FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

COMMISSION FILE NO. 1-5706

METROMEDIA INTERNATIONAL GROUP, INC.

8000 Tower Point Drive, Charlotte, North Carolina 28227
(Address and zip code of principal executive offices)

(704) 321-7380
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the securities exchange act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b of the exchange act). Yes [ ] No [x]

     The number of shares of common stock outstanding as of June 1, 2004 was 94,034,947.

METROMEDIA INTERNATIONAL GROUP, INC.
Index to
Quarterly Report on Form 10-Q

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METROMEDIA INTERNATIONAL GROUP, INC.

See accompanying notes to consolidated condensed financial statements.

2

METROMEDIA INTERNATIONAL GROUP, INC.

See accompanying notes to consolidated condensed financial statements.

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METROMEDIA INTERNATIONAL GROUP, INC.

See accompanying notes to consolidated condensed financial statements.

4

METROMEDIA INTERNATIONAL GROUP, INC.

See accompanying notes to consolidated condensed financial statements

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Metromedia International Group, Inc.

Notes to Unaudited Consolidated Condensed Financial Statements

1. Basis of Presentation, Description of Business, Going Concern and Recent Developments

Basis of Presentation and Description of Business

     The accompanying consolidated condensed financial statements include the accounts of Metromedia International Group, Inc. (the “Company”) and its consolidated subsidiaries. All significant intercompany transactions and accounts have been eliminated.

     The Company is a holding company with ownership interests in telephony and cable television businesses in Northwestern Russia and the Republic of Georgia. For the three months ended March 31, 2004, the telephony businesses generated 96% of consolidated revenues, while the cable television businesses generated 4% of consolidated revenues. Substantially all of the Company’s assets are located and revenues are generated outside of the United States.

     On September 30, 2003, the Board of Directors formally approved management’s plan of disposing its remaining non-core media businesses. As of March 31, 2004, the Company’s non-core media businesses were comprised of nineteen radio businesses operating in Finland, Hungary, Bulgaria, Estonia, Latvia and the Czech Republic and one cable television network, with operations in Lithuania. These consolidated financial statements also include the results of the Company’s discontinued business components (see Note 3, “Discontinued Business Components”).

     The accompanying interim consolidated condensed financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of March 31, 2004, and the results of its operations and its cash flows for the three-month periods ended March 31, 2004 and 2003, have been included. The results of operations for the interim period are not necessarily indicative of the results which may be realized for the full year.

Going Concern and Recent Developments

     In the first quarter of 2003, the Company embarked on an overall restructuring of its business (the “Restructuring”). The Restructuring was prompted by and was intended to resolve the severe liquidity issues that had confronted the Company since the beginning of 2002. In this Restructuring, the Company undertook to sell its non-core businesses, which at the beginning of the Restructuring included nine cable television networks, twenty radio broadcasting stations and various non-core telephony businesses located in Western, Central and Eastern Europe. Proceeds of these sales mitigated short-term liquidity concerns and provided capital for further core business development. Upon completion of all planned sales, the Company will emerge as a business with its principal attention focused on the continued development of its core telephony businesses in Northwest Russia and the Republic of Georgia. In connection with the Restructuring, the Company also substantially downsized its corporate headquarters staff and undertook actions with the intended objective of significantly decreasing its corporate overhead cash-burn rate.

     As of May 31, 2004, the Company’s remaining non-core media businesses held for sale consist of eighteen radio broadcast stations operating in Finland, Hungary, Bulgaria, Estonia, and the Czech Republic and one cable television network in Lithuania. Sale of these remaining non-core businesses is expected during the first half of 2004 or promptly thereafter. The Company relocated its corporate headquarters from New York City, New York to Charlotte, North Carolina and has achieved a significant reduction in its corporate personnel and office related expenditures. Further reductions in corporate overhead expenditures are expected to follow the final disposition of all non-core operations. The Company’s core telephony businesses are now:

     Both of these business ventures are currently self-financed and hold leading positions in their respective markets. Furthermore, the Company also intends to retain its ownership in Ayety TV, a cable television provider in Tbilisi, Georgia, in which the Company

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has an 85% ownership interest and Telecom Georgia, a long-distance transit operator in Tbilisi, Georgia, in which the Company has a 30% ownership interest.

     The Company is a holding company; accordingly, it does not generate cash flows from operations. As of March 31, 2004 and May 31, 2004, the Company had approximately $32.3 million and $30.9 million, respectively, of unrestricted cash on hand. In addition, as of March 31, 2004, the Company’s consolidated business ventures held $1.5 million of cash. Furthermore, as of March 31, 2004, the Company’s unconsolidated business venture had approximately $17.7 million of cash on hand, $17.2 million of which is held in banks in the Republic of Georgia.

     The Company continues to actively pursue the sale of remaining non-core businesses to raise additional cash and has undertaken to maximize cash distributions from all of its business ventures. The Company projects that its current corporate cash reserves, anticipated cash proceeds of non-core business sales and anticipated continuing dividends from core business operations will be sufficient for the Company to meet on a timely basis its future corporate overhead requirements and interest payment obligations, associated with its $152.0 million aggregate principal amount (fully accreted) 10 ½% Senior Discount Notes, due 2007 (the “Senior Notes”). However, the Company cannot assure that dividends from core businesses will be declared and paid nor can it assure that it will be successful in selling any additional non-core businesses or that these sales, if they occur, will raise sufficient cash to meet short-term liquidity requirements. The Company also is subject to legal and contractual restrictions, including those under the indenture for the Senior Notes, on its use of any cash proceeds from the sale of its assets or those of its business ventures.

     Separately, the Company projects that it has sufficient corporate cash on hand to support the Company’s planned operating, investing and financing cash flows through the end of 2004, including the Company’s $8.0 million semi-annual interest payment due on September 30, 2004 on its Senior Notes. This projection does not include cash inflows that might reasonably arise from operating business venture dividend distributions or cash proceeds from the remaining non-core media businesses; either of which would further strengthen our current liquidity position.

     However, the Company does not believe that it has sufficient corporate cash on hand today to support the Company’s planned operating, investing and financing cash flows through March 31, 2005, including the Company’s $8.0 million semi-annual interest payment that is due on March 31, 2005 associated with its Senior Notes.

     If the Company is not able to satisfactorily address the liquidity issues described above, the Company may have to resort to certain other measures, including ultimately seeking the protection afforded under the U.S. Bankruptcy Code. The Company cannot provide assurances at this time that it will be successful in avoiding such measures. Additionally, the Company has a stockholders’ deficit and has suffered recurring operating losses and operating cash deficiencies.

     The factors discussed above raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

     During 2003, the Company engaged in discussions with representatives of holders of a substantial portion of the Company’s Senior Notes concerning a restructuring of the Senior Notes. To date, no restructuring has been agreed upon and further restructuring discussions with these substantial Senior Note holders were suspended.

     According to the terms of the Company’s 7 ¼% cumulative convertible preferred stock (the “Preferred Stock”), if the Company does not make six consecutive dividend payments and thereafter receives a written request from the holders of 25% of the voting power of the outstanding Preferred Stock, then the Company is obligated to call a special meeting of the holders of the Preferred Stock for the purpose of electing two new directors, except that no special meeting may be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the Company’s stockholders. Beginning in late 2003 and continuing into 2004, the Company has had discussions with several holders of the Company’s Preferred Stock regarding the Preferred Stockholders’ right to elect two new directors to the Company’s Board of Directors. These discussions have recently resulted in a tentative agreement, which is expected to be finalized shortly, to appoint two individuals identified by certain holders of the Preferred Stock to the Company’s Board of Directors for terms that end at the Company’s next annual meeting of stockholders. It is presently expected that, at that time, such individuals will, in accordance with the terms of the Preferred Stock, stand for election by a vote of the holders of the Preferred Stock. The Company believes that this agreement is advantageous to the Company because it eliminates the need to hold a special meeting, which would be both time consuming and expensive.

     Opportunities to restructure the Company’s balance sheet, including to refinance the Senior Notes and Preferred Stock, which had an aggregate preference claim of $257.4 million as of March 31, 2004 are being pursued, but present Company plans presume the continued service of the Senior Notes on current terms and the continued deferral of the payment of dividends on the Preferred Stock. The Company cannot provide assurances at this time that a capital restructuring effort will be undertaken or, if undertaken, that such effort would produce a material improvement in short-run cash flows or equity valuations.

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2. Summary of Significant Accounting Policies

Stock Option Plans

     The Company has elected to account for its stock-based compensation in accordance with the provisions of Accounting Principles Board (“APB”) No. 25 “Accounting for Stock Issued to Employees” and present proforma disclosures of results of operations as if the fair value method had been adopted.

Accounting Change

     Effective January 1, 2003, the Company changed its policy regarding the accounting for certain business ventures previously reported on a lag basis. All of the Company’s current operating business ventures with the exception of PeterStar, have historically reported their financial results on a three-month lag. In an effort to provide more timely and meaningful financial information on the Company’s business operations, the Company determined that all ventures should be reported on a real-time basis. As a result of this change, a $2.5 million decrease to the beginning accumulated deficit was recorded, of which $2.0 million is reflected as income related to the cumulative effect of a change in accounting principle and the remaining $0.5 million is included as a cumulative effect of a change in accounting principle in income from discontinued components for the three months ended March 31, 2003.

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     The effect of this change on the consolidated statement of operations for the three months ended March 31, 2003 is as follows (in thousands, except per share data):

Effect of change in year-end for lag ventures

Reclassifications

     Certain reclassifications have been made to prior period’s financial information to conform to the current period presentation.

3. Discontinued Business Components

     On September 30, 2003, the Board of Directors formally approved management’s plan to dispose of the remaining non-core media businesses of the Company. Management anticipates that the remaining non-core media businesses will be disposed of by June 30, 2004 or promptly thereafter.

     A summary of such assets that are to be disposed include:

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     Furthermore, since the first quarter of 2002, the Company has sought out opportunities to sell other business ventures for the purpose of improving the Company’s liquidity position. In light of these events, the Company concluded that certain business ventures meet the criteria for classification as discontinued business components as outlined in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and these entities have been presented as such within the condensed consolidated financial statements.

     Accordingly, the income statement of the Company for current and prior periods has presented the results of operations of the discontinued components, including any gain or loss recognized on such disposition, in income (loss) from discontinued components and the balance sheets presents the assets and liabilities of such operations as assets and liabilities of discontinued components.

     A summary of significant dispositions of such businesses from January 1, 2003 to March 31, 2004 are summarized below.

ATK

     On March 26, 2004, the Company announced that it has completed the sale of its interests in Arkhangelsk Television Company (“ATK”) to Yuri Firsov, the General Director of ATK, for net cash proceeds of approximately $1.5 million. The Company recognized a gain of $0.7 million on the disposition, which was recorded in discontinued components in the three months ended March 31, 2004.

Romsat

     On March 4, 2004, the Company announced that it had completed the sale of its interests in FX Communications S.R.L. (aka Romsat Cable TV) and FX Internet S.R.L., to a consortium of buyers that includes Romania Cable Systems S.A. and Astral Telecom S.A. in a transaction that has resulted in net cash proceeds of $16.0 million. The Company recognized a gain of $5.8 million on the disposition, which was recorded in discontinued components in the three months ended March 31, 2004.

Sun TV

     On November 12, 2003, the Company sold its interest in the Moldovan cable television company Sun TV and Sun Constructie S.R.L., a Moldovan trading company to Lekert Management, Ltd., a company organized under the laws of British Virgin Islands for cash consideration of $2.1 million. Lekert Management, Ltd. is an affiliate of Neocom S.R.L., which owned 35% of Sun TV prior to the transaction. The Company recorded a charge to earnings in the third quarter of 2003 in the amount of $0.4 million to reflect its investment in Sun TV and Sun Constructie at the lower of cost or fair value less cost to sell. The impairment charge was included in the results of discontinued components.

Technocom

     On June 25, 2003, the Company sold its wholly owned subsidiary, Technocom Limited (“Technocom”) for $4.5 million. Technocom held interests in several Russian telecommunications enterprises including satellite-based transport operator Teleport-TP. Simultaneous with the sale of Technocom, the Company entered into agreements intended to settle all historical claims concerning Technocom-related businesses, including claims arising from litigation in Guernsey that Technocom initiated in 2002 concerning its majority-owned subsidiary Roscomm and from arbitration proceedings initiated in 2003 in connection with that Guernsey litigation. The Company further expects that the broad releases, from and among all potential claimants contained in the settlement agreements, will avoid any further dispute in connection with Technocom, its subsidiary businesses, or its past or present stakeholders.

     The Company received cash proceeds of $4.5 million and incurred closing costs of $0.6 million, principally legal fees and severance costs, resulting in a gain of $2.8 million on the disposition, which was recorded in the three months ended June 30, 2003. Such gain was included in the results of discontinued components.

Adamant Transaction

     On April 24, 2003, the Company completed an exchange with Adamant Advisory Services (“Adamant”) of its ownership in certain of its business units in Russia for approximately $58.6 million, face value, of the Company’s Senior Notes held by Adamant. The Company conveyed to Adamant its ownership interests in Comstar, a Moscow-based fixed-line telephony operator (“Comstar”); Kosmos TV, a Moscow-based cable television operator (“Kosmos TV”); and the Company’s Russian radio businesses (the “Radio Businesses”). In addition to conveying the Senior Notes to the Company, Adamant paid $5.0 million in cash and released the Company of its $3.5 million obligation to pay interest accrued on the Senior Notes being exchanged. The consideration was determined by arms length negotiations between the Company and Adamant.

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     The Company recorded a gain related to this transaction of approximately $31.6 million in the year ended December 31, 2003, which is comprised of a $24.6 million gain related to the early extinguishment of the exchanged Senior Notes and a $7.0 million gain on the transfer of the Company’s interests in the Radio Businesses. Such gain on early debt extinguishment was adjusted to $24.6 million in the third quarter of 2003, due to a favorable adjustment of $0.5 million to professional fees previously accrued. The gain on early extinguishment was reflected in the Company’s income from continuing operations in the three months ended June 30, 2003, while the gain on sale of the Company’s interests in the Radio Businesses was reflected in the income from operations of discontinued components in the three months ended June 30, 2003.

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Other

     The Company recognized a gain of $0.5 million related to the settlement of remaining severance obligations and other liabilities of discontinued components in 2004.

     The Company recognized income of $0.5 million in discontinued components in 2003 related to the cumulative effect of a change in accounting principle (see Note 2, “Summary of Significant Accounting Policies — Accounting Change”).

Operating Results

     The combined operating results of the discontinued radio businesses are as follows (in thousands):

     The combined operating results of discontinued cable television businesses are as follows (in thousands):

     The principal balance sheet items included in Discontinued Business Components are as follows (in thousands):

     The balance sheet as of March 31, 2004 excludes those ventures disposed of during the three months ended March 31, 2004 as previously disclosed.

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4. Investments in and advances to business ventures

Credit Agreements with Business Ventures

     Advances are made to business ventures in the form of cash, for working capital purposes, payment of expenses or capital expenditures, or in the form of equipment purchased on behalf of the business ventures. Interest rates charged to the business ventures range from prime rate to prime rate plus 6%. The credit agreements generally provide for the payment of principal and interest from 90% of the business ventures’ available cash flow, as defined, prior to any substantial distributions of dividends to the business venture partners. The Company has entered into credit agreements with its business ventures, including those classified as discontinued components, to provide up to $17.5 million in funding of which $6.0 million in funding obligations remain at March 31, 2004. The Company’s funding commitments are contingent on its approval of the respective business ventures’ business plans. Due to dispositions of business ventures during the year ended December 31, 2003, interest accruals and limited funding by the Company, partially offset by credit agreement repayments, such commitment has been significantly reduced from March 31, 2003 to March 31, 2004. In addition, Magticom repaid its obligation in first quarter of 2003 and such credit agreement was subsequently terminated.

     The following table summarizes the credit agreement activity for the three months ended March 31, 2004 and 2003 (in thousands):

Investments in and Advances to Business Ventures

     As of March 31, 2004 and December 31, 2003, the Company’s investment in and advances to business ventures line item included within the Company’s consolidated balance sheet reflects only the Company’s 49% equity investment in Magticom through Telcell Wireless, LLC (“Telcell”), a 70.41% owned subsidiary holding company for which the Company follows the consolidation method of accounting. The Company’s effective ownership of Magticom is 34.5%.

     The components of the Company’s investments in and advances to business ventures are as follows (in thousands):

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Changes in the Investments in and Advances to Business Ventures

     The changes in the investments in and advances to business ventures are as follows (in thousands):

Combined Information of Unconsolidated Business Ventures

     Certain cable and telephony business ventures in which the Company disposed of its interests in were accounted for using the equity method of accounting. Such ventures principally include:

     Comstar and Kosmos TV were disposed as a part of the Adamant transaction while MTR Svyaz and Teleport TP were disposed as a part of the Technocom transaction. The remaining transactions are as follows:

Cosmos TV Transaction

     On March 26, 2004, the Company announced that it has completed the sale of its interests in various cable ventures, including Cosmos TV (“Cosmos”), to Star Broadband Limited, a British Virgin Islands company, which is controlled by Dominic Reed, former General Director of the Company’s cable business group, for approximately $0.7 million. As of December 31, 2003, the Company had presented its investment in Cosmos as “Business ventures held for sale” in noncurrent assets.

     The results of Cosmos are required to be presented in the Statement of Operations of the Company as continuing operations and have been included in the “Equity in income (losses) of unconsolidated investees.”

Teleplus Transaction

     On November 21, 2003, the Company sold all of its interest in the St. Petersburg, Russia cable television company, Teleplus to a Russian company “Svyaz-Kapital” and AVT Systems Ltd., a company organized under the laws of Cayman Islands, for cash

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consideration of $0.9 million. The Company recognized a gain of $0.7 million on the disposition in the three months ended December 31, 2003.

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Tyumenruskom Transaction

     On September 24, 2003, the Company sold its interest in the Russian mobile phone company Tyumenruskom to a Russian company for cash consideration of $1.2 million. In addition, the Company was released from its guarantee of Tyumenruskom’s debt by a vendor. The Company had previously recorded a reserve related to this guarantee that totaled $1.4 million on the date of the transaction. The Company recognized a gain on the disposition of $2.6 million, which was recorded in the three months ended September 30, 2003.

Baltcom TV Transaction

     On August 1, 2003, the Company sold all of its interest in the Latvian cable television company Baltcom TV (“Baltcom”) to the Latvian company SIA Alina (“Alina”) for cash consideration of $14.5 million. Alina was the owner of 45% of Baltcom prior to the transaction. The Company recognized a gain of $9.3 million on the disposition, which was recorded in the three months ended September 30, 2003.

Financial Information

     The following tables represent summary financial information for the Company’s operating unconsolidated business ventures, including those disposed, up to the date of disposition, being grouped as indicated for the three months ended March 31, 2004 and 2003. The results of operations presented below are before the elimination of intercompany interest (in thousands):

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     The summarized consolidated balance sheets of Magticom as of March 31, 2004 and December 31, 2003 are as follows (in thousands):

     Cosmos is excluded at December 31, 2003 as such venture was presented as “Business Ventures Held for Sale.”

5. Long-term Debt

10½% Senior Notes

     In September 1999, the Company entered into a trust agreement to issue the Senior Notes in the face amount of $210.6 million. The Senior Notes are unsecured but rank senior to all existing and future subordinated indebtedness of the Company. The Senior Notes are not subject to sinking fund requirements and are redeemable at the Company’s option at any time. The principal is due, in its entirety, in September 2007. The Notes bear interest at a rate of 10½% per annum, payable semiannually.

     Under the terms of the indenture governing the Senior Notes, the Company is subject to certain covenants pertaining to its financing activities. Such covenants restrict the Company from paying dividends, acquiring its capital stock, prepaying subordinated indebtedness, investing in and selling assets and subsidiary stock, and incurring additional indebtedness, among other activities. In addition, upon the occurrence of a change of control of the Company (as defined), the holders of the Senior Notes have the right to require the Company to repurchase all or any part of the Senior Notes at a cash purchase price of 101% of the face value of the Senior Notes plus accrued interest as of the date of repurchase.

     On April 24, 2003, the Company completed an exchange with Adamant of its ownership interest in certain of its business units in Russia for, among other things, approximately $58.6 million face value of Senior Notes held by Adamant, $5.0 million in cash and a release of its $3.5 million obligation to pay interest accrued on the Senior Notes being exchanged. With the completion of this transaction, the outstanding principal balance on the Senior Notes was reduced to $152.0 million.

6. Stockholders’ Equity

Preferred Stock

     There are 70.0 million authorized shares of Preferred Stock of which 4.1 million shares have been designated as 71/4 cumulative convertible Preferred Stock with a liquidation preference of $50.00 per share, all of which were outstanding as of March 31, 2004 and December 31, 2003.

     Dividends on the Preferred Stock are cumulative from the date of issuance and payable quarterly, in arrears. The Company may make any payments due on the Preferred Stock, including dividend payments and redemptions (i) in cash; (ii) issuance of the Company’s common stock or (iii) through a combination thereof. The dividend requirement for the twelve months ending March 31, 2005 will be $19.1 million, inclusive of the effects of compounding and assuming no payments of the dividends.

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     Through March 15, 2001, the Company paid its quarterly dividends in cash. The Company has elected not to declare a dividend for any quarterly dividend periods ending after June 15, 2001. As of March 31, 2004, total dividends in arrears are $50.4 million.

     The Preferred Stock is redeemable at any time, in whole or in part, at the discretion of the Company, initially at a price of $52.5375 per share in the year 2000 and thereafter at prices declining to $50.00 per share on or after September 15, 2007, plus in each case all accrued and unpaid dividends as of the redemption date. As of March 31, 2004, the Company has not redeemed any of the Preferred Stock. The Preferred Stock is not subject to any sinking fund provisions.

     Except as described in this paragraph, the Preferred Stock is convertible at any time at the option of the holders into shares of common stock of the Company. The rate used to determine the number of shares of common stock is a function of the liquidation preference, any accrued and unpaid dividends and the initial conversion price of $15.00. As of March 31, 2004, no shares of Preferred Stock have been converted into shares of common stock. In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Company, the holders of the Preferred Stock will be entitled to be paid out of the Company’s assets available for distribution to its stockholders, before any payment or distribution is made to the holders of common stock or other class of stock subordinated to the Preferred Stock. The holders of the Preferred Stock are entitled to receive a liquidation preference in the amount of $50.00 per share, plus all accrued and unpaid dividends, or a pro rata share of the full amounts to which the holders of the Preferred Stock are entitled in the event the liquidation preference cannot be paid in full.

     The holders of the Preferred Stock have no voting rights. According to the terms of the Preferred Stock, if the Company does not make six consecutive dividend payments and thereafter receives a written request from the holders of 25% of the voting power of the outstanding Preferred Stock, then the Company is obligated to call a special meeting of the holders of the Preferred Stock for the purpose of electing two new directors, except that no special meeting may be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the Company’s stockholders. Beginning in late 2003 and continuing into 2004, the Company has had discussions with several holders of the Company’s Preferred Stock regarding the Preferred Stockholders’ right to elect two new directors to the Company’s Board of Directors. These discussions have recently resulted in a tentative agreement, which is expected to be finalized shortly, to appoint two individuals identified by certain holders of the Preferred Stock to the Company’s Board of Directors for terms that end at the Company’s next annual meeting of stockholders. It is presently expected that, at that time, such individuals will, in accordance with the terms of the Preferred Stock, stand for election by a vote of the holders of the Preferred Stock. The Company believes that this agreement is advantageous to the Company because it eliminates the need to hold a special meeting, which would be both time consuming and expensive.

7. Employee Benefit Plans

     The Company has two principal qualified retirement plans in the United States. These plans covered certain former employees of the Company or one of its subsidiaries. The Plan covering Company personnel was amended effective December 31, 1995 and such benefits were frozen as of that date. The Plan covering the former subsidiaries’ personnel was amended effective December 31, 2002 and such benefits were frozen as of that date. Both plans are noncontributory defined benefit pension plans, under which pension benefits are calculated based on years of service and participants’ compensation.

     The Company’s policy is to make plan contributions equal to an actuarially determined amount consistent with federal tax regulations. The funding objective is to accumulate funds at a relatively stable rate over the participants’ working lives so benefits are fully funded at retirement.

     The Company also maintains an unqualified, unfunded supplemental retirement plan for certain former executives based in the U.S. The plan is a noncontributory defined benefit pension plan, under which pension benefits are calculated based on a formula incorporating years of service and participants’ compensation.

     The Company also provides an unfunded group medical plan and life insurance coverage for certain former employees subsequent to retirement.

     The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Act”) became law in December 2003 and introduced both a Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree health-care plans that provide a benefit at least “actuarially equivalent” to the Medicare benefit. The Company’s Postretirement Medical Benefit Plan does provide for such prescription-drug benefits. The Company has deferred recognition of the accounting for the economic effects of the Medicare Act, as the Company has not yet completed its computations to determine if the benefits are actuarially equivalent to Medicare Part D as permitted by FASB Staff Position 106-2. Accordingly, the accumulated benefit obligation or net periodic postretirement benefit cost do not reflect any amount associated with the subsidy.

     Our policy is to contribute annually, at minimum, amounts required by applicable laws and regulations. However, we may from time to time make contributions beyond those legally required. The Company expects to contribute $1.1 million to the defined benefit plans and $0.4 million to other benefit plans during 2004.

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Components of net periodic benefit costs are as follows (in thousands):

8. Earnings Per Share of Common Stock

     Basic earnings per common share (“EPS”) is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The weighted average number of common shares outstanding for computing basic and diluted EPS was 94.0 million for each of the three months ended March 31, 2004, and 2003. For the three months ended March 31, 2004 and 2003, 21.2 million and 22.6 million shares, respectively, attributable to the common stock equivalents were excluded from the calculation of diluted EPS because the effect was antidilutive. No adjustments were made to reported net income (loss) in the computation of EPS.

9. Business Segment Data

     The Company evaluates the performance of its operating segments based on earnings before interest, taxes, depreciation, and amortization. The segment information is based on operating income (loss) which includes depreciation and amortization. Equity in income (losses) of unconsolidated investees reflects elimination of intercompany interest expense and management fees.

     The Company has operations in northwestern Russia and the Republic of Georgia. The Company’s reporting segments are comprised of (i) fixed telephony, (ii) wireless telephony and (iii) cable television.

     Consolidated fixed telephony is comprised of PeterStar. On October 1, 2003, PeterStar acquired the ownership rights of Baltic Communications Ltd. (“BCL”) and prior to such date, BCL was an indirect wholly owned subsidiary of the Company.

     Unconsolidated wireless telephony is principally comprised of Magticom.

     Consolidated cable television is comprised of Ayety TV.

     In addition to these segments, the Company has other operating activities which are considered discontinued components (See Note 3 – “Discontinued Business Components”). Further, the Company had other unconsolidated activities which were disposed of during 2004 and 2003 (See Note 4 – “Investments in and advances to business ventures”).

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     The Company’s segment information is set forth for the three months ended March 31, 2004 and 2003 in the following tables (in thousands):

     Information about the Company’s continuing operations by geographic location for the three months ended March 31, 2004 and 2003 and assets as of March 31, 2004 and December 31, 2003 is as follows (in thousands):

     The Company has cash, other assets and minimal fixed assets at its corporate headquarters in the United States.

10. Other Consolidated Condensed Financial Statement Information

Accounts Receivable

     The total allowance for doubtful accounts at March 31, 2004 and December 31, 2003 was $2.1 million and $2.0 million, respectively.

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Intangible Assets

     Intangible assets, other than goodwill, at March 31, 2004 and December 31, 2003 consist of the following (in thousands):

     Estimated amortization expense is expected to be $4.9 million in 2004 and insignificant thereafter.

     The change in the carrying value of goodwill and other indefinite life intangibles of $0.8 million from December 31, 2003 to March 31, 2004 is principally due to foreign currency fluctuations during the period.

Accrued Expenses

     Accrued expenses at March 31, 2004 and December 31, 2003 consist of the following (in thousands):

Other Long-Term Liabilities

     Other long-term liabilities at March 31, 2004 and December 31, 2003 consist of the following (in thousands):

Supplemental Disclosure of Cash Flow Information

     Supplemental disclosure of cash flow information for the three months ended March 31, 2004 and 2003 (in thousands):

11. Commitments and Contingencies

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Risks Associated with the Company’s Investments

     The ability of the Company and its business ventures to establish and maintain profitable operations is subject to, among other things, significant political, economic and social risks inherent in doing business in Russia and the Republic of Georgia. These include matters arising out of government policies, economic conditions, imposition of or changes in government regulations or policies, imposition of or changes to taxes or other similar charges by government bodies, exchange rate fluctuations and controls, civil disturbances, deprivation or unenforceability of contractual rights, and taking of property without fair compensation.

Escrowed Severance

     As a condition of the settlement for the disposal of Snapper’s assets and the termination of its employees, the Company was required to escrow monies owed to former employees under severance arrangements. Such amounts outstanding totaled $1.0 million as of December 31, 2003. During the three months ended March 31, 2004, the Company settled the remaining severance obligations with the former employees at a discount, which resulted in the Company receiving $0.3 million of excess escrowed cash from the escrow agent.

Litigation

     On March 31, 2003, Mr. James Campbell filed a complaint in the Circuit Court of Walker County, Alabama against Turtle Shell, Inc., formerly known as Snapper, Inc. (a wholly owned subsidiary of the Company) for damages related to injuries allegedly sustained by him while operating a Snapper lawnmower. In November 2002, the Company disposed of all assets and most liabilities of Snapper, Inc. but retained certain liabilities, including any obligations that may arise out of this litigation. Mr. Campbell expired on July 14, 2003. In light of Mr. Campbell’s death, his complaint has been amended to include a wrongful death claim and a claim of damages for any pain and suffering incurred by Mr. Campbell from the time of injury until death. Mr. Campbell’s estate has been substituted as the plaintiff in this action. Also named as a defendant in this case is Briggs & Stratton, the Company that manufactured the engine of the lawnmower. Discovery is ongoing in this case. The Company is not currently in a position to predict the outcome of any such proceedings, or the extent to which they could adversely affect the Company’s financial condition and results of operations. The Company has historically self-insured itself for product liability related claims; however, the Company does have stop-loss coverage for settlement damages in excess of $3.0 million. The stop-loss coverage does not apply to any legal fees that the Company may incur to defend itself.

     A complaint was filed against the Company in the Court of Chancery of the State of Delaware. In the complaint Mr. McLaughlin, the plaintiff, is seeking to enforce his rights as a shareholder of the Company to inspect and copy certain books and records of the Company. The Company believes that the request made by the plaintiff is overly broad and lacks proper purpose and is preparing to defend its position in court. However, in order to minimize costs of a potential trial, the Company has entered into discussions with the plaintiff regarding the nature of information sought by him. The parties anticipate that the trial in this case can be scheduled by the Court as early as August 2004. No trial has been scheduled in this case. The Company is not in a position to predict the outcome of any such proceedings, or the extent to which they could adversely affect the Company’s financial condition and results of operations.

     The Company is involved in other various legal and regulatory proceedings. While the results of any litigation or regulatory issue contain an element of uncertainty, management believes that the outcome of any of these known, pending or threatened legal proceedings will not have a material effect on the Company’s consolidated financial position and results of operations, except as noted above.

Georgian Matters

     The Company has received letters from, and corresponded with, two Georgian individuals involved in the initial formation, approximately eight to ten years ago, of certain of the Company’s business ventures in the Republic of Georgia. These individuals allege that the Company has not fully complied with its obligations to them under certain contracts. In addition, the individuals have alleged that Company personnel may have violated the Foreign Corrupt Practices Act and possibly engaged in other improper or illegal conduct. However, the individuals have so far refused to specify details of the alleged violations and have provided no evidence in support of the allegations that they have made.

     The Company had entered into contracts with these Georgian individuals. The contract with one of these individuals entitles him to 5% of any dividends the Company receives from Telecom Georgia. The Company believes it has fully performed its obligations to date under this contract and has so informed the individual. The Company also believes that the fair value of the continuing dividend interest that the individual has in Telecom Georgia is not material. The contract with the other individual entitled him, assuming certain conditions were satisfied, to up to a 1% portion of the Company’s equity interest in certain of the Company’s business ventures in the Republic of Georgia, which the Company currently believes could only include Telecom Georgia, Ayety TV and Paging One (a now defunct paging company). In the first quarter of 2004, the Company terminated the original contract and entered into a settlement

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agreement with the latter individual, who released any claims to equity interests in any of the Company’s business ventures in the Republic of Georgia.

          Furthermore, nothing presented in the unsupported allegations of improper or illegal conduct of Company personnel has prompted the Company to amend or alter the report that it made to the United States Justice Department and the Securities and Exchange Commission in the first quarter of 2003 regarding possible violations of foreign and United States laws, including the FCPA. As a matter of prudence and to ensure the claims of these Georgian individuals were properly considered, the Company’s Board of Directors authorized the Company’s outside counsel to conduct an independent inquiry into both the Company’s obligations under the contracts referred to above and the unspecified allegations of possible improper or illegal conduct referenced above, as well to investigate the existence of other contractual obligations that the Company or its subsidiaries may have with regard to the Company’s Georgian business ventures. The investigation has been completed and the results have been reported by the Company’s outside counsel to the Board of Directors of the Company. The investigation has not uncovered any specific factual support for the allegations regarding alleged improper or illegal conduct, nor has it uncovered any other contractual obligations that the Company or its subsidiaries may have with respect to their Georgian business ventures. As previously disclosed, the Company has settled the contractual dispute with one of the Georgian individuals by entering into a settlement agreement with him. Due to the relatively low current fair value of the business subject to the contract with the second Georgian individual and in view of the unspecific and unsupported nature of the individuals’ allegations, the Company believes that the inquiry will not result in any material adverse effect on the Company’s business, financial condition or results of operations.

12. Related Party Transactions

      Effective January 1, 2002, Metromedia Company, the Company’s largest shareholder, provided certain consulting services to the Company on an hourly basis as requested by the Company in the areas of tax, legal and investor relations pursuant to a Consulting Services Agreement (the “CSA”). For the three months ended March 31, 2004 and 2003, the Company paid Metromedia Company consulting fees of $0.1 million pursuant to the CSA. A significant portion of the consulting fees paid to Metromedia Company in the first quarter of 2004 and 2003 is principally related to tax consulting related services with the remainder for executive managerial, legal and other services. The Company anticipates future payments to Metromedia Company will be principally related to executive managerial services, since Metromedia Company is no longer providing significant tax consulting services to the Company.

      Services provided by Metromedia Company pursuant to the CSA have been provided as requested by the Company and have been invoiced to the Company at agreed-upon hourly rates. There is no minimum required level of services. The Company is also obligated to reimburse Metromedia Company for all of its out-of-pocket costs and expenses incurred and advances paid by Metromedia Company in connection with services performed by it under the CSA. Pursuant to the CSA, the Company agreed to indemnify and hold Metromedia Company harmless from and against any and all damages, liabilities, losses, claims, actions, suits, proceedings, fees, costs or expenses (including reasonable attorneys’ fees and other costs and expenses incident to any suit, proceeding or investigation of any kind) imposed on, incurred by or asserted against Metromedia Company in connection with the agreement, other than those in any way relating to or resulting from the gross negligence or willful misconduct of Metromedia Company, its employees, consultants or other representatives. The CSA continues in effect unless and until Metromedia Company or the Company provided written notice of termination to the other party, whereupon the CSA will terminate immediately.

13. Acquisition

   On March 18, 2004, the Company announced that PeterStar entered into transactions permitting it to acquire 80% of the outstanding shares of Pskov City Telephone Network (“PGTS”), an incumbent local exchange carrier in Northwest Russia. PGTS, established in 1901, is one of Russia’s oldest telecommunications operators and is a Russian public company. The Pskov district is located in the Northwest region of Russia and borders the Baltic States and Belarus.

   PeterStar has entered into several share purchase agreements which in the aggregate will allow it to acquire 80% of the shares of PGTS and 100% of the shares of Pskovinterkom, a smaller local exchange carrier in Pskov and a sister company of PGTS. PeterStar is currently anticipating that the share purchase transactions will be completed in the second quarter of 2004. As part of the transaction, PeterStar has extended to PGTS a secured loan of $2.6 million, which is included in “Other assets” on the consolidated balance sheet as of March 31, 2004. The full consideration for this transaction will be financed directly by PeterStar. In addition, on April 27, 2004, PeterStar completed the acquisition of the 80% of the shares of PGTS and 89% of the shares of Pskovinterkom for an estimated purchase price of $1.5 million, subject to additional due diligence. PeterStar expects to purchase the remaining 11% of the shares of Pskovinterkom after receipt of regulatory approval.

14. Subsequent Events

Magticom Activity

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      On February 20, 2004, Dr. George Jokhtaberidze, co-founder and majority owner of Magticom and son-in-law of former Georgian president Shevardnadze, was detained in the Republic of Georgia without any charges having been filed against him. As reported by various media sources, Dr. Jokhtaberidze was being held in connection with the continuing investigation of various tax-related matters. On April 26, 2004, the Georgian Government investigations into past business and tax payment practices of Magticom were completed with no adverse findings. In addition, the prosecution by the Georgian Government of Dr. Jokhtaberidze was dropped without finding any wrong-doing and Dr. Jokhtaberidze was released from the investigative detention on April 26, 2004. The Company believes that no further investigations or prosecutions of Magticom, Magticom personnel or Dr. Jokhtaberidze with respect to past business or tax payment practices will be undertaken by the Georgian Government.

      The Company’s interest in Magticom is held through Telcell, a joint venture with Western Wireless Corporation. The Company owns 70.41% of the outstanding equity interests of Telcell through its wholly-owned subsidiary, International Telecell Cellular, Inc. (“ITC”).

      On April 23, 2004, Magticom issued a dividend of $15.6 million. Telcell, which is entitled to $6.9 million of this dividend, net of taxes, agreed to loan this amount to Dr. Jokhtaberidze by redirecting its share of the dividend distribution to him. As security for the loan, Dr. Jokhtaberidze has assigned to Telcell his right to receive future dividends from Magticom until the loan, which matures on December 31, 2004, is paid in full. Magticom expects to declare and pay dividends during the remainder of 2004 in an amount necessary to make this repayment. However, as described more fully below, the expectation is that this loan will be repaid during the second quarter of 2004 or promptly thereafter, as part of a business transaction with Dr. Jokhtaberidze.

      The Company, the equity holders of Telcell, and Dr. Jokhtaberidze entered into a binding memorandum of understanding, providing for, upon execution of definitive documents and satisfaction of certain conditions, Dr. Jokhtaberidze to convey his 51% interest in Magticom to ITC in exchange for a 49.9% interest in ITC plus certain cash consideration. The Company will retain the remaining 50.1% majority ownership of ITC. After completion of all transactions contemplated by this memorandum of understanding, the Company will have the largest effective ownership interest in Magticom at 42.8% and will be able to exert operational control over Magticom as a result of its status as managing member of Telcell and majority stockholder of ITC. A portion of Dr. Jokhtaberidze’s cash proceeds from these transactions will be used to repay the aforementioned loan, with $4.8 million of this repayment being distributed to the Company in consequence of its current 70.41% ownership interest in Telcell. The parties anticipate that all transactions contemplated in the memorandum of understanding will be concluded by end of second quarter 2004 or promptly thereafter.

      On May 1, 2004, ITC entered into a memorandum of understanding with the Georgian Government (the “MOU”) providing for issuance by ITC of an assignable option (the “Option”) to purchase a 20% ownership interest from ITC in Magticom after completion of the restructuring of Dr. George Jokhtaberidze’s ownership interest in Magticom as discussed above.

      The Georgian Government is prohibited from directly exercising the Option, but may assign the Option to certain qualified European Union or American entities, as defined in the MOU (a “Qualified Holder”), provided that the transfer of the Option to a Qualified Holder which directly or indirectly owns or controls or is controlled by or is under common control with any telecommunications business in the Republic of Georgia is subject to approval by ITC at its sole discretion. Furthermore, no Qualified Holder is permitted to transfer the Option. The exercise price of the Option is based on a formula that is calculated by using twenty percent of the product of Magticom’s earnings before income taxes, depreciation and amortization (“EBITDA”) for the four most recently ended fiscal quarters prior to the date of the exercise of the Option multiplied by 2.5. Any entity that exercises the Option will be subject to certain transfer restrictions that encourage holding the acquired 20% Magticom ownership interest for a period of at least 3 years. The Option will have a limited exercise period of 12 months from the date of issuance.

      If the Option is exercised, ITC will retain a 31% direct ownership in Magticom and a 34.5% indirect ownership in Magticom through Telcell, and the Company’s aggregate ownership interest in Magticom will be 32.8%. Furthermore, the Company would continue to have the largest effective ownership interest in Magticom, at 32.8%, and will continue to be able to exert operational control over Magticom as a result of its status as majority stockholder of ITC and managing member of Telcell.

Radio Skonto Transaction

      On April 28, 2004, the Company sold its 55% interest in Radio Skonto (“Skonto”) to A/S Multibanka, a stock company registered in Latvia already owning 10% of Skonto. In addition, the Company assigned its right to collect from Skonto unpaid management fees to A/S Multibanka or A/S Multibanka’s designee. Total consideration for the ownership rights and assigned receivable was $0.5 million. The Company anticipates recording a gain of $0.3 million in discontinued components in the three months ended June 30, 2004.

Commercial Dispute

      The Company is in a commercial dispute with its partner in Ayety T.V., Mtatsminda Ltd. (“Mtatsminda”). Mtatsminda holds 15% of the outstanding interests in Ayety TV and the Company holds the remaining 85% of the outstanding interests. On June 2,

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2004, Mtatsminda sent a letter to the Company in which it addressed four issues. First, Mtatsminda requested that the Company cause Ayety TV to renegotiate the terms pursuant to which Ayety TV is using 11 broadcast frequencies, which belong to Mtatsminda. Second, Mtatsminda alleges that the Company has an obligation to pay property taxes on the buildings owned by an affiliate of the Company in Tbilisi and that the Company has failed to meet this obligation. Third, Mtatsminda disputes the amount of certain loans made by the Company to Ayety TV. Fourth, Mtatsminda alleges that the Company may have violated laws against bribery of foreign officials and possibly engaged in other improper or illegal conduct.

     With respect to the broadcast frequencies, Ayety TV has been using the 11 frequencies under an agreement with Mtatsminda, which recently expired. Ayety TV is intending to enter into negotiations with Mtatsminda to secure continued long-term use of these frequencies. The Company believes that the risk of Mtatsminda withdrawing the right to use its frequencies is remote. With respect to the property tax issue, the Company is currently investigating this allegation and has retained outside legal counsel to assist it. The Company believes that the amount of tax due, if any, is relatively low and it has been advised by outside legal counsel that the risk of a tax assessment is remote. Further, the Company believes that the allegations related to the amount of the loans made to Ayety are unfounded and intends to vigorously defend itself on this issue.

     The Company believes that the fourth allegation is substantially similar to those raised previously by certain Georgian individuals and described in Note 11, “Commitments and Contingencies — Georgian Matters.” The Company’s Board of Directors authorized the Company’s outside counsel to conduct an independent inquiry into the allegations of possible improper or illegal conduct made by the Georgian individuals. The investigation has been completed and the results have been reported by the Company’s outside counsel to the Board of Directors of the Company. The investigation did not uncover any specific factual support for the allegations regarding violations of laws against bribery of foreign officials, including the Foreign Corrupt Practices Act, or other alleged improper or illegal conduct. The Audit Committee of the Company’s Board of Directors has reviewed the letter sent by Mtatsminda and believes that the allegations made with respect to violations of laws and other improper or illegal conduct are substantially similar to those previously investigated by the Company’s outside counsel. For this reason, the Audit Committee has determined not to re-open the investigation.

Preferred Dividend

     During the second quarter of 2004, the Company’s Board of Directors elected to not declare a dividend on its Preferred Stock for the quarterly dividend period ended on June 15, 2004.

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MAGTICOM LIMITED

See accompanying notes to financial statements.

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MAGTICOM LIMITED