wireless local loop operator, 13 paging systems, and 17 radio broadcasting
stations. In addition, the Communications Group has interests in and
participates with partners in the management of Joint Ventures that, as of
December 31, 1998, had 5 pre-operational systems, consisting of 1 wireless local
loop service provider, 1 Digital Advanced Mobile Phone System ("DAMPS") cellular
provider and 2 companies participating in the construction and development of
local telephone networks in China for up to 1 million lines and 1 Joint Venture
which will assist in the build out of a GSM system and provide financing,
technical and consulting service to the local operator. The Company believes
that all of the systems will be launched during 1999. The Communications Group
generally owns approximately 50% or more of the Joint Ventures in which it
invests.
The Company's Communications Group's Joint Ventures experienced significant
growth in 1998. Total subscribers at the end of the 1998 fiscal year-end was
520,182 compared with 305,198 at fiscal year-end 1997, an increase of
approximately 70%. The Company's financial results for December 31 include the
Communications 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, 1998, 1997, and
1996 were $130.1 million, $91.2 million, and $57.2 million, respectively. The
Communications Group invested approximately $105.9, $104.7 million, and $52.2
million during the years ended December 31, 1998, 1997, and 1996, respectively,
in the construction and development of its consolidated and unconsolidated Joint
Ventures' communications networks and broadcasting stations.
4
ITEM 1. BUSINESS (CONTINUED)
The following chart summarizes operating statistics by service type of both the
licensed pre-operational and operational systems constructed by the
Communications Group's Joint Ventures:
MARKETS TARGET/POPULATION
OPERATIONAL HOUSEHOLDS
PRE-OPERATIONAL AT (MILLIONS) (A) AGGREGATE
MARKETS AT DECEMBER AT SUBSCRIBERS AT
DECEMBER 31, DECEMBER 31, DECEMBER 31,
31, ----------- -------------- -------------------
COMMUNICATIONS SERVICE 1998 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------ ---------- ---- ---- ------ ----- -------- --------
Telephony (b):
Cellular Telecommunications............................... 2(c) 3(d) 3 13.5 13.5 94,084 21,842
Fixed Telephony (e)....................................... 3 1 -- 49.4(f) 41.8 n/a n/a
International and Long Distance Telephony (f)............. -- 1 1 5.5 5.5 n/a n/a
Cable Television............................................ -- 11 9 9.6 9.5 315,864 225,525
Paging (g).................................................. -- 13 11 103.0 89.5 110,234 57,831
Radio Broadcasting.......................................... -- 17 15 10.7 10.7 n/a n/a
--- ---- ---- -------- --------
5 46 39 520,182 305,198
--- ---- ---- -------- --------
--- ---- ---- -------- --------
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(a) Covers both pre-operational markets and operational markets. Target
population is provided for paging and telephony other than fixed telephony
and target households are provided for cable television systems, radio
stations and fixed telephony.
(b) During 1998, the Communications Group sold all of its interests in trunked
mobile radio, with the exception of its trunk mobile radio operation in
Kazakhstan ("Spectrum"). In addition, the Company wrote down the carrying
value of its investment in Spectrum since it is a non-strategic asset,
although the Communications Group will continue to operate the Joint Venture
to maximize its ultimate value to the Company.
(c) The Communications Group owns 46% of a pre-operational DAMPS cellular
telephone Joint Venture in the Tyumen region of the Russian Federation and a
second pre-operational Joint Venture in Ningbo City which is participating
in the build out of a GSM system and providing financing, technical
assistance and consulting services to the system operator.
(d) The Communications Group's operational systems include its Joint Ventures
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 by providing financing, technical assistance and consulting services
to the systems's operator.
(e) The Communications Group owns 38% of a pre-operational wireless local loop
system licensed to provide services throughout Azerbaijan, and owns 54%
interests in two pre-operational Joint Ventures in the China that are
participating in the construction and development of a local telephone
network for up to one million lines.
(f) Reflects the population of Sichuan Province and Chongqing Municipality in
China where the Communications Group is participating in the construction of
local wireline networks, and Kazakhstan where the Communications Group's
Joint Venture is licensed to operate.
(g) 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.
5
ITEM 1. BUSINESS (CONTINUED)
BUSINESS STRATEGY
The Communications Group's markets generally have large populations, with high
density and strong economic potential, but lack reliable and efficient
communications service. 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, supplement 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 will be able to capitalize on opportunities to provide
additional communications services in its markets as new licenses are awarded.
The Communications Group continually explores new investment opportunities for
communications systems in Eastern Europe, the FSU, China and other emerging
markets. In the FSU, the Communications Group principally utilizes wireless
local loop telephony technology which offers a high quality, cost effective
alternative to operators seeking to replace or compete with antiquated telephone
systems. This technology can provide telephony system operators with competitive
advantages in speed of deployment, low unit cost and ability to deliver high
speed facsimile, data communication and Internet access services. In China, the
Communications Group's experience with developing modern, fiber optic and high
speed digital switching networks is attractive to operators undertaking large
scale wireline communications system projects. Such networks provide operators
with nearly unlimited capacity to provide integrated voice, data and video
services as they compete with the often outdated and overloaded networks of
pre-existing communications systems. This range and depth of the Communications
Group's capabilities in advanced communications technology and business
development makes the Communications Group a uniquely attractive joint venture
partner for parties seeking to exploit the substantial growth opportunities
present in the emerging communications markets. The Communications Group
believes that it is well positioned to convert these capabilities into a
continuing stream of new investment projects.
The Communications Group's objective is to develop its core business of
providing affordable modern digital voice, data and multimedia communications
capabilities to consumers at the lowest possible capital cost in order to
generate the highest feasible return on investment. 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:
INSTALL MODERN WIRELESS AND WIRELINE TECHNOLOGIES IN COMBINATION TO ACHIEVE THE
BEST MIX OF ECONOMY, PERFORMANCE AND ACCESSIBILITY TO CONSUMERS. The
Communications Group's cable television Joint Ventures utilize three possible
distribution technologies; microwave multipoint distribution system ("MMDS"),
wireline cable or a hybrid combination of MMDS and wireline cable in which MMDS
acts
6
ITEM 1. BUSINESS (CONTINUED)
as a backbone to deliver programming to wireline cable networks for further
distribution to the customer.
UTILIZE LOW COST WIRELESS TECHNOLOGIES THAT ALLOW FOR RAPID BUILD-OUT. Many
markets where the Communications Group has or is pursuing wireless licenses have
limitations on wireline construction above ground and/or underground. The use of
wireless technologies has allowed and will continue to allow the Communications
Group to build-out its existing and future license areas, where such
technologies are appropriate, quickly and at a low cost.
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, 1998, 1997, and 1996, the Communications Group invested
approximately $105.9 million, $104.7 million, and $52.2 million, respectively,
in the construction and development of its consolidated and unconsolidated Joint
Ventures' communications networks and broadcast stations in existing license
areas.
DEPLOY ADVANCED FIBER OPTIC NETWORKS THAT PROVIDE SIGNIFICANT GROWTH AND SERVICE
CAPACITY. The nearly unlimited capacity and high speed of modern fiber optic
and digital switching technology will allow the Communications Group's large
scale, urban systems in China to sustain very high rates of subscriber and
service expansion. These modern, integrated systems compete effectively with the
capacity and service limitations of pre-existing analog and copper-based urban
telephone systems.
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.
INVEST IN VERTICAL BUSINESSES ALLIED TO CORE TELECOMMUNICATIONS. The
Communications Group is actively pursuing partnerships with data service
providers, information service operators, Internet access providers and firms
developing electronic commerce applications. Such businesses build vertically
upon the core communications infrastructure for which the Communications Group
has already established a position and reputation. These vertical business
opportunities offer prospects of extraordinary growth and substantially lower
restrictions on foreign participation. The Communications Group has identified
several such opportunities in China's rapidly developing information industry.
PURSUE ADDITIONAL OPPORTUNITIES IN EXISTING MARKETS. The Communications Group
is pursuing opportunities to provide additional communications services in
regions in which it currently operates. 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.
7
ITEM 1. BUSINESS (CONTINUED)
INVEST IN NEW MARKETS. The Communications Group is actively pursuing
investments in Joint Ventures to obtain new licenses and/or agreements for
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) the political, social and economic climate. The
Communications Group has identified several attractive opportunities in Eastern
Europe and the Pacific Rim. In addition, in 1998, the Communications Group
acquired a 38% interest in a Joint Venture licensed to provide wireless local
loop telephone services in the Republic of Azerbaijan and a 46% interest in a
Joint Venture licensed to provide DAMPS cellular service in the Tyumen region of
Russia.
TELEPHONY
The Communication Group's telephony line of business consists of cellular
telecommunications, fixed telephony and international and long distance
telephony calling.
CELLULAR TELECOMMUNICATIONS
OVERVIEW. The Communications Group owns a 22% interest in Baltcom GSM which
operates a nationwide cellular telecommunications system in Latvia. The
Communications Group also owns a 35% interest in Magticom, a Joint Venture that
operates cellular telecommunications systems in major 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 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 1998, the Communications Group acquired a 46% interest in a pre-operational
Joint Venture licensed to provide DAMPS service in the Tyumen region of Russia.
The Communications Group expects such Joint Venture to commence operations in
1999.
The Communications Group owns a 70% interest in a Joint Venture that finances
and provides supporting services to the China Unicom GSM system in Ningbo City,
China. This system launched commercial service in 1997.
TECHNOLOGY. The Communications Group's cellular telephone networks in Latvia,
Georgia and the cellular network to which it provides funding and services in
China operate using the GSM standard. GSM is the standard for cellular service
throughout Western Europe and Asia, 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 Systems
("AMPS") which cannot readily offer international roaming service.
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 home. The Communications Group sells cellular phones at a small
mark-up to cost. This
8
ITEM 1. BUSINESS (CONTINUED)
pass-through strategy encourages quick market penetration and early acceptance
of cellular telephony as a desirable addition to existing fixed telephony
service.
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. The Communications Group's
cellular systems in China compete with an entrenched, state-owned operator. The
Communications Group's systems are developed to provide levels of quality and
performance significantly better than those of the competing operator, thereby
positioning these systems to compete effectively for new mobile customers as
well as to seize a portion of the competing operator's customer base.
COMPETITION. Baltcom GSM's primary competitor in Latvia is Latvia Mobile
Telecom ("LMT") which operates two systems. LMT commenced service in 1995. 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 are Geocell, a Georgian-Turkish Joint Venture using a GSM system and an
existing smaller provider of cellular telephony services which uses the AMPS
technology in its network. The Communications Group's primary competition in the
Tyumen region will be from a GSM provider.
The Communications Group's operating partner in China is China Unicom, the first
company franchised to provide public wireless and wireline telephone service in
China that is independent of China Telecom, the historical Chinese monopoly
provider of telephony services. China Unicom competes in both the wireless and
wireline markets with China Telecom, the historical state-owned
telecommunications monopoly. China Unicom's systems, including especially those
supported by the Communication Group, have successfully captured initial
positions in China's rapidly expanding urban telecom markets. Chinese government
policy is aimed at assuring China Unicom's ultimate success as a measure of
creating open competition in the country's telecommunications industry.
The low level of penetration and often poor quality provided by the national
telephone systems in the emerging markets where the Communications Group's
activities are focused create an ideal competitive opportunity for the
Communications Group's operators. The low penetration of existing national
services means a large, unserved market exists for new operators. The poor
quality of existing services creates a precondition for customers switching to
the price competitive, yet higher quality services made possible by the new
operators' more modern networks. For example, in China more than half of urban
households do not yet have telephone service and most commercial customers are
sharply limited in the volume and speed of traffic that their existing public
telecom links will support. The Communications Group believes that such factors
offset most of the competitive advantage that would otherwise be enjoyed by an
entrenched national telecom monopoly.
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, overloaded, or both and consumers in these markets often must
wait several years to obtain telephone service.
9
ITEM 1. BUSINESS (CONTINUED)
The Communications Group 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 1998, the Communications Group acquired a 38% interest in Caspian American
Telecommunications ("CAT"), a Joint Venture licensed to provide wireless local
loop telephone services in the Republic of Azerbaijan. CAT is currently building
out its systems and negotiating an interconnection agreement with the PSTN. CAT
expects to launch commercial service in 1999. The Communications Group has
formed several other Joint Ventures that are currently exploring opportunities
to provide wireless local loop services.
The Communications Group owns 92% interests in Joint Ventures financing and
supporting China Unicom's development of a wireline Public Switched Telephone
Network ("PSTN") in the Sichuan and Chongqing regions of southern China. China
Unicom commercially launched PSTN services in the capital cities of Sichuan and
Chongqing in January 1999.
TECHNOLOGY. Wireline network investments funded and serviced by the
Communications Group in China employ high speed fiber optic systems capable of
handling integrated voice, data and video traffic. These systems are
competitively superior to the pre-existing metallic networks commonly deployed
in China.
MARKETING. The wireline networks being assisted by the Communications Group's
Joint Ventures in the Sichuan and Chongqing regions of China target large
business and government users needing high reliability, high capacity
communications. These modern, fiber optic based networks compete very
effectively against the antiquated and overloaded systems common to China's
urban areas. The rapidly developing demand for advanced communications services
in China's industrial and commercial sectors creates a significant competitive
advantage for these high capacity, high speed networks. In addition, the spare
capacity of facilities deployed to capture large commercial business can
subsequently be marketed, at very low incremental cost, to serve the surrounding
residential communities. Management believes that this strategy will allow the
Group's Chinese operating partner to economically create city-wide fiber network
coverage for both commercial and residential customers.
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.
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
conventional telephone service by providing local, long distance 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
10
ITEM 1. BUSINESS (CONTINUED)
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.
The low level of penetration and often poor quality provided by the national
telephone systems in the emerging markets where the Communications Group's
activities are focused create an ideal competitive opportunity for the
Communications Group's operators. The low penetration of existing national
services means a large, unserved market exists for new operators. The poor
quality of existing services creates a precondition for customers switching to
the price competitive, yet higher quality services made possible by the new
operators' more modern networks. For example, in China more than half of urban
households do not yet have telephone service and most commercial customers are
sharply limited in the volume and speed of traffic that their existing public
telecom links will support. The Communications Group believes that such factors
offset most of the competitive advantage that would otherwise be enjoyed by an
entrenched national telecom monopoly.
INTERNATIONAL AND LONG DISTANCE TELEPHONY
OVERVIEW. The Communications Group owns approximately 30% of Telecom Georgia.
Telecom Georgia is the primary international and long distance telephony service
provider in Georgia. Telecom Georgia has interconnect arrangements with several
international long distance carriers such as Sprint and Telespazio. For every
international call made to Georgia through Telecom Georgia, a payment is due to
Telecom Georgia by the interconnect carrier and for every call made from Telecom
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.
COMPETITION. Although Telecom Georgia handles the vast majority of all
international toll calls to and from Georgia, in 1998 several new market
entrants started providing international telephone service.
CABLE TELEVISION
OVERVIEW. The Communications Group commenced offering cable television services
in 1992 through 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 11 markets
in Eastern Europe and the FSU that reported 315,864 subscribers at December 31,
1998, an increase of approximately 40% from 225,525 subscribers at December 31,
1997. In 1998, the Communications Group purchased an 81% interest in a wireless
cable television system operating in Archangelsk, Russia. 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 the lack of quality television and alternative
entertainment options in these markets and the growing demand for local language
entertainment programming.
TECHNOLOGY. The Communications Group's cable television Joint Ventures utilize
three possible distribution technologies: MMDS, wireline cable or a hybrid
combination of MMDS and wireline cable in which MMDS acts as a backbone to
deliver programming to wireline cable networks for further
11
ITEM 1. BUSINESS (CONTINUED)
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 to each of the Company's Joint
Ventures gives each system the ability to broadcast a sufficiently 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 hybrid
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 serving
a large number of people. In order to take advantage of such benefits, in many
areas, the Communications Group is wiring buildings and/or neighborhoods so that
it can serve all of the residents in the area through one microwave receiving
location or directly from the cable headend. Subscribers to the Communications
Group's premium tiered services typically utilize a set-top converter which
descrambles the signal and also serves as a channel selector. The Communications
Group 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.
While the Communications Group's cable television systems are generally leading
providers 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. 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, Romanian 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, Nickelodeon, VH-1, Cartoon Network, CNN International,
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
12
ITEM 1. BUSINESS (CONTINUED)
includes channels such as MTV-Europe, Eurosport, Nickelodeon, National
Geographic, Cartoon Network, ESPN International, CNN, Star TV, and Discovery
Channel. Each tier also generally 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 pre-pays for
"pay-per-view" services and the intelligent decoders that the Joint Venture uses
automatically deduct the purchase of a particular service from the prepayment.
MARKETING. 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. Each cable television Joint Venture also
targets its cable television services toward foreign national households,
embassies, foreign commercial establishments and international or local hotels.
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 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.
PAGING
OVERVIEW. The Communications Group's paging business provides traditional
paging services. The underlying premise for the paging business has been the
availability of service to mobile subscribers at a price significantly lower
than alternative mobile messaging services. When the Communications Group
entered the paging business, the price for cellular communication was
significantly higher than for its paging services which were a viable, low cost
alternative to GSM cellular telephony. At such time, customers could receive
messages and information via the pager at a fraction of the cost of GSM cellular
service.
The paging business is now operating in an increasingly competitive environment.
The most significant impact has been the accelerated growth of GSM use in those
markets in which the Company has paging operations. In the past two years the
number of GSM subscribers has significantly increased in Europe generally and in
many parts of Central and Eastern Europe in particular. For example, in Austria
GSM subscribers grew from approximately 384,000 or 5% penetration at the end of
1995 to approximately 2,271,000 or 28% penetration at the end of 1998.
The combination of deregulation and availability of attractively priced
financing has changed the GSM mobile telephony business by increasing the number
of competitors. This increased level of competition has resulted in new and
innovative pricing structures. The combination of reduced handset prices,
calling party pays ("CPP") tariffs and the introduction of prepaid calling cards
has significantly reduced the cost of entry for GSM subscribers. The GSM phone
service includes voice mail and in many cases short messaging service ("SMS")
which is very similar to paging messaging. A prepaid GSM subscriber can purchase
a GSM handset for approximately $150, receive incoming calls for free (paid for
by the calling party), use voice mail and SMS and only pay for calls made using
the prepaid card.
13
ITEM 1. BUSINESS (CONTINUED)
The Communications Group recognized this competitive risk during 1997 and 1998
and in response rolled out its own programs to reposition its paging services in
a unique fashion. Such programs as CPP and "web paging" were introduced as new
applications.
The Communications Group now believes that it will not be able to effectively
compete for its traditional paging customers in those markets where GSM is
combined with CPP tariffs and prepaid calling cards. Accordingly, the
Communications Group has evaluated each of it paging properties, revised
operating plans and determined that a write down of the carrying value of its
investment is appropriate.
The Communications Group believes that its paging businesses in Moscow, Ukraine
and Uzbekistan are relatively unaffected by the GSM competition and continue to
be viable business opportunities and have not been written down. Although GSM is
available in those markets, the Company believes that the regulators are
unlikely to allow CPP tariffs for the foreseeable future.
The Communications Group believes that there is an inherent value to delivery of
data via a wireless transmission and that the increased demand for data
transmission may create a valuable business for the use of its paging
frequencies. The Communications Group will continue to explore those areas and
other opportunities for the paging business.
TECHNOLOGY. Paging is a one-way wireless messaging technology that uses an
assigned frequency and a specific pager identifier to contact a paging customer
within a geographic service area. 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
240 characters. Depending on the market, the Joint Ventures offer alphanumeric
pagers which have Latin and/or Cyrillic (Russian 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.
MARKETING. The Communications Group intends to manage its paging business to a
level that will not require significant additional funding for its operations.
The Communications Group believes that its paging operations in Moscow, Ukraine
and Uzbekistan are unaffected by the GSM competition and are viable business
opportunities. In these markets, 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,
young consumers, 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, and for young adults to communicate with each other
while away from a telephone. Subscribers pay a monthly fee which entitles them
to either a fixed or 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. In addition, as noted above
there has been increased competition from GSM
14
ITEM 1. BUSINESS (CONTINUED)
providers which has adversely impacted the Communications Group's paging
operations. 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.
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, 17 radio stations. During
1998, the Joint Ventures in Estonia and Georgia each opened an additional radio
station.
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 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 listener 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 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.
OTHER
OVERVIEW. In July 1998, the Communications Group sold its investment in
Protocall Ventures. The Communications Group currently owns an interest in a
Joint Venture operating a trunked mobile radio
15
ITEM 1. BUSINESS (CONTINUED)
service in Kazakhstan, servicing 1,245 subscribers. The Communications Group is
currently evaluating how to best maximize its value to the Company. 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). 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 Kazakhstan although it faces competition from other trunked mobile
radio service providers and from private networks. 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 and from paging
providers for users who need only one-way communication and private branch
exchanges, where users do not need mobile communications.
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 next several years. Two of
the licenses held by the Communications Group have expired, although the
Communications Group has been permitted to continue operations while the
decision on reissuance is pending. One of these licenses is for the Company's
radio Joint Venture in Hungary. The Communications Group has been informed that
its bid in a competitive tender has been accepted and it anticipates receiving a
new license shortly. Certain other licenses held or used by seven Joint Ventures
will expire during 1999. 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.
The Company's Joint Ventures will apply for renewals of their licenses. While
there can be no assurance that these licenses will be renewed, based on past
experience, the Communications Group expects to obtain such renewals.
Licenses to operate in China are held by the Communications Group's operating
partner, China Unicom. China Unicom obtained licenses in 1997 to provide
wireless services interconnected with China's national public network for the
Ningbo City GSM system supported by the Communications Group's investment. China
Unicom obtained licenses in January 1999 to provide public wireline telephone
service for the Sichuan and Chongqing systems supported by the Communications
Group's investments. These licenses are subject to periodic review and renewal
by China's Ministry of Information Industry. The Communications Group expects
such renewals to occur as a consequence of China's state policy to maintain an
open and competitive telecommunications market.
16
ITEM 1. BUSINESS (CONTINUED)
JOINT VENTURE OWNERSHIP STRUCTURES/LIQUIDITY ARRANGEMENTS
The following table summarizes the Communications Group's Joint Ventures and
subsidiaries at December 31, 1998, as well as the amounts contributed, amounts
loaned net of repayments and total amounts invested in such Joint Ventures and
subsidiaries at December 31, 1998 (in thousands).
AMOUNT AMOUNT
CONTRIBUTED LOANED TOTAL
TO JOINT TO JOINT INVESTED IN
COMPANY VENTURE/ VENTURE/ JOINT VENTURE/
JOINT VENTURE (1) OWNERSHIP % SUBSIDIARY SUBSIDIARY SUBSIDIARY (2)
- -------------------------------------------------------- ------------- ----------- ----------- ---------------
CELLULAR TELECOMMUNICATIONS
Baltcom GSM (Latvia).................................... 22% $ 13,736 $ -- $ 13,736
Magticom (Tbilisi, Georgia)............................. 35% 2,450 17,138 19,588
Tyumenruskom (Tyumen, Russia) (5)....................... 46% 986 1,387 2,373
Ningbo Ya Mei Telecommunications Co., Ltd. (Ningbo City,
China) (6)............................................ 41% 9,530 22,961 32,491
Ningbo Ya Lian Telecommunications Co., Ltd. (Ningbo
Municipality, China) (5) (6).......................... 41% 5,046 2,009 7,055
----------- ----------- -------
31,748 43,495 75,243
----------- ----------- -------
FIXED TELEPHONY
Sichuan Tai Li Feng Telecommunications Co., Ltd.
(Sichuan Province, China) (5) (7)....................... 54% 11,087 9,315 20,402
Chongqing Tai Le Feng Telecommunications Co., Ltd.
(Chongqing Municipality, China) (5) (7)............... 54% 13,581 2,478 16,059
Instaphone (Kazakhstan)................................. 50% 28 1,631 1,659
Caspian American Telecommunications (Azerbaijan) (5)
(8)................................................... 38% 200 5,409 5,609
----------- ----------- -------
24,896 18,833 43,729
----------- ----------- -------
INTERNATIONAL AND LONG DISTANCE TELEPHONY
Telecom Georgia (Tbilisi, Georgia)...................... 30% 2,554 -- 2,554
----------- ----------- -------
CABLE TELEVISION
Romsat Cable TV (Bucharest, Romania) (3)................ 100% 2,405 6,633 9,038
Viginta (Vilnius, Lithuania) (3)........................ 55% 397 3,174 3,571
ATK (Archangelsk, Russia) (4)........................... 81% 1,597 150 1,747
Kosmos TV (Moscow, Russia).............................. 50% 1,093 13,032 14,125
Baltcom TV (Riga, Latvia)............................... 50% 819 12,260 13,079
Ayety TV (Tbilisi, Georgia)............................. 49% 779 8,569 9,348
Kamalak TV (Tashkent, Uzbekistan)....................... 50% 400 2,996 3,396
Sun TV (Chisinau, Moldova).............................. 50% 400 7,122 7,522
Alma TV (Almaty, Kazakhstan)............................ 50% 222 6,372 6,594
Cosmos TV (Minsk, Belarus).............................. 50% 400 4,268 4,668
Teleplus (St. Petersburg, Russia)....................... 45% 990 1,419 2,409
----------- ----------- -------
9,502 65,995 75,497
----------- ----------- -------
17
ITEM 1. BUSINESS (CONTINUED)
AMOUNT AMOUNT
CONTRIBUTED LOANED TOTAL
TO JOINT TO JOINT INVESTED IN
COMPANY VENTURE/ VENTURE/ JOINT VENTURE/
JOINT VENTURE (1) OWNERSHIP % SUBSIDIARY SUBSIDIARY SUBSIDIARY (2)
- -------------------------------------------------------- ------------ ----------- ---------- ---------------
PAGING
Baltcom Paging (Tallinn, Estonia) (3)................... 85% $ 3,715 $ 2,653 $ 6,368
CNM (Romania) (3)....................................... 54% 490 12,877 13,367
Paging One Services (Austria) (3)....................... 100% 1,036 10,833 11,869
Eurodevelopment (Ukraine) (3)........................... 51% 930 1,539 2,469
Baltcom Plus (Riga, Latvia)............................. 50% 250 3,093 3,343
Paging One (Tbilisi, Georgia)........................... 45% 250 1,589 1,839
Raduga Poisk (Nizhny Novgorod, Russia).................. 45% 330 51 381
PT Page (St. Petersburg, Russia)........................ 40% 1,100 49 1,149
Kazpage (Kazakhstan) (10)............................... 26-41% 521 407 928
Kamalak Paging (Tashkent, Samarkand, Bukhara and
Andijan, Uzbekistan).................................. 50% 435 2,131 2,566
Alma Page (Almaty and Ust-Kamenogorsk, Kazakhstan)...... 50% -- 2,314 2,314
Paging Ajara (Batumi, Georgia).......................... 35% 43 283 326
Mobile Telecom (Russia) (11)............................ 50% 7,500 352 7,852
----------- ---------- ---------------
16,600 38,171 54,771
----------- ---------- ---------------
RADIO BROADCASTING
Radio Juventus (Budapest, Hungary) (3).................. 100% 8,107 1,012 9,119
SAC (Moscow, Russia) (3)................................ 83% 631 2,499 3,130
Radio Skonto (Riga, Latvia) (3)......................... 55% 302 83 385
Radio One (Prague, Czech Republic) (3).................. 80% 627 484 1,111
NewsTalk Radio (Berlin, Germany) (3).................... 85% 2,758 5,625 8,383
Radio Vladivostok, (Vladivostok, Russia) (3)............ 51% 267 47 314
Country Radio (Prague, Czech Republic) (3) (12)......... 85% 2,040 -- 2,040
Radio Georgia (Tbilisi, Georgia) (3).................... 51% 560 257 817
Radio Katusha (St. Petersburg, Russia) (3) (12)......... 75% 464 805 1,269
Radio Nika (Socci, Russia).............................. 51% 260 -- 260
AS Trio LSL (Tallinn, Estonia) (12)..................... 49% 1,536 409 1,945
----------- ---------- ---------------
17,552 11,221 28,773
----------- ---------- ---------------
OTHER (9)
Spectrum (Kazakhstan)................................... 33% 200 1,645 1,845
----------- ---------- ---------------
TOTAL................................................... $ 103,052 $ 179,360 $ 282,412
----------- ---------- ---------------
----------- ---------- ---------------
- ------------------------------
(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.
(2) Total investment does not include any income or losses.
(3) Results of operations are consolidated with the Company's financial
statements.
(4) The investment in this venture was made in the quarter ended December 31,
1998. The Joint Venture's results of operations will be consolidated with
the Company's financial statements in the quarter ended March 31, 1999.
(5) Pre-operational systems as of December 31, 1998.
18
ITEM 1. BUSINESS (CONTINUED)
(6) Ningbo Ya Mei Telecommunications is supporting the development by China
Unicom (a Chinese telecommunications operator) of a GSM mobile telephone
system in Ningbo City, China. Ningbo Ya Lian Telecommunications is similarly
supporting development by China Unicom of expansion of GSM services
throughout Ningbo Municipality, China. Both Joint Ventures provide
financing, technical assistance and consulting services to the Chinese
operator. In January 1999, the fixed wireline telephony systems in Sichuan
and Chongqing commenced commercial operations.
(7) Sichuan Tai Li Feng Telecommunications and Chongqing Tai Le Feng
Telecommunications are supporting the development by China Unicom of
fixed-line, PSTNs in Sichuan Province and Chongqing Municipality, China,
respectively. Both Joint Ventures provide financing, technical assistance
and consulting services to the Chinese operator.
(8) In August 1998, the Communications Group acquired a 76% interest in
Omni-Metromedia Caspian, Ltd., a company that owns 50% of a joint venture in
Azerbaijan, CAT. CAT has been licensed by the Ministry of Communications of
Azerbaijan to provide high speed wireless local loop services and digital
switching throughout Azerbaijan. Omni-Metromedia has committed to provide up
to $40.5 million in loans to CAT for the funding of equipment acquisition
and operational expenses in accordance with CAT's business plans.
(9) In July 1998 the Communications Group sold its share of Protocall Ventures
Limited. As part of the transaction, Protocall Ventures Limited repaid its
outstanding debt to the Communications Group. The Communications Group
retained Protocall Ventures Limited's interest in Spectrum. The Company
recorded a gain of approximately $7.1 million on the sale. The Company's
interest in Spectrum of $1.6 million was written down and offset against the
gain on the sale of Protocall Ventures.
(10) Kazpage is comprised of a service entity and 10 paging Joint Ventures that
provide services in Kazakhstan. 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. The results of
operations of the service entity are consolidated with the Company's
financial statements.
(11) The Company's purchase of Mobile Telecom closed during June 1998. The
Company purchased its 50% interest in Mobile Telecom for $7.0 million plus
two additional earnout payments to be made on February 14, 2000 and February
14, 2001. Each of the two earnout payments is to be equal to $2.5 million,
adjusted up or down based upon performance compared to certain financial
targets. Simultaneously with the purchase of Mobile Telecom, the Company
purchased 50% of a related pager distribution company for $500,000.
(12) Radio Katusha includes two radio stations operating in St. Petersburg,
Russia and AS Trio LSL includes five radio stations operating in various
cities throughout Estonia. Radio Georgia includes two radio stations
operating in Georgia.
19
ITEM 1. BUSINESS (CONTINUED)
The following table summarizes by country the amounts contributed, amounts
loaned net of repayments and total amounts invested in the Communications
Group's Joint Ventures and subsidiaries at December 31, 1998 (in thousands):
AMOUNT AMOUNT TOTAL
CONTRIBUTED LOANED INVESTED
TO JOINT TO JOINT IN JOINT
VENTURE/ VENTURE/ VENTURE/
COUNTRY SUBSIDIARY % SUBSIDIARY % SUBSIDIARY %
- ---------------------------------------- ----------- --------- ---------- --------- ----------- ---------
Austria................................. $ 1,036 1.0 $ 10,833 6.0 $ 11,869 4.2
Azerbaijan.............................. 200 0.2 5,409 3.0 5,609 2.0
Belarus................................. 400 0.4 4,268 2.4 4,668 1.7
Czech Republic.......................... 2,667 2.6 484 0.3 3,151 1.2
Estonia................................. 5,251 5.1 3,062 1.7 8,313 2.9
Georgia................................. 6,636 6.4 27,836 15.5 34,472 12.2
Germany................................. 2,758 2.7 5,625 3.1 8,383 3.0
Hungary................................. 8,107 7.9 1,012 0.6 9,119 3.2
Kazakhstan.............................. 971 0.9 12,369 6.9 13,340 4.7
Latvia.................................. 15,107 14.6 15,436 8.6 30,543 10.8
Lithuania............................... 397 0.4 3,174 1.8 3,571 1.3
Moldova................................. 400 0.4 7,122 4.0 7,522 2.7
People's Republic of China.............. 39,244 38.1 36,763 20.5 76,007 26.9
Romania................................. 2,895 2.8 19,510 10.9 22,405 7.9
Russia.................................. 15,218 14.8 19,791 11.0 35,009 12.2
Ukraine................................. 930 0.9 1,539 0.9 2,469 0.9
Uzbekistan.............................. 835 0.8 5,127 2.8 5,962 2.2
----------- --------- ---------- --------- ----------- ---------
$ 103,052 100.0 $ 179,360 100.0 $ 282,412 100.0
----------- --------- ---------- --------- ----------- ---------
----------- --------- ---------- --------- ----------- ---------
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 network system cooperation contracts under which 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 owns or acquires interests in entities
(including competitors) that are already licensed and are providing service.
Each Joint Venture's 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.
20
ITEM 1. BUSINESS (CONTINUED)
The Communications Group's Joint Ventures in Eastern Europe and the FSU are
limited liability entities which are 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 liability limited 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 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, a Joint Venture is significantly
limited or prohibited from distributing profits to its shareholders. As of
December 31, 1998, the Company had obligations to fund up to an additional $49.4
million with respect to funding 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.
The Communications Group's Joint Ventures in China are foreign-invested, limited
liability entities that are legal persons under China's laws and are permitted
to enter into contracts, acquire property and undertake obligations in their own
names. The Joint Ventures' owners have liability only for the amount of their
subscribed for but unpaid registered capital contributions in the ventures. Such
ventures are limited under their current approvals to total paid-in capital plus
debt of approximately $30 million. The Group's Ningbo Joint Ventures are equity
ventures, organized under laws that require contribution of paid-in capital by
the owning partners in proportion to their respective share of ownership and
regulate dividend distribution to the owners in proportion to their respective
equity share. The Communications Group's Sichuan and Chongqing Joint Ventures
are cooperative ventures, organized under laws that permit the owning partners
to determine themselves each party's relative share of direct capital
contribution and dividend distribution. In each case, the venture's owners were
required to invest and register 40% of the venture's total investment within a
predetermined period after the venture was licensed. Additional funds, up to the
total investment limits set for the ventures, can then be contributed as
additional paid-in capital, loaned to the ventures by the owners or borrowed
from other sources. In each of its China Joint Ventures, the Communications
Group has agreed to loan funds that may be required by the venture in excess of
paid-in capital, if alternative debt financing is unavailable or unattractive.
The Communications Group has extended loans to each of the China Joint Ventures
at interest rates ranging from 8%-10% and on terms permitting repayment by the
venture as cash flows permit. Repayments of such loans takes precedence over
distributions to the ventures' owners. The ventures have also secured supplier
credit for certain equipment purchased by China Unicom and backed by the
ventures' letters of credit. Such supplier financing is treated as the ventures'
funding of China Unicom's projects. The Communications Group's ownership
interests in the China Joint Ventures and its loans to the Joint Ventures are
registered with China's State Administration of Foreign Exchange, thereby
assuring the venture's subsequent ability to convert Chinese currency revenues
and to make dividend distributions and loan repayments in U.S. dollars.
21
ITEM 1. BUSINESS (CONTINUED)
Current Chinese law and regulation prohibit foreign companies and joint ventures
in which they participate from providing telephony services to customers in
China and generally limit the role that foreign companies or their joint
ventures may play in the telecommunications industry. As a result, the
Communications Group's investments in Joint Ventures in China have been made
through a structure known as the Sino-Sino-Foreign ("SSF") joint venture, a
widely used method for foreign investment in the Chinese telecommunications
industry, in which the SSF venturer is a provider of telephony equipment,
financing and technical services to telecommunications operators and not a
direct provider of telephone service.
Since mid-1998, there has been uncertainty regarding possible significant
changes in the regulation of and policy concerning foreign participation in and
financing of the telecommunications industry in China, including the continued
viability of the SSF structure and associated service and consulting
arrangements with China Unicom. There has been no official policy statement or
new regulations as yet announced, and the Company has not received any official
notice regarding new policy or regulation. The Communications Group is not now
holding discussions regarding new projects in the Chinese telephony sector. The
Company believes that no such discussions can be productive until more
definitive information is available. In light of the current regulatory
uncertainty, the Company is unable to estimate the impact such changes in policy
or regulation, if any, would have on the Communications Group's Chinese Joint
Ventures ability to generate significant revenue, cash flow or net income.
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 such services where they are provided.
The failure of the Company 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 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 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 to and supports directly an approximately 5,000-dealer
network for the distribution of its products. Snapper also sells its products
through foreign distributors and offered a limited selection of residential
walk-behind lawnmowers and rear-engine riding lawnmowers through approximately
250 of the Home Depot locations through August 1998, when Snapper terminated its
relationship with the Home Depot.
22
ITEM 1. BUSINESS (CONTINUED)
A large percentage of the residential and commercial 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 and
subsequent 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 new and unused equipment recovered
from the dealership. At December 31, 1998 there was approximately $96.4 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, transmissions and
tires, Snapper manufactures a substantial portion of the component parts for 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, 1998, Snapper spent an average of $3.8
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 being
based on 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, some of which are better
capitalized than Snapper, manufacture and distribute products that compete with
Snapper's, including The Toro Company, Lawn-Boy (a product of 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
23
ITEM 1. BUSINESS (CONTINUED)
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"), an affiliate 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 (the "Letter of Credit") for
Metromedia's 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 discontinued ongoing
business operations and their assets are being liquidated. 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 of 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 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 if it is successful in asserting any such subrogation
claims, whether RDM's remaining assets will be sufficient to pay them.
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 chapter 11 trustee is in the process of selling all of RDM's assets to
satisfy its obligations to its creditors and the Company believes that its
equity interest will not be entitled to receive any distributions.
On August 19, 1998, a purported class action lawsuit, THEOHAROUS V. FONG, ET AL,
Civ. No. 1:98CV2366, was filed in United States District Court for the Northern
District of Georgia. The complaint alleges that certain officers, directors and
shareholders of RDM, including the Company, are liable under
24
ITEM 1. BUSINESS (CONTINUED)
federal securities laws for misrepresenting and failing to disclose information
regarding RDM's alleged financial condition during the period between July 19,
1996 and August 22, 1997, on which date RDM disclosed that its management had
discussed the possibility of filing for bankruptcy. The complaint also alleges
that the plaintiffs, including the Company, are secondarily liable as
controlling persons of RDM. On October 19, 1998, a second purported class action
lawsuit with substantially the same allegations, SCHUETTE V. FONG, ET AL., Civ.
No. 1:98CV3034, was filed in United States District Court for the Northern
District of Georgia. On December 30, 1998, the chapter 11 trustee of RDM brought
an adversary proceeding in the bankruptcy of RDM, HAYS, ET AL. v. FONG, ET AL.,
Adv. Proc. No. 98-1128, in the United States Bankruptcy Court, Northern District
of Georgia, alleging that former officers or directors of the Company, while
serving as directors on the board of RDM, breached fiduciary duties allegedly
owed to RDM's shareholders and creditors in connection with the bankruptcy of
RDM. On January 25, 1999, the plaintiff filed a first amended complaint. The
official committee of unsecured creditors of RDM ("the Creditors' Committee")
has moved to proceed as co-plaintiff or to intervene in this proceeding, and the
official committee of bondholders of RDM ("the Bondholders' Committee") has
moved to intervene in or join the proceeding. On February 16, 1999, the
Creditors' Committee brought an adversary proceeding, THE OFFICIAL COMMITTEE OF
UNSECURED CREDITORS OF RDM SPORTS GROUP, INC. AND RELATED DEBTORS V. METROMEDIA
INTERNATIONAL GROUP, INC., Adv. Proc. No. 99-1023, seeking in the alternative to
recharacterize as contributions to equity a secured claim in the amount of $15
million made by the Company arising out of the Company's financing of RDM, or to
equitably subordinate such claim made by Metromedia against RDM and other
debtors in the bankruptcy proceeding. On March 3, 1999, the Bondholders'
Committee brought an adversary proceeding, THE OFFICIAL COMMITTEE OF BONDHOLDERS
OF RDM SPORTS GROUP, INC. v. METROMEDIA INTERNATIONAL GROUP, INC., Adv. Proc.
No. 99-1029, with substantially the same allegations as the above proceedings.
The Company believes it has meritorious defenses and plans to vigorously defend
these actions. Due to the early stage of these proceedings, the Company cannot
evaluate the likelihood of an unfavorable outcome or an estimate of the likely
amount or range of possible loss, if any.
LANDMARK SALE
On April 16, 1998, the Company sold to Silver Cinemas, Inc. (the "Landmark
Sale") all of the assets of Landmark, except cash, for an aggregate cash
purchase price of approximately $62.5 million and the assumption of certain
Landmark liabilities.
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 1998 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, 1998. As of December 31, 1998, the Company
had a remaining reserve of approximately $2.2 million to cover its obligations
to its former subsidiary. During 1996, the Company was notified by certain
potentially
25
ITEM 1. BUSINESS (CONTINUED)
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 has agreed to participate in remediation in a global settlement that
is subject to court approval, but the amount of the liability has not been
finally determined. The Company believes that such liability will not exceed the
reserve.
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 required
the Company to present for ADEM's approval a written environmental remediation
plan for the Opelika Property. The Company 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 successfully completed. The Company has
proposed to ADEM an accelerated groundwater monitoring schedule. If ADEM
responds favorably, the Company anticipates closure of this site in 1999. The
Company believes that its reserve of approximately $100,000 will be adequate to
cover any further costs.
EMPLOYEES
As of March 9, 1999, the Company had approximately 1,000 regular employees.
Approximately 600 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 13 to the Notes to Consolidated
Financial Statements included in Item 8 hereof.
26
ITEM 2. PROPERTIES
The following table contains a list of the Company's principal properties.
NUMBER OF
------------------------
DESCRIPTION OWNED LEASED LOCATION
- ------------------------------------------ ----------- ----------- ------------------------------------------
COMMUNICATIONS GROUP:
Office space.............................. -- 1 Stamford, Connecticut
Office space.............................. -- 1 Moscow, Russia
Office space.............................. -- 1 Vienna, Austria
Office space.............................. -- 1 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.
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 a 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
27
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
(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, 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 (ii)
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.
In March 1998, defendants J. B. Fuqua, 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 also filed its
answer, submitting itself to the jurisdiction of the Court for a proper
resolution of the claims purported to be set forth by the plaintiffs.
Discovery is ongoing. The individual defendants have also filed motions to
disqualify Abrams and Freberg as derivative plaintiffs. No decision has been
rendered with respect to either motion.
MICHAEL SHORES V. SAMUEL GOLDWYN COMPANY, ET AL.
On May 20, 1996, a purported class action lawsuit, MICHAEL SHORES V. SAMUEL
GOLDWYN COMPANY, ET AL., Case No. BC 150360, was filed in the Superior Court of
the State of California. Plaintiff Michael Shores alleged that, in connection
with the merger of the Samuel Goldwyn Company ("Goldwyn"), Goldwyn's directors
and majority shareholder breached their fiduciary duties to the public
shareholders of Goldwyn. In amended complaints, plaintiff subsequently added
claims that the Company had aided and abetted other defendants' fiduciary
breaches and had negligently misrepresented and/or omitted material facts in the
Company's prospectus issued in connection with the merger. The Company
successfully demurred to the first and second amended complaints and plaintiff
filed a third amended complaint, which included only the negligent
misrepresent