SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: November 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to
_______________
Commission File Number: 1-5979
ORION PICTURES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-1680528
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification no.)
1888 Century Park East, Los Angeles, California 90067
(Address of principal executive offices)
Registrant's telephone number, including area code:
(310) 282-0550
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 and 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes X No
Number of shares of Common Stock outstanding as of January 13,
1995: 20,000,000
<PAGE>
Page 2
ORION PICTURES CORPORATION
INDEX TO
QUARTERLY REPORT ON FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ORION PICTURES CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per-share amounts)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
------------------- ------------------
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Revenues $ 44,265 $ 70,729 $157,509 $140,952
Cost of rentals 36,691 62,320 151,626 150,262
-------- -------- -------- --------
Gross profit (loss) 7,574 8,409 5,883 (9,310)
Other costs and expenses:
Selling, general and administrative 5,480 5,250 16,663 15,805
Interest, net 6,604 8,107 21,025 24,674
-------- -------- -------- -------
Loss before chapter 11 reorganization items
and provision for income taxes (4,510) (4,948) (31,805) (49,789)
Chapter 11 reorganization items 135 193 524 1,406
-------- -------- -------- -------
Loss before provision for income taxes (4,645) (5,141) (32,329)
(51,195)
Provision for income taxes 200 300 900 1,300
-------- -------- -------- -------
Net loss $ (4,845) $ (5,441) $(33,229) $(52,495)
======== ======== ======== ========
Loss per common share $ (.24) $ (.27) $ (1.66) $ (2.62)
======== ======== ======== ========
Number of common and common equivalent
shares entering into computation 20,000 20,000 20,000 20,000
========= ========= ========= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements
<PAGE>
Page 4
ORION PICTURES CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
November 30, February 28,
1994 1994
------------ ------------
ASSETS:
Cash and cash equivalents $ 13,977 $ 37,114
Accounts receivable, net 79,380 81,981
Film inventories 273,468 367,152
Other assets 18,339 21,767
--------- ---------
$ 385,164 $ 508,014
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable $ 1,978 $ 1,681
Accrued expenses 33,299 40,906
Participations and residuals 46,811 50,595
Notes and subordinated debt (including
$19,200 due to majority shareholder
at November 30, 1994) 217,617 274,501
Deferred revenues 76,885 98,528
Shareholders' equity:
Common stock 5,000 5,000
Paid-in surplus 265,811 265,811
Accumulated deficit (262,237) (229,008)
-------- --------
Total shareholders' equity 8,574 41,803
-------- --------
$ 385,164 $ 508,014
========= =========
See accompanying Notes to Condensed Consolidated Financial
Statements
<PAGE>
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<TABLE>
ORION PICTURES CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
November 30,
1994 1993
<S> <C> <C>
Operations:
Loss before chapter 11 reorganization
items and provision for income taxes $ (31,805) $ (49,789)
Provision for income taxes (900) (1,300)
--------- ---------
Loss exclusive of chapter 11 reorganization items (32,705) (51,089)
Adjustments to reconcile loss exclusive
of chapter 11 reorganization items
to cash provided by operations exclusive
of chapter 11 reorganization items:
Amortization of film costs 115,916 115,452
Decrease in accounts receivable 2,601 5,594
Decrease in accounts payable and
accrued expenses (6,785) (9,528)
Accrual of participation and residuals 20,462 12,183
Payments of participation and residuals (24,246) (21,763)
Decrease in deferred revenues (21,643) (12,667)
Other, net 13,008 13,975
-------- ---------
Cash provided by operations
exclusive of chapter 11 reorganization items 66,608 52,157
Payments of chapter 11 reorganization items (524) (1,406)
-------- ---------
Cash provided by operations 66,084 50,751
Investment activities:
Investment in film inventories (22,232) (49,132)
Other (329) 5,194
-------- ---------
Cash used in investment activities (22,561) (43,938)
Financing activities:
Additions to notes and subordinated debt 19,200 ---
Payments on notes and subordinated debt (85,860) (60,982)
-------- ---------
Cash used in financing activities (66,660) (60,982)
Decrease in cash (23,137) (54,169)
Cash and cash equivalents at beginning of period 37,114 77,539
-------- ---------
Cash and cash equivalents at end of period $ 13,977 $ 23,370
======== =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements
<PAGE>
Page 6
ORION PICTURES CORPORATION
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Introduction
The accompanying interim condensed consolidated financial
statements of Orion Pictures Corporation and its subsidiaries (the
"Company") 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 latest Annual Report on Form
10-K (the "1994 Form 10-K"). 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 November 30, 1994, the results of its operations for the
three- and nine-month periods ended November 30, 1994 and 1993 and
its cash flows for the nine-month periods ended November 30, 1994
and 1993 have been included. The results of operations for interim
periods are not necessarily indicative of the results which may be
realized for the full year.
The Company's Modified Third Amended Joint Consolidated Plan of
Reorganization was confirmed by the United States Bankruptcy Court
for the Southern District of New York pursuant to an order issued
on October 20, 1992, and became effective on November 5, 1992. The
condensed consolidated financial statements and other disclosures
contained herein should be read in light of such effectiveness. In
particular, as described in "Liquidity and Capital Resources",
selling, general and administrative costs and interest expense in
future periods are likely to exceed gross profit recognized in each
period, which will result in the reporting of net losses for
financial reporting purposes for the foreseeable future.
2. Basis of Presentation
On December 11 and 12, 1991 (the "Filing Date"), the Company and
substantially all of its subsidiaries filed petitions for relief
under chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the
Southern District of New York (the "Court"). During the period
from the Filing Date to November 5, 1992 (the "Bankruptcy Period"),
the Company operated under a series of court orders and actively
sought to obtain new equity capital and other forms of investment
in order to recapitalize. In this regard, the Company filed its
"Debtors' Joint Consolidated Plan of Reorganization" (the "Plan")
with the Court on July 13, 1992 (as amended on July 24, 1992,
August 7, 1992, September 3, 1992 and October 20, 1992) and the
related "Disclosure Statement for Debtors' Joint Consolidated Plan
of Reorganization" with the Court on July 21, 1992 (as amended on
July 24, 1992, August 7, 1992 and September 3, 1992). On October
20, 1992 (the "Confirmation Date"), the Court confirmed the Plan
which became effective on November 5, 1992 (the "Effective Date").
The Plan and the Company's reorganization activities are more fully
described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Certain claims have arisen after the Filing Date from rejection of
executory contracts and leases, and from the determination by the
Court (or agreed to by parties in interest) of allowed claims for
contingencies and other disputed amounts (Note 9).
<PAGE>
Page 7
3. Chapter 11 Reorganization Costs
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", issued by the American
Institute of Certified Public Accountants ("SOP 90-7") requires
direct costs of administering the chapter 11 filing, particularly
professional fees, to be expensed as incurred. Accordingly,
Chapter 11 reorganization items presented on the Condensed
Consolidated Statements of Operations for the three- and nine-month
periods ended November 30, 1994 and 1993 are comprised primarily of
legal fees incurred during those periods. Direct costs of
administering the chapter 11 filing are expected to continue until
all claims and related litigation are resolved.
4. Film Inventories
The following is an analysis of film inventories (in thousands):
November 30, February 28,
1994 1994
----------- -----------
Theatrical films:
Released $ 262,896 $ 305,560
Completed and unreleased -- 50,204
Television programs:
Released 10,572 11,388
--------- ---------
$ 273,468 $ 367,152
========= =========
In late December 1991, the Company received a notice from Showtime
Networks, Inc. ("Showtime") stating that Showtime believed the
Company had not complied with the so-called "key man clause" in the
Company's exclusive film licensing agreement with Showtime and,
accordingly, that Showtime would not license the 16 pictures
theatrically released in the domestic marketplace during fiscal
1992, 1993 and 1994 and the first and third quarters of fiscal
1995, (the "Key Man Dispute"). License fees under the Showtime
agreement for these sixteen films were expected to aggregate
approximately $77,000,000. After a review of the underlying facts
and circumstances and consultation with counsel, the Company
advised Showtime that the Company had complied with the key man
clause in the Showtime agreement, that failure to accept delivery
of the product rejected by Showtime constituted Showtime's default
under the agreement and that the Company intended to pursue all
available remedies to realize the domestic pay television license
fees due under the Showtime agreement.
On March 20, 1992, the Company filed a proceeding in the Court
against Showtime seeking, among other things, an order permitting
the Company to exercise its power under the Bankruptcy Code to
assume, and therefore not reject, the Showtime agreement. As part
of its request to assume the agreement, the Company sought a
factual determination by the Court that it had complied with the
key man clause.
After a hearing and trial on these matters held on May 14 and 15,
1992, the Court issued an order dated June 3, 1992 (the "Showtime
Order"), authorizing the Company to assume the Showtime agreement
and finding that the Company had complied with the key man clause.
Showtime subsequently appealed the Showtime Order to the United
States District Court for the Southern District of New York (the
"District Court"). On December 8, 1992, the District Court
affirmed the decision of the Court. On January 13, 1993, Showtime
appealed the decision of the District Court to the United States
Court of Appeals for the Second Circuit (the "Appeals Court").
Oral argument was held on June 7, 1993. On September 17, 1993, the
Appeals Court vacated the grant of motion to assume and remanded
the motion to assume to the Court for further proceedings. On
January 31, 1994, the Company commenced an appeal of the Appeals
Court's decision to the Supreme Court of the United
<PAGE>
Page 8
States by petitioning for a writ of certiorari. If the Appeals Court's
decision was not reversed by the Supreme Court, the Appeals Court's
decision ultimately could have lead to a retrial of the issue of
the Company's compliance with the key man clause to a jury. In the
event of any such retrial, the Company intended to pursue the
matter vigorously although it could not predict how a jury would
determine the facts.
On May 6, 1993, the Company was served with a complaint from
Showtime alleging that Showtime should be permitted to offset
approximately $29,300,000 in fees plus interest against future
license fees due the Company under the Showtime agreement (the
"Qualification Dispute"). Showtime claimed that the Company did
not meet the qualification criteria on eight films, one of which is
already included in the disputed pictures under the Key Man Dispute
described above.
In order to avoid the uncertainty inherent in jury trials and the
continued delay and cost related to pursuing its rights, claims and
defenses in connection with these disputes, the Company determined
that it was prudent to commence settlement negotiations with
Showtime. On March 29, 1994, the Company and Showtime reached an
agreement (the "Showtime Settlement") settling the litigations and
disputes described above which was approved by the Court on such
date and became effective on March 29, 1994. The Showtime
Settlement continues to provide for the exclusive United States pay
television exhibition of the 16 pictures that were the subject of
the Key Man Dispute. For each motion picture meeting certain
requirements, the Showtime Settlement provides for a reduced
minimum license fee. The Showtime Settlement also reduced the
license fees related to the seven pictures included in the
Qualification Dispute described above that were not the subject of
the Key Man Dispute. License fees for the 23 pictures subject to
the Showtime Settlement were approximately $33,300,000 less than
the approximate $105,000,000 of such fees pursuant to the Showtime
agreement; accordingly, film inventories at February 28, 1994 were
adjusted to reflect this settlement.
Approximately three-quarters of the Company's film inventories at
November 30, 1994 and at February 28, 1994 are stated at amounts
approximating their estimated net realizable value and will not
result in the recording of gross profit upon the recognition of
related revenues in future periods.
Since the date of the Company's quasi-reorganization (February 28,
1982), when the Company's inventories were restated to reflect
their then current market value, the Company has amortized 92% of
the gross cost of its film inventories, including those produced
subsequent to the quasi-reorganization. Approximately 97% of such
gross film inventory costs will have been amortized by November 30,
1997. Due to the restrictions of the Plan, the Company has not
produced or acquired incremental inventory. Therefore, as the
existing inventory moves into the ancillary markets and is not
replaced by significant recent inventory, a greater percentage of
the future revenue estimate will occur subsequent to the first
three years. As of November 30, 1994, approximately 59% of the
unamortized balance of film inventories will be amortized within
the next three-year period based upon the Company's revenue
estimates at that date. However, such amortization is expected to
exceed 60% within one additional year (a four-year period).
<PAGE>
Page 9
5. Notes and Subordinated Debt
Notes and subordinated debt is comprised of the following (in
thousands):
November 30, February 28,
1994 1994
------ ------
Notes payable to banks pursuant to the Third
Amended and Restated Credit Agreement
("Third Restated Credit Agreement") $ 64,216 $ 122,862
Obligation to Metromedia pursuant to the
Reimbursement Agreement 19,200 ---
Talent Notes, net of unamortized discounts
of $8,721 and $9,995 26,359 29,349
Creditor Notes, net of unamortized discounts
of $23,338 and $27,722 39,037 34,820
Non-interest bearing payment obligation to
Sony, net of unamortized discounts of
$1,453 and $2,783 18,547 38,735
Other guarantees and contracts payable,
net of unamortized discounts of $3,116
and $3,634 8,549 9,297
------- -------
Total notes payable $ 175,908 $ 235,063
10% Subordinated Debentures due 2001,
net of unamortized discounts
of $8,737 and $10,483 41,709 39,438
------- -------
Total notes and subordinated debt $ 217,617 $ 274,501
========= =========
Approximately $190,826,000 was outstanding under the Third Restated
Credit Agreement on the Effective Date of the Plan (Note 2). Such
amount has been reduced through repayments to approximately
$58,619,000 at December 31, 1994 which amount matures on October
20, 1995.
Notwithstanding the above maturity date and to the extent that the
Company generates positive net cash flow (as defined in the Third
Restated Credit Agreement) ("Net Cash Flow") for the immediately
preceding period, the Company is required to make principal
payments of amounts outstanding under the Third Restated Credit
Agreement at least quarterly during the period from the Effective
Date to October 20, 1995, in amounts approximating 62% of the
Company's Net Cash Flow. In addition, in connection with
consummation of the Plan, Metromedia Company ("Metromedia"), the
Company's principal shareholder, and an affiliate of Metromedia
(collectively, the "Guarantors") guaranteed the payment of
substantially all of the Company's payment obligations under the
Third Restated Credit Agreement pursuant to a bank guarantee (the
"Bank Guarantee"). On October 20, 1994 the Guarantors made a
payment of $14,041,000 to the Banks under the Bank Guarantee as the
Company had not generated sufficient Net Cash Flow for the 12-month
period prior to such date to make the required principal payments
to the Banks. Pursuant to a reimbursement agreement between the
Company and Metromedia (the "Reimbursement Agreement") entered into
in connection with the
<PAGE>
Page 10
consummation of the Plan, the Company has agreed to reimburse
Metromedia for all such payments made under the Bank Guarantee
or as cure payment to Sony (as described below) plus interest
on all such guaranteed payments made by Metromedia at the
rate of LIBOR plus 1.75% out of the portion of Net Cash Flow
allocated to the Banks (62%) and Sony (23%) following payment in
full of the Banks and Sony.
In accordance with the terms of the Plan, the Company had a
$70,000,000 non-interest bearing payment obligation to Sony at the
Effective Date (the "Sony Obligation"). The Sony Obligation is
payable pari passu with amounts payable under the Third Restated
Credit Agreement described above, and is backed up by a letter of
credit issued pursuant to the Third Restated Credit Agreement.
Such amount has been reduced through repayments to approximately
$17,947,000 at December 31, 1994 which amount matures on November
5, 1995.
Notwithstanding the above maturity schedule and to the extent that
the Company generates positive Net Cash Flow for the immediately
preceding period, the Company is required to make principal
payments of amounts outstanding for the obligation to Sony at least
quarterly during the period from the Effective Date to November 5,
1995 in an amount approximating 23% of the Company's Net Cash Flow.
To the extent the Company fails to repay such amounts on a timely
basis, Sony may draw under the letter of credit issued in its favor
after giving notice and an opportunity to cure to the Guarantors
under the Bank Guarantee. In the event Sony does draw under the
letter of credit issued in its favor, such amount would become an
obligation of the Company under the Third Restated Credit Agreement
and guaranteed pursuant to the Bank Guarantee. In order to cure a
shortfall by the Company in its payments to Sony which would have
entitled Sony to draw under the letter of credit issued in its
favor, on November 5, 1994, the Guarantors under the Bank Guarantee
made a payment of $5,159,000 to Sony. Such amount plus interest on
such amount at the rate of LIBOR plus 1.75% is reimbursable to
Metromedia in accordance with the terms of the Reimbursement
Agreement described above.
In accordance with the provisions of the Plan and the agreements
entered into in connection with the Plan, the Company must make
certain cumulative minimum aggregate Net Cash Flow payments
("Mandatory Minimum") to the holders of the Talent Notes, the
Creditors Notes and the 10% Subordinated Debentures (the "Plan
Debt") in payment of their respective principal and interest. As is
more fully described in the 1994 Form 10-K, the Indentures pursuant
to which the Talent Notes and the Creditor Notes were issued (the
"Indentures") provide for only a single Mandatory Minimum threshold
that must be received by the holders of the Plan Debt in payment of
their respective principal and interest for each fiscal quarter
through the fiscal year ended February 28, 1999, rather than
separate quarterly thresholds for each fiscal quarter. The Company
believes the language set forth in the Indentures does not reflect
the agreement between the Company and its principal creditors who
negotiated and agreed upon the provisions based upon the Company's
review of the agreement in principle agreed to by such parties.
Notwithstanding the literal language of the Indentures, it is the
Company's intention to follow what it believes is the intention of
the agreeing parties. Therefore, the following summarizes both the
anticipated Mandatory Minimum amounts contained in the Indentures
and the interpretation of the Company ("Interpretation"). Under
the terms of the Indentures, these Mandatory Minimum amounts are to
be reduced by 15% of the portion of amounts due under the Showtime
agreement to the extent that the amounts are not received by the
Company ("Showtime Shortfall") until such time as the Banks and/or
Sony and, if applicable, the guarantor under the Bank Guarantee are
paid in full. Thereafter, the Mandatory Minimums will be reduced
by 100% of the Showtime Shortfall.
<PAGE>
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Per Indentures
Estimated Adjusted Cumulative Minimum Amounts
---------------------------------------------
(in thousands)
Fiscal Year Ended
February 28(29) May August November February
- ----------------- -------- -------- -------- --------
1995 $ ---- $ ---- $ ---- $ 27,596
1996 $ 61,948 $ 61,948 $ 61,948 $ 61,948
1997 $ 97,802 $ 97,802 $ 97,802 $ 97,802
1998 $161,140 $161,140 $161,140 $161,140
1999 $204,741 $204,741 $204,741 $204,741
Per Interpretation
Estimated Adjusted Cumulative Minimum Amounts
---------------------------------------------
(in thousands)
Fiscal Year Ended
February 28(29) May August November February
- ----------------- -------- -------- -------- --------
1995 $ ---- $ ---- $ ---- $ 27,596
1996 $ 36,184 $ 44,772 $ 53,360 $ 61,948
1997 $ 70,911 $ 79,874 $ 88,838 $ 97,802
1998 $113,636 $129,470 $145,304 $161,140
1999 $172,040 $182,940 $193,840 $204,741
The Company has made nine Net Cash Flow distributions in accordance
with the Plan. The distributions were made in November 1992, March
1993, June 1993, December 1993, March 1994, June 1994, September
1994, October 1994, and December 1994, respectively. In accordance
with the provisions of the Plan and the agreements entered into in
connection with the Plan, a Net Cash Flow distribution was not made
for the quarter ended August 31, 1993 because the Company did not
generate Net Cash Flow. Because distributions of Net Cash Flow are
dependent upon the Company's ability to generate Net Cash Flow and
are determined for specified periods in accordance with the Plan
and the agreements entered into in connection with the Plan, no
assurance can be made as to the amount, if any, of each future
distribution. The following table summarizes and describes the
allocation of these distributions in accordance with the Plan (in
thousands):
<TABLE>
<CAPTION>
Dec. Oct. Sept. Jun. Mar. Fiscal 11/5/92
1994 1994 1994 1994 1994 1994 to 2/28/93 Total
------- ------- -------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Third Restated Credit Agreement $ 5,597 $ 2,688 $ 11,500 $ 14,188 $ 16,229 $ 39,345 $ 28,619 $118,166
Metromedia Obligation --- --- --- --- --- --- --- ---
Sony Obligation 2,053 986 4,218 5,204 5,952 17,984 10,497 46,894
Talent Notes (principal and interest) 765 367 1,572 1,939 2,218 5,733 3,910 16,504
Creditor Notes --- --- 164 --- --- 1,046 1,498 2,708
10% Subordinated Debentures due 2001 --- --- --- --- --- --- 977 977
Interest on 10% Subordinated
Debentures due 2001 585 281 1,037 1,483 1,697 3,339 519 8,941
------- ------- -------- -------- -------- -------- -------- --------
$ 9,000 $ 4,322 $ 18,491 $ 22,814 $ 26,096 $ 67,447 $ 46,020 $194,190
======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
Pursuant to the Waiver and Consent dated as of June 30, 1993 under
the Third Restated Credit Agreement, $2,600,000 of the portion of
the June 1993 distribution payable pursuant to the Plan to the
Company's banks was instead paid to Sony. In accordance with the
terms of the Plan, all or part
<PAGE>
Page 12
of the portion of Net Cash Flow which would otherwise be payable
to holders of Creditor Notes for the December 1994, October 1994,
September 1994, June 1994, March 1994, December 1993, June 1993 and
March 1993 distributions were used to satisfy, in whole or in part, the
interest obligation on the 10% Subordinated Debentures. In addition, in
accordance with the indenture for the 10% Subordinated Debentures,
approximately $898,000 and $525,000, respectively, of the interest due
October 1, 1993 and April 1, 1994 related to the 10% Subordinated
Debentures was paid by the issuance of additional debentures.
Also, in accordance with the Talent Note indenture, some or all of
the interest due for the three-month periods ended August 31, 1993,
November 30, 1993, and November 30, 1994 on the Talent Notes was
paid by the issuance of additional notes (approximately $405,000,
$426,000, and $393,000 respectively). The payments on the Sony
Obligation have reduced the outstanding amount on the letter of
credit supporting such obligation to $22,947,000 at December 31,
1994.
All descriptions of securities above refer to securities issued and
in certain cases, estimated amounts of such securities that are yet
to be issued, because certain bankruptcy claims have not been
resolved.
6. Income Taxes
The provision for income taxes for the three and nine months ended
November 30, 1994 and 1993 consists of the following (in
thousands):
Three Months Ended Nine Months Ended
November 30 November 30
------------------- -------------------
1994 1993 1994 1993
---- ---- ---- ----
Federal $ - $ - $ - $ -
State and local - - 100 100
Foreign 200 300 800 1,200
------ ------ ------ ------
$ 200 $ 300 $ 900 $1,300
====== ====== ====== ======
These provisions are based, in part, upon estimates of the
Company's effective tax rate for the entire year. Only a portion
of such provisions are offset by losses from operations, because of
certain foreign and state taxes which cannot be mitigated by such
losses. In addition, foreign taxes are provided for certain
transactions in the period in which they occur.
7. Loss Per Common Share
Per-share amounts presented on the Company's Condensed Consolidated
Statements of Operations are computed by dividing Net loss by the
weighted average number of issued common shares outstanding during
each period.
8. Revenue Information
The sources of the Company's revenues from operations by market for
the three- and nine-month periods ended November 30, 1994 and 1993
are set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company derives significant revenues from the foreign
distribution of its theatrical motion pictures and television
programming. During the three months ended November 30, 1994 and
1993, the Company
<PAGE>
Page
generated revenues of $13,638,000 and $23,280,000, respectively,
from foreign distribution of such product. During the nine-month
periods ended November 30, 1994 and 1993, the Company generated
foreign distribution revenues of $40,957,000 and $64,412,000
respectively.
9. Contingent Liabilities
The Company and its subsidiaries are contingently liable with
respect to various matters, including litigation in the ordinary
course of business and otherwise. Some of the pleadings in various
litigation matters contain prayers for material awards including
claims arising after the Filing Date from the determination by the
Court (or agreement by parties in interest) to allow claims for
certain of these contingencies and other disputed amounts. Based
upon management's review of the underlying facts, circumstances and
consultation with counsel, management believes such matters will
not result in the allowance by the Court of significant additional
liabilities which would have a material adverse effect upon the
consolidated financial position or results of operations of the
Company with the possible exception of the matter described below.
As previously disclosed in the Registrant's Annual Reports on Form
10-K for the fiscal years ended February 28, 1993 and February 28,
1994, on October 12, 1990, Hemdale Film Corporation ("Hemdale")
filed an action against the Company in the Superior Court for Los
Angeles alleging various breaches of the agreements between Hemdale
and the Company for distribution of the motion pictures "PLATOON",
"HOOSIERS" and "THE TERMINATOR". The plaintiff produced these
pictures which the Company released. The complaint seeks an
accounting and damages purportedly in excess of $30,000,000 and is
based on the allegation that the Company paid Hemdale less than it
was due under the agreements, used improper accounting practices,
refused to permit Hemdale's representatives to conduct appropriate
examinations of the Company's books and records and provided
Hemdale with allegedly inaccurate and inadequate settlement
statements. On December 10, 1990, the Company filed its answer,
denying the material allegations of the complaint, asserting that
its accounting practices were accurate in all respects. Hemdale
has filed a proof of claim substantially based on the allegations
in its complaint. The Company has objected to Hemdale's claim and
the estimation hearing on Hemdale's claim has been further
adjourned in the Court until January 17, 1995. Therefore, no
assurance can be given at this time concerning the ultimate outcome
of the Hemdale litigation or the effect thereof, if adverse to the
Company. As a result of the Company's chapter 11 filings, it is
expected that this case will be tried before the Court.
10. Proposed Transaction
On August 31, 1994, the Company, the Actava Group Inc. ("Actava"),
MCEG Sterling Incorporated ("Sterling"), International Telcell,
Inc. ("ITI") and Metromedia International Inc. ("MII"; and together
with ITI, Metromedia International Telecommunication, Inc., "MITI")
signed letters of intent to combine the foregoing companies (the
"Proposed Transaction") into a new company to be called "Metromedia
International Group, Inc." MITI is an affiliate of Metromedia, the
Company's principal shareholder.
Under the terms of the Proposed Transaction, as set forth in the
nonbinding letters of intent, each share of the Company's common
stock would be exchanged for 0.57143 shares of Actava common stock
or its equivalent, each share of Sterling common stock will be
converted into Actava common stock or its equivalent at the same
0.57143 exchange ratio and each share of MITI common stock would be
converted into 5.5614 shares of Actava common stock or its
equivalent. The foregoing exchange ratios will be subject to
certain adjustments depending on the trading range of Actava common
stock. As a result of the Proposed Transaction, it is currently
anticipated that Actava (based upon market prices on the dates the
letters of intent were executed, and assuming Actava is the
surviving entity in the Proposed Transaction) would issue an
additional approximately 21,500,000 shares of common stock. Actava
currently has approximately 18,335,186 shares of common stock
<PAGE>
Page 14
outstanding. The Actava common stock to be issued to the
Company's, Sterling's and MITI's shareholders in connection with
the Proposed Transaction will be identical to the shares of Actava
common stock currently outstanding, except that the shares of
common stock issued to Metromedia and its affiliates will be
entitled to three votes per share. It is currently anticipated
that Metromedia and its affiliates would control in excess of 50%
of the voting power of the surviving entity as a result of the
stock exchanges contemplated by the Proposed Transaction.
Metromedia International Group, Inc. will be managed by a three
person Office of the Chairman consisting of John W. Kluge, the
Company's current Chairman of the Board as Chairman, Stuart
Subotnick, the Company's current Vice Chairman as Vice Chairman and
John D. Phillips, President and Chief Executive Officer of Actava,
as President.
The closing of each transaction included in the Proposed
Transaction is contingent upon the closing of each other
transaction included in the Proposed Transaction. The consummation
of the Proposed Transaction is subject, among other things, to the
successful negotiation and execution of definitive agreements,
approval of the Proposed Transaction by the Boards of Directors and
shareholders of Actava, the Company, Sterling, and MITI, the
completion of satisfactory due diligence investigations by each of
the parties to the Proposed Transaction, the receipt of all
required lender consents, the successful refinancing of the
currently outstanding amounts owed to the Company's debtholders
(the Banks, Sony, Holders of Talent Notes, Creditor Notes and 10%
Subordinated Debentures), and the receipt of all required
regulatory approvals, including approval with respect to the Hart-
Scott-Rodino Antitrust Improvement Act of 1976, as amended.
The Company has been named a defendant in two separate lawsuits
regarding the Proposed Transaction. See "Part II - Other
Information - Item 1 - Legal Proceedings"
11. Liquidity
As described in Note 5 the Company has significant obligations
under the Plan. To the extent that the Company generates Net Cash
Flow, the Company is required to make principal payments with
respect to the Banks and Sony and to holders of its Talent Notes,
Creditor Notes and 10% Subordinated Debentures at least quarterly
out of Net Cash Flow. Net Cash Flow as defined in the Plan
generally provides for the payment of operating costs as incurred.
Because distributions are dependent upon the Company's ability to
generate Net Cash Flow and are determined for specified periods in
accordance with the Plan, no assurance can be made as to the
amount, if any, of each future distribution. See Note 5 for a
schedule of the Company's Net Cash Flow payments since the
Effective Date.
The poor performance of the Company's pictures released after the
Effective Date and the reduction pursuant to the Showtime
Settlement from the contractual amounts which otherwise would be
payable by Showtime under the Showtime Agreement, have had an
adverse effect on the liquidity of the Company. As described in
Note 5, such events had an adverse effect on the Company's ability
to meet its obligations under the Third Restated Credit Agreement
and to Sony discussed below in the fiscal year ended February 28,
1995 ("fiscal 1995") and could have an adverse effect on the
Company's ability to meet the other Plan obligations discussed
below in the fiscal year ended February 29, 1996 ("fiscal 1996").
As described in Note 5, the Company was obligated to make certain
principal payments to its bank lenders under the terms of the Third
Restated Credit Agreement and to Sony pursuant to the Sony
Obligation in October and November 1994, respectively, and is
obligated to make additional principal payments in October and
November 1995, respectively. The Company did not generate
sufficient Net Cash Flow to make the scheduled payments to the
Banks and Sony in October and November 1994,
<PAGE>
Page 15
respectively, and accordingly, the Guarantors under the Bank Guarantee
made certain payments to such parties. In addition, based upon current
estimates of Net Cash Flow, the Company does not currently believe
it will generate sufficient Net Cash Flow to make the scheduled
final maturity payments to the Banks and Sony, in October and
November 1995, respectively. The payments made by the Guarantor in
October and November 1994 and any such additional payments made by
the Guarantors under the Bank Guarantee on behalf of the Company to
the Bank and/or to Sony result in such Guarantors becoming
subrogated to the Banks' and Sony's portion of the Company's Net
Cash Flow following payment in full of the Company's obligations to
the Banks and Sony. The Company is obligated to reimburse the
amounts paid by the Guarantors under the Bank Guarantee on the
Company's behalf, plus interest, out of the portion of the
Company's Net Cash Flow previously allocable to the Banks and Sony
until such Guarantors are reimbursed in full.
In addition, as described in Note 5, the Indentures pursuant to
which the Talent Notes and Creditor Notes were issued (the
"Indentures") provide that an event of default ("Event of Default")
will occur under such Indentures if the aggregate amount of Net
Cash Flow paid by the Company to the holders of Talent Notes,
Creditor Notes and 10% Subordinated Debentures (the "Plan Debt")
does not exceed the mandatory minimum amounts (the "Mandatory
Minimums") specified in the Indentures. The Indentures also
provide, however, that the Mandatory Minimums will be reduced by
certain net amounts due under the Showtime Agreement which are not
received by the Company because of the Showtime Settlement.
The Indentures provide that the first Mandatory Minimum threshold
must be met by the Company by the last quarter of fiscal 1995.
Thereafter, although the Indentures provide that the Company must
make payments to the holders of the Plan Debt in the amounts
specified in the Indentures (less the reduction for the Showtime
Settlement discussed above) for each fiscal quarter through the
fiscal year ended February 28, 1999, the Indentures only set forth
a single Mandatory Minimum threshold for each such fiscal year,
rather than separate quarterly thresholds for each fiscal quarter.
Accordingly, a literal reading of the Indentures would mean that by
the end of each of the Company's four fiscal quarters in each
fiscal year beginning with the fiscal quarter ended May 31, 1995,
the Company would have had to pay to the holders of the Plan Debt
the same Mandatory Minimum amount. The Company believes that the
language set forth in the Indentures does not reflect the agreement
between the Company and its principal creditors who negotiated and
agreed upon the provisions based upon the Company's review of the
agreement in principle agreed to by such parties. The Company
believes that the Mandatory Minimums specified in the Indentures
were intended to be the required Mandatory Minimum thresholds for
only the last fiscal quarter of each fiscal year beginning with the
fiscal year ended February 29, 1996 and that lower quarterly
Mandatory Minimum amounts should have been calculated and set forth
in the Indentures for each fiscal quarter of each fiscal year
beginning with the quarter ended May 31, 1995. Notwithstanding the
literal language of the Indentures, it is the Company's intention
to follow what it believes to be the intention of the agreeing
parties.
Utilizing the Mandatory Minimums contained in the Indentures rather
than the interpretation the Company believes reflects the agreement
of the parties, the Company, based upon current cash flow
projections (which are subject to change), currently anticipates
that it would not generate sufficient Net Cash Flow to satisfy the
Mandatory Minimum threshold under the Indentures beginning with the
quarter ended May 31, 1995 and that accordingly, an Event of
Default would occur under each such Indenture on such date. Upon
the occurrence and continuation of an Event of Default, the Trustee
under each of the Indentures or 40% in aggregate principal amount
of either the Talent Notes or the Creditor Notes could cause an
immediate acceleration of the entire principal amount of such
Notes. Should such acceleration under the Indentures occur, the
Company, absent other financing arrangements, may be forced to seek
protection under chapter 11 of the United States Bankruptcy Code.
Notwithstanding the literal language of the Indentures, the Company
believes, however, that no such Event of Default should occur
because the language set forth in the Indentures does not reflect
<PAGE>
Page 16
the intention of the Company and the representatives of the Plan
Debt who negotiated such provisions and accordingly that no
acceleration of the Notes should occur on such quarterly date.
Utilizing the Company's view that the agreement of the parties is
not reflected in the language of the Indentures and that the
Indentures should be reformed to set forth quarterly Mandatory
Minimum thresholds for each fiscal quarter, the Company
nevertheless currently believes, based upon current cash flow
projections (which are subject to change), that it will not
generate sufficient Net Cash Flow to satisfy such reformed
quarterly Mandatory Minimums at the quarter ended August 31, 1995.
In order to meet the Company's anticipated shortfall, the Company
must obtain a waiver, refinance its existing Plan Debt, or obtain
additional sources of financing including those described below.
If the Company cannot satisfy the Mandatory Minimum thresholds at
the quarter ended August 31, 1995, on such date an Event of Default
would occur under the Indentures, which in turn could cause an
acceleration of such Notes as described above. Should such
acceleration under the Indentures occur, the Company, absent other
financing arrangements, may be forced to seek protection under
chapter 11 of the United States Bankruptcy Code. As more fully
described in Note 10, the Company has entered into letters of
intent to combine the Company with The Actava Group Inc., MCEG
Sterling Inc., and Metromedia International Telecommunications,
Inc. A condition to consummation of the Proposed Transaction is
the refinancing of all the Company's Plan Debt and its remaining
obligations to the Banks and to Sony, so as to ease the cash flow
burden on the surviving company of the proposed merger and avoid an
Event of Default and possible acceleration of the Notes pursuant to
the Indentures. There can be no assurance that this proposed
refinancing or the Proposed Transaction will be consummated.
As previously discussed herein, the Company anticipates net losses
for financial reporting purposes for fiscal 1995, however, the
Company believes it will have sufficient liquidity to meet its
obligations through fiscal 1995 except for its obligations to the
Banks and Sony. Such obligations are guaranteed obligations under
the Bank Guarantee as described above.
The Company continues to exploit its existing library of product in
order to generate Net Cash Flow. The Company is also actively
pursuing a number of steps aimed at improving its operating results
to date and increasing its Net Cash Flow by acquiring or producing
new product on a nonrecourse basis as permitted under the Plan.
Since the Effective Date, the Company has been able to acquire some
new product with nonrecourse financing. In order to further
exploit its existing distribution apparatus, the Company will
continue to actively seek to attract the requisite nonrecourse
financing to fund the acquisition and distribution costs of new
theatrical and home video product, which would be distributed by
the Company through its distribution system. In addition, the
Company will pursue additional nonrecourse financing for the
production of new product, which the Company is also permitted to
engage in under the Plan on a nonrecourse basis or through certain
unrestricted subsidiaries. If the Company is successful in
obtaining nonrecourse financing as described above, the
contribution to the Company's liquidity will generally be in the
form of a distribution fee. In addition to the Proposed
Transaction described above, the Company continues to consider its
alternatives in connection with the anticipated payment shortfall
to the holders of the Plan Debt including other restructuring or
refinancing of such Plan Debt. Despite these intentions, there can
be no assurance that any transaction, restructuring or refinancing
will be consummated or that the Company will be able to generate
sufficient Net Cash Flow to avoid an Event of Default under its
Indentures in fiscal 1996.
<PAGE>
Page 17
ORION PICTURES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On December 11 and 12, 1991 (the "Filing Date"), the Company and
certain of its subsidiaries filed petitions for relief under
chapter 11 of Title 11 of the United States Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Court"). During the period from the
Filing Date to November 5, 1992 (the "Bankruptcy Period"), the
Company operated under a series of Court orders and actively sought
to obtain new equity capital and other forms of investment in order
to recapitalize. In this regard, the Company filed its "Debtors'
Joint Consolidated Plan of Reorganization" as amended July 24,
August 7, September 3 and October 20, 1992 (the "Plan") with the
Court on July 13, 1992. On October 20, 1992 (the "Confirmation
Date"), the Court confirmed the Plan which became effective on
November 5, 1992 (the "Effective Date"). The Plan and the
Company's reorganization activities are more fully described in
"Liquidity and Capital Resources" below. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report on Form 10-K for the
year ended February 28, 1994 (the "1994 Annual M,D & A") for a
further discussion of the Company's Plan of Reorganization and the
implications thereof.
On August 31, 1994, the Company, the Actava Group Inc. ("Actava"),
MCEG Sterling Incorporated ("Sterling"), International Telcell,
Inc. ("ITI") and Metromedia International Inc. ("MII"; and together
with ITI, "MITI") signed letters of intent to combine the foregoing
companies (the "Proposed Transaction") into a new company to be
called "Metromedia International Group, Inc.", as is more fully
described in Note 10 of Notes to Condensed Consolidated Financial
Statement ("Note 10").
RESULTS OF OPERATIONS
During the third quarter of the fiscal year ending February 28,
1995 ("fiscal 1995"), the Company recorded a net loss of $4,845,000
on revenues of $44,265,000. During the third quarter of the
preceding year ("fiscal 1994"), the Company recorded a net loss
$5,441,000 on revenues of $70,729,000.
For the first nine months of fiscal 1995, the Company reported a
net loss of $33,229,000 on revenues of $157,509,000. For the first
nine months of fiscal 1994, the Company reported a net loss of
$52,495,000 on revenues of $140,952,000.
Certain factors should be considered when evaluating the Company's
results of operations in the third quarter of both fiscal 1995 and
fiscal 1994. First, as previously disclosed in the Company's 1994
Form 10-K, approximately three-quarters of the Company's film
inventories are stated at amounts approximating their estimated net
realizable value and do not result in the recording of gross profit
upon recognition of related revenues. A significant portion of
recorded revenues in the third quarter of both fiscal 1995 and
fiscal 1994 related to such film inventories. In addition, the
Company recorded $5,400,000 of writedowns on this product in the
third quarter of fiscal 1994 including a $4,400,000 writedown of
"ROBOCOP 3" based on the disappointing results of the domestic
theatrical release of this picture. Accordingly, gross profit from
profitable pictures (before the effect of the writedowns in the
third quarter of fiscal 1994 described above), was insufficient to
cover selling, general and administrative costs and interest costs
recognized during each quarter.
<PAGE>
Page 18
THREE MONTHS ENDED NOVEMBER 30 (1994 vs 1993)
Revenues
The following table sets forth the sources of the Company's
revenues from operations by market during the third quarter of
fiscal 1995 and 1994 (in thousands):
Three Months Ended
November 30,
-----------------------
1994 1993
-------- ---------
Theatrical distribution $ 2,164 $ 12,755
Television and video distribution:
Home video direct distribution 19,029 15,093
Home video subdistribution 2,325 3,401
Pay television 6,926 3,220
Free television and other 13,821 36,260
------- -------
Total television and video distribution 42,101 57,974
------- -------
$ 44,265 $ 70,729
======== ========
Theatrical Revenues
Of the films unreleased at the Effective Date, the Company released
the last two ("BLUE SKY" and "THERE GOES MY BABY") in the domestic
theatrical marketplace during the third quarter of fiscal 1995.
Due to disappointing results neither title contributed significant
revenues during the current quarter. The Company also released in
the domestic marketplace one title ("NOSTRADAMUS") that was
acquired under the restrictions of the Plan. Such title also did
not contribute significant revenues during the current quarter.
The Company's ability to produce or acquire additional product for
distribution is limited, therefore, revenues from theatrical
distribution after the third quarter of fiscal 1995 will depend
entirely on the Company's ability to produce or acquire additional
product.
The majority of the Company's theatrical revenues in the quarter
ended November 30, 1993 were generated by the domestic and foreign
theatrical distribution of "ROBOCOP 3".
Home Video Revenues
The distribution of three of the Company's theatrical releases,
"CLIFFORD", "THE FAVOR" and "CHINA MOON" in the domestic home video
rental market through Orion Home Video ("OHV") accounted for over
two-thirds of the Company's home video direct distribution revenues
during the current year's third quarter. The remaining revenues
were derived from "sell-thru" (i.e. lower priced) sales of various
titles. Approximately three-quarters of the Company's home video
direct distribution revenues in the previous year's third quarter
were derived from the release of two titles in the domestic home
video rental market.
The Company's home video subdistribution revenues in the current
and previous years' third quarter were mostly generated by sales in
a number of foreign territories of titles under the Company's
subdistribution agreement with Sony including approximately
$1,200,000 which was recognized based upon sales of "ROBOCOP 3" in
each of the current and previous years' third quarters.
Furthermore, the Company's reduced theatrical release schedule
beginning in fiscal 1992, and the
<PAGE>
Page 19
limitations of the Plan with regard to the investment in the production of
new theatrical product, are likely to continue to have an adverse effect on
quarterly revenues in both the home video direct distribution and
subdistribution market for the foreseeable future.
Pay Television Revenues
One title became available during the third quarter of fiscal 1995
for exclusive exhibition in the pay cable market pursuant to a
settlement (the "Showtime Settlement") reached with Showtime
Networks Inc. ("Showtime") as described in Note 4 of Notes to
Condensed Consolidated Financial Statements ("Note 4").
One title first became available during the third quarter of fiscal
1993 under the Company's original exclusive long-term film
licensing agreement with Showtime. Recognition of approximately
$3,100,000 of revenues on this title was deferred for the reason
described below in the section entitled "Pay Television Revenues"
for the nine-month periods ended November 30 (1994 vs 1993).
The remainder of the Company's revenues in this market in each
quarter was recorded upon the availability of various titles under
certain foreign pay television agreements.
Furthermore, the reduced license fees under the Showtime
Settlement, as described in Note 4, the Company's reduced
theatrical release schedule beginning in fiscal 1992, and the
limitations of the Plan with regard to the investment in the
production of new theatrical product, are likely to have an adverse
effect on quarterly revenues in this market for the foreseeable
future.
Free Television Revenues
The Company's free television revenues in the three-month periods
ended November 30, 1994 and 1993, included approximately $7,200,000
and $9,200,000, respectively, of license fees recognized under
certain foreign free television agreements. Free television
revenues in the current and previous quarters each include fees
from the availability to Lifetime of four and nine pictures,
respectively, under the Company's two major agreements with that
basic cable network. The previous year's quarter also included
approximately $19,500,000 of free television revenue which was
recorded upon the availability of "DANCES WITH WOLVES" to ABC and
"THE SILENCE OF THE LAMBS" to CBS. The Company does not expect the
network license fees of any of its remaining titles to be
comparable to the amount generated by these two titles.
Gross Profit
No film generated significant gross profit in the current year's
third quarter. Gross profit in the previous year's third quarter
was most favorably affected by the network availability of "DANCES
WITH WOLVES" and "THE SILENCE OF THE LAMBS". Together, these two
titles contributed approximately $13,300,000 to the Company's
fiscal 1994 third quarter gross profit.
As previously disclosed in the Company's 1993 and 1994 Forms 10-K,
approximately three-quarters of the Company's film inventories are
stated at estimated net realizable value and do not result in the
recording of gross profit upon the recognition of related revenues.
A large portion of recorded revenues in the third quarter of fiscal
1994 and 1995 related to this film inventory. In addition, the
previous year's third quarter was adversely affected by the
recording of a $4,400,000 writedown to "ROBOCOP 3" based upon its
less-than-previously-expected domestic theatrical performance.
As previously disclosed, the Company has released only 16
theatrical films that were substantially
<PAGE>
Page 20
financed by the Company in the domestic theatrical marketplace since the
beginning of fiscal 1992 compared to an annual average of 14 releases in
each of the previous three years. This reduced release schedule has had an
adverse effect on amounts and comparisons of revenues and,
consequently, gross profit and is expected to continue to have an
adverse effect on comparisons with earlier periods in the future.
Chapter 11 Reorganization Items
The Company charged approximately $135,000 and $193,000 of direct
expenses for administration of the chapter 11 filing, consisting
primarily of professional fees, to operations during the quarters
ended November 30, 1994 and 1993, respectively.
Interest Expense
Interest expense for the three months ended November 30, 1994
decreased $1,503,000 (19%) from the previous year's quarter from
$8,107,000 to $6,604,000. This decrease, which primarily reflects
reduced interest charges on lower outstanding debt balances as
principal payments continue to reduce the Company's debt, was
partially offset by increased interest rates.
Provision for Income Taxes
The provision for income taxes on operations in the third quarter
of both fiscal 1994 and fiscal 1995 are partially based on an
estimate of the effective tax rate for the entire year. Only a
portion of the provisions are offset by losses from operations
because of certain foreign and state taxes which cannot be
mitigated by such losses. In addition, foreign taxes are provided
for certain transactions in the period in which they occur. The
provision for income taxes for the three months ended November 30,
1994 and 1993 are attributable to foreign remittance taxes.
<PAGE>
Page 21
NINE MONTHS ENDED NOVEMBER 30 (1994 vs.1993)
Revenues
The following table sets forth the sources of the Company's
revenues from operations by market during the first nine months of
fiscal 1995 and 1994 (in thousands):
Nine Months Ended
November 30,
--------------------
1994 1993
-------- --------
Theatrical distribution $ 7,210 $ 33,779
Television and video distribution:
Home video direct distribution 41,769 27,492
Home video subdistribution 6,726 5,845
Pay television 53,271 14,319
Free television and other 48,533 59,517
-------- --------
Total television and video distribution 150,299 107,173
-------- --------
$157,509 $140,952
======== ========
Theatrical Revenues
During the first three quarters of fiscal 1995 no title contributed
significant theatrical revenues. Of the films unreleased at the
Effective Date, the Company released the last two in the domestic
theatrical marketplace during the third quarter of fiscal 1995.
Pursuant to the terms of the Plan and the related Plan documents,
the Company's ability to produce or acquire additional product for
distribution is limited. Accordingly, revenues from theatrical
distribution after the third quarter of fiscal 1995 will depend
entirely on the Company's ability to produce or acquire additional
product.
Approximately 73% of the Company's theatrical revenues in the first
three quarters of fiscal 1994 were derived from the distribution of
"ROBOCOP 3" and of "THE DARK HALF" in the domestic and foreign
theatrical marketplaces. These films produced approximately
$18,000,000 and $6,400,000 of film rentals, respectively, during
the period.
Home Video Revenues
The distribution of "ROBOCOP 3", "CLIFFORD", "THE FAVOR" and "CHINA
MOON" in the domestic home video rental market and "DANCES WITH
WOLVES" in the domestic home video "sell-thru" market through OHV
accounted for approximately 59% of the Company's home video direct
distribution revenues during the nine months ended November 30,
1994. The distribution of "THE DARK HALF", "MARRIED TO IT" and
"LOVE FIELD" in the domestic home video rental market and of
"DANCES WITH WOLVES" in the domestic home video "sell-thru" market
through OHV accounted for approximately 76% of the Company's home
video direct distribution revenues during the previous nine month-
period.
The Company's home video subdistribution revenue is primarily
generated in the foreign market place. Beginning in fiscal 1992,
the Company's foreign home video releases began to be distributed
under the subdistribution agreement with Sony described in the
Company's 1994 Annual Report on Form 10-K for the year ended
February 28, 1994. Under the terms of this agreement, which was
entered into in February 1990, and amended and restated as of
October 20, 1992, the Company received a substantial advance
against the performance of the 23 pictures (amended from 50
pictures) covered by the agreement. Revenues recorded to date and
to be recorded under this agreement in future periods will be less
than amounts that would have been recorded under previous
performance-based subdistribution agreements due to the receipt of
the substantial advance.
<PAGE>
Page 21
Furthermore, the Company's reduced theatrical release schedule
beginning in fiscal 1992, and the limitations of the Plan and the
related Plan documents with regard to the ability of the Company to
invest in production or acquisition of new theatrical product, are
likely to have an adverse effect on quarterly home video revenues
for the foreseeable future.
Pay Television Revenues
During the first nine months of fiscal 1995, ten titles became
available for exclusive exhibition in the pay cable market pursuant
to the Showtime Settlement reached with Showtime, as described
below. Pay television revenues for the current nine-month period
included approximately $42,800,000 from the recognition of license
fees on these titles. As described below, pay television revenues
of $11,700,000 for two titles were deferred during the first nine-
months of fiscal 1994.
Note 4 of Notes to Condensed Consolidated Financial Statements
("Note 4") describes the terms of the settlement reached on March
29, 1994 regarding, inter alia, a dispute (defined therein as the
"Key Man Dispute") that existed between the Company and Showtime
regarding the licensing by Showtime of the 16 pictures theatrically
released in the domestic marketplace by the Company in fiscal 1992,
1993 and 1994, and in the first and third quarter of fiscal 1995.
No revenues related to the licensing to Showtime of these disputed
pictures had been recorded pending resolution of this dispute.
Such deferral began to have an adverse effect on pay television
revenues in the first quarter of fiscal 1993. Note 4 also
describes a complaint (defined therein as the "Qualification
Dispute") filed by Showtime alleging that Showtime should be
permitted to offset approximately $29,300,000 in fees already paid
against future license fees due the Company. This matter was also
settled under the Showtime Settlement, as described in Note 4.
The Showtime Settlement provides for reduced license fees for the
16 pictures subject to the Key Man Dispute, including an
approximate $4,700,000 reduction to approximately $44,700,000 of
the license fees that would have been recorded during the first
quarter of fiscal 1995 and during fiscal 1994 and 1993 for the nine
otherwise available pictures. In addition, the license fees for the
seven remaining pictures subject to the Key Man Dispute have been
reduced approximately $13,600,000 to approximately $19,300,000
including one picture that became available in the third quarter of
fiscal 1994. Also, the Showtime Settlement provided for a
reduction of $15,000,000 in license fees recorded as revenues in
previous periods related to the pictures subject to the
Qualification Dispute, which amount was reversed in the fourth
quarter of fiscal 1994.
The majority of the remainder of the Company's revenue in this
market for the first nine months of each fiscal year was recorded
upon the availability of various titles under certain foreign pay
television agreements.
Furthermore, as described above, the current nine-month period
included a one time recognition of significant domestic pay
revenues due to the Showtime Settlement. The reduced license fees
under the Showtime Settlement, the Company's reduced theatrical
release schedule beginning in fiscal 1992, and the limitations of
the Plan with regard to the investment in the production of new
theatrical product, are likely to have an adverse effect on
quarterly revenues in this market for the foreseeable future.
Free Television Revenues
The Company's free television revenues in each of the fiscal 1995
and 1994 nine-month periods included approximately $23,900,000 and
$23,400,000, respectively, of license fees which were recorded upon
the availability in a number of foreign territories of certain of
the Company's theatrical titles. Free television revenues in the
current period also include approximately $11,300,000 of license
fees from the availability to Lifetime of 16 pictures under the
Company's two major agreements with
<PAGE>
Page 23
that basic cable network, which compares to $6,800,000 of license fees for
11 titles in the previous nine-month period. During the first nine months
of fiscal 1994, approximately $23,200,000 of revenues were recorded upon the
availability of five films to the major networks.
Gross Profit (Loss)
The Company's gross profit (loss) from operations for the nine
months ended November 30, 1994 increased $15,193,000 from the
previous year's nine-month period from $(9,310,000) to $5,883,000.
Gross profit in the first nine months of fiscal 1995 was most
favorably affected by the recognition of approximately $42,800,000
of domestic pay television license fees on ten titles pursuant to
the Showtime Settlement as described above and in Note 4. These
ten titles accounted for approximately $7,300,000 in gross profit
during the period.
Gross profit in the previous year's first three quarters was most
favorably affected by the availability to certain networks of
"DANCES WITH WOLVES" and "THE SILENCE OF THE LAMBS". Together
those titles generated approximately $13,300,000 of gross profit
during the period.
As is done every quarter, the Company performed a review of its
inventory of film product and, where appropriate, adjusted values
of films in release to reflect current estimates of net realizable
value. The current nine-month period was most adversely affected
by the recording of writedowns to the estimated net realizable
value of the carrying amounts of the Company's five domestic
theatrical releases during the current nine-month period. These
writedowns aggregated approximately $9,400,000. Writedowns for the
nine months ended November 30, 1993, aggregated approximately
$20,400,000 including a $14,100,000 writedown on three of the
Company's domestic theatrical releases during that nine-month
period, "ROBOCOP 3", "THE DARK HALF" and "MARRIED TO IT". In
addition, the Company took further writedowns aggregating
approximately $6,900,000 to its completed unreleased product based
upon further evaluations of their potential performance.
As stated in previous publicly-filed reports, the Company has
released only 16 theatrical films that were substantially financed
by the company in the domestic theatrical marketplace since the
beginning of fiscal 1992, compared to an annual average of 14
releases in each of the previous three years. This reduced release
schedule has had an adverse effect on amounts and comparisons of
revenues and, consequently, gross profit and is expected to
continue to have an adverse effect on such comparisons in future
periods. Furthermore, as previously disclosed in the Company's
1993 and 1994 Forms 10-K, approximately two-thirds and three-
quarters, respectively, of the Company's film inventories are
stated at estimated net realizable value and do not result in the
recording of gross profit upon the recognition of related revenues.
Chapter 11 Reorganization Items
The Company charged approximately $524,000 and $1,406,000 of direct
expenses of administering the chapter 11 filing, consisting
primarily of professional fees, to operations during the nine-month
periods ended November 30, 1994 and 1993, respectively.
Interest Expense
Interest expense for the nine months ended November 30, 1994
decreased $3,649,000 (15%) from the prior year's nine-month period
from $24,674,000 to $21,025,000. This decrease, which primarily
reflects reduced interest charges on lower outstanding debt
balances as principal payments continue to reduce the Company's
debt, was partially offset by increased interest rates.
<PAGE>
Page 24
Provision for Income Taxes
The provision for income taxes for the first nine months of both
fiscal 1994 and 1995 are partially based upon an estimate of the
effective rate for the entire year. Only a portion of the
provisions are offset by losses from operations because of certain
foreign and state taxes which cannot be mitigated by such losses.
In addition, foreign taxes are provided for certain transactions in
the period in which they occur.
The provision for income taxes for the nine months ended November
30, 1994 and 1993 are attributable to foreign remittance taxes and
minimum state taxes.
LIQUIDITY AND CAPITAL RESOURCES
On the Filing Date, as described above, the Company and certain of
its subsidiaries filed petitions for relief under the Bankruptcy
Code in the Court. Under the Plan, the Company will continue to
concentrate its efforts on the licensing and distribution of its
library. Currently, the principal sources of the funds required
for the Company's motion picture distribution activities are
proceeds from the licensing of exhibition and ancillary rights to
the Company's library. In accordance with the terms of the Plan,
the Company was permitted to expend certain amounts to release the
remaining unreleased titles; however, the Company will be permitted
to invest in the production of new theatrical product, only if,
among other things, financing for such product can be obtained,
which is secured only by the film being produced or acquired and is
thus nonrecourse to the other assets of the Company.
Before the filing of the Company's petitions under chapter 11, the
Company had as an operating plan to release each year approximately
12 to 15 theatrical motion pictures which the Company fully or
substantially financed. Prior to the filing, all new production
was halted leaving the Company with only 12 largely completed but
unreleased motion pictures ("Unreleased Films") at the Filing Date.
In addition, under the Plan, the Company's ability to produce or
invest in new theatrical product is severely limited as described
above. As a result, the Company released four, three, and four
theatrical motion pictures in the domestic marketplace in fiscal
1994, 1993, and 1992, respectively. Three motion pictures were
released domestically in the first quarter of fiscal 1995, and the
last two unreleased films were released in the current quarter.
This reduced release schedule described above is likely to have an
adverse impact on results of operations for the foreseeable future.
Furthermore, as described in Note 4, approximately three-quarters
of the Company's film inventories at February 28, 1994 are stated
at amounts approximating their estimated net realizable value and
will not result in the recording of gross profit upon the
recognition of related revenues in future periods. Accordingly,
selling, general and administrative costs and interest expense in
future periods are likely to exceed gross profit recognized in each
period, which will result in the reporting of net losses for
financial reporting purposes for the foreseeable future.
Under the Bankruptcy Code, the Company remained in possession of
its property and, as such, was operating its business as a debtor-
in-possession subject to the supervision of the Court. The Company
also developed a plan of reorganization which is described below.
The plan of reorganization satisfied the provisions of the
Bankruptcy Code (including acceptance by certain required votes of
creditors) and was confirmed by the Court.
During the Bankruptcy Period, the Company's financial and other
resources continued to decline. Production operations were
suspended because of the Company's inability to finance production
of new films. New product for distribution was limited to the
Unreleased Films. To conserve resources, the Company confined its
use of cash collateral to those operating, post-production, and
distribution and marketing costs that were necessary to preserve
and maintain going-concern value.
<PAGE>
Page 25
The Company filed a proposed plan of reorganization and the related
disclosure statement as described above. The Court approved the
Disclosure Statement on September 8, 1992 and confirmed the Plan on
October 20, 1992. On November 5, 1992, the Effective Date, the
Company emerged from the chapter 11 proceedings.
The Plan is extremely complex and the summary presented below
contains only a brief synopsis of the compromises and benefits
granted pursuant to the Plan and is qualified in its entirety by
reference to the Plan. The reader should refer to the Plan to
obtain a more thorough understanding of the provisions of the Plan
and for precise definitions of capitalized terms in the summary
presented below. The Plan represents a compromise and settlement
reached among the Company's principal creditor constituencies, most
of which relinquished, upon confirmation of the Plan, potential
legal and equitable arguments in exchange for the treatment and
certainty provided by the Plan.
Under the Plan, the Company's senior secured creditors (the Banks
and Sony) are sharing 85% of the reorganized Company's Net Cash
Flow. The Plan permits certain unsecured creditors (including
holders of certain 10% Subordinated Debentures that were issued
pursuant to the Plan as described below) to receive, on a pari
passu basis with the senior secured creditors, the remaining 15% of
Net Cash Flow. After payment in full of the Allowed Claims of the
Banks (and Metromedia and its Affiliate, if they shall become
subrogees under the Bank Guarantee) and Sony, 100% of Net Cash Flow
will be paid to the holders of such unsecured Allowed Claims.
After payment of the Talent Notes, holders of the Creditor Notes
and the 10% Subordinated Debentures issued pursuant to the Plan, as
described below, will share 100% of Net Cash Flow.
Under the Plan, the holders of Guild Claims and Participation
Claims reduced by 17% their Allowed Prepetition Residual Claims and
Allowed Preconfirmation Participation Claims, respectively, in
exchange for Talent Notes, which are payable currently out of a
portion of Net Cash Flow not required to be paid to the Banks and
Sony; holders of Allowed Postpetition Residual Claims will be or
have been paid in full with respect to such Claims. The holders of
most of the other Unsecured Claims, have or will receive Creditor
Notes, which are also payable currently out of a portion of Net
Cash Flow not required to be paid to the Banks and Sony.
Additional Creditor Notes will be issued in accordance with the
Plan as and when Disputed Unsecured Claims become allowed.
Under the Plan, the holders of the Company's subordinated notes and
debentures outstanding at the Filing Date received an aggregate of
$50,000,000 initial principal amount of 10% Subordinated Debentures
due October 31, 2001 of the reorganized Company, payable out of the
portion of Net Cash Flow not otherwise payable to the Banks and
Sony as described above, as well as 49% of the equity of the
reorganized Company. The holders of the Company's previously
outstanding Series B Preferred Stock and common stock received, in
the aggregate, 0.1% and 0.8%, respectively, of the common stock of
the reorganized Company. Metromedia and its affiliate have
received an aggregate of 50.1% of the common stock of the
reorganized Company in exchange for $15,000,000, a guarantee of the
bank borrowings of the reorganized Company and a contribution of
all rights in respect of a letter agreement dated November 28, 1990
between the Company and an affiliate of Metromedia (the
"MetMermaids Rights").
For a period of five years from the Effective Date, the Company's
By-laws provide that the Company must cause certain Directors not
affiliated with Metromedia to be included in the Company's slate of
directors nominated for election by the Company's stockholders.
One of such nominees is to be a member of the Executive Committee
of the Board of Directors of the reorganized Company.
Pursuant to the terms of the Plan, the Company is licensing and
distributing its library. Expenditures for selling, general and
administrative costs are substantially less than the levels of such
expenditures that were incurred prior to the Filing Date. Further,
the Plan limits the Company's ability to produce
<PAGE>
Page 26
or acquire new motion pictures or other product. Such product may be
produced or acquired only if, among other things, any financing of such
purchase or acquisition is secured, if necessary, only by the
assets being produced or acquired. With respect to acquired assets
only, the Company is nevertheless allowed, without any restriction,
to pay related debt service out of operating cash flow. While the
Company has been able to acquire certain distribution rights to
certain new product with nonrecourse financing, no assurance can be
given that the Company will be successful in obtaining additional
nonrecourse debt financing or acquiring additional substantial
entertainment assets. Furthermore, to date, such arrangements have
not contributed substantially to the Company's results of
operations.
To the extent that the Company generates Net Cash Flow, the Company
is required to make principal payments with respect to the Banks
and Sony and to its holders of its Talent Notes, Creditor Notes and
10% Subordinated Debentures at least quarterly out of Net Cash
Flow. Net Cash Flow as defined in the Plan generally provides for
the payment of operating costs as incurred. Because distributions
are dependent upon the Company's ability to generate Net Cash Flow
and are determined for specified periods in accordance with the
Plan, no assurance can be made as to the amount, if any, of each
future distribution. See Note 5 of Notes to Condensed Consolidated
Financial Statements ("Note 5"), for a schedule of the Company's
Net Cash Flow payments since the Effective Date.
The poor performance of the Company's pictures released after the
Effective Date and the reduction pursuant to the Showtime
Settlement from the contractual amounts which otherwise would be
payable by Showtime under the Showtime Agreement, have had an
adverse effect on the liquidity of the Company. As described in
Note 5, such events have had an adverse effect on the Company's
ability to meet its obligations under the Third Restated Credit
Agreement and to Sony discussed below in the fiscal year ended
February 28, 1995 ("fiscal 1995") and could have an adverse effect
on the Company's ability to meet the payment obligations to the
Banks and Sony, and other Plan obligations discussed below in the
fiscal year ended February 29, 1996 ("fiscal 1996").
As described in Note 5, the Company was obligated to make certain
principal payments to its bank lenders under the terms of the Third
Restated Credit Agreement and to Sony pursuant to the Sony
Obligation in October and November 1994, respectively, and is
obligated to make additional principal payments in October and
November 1995, respectively. The Company did not generate
sufficient Net Cash Flow to make the scheduled payment to the Banks
and Sony in October and November 1994, respectively, and
accordingly, the Guarantors under the Bank Guarantee made certain
payments to such parties. In addition, based upon current
estimates of Net Cash Flow, the Company does not currently believe
it will generate sufficient Net Cash Flow to make the scheduled
final maturity payments to the Banks and Sony, in October and
November 1995, respectively. Any such payments made by the
Guarantors under the Bank Guarantee on behalf of the Company to the
Banks and/or to Sony result in such Guarantors becoming subrogated
to the Banks' and Sony's portion of the Company's Net Cash Flow
following payment in full of the Company's obligations to the Banks
and Sony. The Company would be obligated to reimburse the amounts
paid by the Guarantors under the Bank Guarantee on the Company's
behalf, plus interest, out of the portion of the Company's Net Cash
Flow previously allocable to the Banks and Sony until such
Guarantors are reimbursed in full.
In addition, as described in Note 5, the Indentures pursuant to
which the Talent Notes and Creditor Notes were issued (the
"Indentures") provide that an event of default ("Event of Default")
will occur under such Indentures if the aggregate amount of Net
Cash Flow paid by the Company to the holders of Talent Notes,
Creditor Notes and 10% Subordinated Debentures (the "Plan Debt")
does not exceed the mandatory minimum amounts (the "Mandatory
Minimums") specified in the Indentures. The Indentures also
provide, however, that the Mandatory Minimums will be reduced by
certain net amounts due under the Showtime Agreement which are not
received by the Company because of the Showtime Settlement.
<PAGE>
Page 27
The Indentures provide that the first Mandatory Minimum threshold
must be met by the Company by the last quarter of fiscal 1995.
Thereafter, although the Indentures provide that the Company must
make payments to the holders of the Plan Debt in the amounts
specified in the Indentures (less the reduction for the Showtime
Settlement discussed above) for each fiscal quarter through the
fiscal year ended February 28, 1999, the Indentures only set forth
a single Mandatory Minimum threshold for each such fiscal year,
rather than separate quarterly thresholds for each fiscal quarter.
Accordingly, a literal reading of the Indentures would mean that by
the end of each of the Company's four fiscal quarters in each
fiscal year beginning with the fiscal quarter ended May 31, 1995,
the Company would have had to pay to the holders of the Plan Debt
the same Mandatory Minimum amount. The Company believes that the
language set forth in the Indentures does not reflect the agreement
between the Company and its principal creditors who negotiated and
agreed upon the provisions based upon the Company's review of the
agreement in principle agreed to by such parties. The Company
believes that the Mandatory Minimums specified in the Indentures
were intended to be the required Mandatory Minimum thresholds for
only the last fiscal quarter of each fiscal year beginning with the
fiscal year ended February 29, 1996 and that lower quarterly
Mandatory Minimum amounts should have been calculated and set forth
in the Indentures for each fiscal quarter of each fiscal year
beginning with the quarter ended May 31, 1995. Notwithstanding the
literal language of the Indentures, it is the Company's intention
to follow what it believes to be the intention of the agreeing
parties.
Utilizing the Mandatory Minimums contained in the Indentures rather
than the interpretation the Company believes reflects the agreement
of the parties, the Company, based upon current cash flow
projections (which are subject to change), currently anticipates
that it would not generate sufficient Net Cash Flow to satisfy the
Mandatory Minimum threshold under the Indentures beginning with the
quarter ended May 31, 1995 and that accordingly, an Event of
Default would occur under each such Indenture on such date. Upon
the occurrence and continuation of an Event of Default, the Trustee
under each of the Indentures or 40% in aggregate principal amount
of either the Talent Notes or the Creditor Notes could cause an
immediate acceleration of the entire principal amount of such
Notes. Should such acceleration under the Indentures occur, the
Company, absent other financing arrangements, may be forced to seek
protection under chapter 11 of the United States Bankruptcy Code.
Notwithstanding the literal language of the Indentures, the Company
believes, however, that no such Event of Default should occur
because the language set forth in the Indentures does not reflect
the intention of the Company and the representatives of the Plan
Debt who negotiated such provisions and accordingly that no
acceleration of the Notes should occur on such quarterly date.
Utilizing the Company's view that the agreement of the parties is
not reflected in the language of the Indentures and that the
Indentures should be reformed to set forth quarterly Mandatory
Minimum thresholds for each fiscal quarter, the Company
nevertheless currently believes, based upon current cash flow
projections (which are subject to change), that it will not
generate sufficient Net Cash Flow to satisfy such reformed
quarterly Mandatory Minimums at the quarter ended August 31, 1995.
In order to meet the Company's anticipated shortfall, the Company
must obtain a waiver, refinance its existing Plan Debt, or obtain
additional sources of financing including those described below.
If the Company cannot satisfy the Mandatory Minimum thresholds at
the quarter ended August 31, 1995, on such date an Event of Default
would occur under the Indentures, which in turn could cause an
acceleration of such Notes as described above. Should such
acceleration under the Indentures occur, the Company, absent other
financing arrangements, may be forced to seek protection under
chapter 11 of the United States Bankruptcy Code. As more fully
described in Note 10, the Company has entered into letters of
intent to combine the Company with The Actava Group Inc., MCEG
Sterling Inc., and Metromedia International Telecommunications,
Inc. A condition to consummation of the Proposed Transaction is
the refinancing of all the Company's Plan Debt and its remaining
obligations to the Banks and to Sony, so as to ease the cash flow
burden on the surviving company of the proposed merger and avoid an
Event of Default and possible acceleration of the Notes pursuant to
the Indentures. There can be no assurance that this proposed
refinancing or the Proposed Transaction will be consummated.
<PAGE>
Page 28
As previously discussed herein, the Company anticipates net losses
for financial reporting purposes for fiscal 1995, however, the
Company believes it will have sufficient liquidity to meet its
obligations through fiscal 1995 except for its obligations to the
Banks and Sony. Such obligations became guaranteed obligations
under the Bank Guarantee as described above.
The Company continues to exploit its existing library of product in
order to generate Net Cash Flow. The Company is also actively
pursuing a number of steps aimed at improving its operating results
to date and increasing its Net Cash Flow by acquiring or producing
new product. Since the Effective Date, the Company has been able
to acquire some new product with nonrecourse financing. In order
to further exploit its existing distribution apparatus, the Company
will continue to actively seek to attract the requisite nonrecourse
financing to fund the acquisition and distribution costs of new
theatrical and home video product, which would be distributed by
the Company through its distribution system. In addition, the
Company will pursue additional nonrecourse financing for the
production of new product, which the Company is also permitted to
engage in under the Plan on a nonrecourse basis or through certain
unrestricted subsidiaries. If the Company is successful in
obtaining nonrecourse financing as described above, the
contribution to the Company's liquidity will generally be in the
form of a distribution fee. In addition to the Proposed
Transaction described above, the Company continues to consider its
alternatives in connection with the anticipated payment shortfall
to the holders of the Plan Debt including other restructuring or
refinancing of such Plan Debt. Despite these intentions, there can
be no assurance that any transaction, restructure or refinance is
consummated or that the Company will be able to generate sufficient
Net Cash Flow to avoid an Event of Default under its Indentures in
fiscal 1996.
<PAGE>
Page 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
1. The Chapter 11 Cases and Related Proceedings
The Company is, and will continue to be, a party to numerous
contested matters and adversary proceedings pending against it in
the Bankruptcy Court seeking a variety of forms of relief,
including, without limitation, motions (a) to determine
classification and treatment of certain tax shelter claims, (b) to
approve settlements and compromises, and (c) to allow or disallow
claims. Other matters and claims may be referenced in the
Disclosure Statement filed by Debtors with the Bankruptcy Court on
July 24, 1992, as amended, and approved by such Court by order
dated September 8, 1992. The Company also has the right to file
such motions or actions as may be necessary to implement and
enforce the terms of the Plan.
Pursuant to section 362 of the Bankruptcy Code an automatic stay
went into effect when the Debtors commenced their chapter 11 cases.
The automatic stay halts, among other things, all pending
litigation and prevents the commencement of all judicial,
administrative or other proceedings against the debtor that were or
could have been commenced before the commencement of the bankruptcy
case. Pursuant to paragraph 35 of the Confirmation Order, any
action which had been stayed by operation of section 362(a) of the
Bankruptcy Code continues to be stayed pursuant to sections 1141(d)
and 105(2) of the Bankruptcy Code.
The Litigation-Based Claims
Mace Neufeld Productions, Inc. and Mace Neufeld v. Orion Pictures
Corporation, et al., (United States District Court, Central
District of California, Civ. Action No. CV-85-7149-ER (Bx)); Mace
Neufeld Productions, Inc. and Mace Neufeld v. Orion Pictures
Corporation, et al., (Los Angeles County Superior Court, Western
District, Case No. WEC 100794). The Bankruptcy court has approved
a stipulation of settlement executed by the Company, Mace Neufeld
Productions, Inc., Mace Neufeld and Fidelity and Deposit Company of
Maryland settling the claims at issue and releasing claims between
and among the various parties to the settlement. The settlement
included, inter alia, the following: (i) the Company's allowance of
a single general unsecured claim within Class 7 of the Plan in the
amount of $740,000; (ii) the Company's allowance of a single
general unsecured claim within Class 6 of the Plan in the amount of
$250,000; and (iii) a cash payment by Fidelity and Deposit Company
of Maryland to Mace Neufeld Productions, Inc. and Mace Neufeld in
the amount of $593,000.
Hemdale Film Corporation v. Orion Pictures Corporation, (Los
Angeles County Superior Court, Case No. RCO12594). The Bankruptcy
Court has adjourned the claim estimation to January 17, 1995.
Settlement negotiations are ongoing.
Pacific Western Productions, Inc., et al. v. Hemdale Film
Corporation and Orion Pictures Corporation, et al., (Los Angeles
County Superior Court, Case No. RCO12873). The Bankruptcy Court
has adjourned the claim estimation to January 17, 1995.
Paradise Films, Inc. v. Orion Pictures Corporation and Orion
Pictures Distribution Corporation, (Los Angeles County Superior
Court, Case No. BC 038330). The Bankruptcy Court has approved a
stipulation of settlement settling the claims at issue and
releasing claims between and among the various parties to the
settlement. The settlement included, inter alia, the Company's
allowance of a
<PAGE>
Page 30
single general unsecured claim within Class 7 of the Plan in the amount
of $20,000.
Sharon Badal v. Orion Pictures Corporation, (United States
District Court, Southern District Court, Southern District of New
York, Case No. 91 Civ. 4288). The Bankruptcy Court has adjourned
the claim estimation to January 17, 1995.
Bruno Damon v. Orion Pictures Corporation, Island Helicopter
Leasing Corporation and A.G.S. Realty Holding Corp., (N.Y. Sup. Ct.
Index No. 34167/91) (the "Damon Action"). The Bankruptcy Court has
adjourned the claim estimation to January 17, 1995. Settlement
negotiations are ongoing.
Antitrust and Similar Proceedings - Joseph Soffer d/b/a Cine
1-2-3-4 v. Orion Pictures Distribution Corporation, et al., (United
States District Court for the District of Connecticut). The
Bankruptcy Court has adjourned the claim estimation to January 17,
1995. The Movie v. Orion Pictures Distribution Corporation, Orion
Classics, et al., (United States District Court for the Northern
District of California, Case No. C86-203-90RPA). The Bankruptcy
Court has adjourned the claim estimation to January 17, 1995.
The Derivative Action
Harvey Cooper, Derivatively on behalf of Orion Pictures
Corporation, Plaintiff, v. John W. Kluge, Stuart Subotnick,
Metromedia Company, a Partnership, and Does 1 through 100
Inclusive, Defendants, and Orion Pictures Corporation, Nominal
Defendant, Case No. SC016674 (Super. Ct. of Cal., L.A. Co.) (filed
April 27, 1993) (the "Cooper Action"). On or about May 31, 1994,
Cooper filed a Notice of Appeal to the United States Court of
Appeals for the Second Circuit (the "Court of Appeals"). On or
about July 26, 1994, the Company moved to dismiss Cooper's in
propia persona appeal upon the grounds that: (i) pursuant to the
Court of Appeals' prior rulings, Cooper, as a disbarred California
attorney, is disqualified from pursuing the appeal; and (ii)
Cooper was not represented by a member of the Bar of the Court of
Appeals. On September 7, 1994, the Court of Appeals granted the
Company's motion and dismissed Cooper's appeal. Mandate issued on
September 8, 1994.
Other Claims Issues
The Company filed numerous claims objections with the Bankruptcy
Court, both prior to and after the Effective Date of the Plan.
Most of those objections have been granted by the Bankruptcy Court
or consensually resolved, but certain disputes remain outstanding
and ultimately will be disposed of through negotiations or
contested hearings before the Bankruptcy Court. The Company
believes that the disposition of the disputed claims will not have
a material adverse effect on its consolidated financial position or
results of operations.
2. Shareholder Actions Arising Out of Proposed Transaction
Jerry Krim v. John W. Kluge, Silvia Kessel, Joel R. Packer,
Michael I. Sovern, Raymond L. Steel, Stuart Subotnick, Arnold C.
Wadler, Stephen Wertheimer, Leonard White and Orion Pictures
Corporation, (Delaware Chancery Court, C.A. No.13721). The Company
and each of its directors has been named as a defendant in a
purported class action lawsuit which alleges that although the
Company's Board of Directors have not yet considered the Proposed
Transaction, that the directors have failed to use the required
care and diligence in considering the Proposed Transaction, and
seeks to enjoin the Proposed Transaction. The lawsuit further
alleges that as a result of the actions of the Company's directors,
the Company's shareholders will not receive the fair value of the
Company's assets and business in exchange for their Orion stock, in
the Proposed Transaction. The Company and its directors have
obtained an extension of time to answer the complaint. The answer
is currently due
<PAGE>
Page 31
on January 18, 1995.
James F. Sweeney, Trustee of Frank Sweeney Defined Benefit Plan
Trust v. John D. Phillips, Frederick B. Beilstein, III, John E.
Aderhold, Michael B. Cahr, J. M. Darden, III, John P. Inlay, Jr.,
Clark A. Johnson, Anthony F. Kopp, Richard Nevins, Carl E. Sanders,
Orion Picture Corporation, International Telcell, Inc., Metromedia
International, Inc. and MCEG Sterling Inc. (Delaware Chancery
Court, C.A. No. 13765). The Company is a defendant in this class
action lawsuit which was filed by shareholders of the Actava Group
Inc. against Actava and its directors as well as the Company. The
Complaint alleges that the terms of the Proposed Transaction
constitute an overpayment by Actava for the assets of the Company
and it seeks to enjoin the Proposed Transaction. The complaint
further alleges that the Company knowingly aided, abetted and
materially assisted Actava's directors in breach of their fiduciary
duties to Actava's shareholders. The Company has obtained an
extension of the time to answer the complaint, such extension can
be terminated with 30 days notice.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the third quarter of the fiscal
year ended February 28, 1995 to a vote of the holders of the
Company's Common Stock, through the solicitation of proxies or
otherwise.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.26 - Loan agreement dated as of October, 1994 between the
Company and Metproductions, Inc.
11 - Statement Re: computation of per-share earnings.
(b) Reports on Form 8-K
The Registrant filed no Current Reports on Form 8-K during the
fiscal quarter for which this Quarterly Report on Form 10-Q is
filed.
<PAGE>
Page 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ORION PICTURES CORPORATION
(Registrant)
Dated: January 17, 1995 \s\ Cynthia A. Friedman
Cynthia A. Friedman
Senior Vice President and
Chief Financial Officer
<PAGE>
Page 33
EXHIBIT 11
ORION PICTURES CORPORATION
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per-share amounts)
- ------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
November 30, November 30,
- ------------------------------------------------------------------------------
1994 1993 1994 1993
- ------------------------------------------------------------------------------
Net loss $ (4,845) $ (5,441) $ (33,229) $ (52,495)
======== ======== ========= =========
Weighted average number
of shares outstanding 20,000 20,000 20,000 20,000
====== ====== ====== ======
Loss per common share $ (0.24) $ (0.27) $ (1.66) $ (2.62)
======= ======= ======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1995
<PERIOD-END> NOV-30-1994
<CASH> 13,977
<SECURITIES> 0
<RECEIVABLES> 79,380
<ALLOWANCES> 12,000
<INVENTORY> 273,468
<CURRENT-ASSETS> 0
<PP&E> 1,888
<DEPRECIATION> 96
<TOTAL-ASSETS> 385,164
<CURRENT-LIABILITIES> 0
<BONDS> 217,617
<COMMON> 5,000
0
0
<OTHER-SE> 3,574
<TOTAL-LIABILITY-AND-EQUITY> 385,164
<SALES> 44,265
<TOTAL-REVENUES> 44,265
<CGS> 36,691
<TOTAL-COSTS> 36,691
<OTHER-EXPENSES> 5,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,604
<INCOME-PRETAX> (4,645)
<INCOME-TAX> 200
<INCOME-CONTINUING> (4,845)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,845)
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
EXHIBIT 10.26
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Loan Agreement") dated
as of October , 1994 between Orion Pictures Corporation, a
Delaware corporation (hereinafter referred to as "Orion")
and MetProductions, Inc., a Delaware corporation (herein-
after referred to as "MetProductions").
W I T N E S S E T H :
WHEREAS, Orion and Streamline Enterprises, Inc.
d/b/a Streamline Pictures ("Streamline") have entered into
that certain Deal Memorandum attached hereto as Exhibit A
(the "Agreement") dated as of August 1, 1994 in connection
with the exclusive home video distribution rights in the
United States and Canada for all of the current and future
titles in the Streamline library (the "Films"). Capitalized
terms used herein and not otherwise defined shall have the
meanings assigned thereto in the Agreement.
WHEREAS, pursuant to the terms of the Distribution
Agreement, Orion agreed to advance and guarantee to Stream-
line up to One Million and 00/100 Dollars ($1,000,000).
WHEREAS, in connection with the Distribution
Agreement, Orion has requested and MetProductions has agreed
to loan to Orion up to the sum of One Million and 00/100
Dollars ($1,000,000).
NOW, THEREFORE, in consideration of the premises
and of the mutual covenants and agreements hereinafter set
forth, the parties hereto agree as follows:
1. THE LOAN.
1.1 Loan. Subject to the terms and conditions
set forth herein, upon the execution hereof, MetProductions
shall loan to Orion up to the principal sum of up to One
Million and 00/100 Dollars ($1,000,000) (the "Loan"). The
Loan shall be payable in accordance with the provisions of
the Agreement relating to the advance and guarantee of Gross
Receipts made by Orion to Streamline.
1.2 Note. The Loan shall be evidenced by a prom-
issory note of Orion in the principal amount of One Million
and 00/100 Dollars ($1,000,000) and in the form attached
hereto as Exhibit B.
1.3 Payments Generally. All payments of prin-
cipal and interest, or any other amount payable hereunder,
shall be made to MetProductions at its address set forth
under its name on the signature page hereof in immediately
<PAGE>
Page 2
available funds by wire transfer in accordance with the
instructions set forth on the signature page hereto. Upon
payment in full of the Loan hereunder, MetProductions will
surrender to Orion such Note duly marked cancelled and
terminate any security interest. Orion may prepay, in whole
or in part, without premium or penalty the principal amount
of the Loan and any accrued interest on the Loan at any time
notwithstanding the accounting terms set forth in Sec-
tion 1.5 below.
1.4 Interest. Orion will pay interest on the
principal amount of the Loan from the date of such loan
until the Loan is paid in full hereunder, at a rate per
annum equal to Ten Percent (10%). Interest shall be calcu-
lated on the basis of a 360-day year for the actual number
of days elapsed.
1.5 Repayment of Loan. The Loan and all accrued
interest thereon shall be payable upon commencement of prin-
cipal photography of the Film or upon the sale of the Film
project to a third party.
2. SECURITY.
2.1 Security. As security for the punctual
payment in full of the Loan and all accrued interest
thereon, and other amounts payable hereunder or any other
agreement or by operation of law or otherwise, relating to
the transactions described herein, Orion hereby grants to
MetProductions a first priority lien on and security
interest in all of Orion's right, title and interest in the
distribution rights to the Films acquired pursuant to the
terms of the Distribution Agreement but only to the extent
necessary to secure MetProductions' right to receive pay-
ments under this Loan Agreement (the "Collateral"). The
security interest hereby created shall attach immediately on
the execution of this Loan Agreement by MetProductions and
Orion. Concurrently with the execution of this Loan Agree-
ment (or within a reasonable time thereafter), the parties
hereto shall execute and file the Mortgage of Copyright and
Security Agreement (the "Security Agreement") attached
hereto as Exhibit C and any UCC Financing Statement(s)
required to perfect the security interest created by this
Loan Agreement and the Security Agreement.
3. EVENTS OF DEFAULT.
3.1 Each of the following shall constitute an
Event of Default:
(a) the failure of Orion to pay
MetProductions in accordance with Section 1.5 hereof within
<PAGE>
Page 3
three (3) business days after notice from MetProductions
that such amount is due.
(b) the filing by Orion of a voluntary
petition for relief under any federal or state bankruptcy or
insolvency law, or the commencement by Orion of any other
voluntary proceeding or other action, proceeding or other
action in bankruptcy, or the filing of any involuntary
petition against Orion under any federal or state bankruptcy
law.
3.2 If any Event of Default shall occur,
MetProductions may, at its sole option and without notice,
declare the entire principal amount loaned to Orion in
accordance with this Loan Agreement and the Note to be due
and payable in accordance with the terms and conditions of
this Loan Agreement and the Note.
3.3 If any Event of Default shall occur,
MetProductions shall be entitled to exercise all of the
rights, powers and remedies permitted by law, including
without limitation, all rights and remedies of a secured
party of a debtor in default under the Uniform Commercial
Code in effect in the State of New York for the protection
and enforcement of its rights in respect of the Collateral.
4. REPRESENTATIONS AND WARRANTIES OF ORION.
Orion hereby represents and warrants to
MetProductions that:
4.1 Orion has the right to enter into this Loan
Agreement and to grant and assign to MetProductions the
interest in the Films herein granted.
4.2 The execution, delivery and performance of
this Loan Agreement have been duly authorized by all neces-
sary action of Orion and do not and will not contravene or
conflict with any corporate or fiduciary obligation Orion
has to its shareholders, including but not limited to, the
terms or provisions of Orion Pictures Corporation's By-Laws
or Orion Pictures Corporation's Restated Certificate of
Incorporation. This Loan Agreement constitutes the legally
valid and binding obligations of Orion and is enforceable
against Orion in accordance with its terms.
4.3 The execution, delivery and performance of
this Loan Agreement will not result in a breach of or
constitute (with due notice or lapse of time or both) a
default under any agreement, undertaking or other instrument
to which Orion is a party or by which it may be bound or
affected.
<PAGE>
Page 4
4.4 To the best of Orion's knowledge and except
as disclosed in Orion Pictures Corporation's Annual Report
on Form 10-K for the fiscal year ended February 28, 1994,
and those quarterly reports on Form 10-Q filed up to and
including the date hereof, there is no action, suit or
proceeding pending or threatened against or affecting Orion,
or the Film which, if adversely determined, would materially
affect Orion's ability to perform this Loan Agreement.
4.5 Orion agrees to use its reasonable commercial
efforts, consistent with good business practices, in arrang-
ing for the production, distribution and exploitation and/or
causing the distribution and/or exploitation of the Films as
herein provided.
4.6 Orion agrees to provide MetProductions with
statements of the production (to the extent applicable) and
distribution costs and expenses in connection with the
Films, if any, on a reasonable basis but not less than semi-
annually.
4.7 Orion agrees to maintain records pertaining
to the production (to the extent applicable) and distribu-
tion of the Films. MetProductions shall have the right upon
reasonable notice to Orion to inspect such records until
repayment of the Note in full.
5. ACKNOWLEDGMENT OF METPRODUCTIONS.
5.1 MetProductions acknowledges and agrees that
Orion makes no representation, warranty, guarantee or agree-
ment as to the amount of any proceeds of the Films which may
be derived from the production, distribution, exhibition or
other exploitation thereof, nor does Orion guarantee the
performance by any distributor, sub-distributor, sub-
licensee and/or agent of the Films.
5.2 Orion shall have the right to select distrib-
utors, sub-distributors, sub-licensees, and/or agents upon
such terms and conditions as Orion may determine, consistent
with its past business practices and with the customs and
practices of the motion picture industry in general, in con-
nection with the distribution, exhibition or other exploita-
tion of the Films.
6. INDEMNIFICATION.
6.1 Orion agrees, at its own expense, to defend,
indemnify and hold MetProductions, its affiliates, its
assignees and licensees, harmless from and against any and
all loss, damage, liability and expense (including without
limitation, reasonable attorneys' fees and costs) which may
be suffered or incurred by MetProductions, its assignees or
<PAGE>
Page 5
licensees, as the result of (i) any material breach or
default of any of the representations, warranties, covenants
or agreements made by Orion hereunder, (ii) any material
breach or default of any agreement whatsoever entered into
by Orion in connection with the Films or (iii) any claim
arising out of, or related to, the production, distribution,
or other exploitation of the Films.
7. MISCELLANEOUS.
7.1 This Loan Agreement shall be construed in
accordance with and interpreted under the laws of the State
of New York governing agreements which are wholly executed
and performed therein.
7.2 Wherever provision is made in this Loan
Agreement for the giving of any notice, such notice shall be
in writing and shall be deemed to have been duly given if
mailed by first class United States mail, postage prepaid,
addressed to the party entitled to receive the same or
delivered personally to such party at the address specified
below or by facsimile (receipt confirmed) to such party:
If to MetProductions to:
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, New Jersey 07073
Attention: General Counsel
Telecopy No.: (201) 531-2803
If to Orion:
Orion Pictures Corporation
1888 Century Park East
Los Angeles, California 90067
Attention: General Counsel
Telecopy No.: (310) 282-9902
or to such other address as either party hereto shall have
last designated by notice to the other party. Notice shall
be deemed to have been given three days following the date
on which such notice was so mailed or on the date such
notice was delivered personally or by facsimile.
7.3 This Loan Agreement may be executed by one or
more of the parties to this Loan Agreement on any number of
separate counterparts and all of said counterparts taken
together shall be deemed to constitute one and the same
instrument.
7.4 Each party shall execute and deliver to the
other party from time to time all such other agreements,
<PAGE>
Page 6
instruments and other documents (including without limita-
tion all requested financing and continuation statements)
and do all such other and further acts and things as the
requesting party may reasonably request in order further to
evidence or carry out the intent of this Loan Agreement.
7.5 This Loan Agreement represents the entire
agreement between the parties hereto with respect to the
subject matter hereof and supersedes all previous represen-
tations, understandings or agreements, oral or written,
between the parties, with respect to the subject matter
hereof.
7.6 If any inconsistencies between the terms and
conditions of this Loan Agreement and the Distribution
Agreement are deemed to exist, the terms and conditions of
the latter agreement shall govern.
IN WITNESS WHEREOF, the parties hereto have
executed this Loan Agreement as of the date and year first
above written.
MetProductions, Inc.
By:
Arnold L. Wadler,
Senior Vice President
Orion Pictures Corporation
By:
Leonard White, President
<PAGE>
EXHIBIT B
PROMISSORY NOTE
$1,000,000.00 New York, New York
October, 1994
FOR VALUE RECEIVED, Orion Pictures Corporation, a
Delaware corporation ("Borrower"), promises to pay to the
order of MetProductions, Inc. ("Lender") or its assigns, up
to the principal sum of $1,000,000.00 in accordance with the
terms of the Loan Agreement between Borrower and Lender of
even date herewith (the "Loan Agreement"); together with
accrued interest on the unpaid principal balance from the
date herewith at the annual rate of Ten (10%) percent. All
payments of principal and interest shall be made at Lender's
offices located at One Meadowlands Plaza, East Rutherford,
New Jersey 07073-2137, Attention: Accounting Department, or
at such other address provided to Borrower, in writing, from
time to time by the holder of this Note.
All capitalized terms used herein and not other-
wise defined shall have the meanings assigned thereto in the
Loan Agreement.
If any Event of Default specified in the Loan
Agreement shall occur, then the holder of this Note can
declare the entire unpaid principal amount of this Note,
together with interest accrued thereon, to be immediately
due and payable and such holder will have all of the rights
and remedies set forth in the Loan Agreement.
Borrower hereby waives presentment, demand for
payment, notice of default, dishonor or nonpayment, protest
and notice of protest and all other demands and notices in
connection with the delivery, acceptance, performance or
enforcement of this Note.
This Note shall be governed by and construed in
accordance with the laws of the State of New York, without
reference to the conflict of laws principles thereof.
IN WITNESS WHEREOF, Borrower has executed and
delivered this Note on the ____ day of October, 1994.
ATTEST: Orion Pictures Corporation
______________________ By:__________________________
Secretary Leonard White, President
<PAGE>
EXHIBIT C
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Security Agree-
ment") is made and entered into as of October , 1994
between Orion Pictures Corporation, a Delaware corporation
(the "Debtor"), with offices located at 1888 Century Park
East, Los Angeles, California 90067 and MetProductions,
Inc., a Delaware corporation (the "Secured Party") with
offices of c/o Metromedia Company, One Meadowlands Plaza,
East Rutherford, New Jersey 07073.
R E C I T A L S :
WHEREAS, pursuant to that certain Distribution
Agreement dated as of August 1, 1994 between Debtor and
Streamline Pictures (such agreement as it may be amended,
modified, supplemented, replaced, renewed or superseded from
time to time is herein referred to as the "Agreement"),
Debtor acquired the exclusive distribution rights to all
films in the Streamline library and all films to be produced
or which are acquired in the future (the "Films"). Capi-
talized terms used herein and not otherwise defined shall
have the meanings assigned thereto in the Agreements.
WHEREAS, the Debtor and Secured Party have entered
into that certain Loan Agreement of even date herewith (the
"Loan Agreement"). Pursuant to the Loan Agreement, Secured
Party has agreed to loan (the "Loan") to Debtor up to the
sum of One Million and 00/100 Dollars ($1,000,000).
In consideration of the promises and mutual
covenants herein contained and for other good and valuable
consideration the receipt of which is hereby acknowledged,
and in order to induce the Secured Party to enter into the
Loan Agreement, the parties hereto hereby agree as follows:
7.7 GRANT OF SECURITY INTEREST.
(a) Grant. Debtor hereby mortgages, hypo-
thecates, grants and assigns to Secured Party as security
for the Secured Obligations and Rights (as such term is
defined in subparagraph 1(b) below) a continuing first
priority security interest in and to all of Debtor's right,
title, and interest of every kind and nature in and to (but
none of Debtor's obligations with respect to) all of the
items listed in subparagraph 1(c) below, which items are
hereinafter collectively referred to as the "Collateral."
Notwithstanding anything to the contrary contained herein,
except for the security interest granted hereby and pursuant
to the Copyright Mortgages and Assignments referred to in
subparagraph 1(f) below and the Secured Party's rights and
remedies with respect to such security interests, this
Security Agreement is not intended to and does not grant to
Secured Party any greater rights in the Films than granted
to Debtor pursuant to the Agreement.
(b) Purpose of Grant. The security interest
in the Collateral granted to the Secured Party pursuant
hereto and pursuant to the Copyright Mortgages and Assign-
ments is being granted to secure the Secured Obligations and
Rights. The term "Secured Obligations and Rights" shall
mean and include (i) the full and timely payment and perfor-
mance by Debtor when due of all of Debtor's agreements,
representations, warranties and covenants, hereunder and
under the Loan Agreement (collectively, the "Debtor Obliga-
tions"), and (ii) the continuing right of the Secured Party
in accordance with all of the terms of the Loan Agreement to
exercise all of the rights of the Secured Party under the
Loan Agreement (collectively, the "Secured Party's Rights")
including, without limitation, the rights of the Secured
Party to (a) exploit the Films pursuant to the terms of the
Agreement, (b) receive, retain and own any sums derived from
or in connection with the exploitation of the Films subject
to the terms and conditions of the Agreement, (c) exercise
the Secured Party's right of access to and use of all Physi-
cal Properties (as herein defined), and (e) enjoy the full
exercise and quiet enjoyment of all rights in connection
with the Films provided for in the Agreement.
(c) Collateral. The term "Collateral," as
used herein shall mean all of Debtor's right, title and
interest of every kind and nature in and to the following
items, whether now owned or in existence or hereafter made,
acquired or created and all product and proceeds thereof:
All of the Debtor's rights under
the Agreement and in all collateral with respect to the
foregoing;
All proceeds and product of the
rights granted to Debtor under the Agreement, including
without limitation, any and all agreements, assignments,
licenses and other instruments or documents of whatsoever
kind and nature (the "Documents") heretofore or hereafter
made or executed which transfer rights in and to the Films
and any amounts, contract rights, chattel paper, documents,
general intangibles and instruments (as defined under the
Uniform Commercial Code of the States of California and
New York) and all money and claims for money (whether or not
such claims to money have been earned by performance)
derived from or arising out of such rights;
All of Debtor's rights to receive
any sums of money under or in connection with the Agreement;
<PAGE>
Page 3
The nonexclusive right to all
common law and statutory domestic and foreign copyrights,
rights and interests in copyrights and renewals and exten-
sions of copyrights, in or relating to the Films (collec-
tively, the "Copyrights"), to the extent that the same are
acquired by Debtor pursuant to the Agreement;
The nonexclusive right to all
tangible personal property and physical properties (the
"Physical Properties") of every kind or nature whatsoever of
or directly relating to the Films to the extent that the
same are acquired by Debtor pursuant to the Agreement
(including all of Streamline's right, title and interest of
whatsoever kind and nature, under copyright and extensions
and renewals thereof, whether statutory or common law, and
otherwise, in and to the Films, and the Documents);
The nonexclusive right to all
literary, dramatic, musical and other material created for
the Films or upon which the same are based or to be based,
in whole or in part, or which are used in connection with
the Films to the extent the same are acquired pursuant to
the terms of the Agreement (including without limitation any
screenplays and the underlying materials upon which such
screenplays are based) and all common law and statutory
domestic and foreign copyrights, and rights and interests in
copyrights and renewals and extensions of copyrights, in and
to said literary, dramatic, musical and other written mate-
rial (the "Literary Properties").
The nonexclusive right to all general
intangibles and contract rights in or relating to all
agreements and understandings (whether or not evidenced in
writing) with third parties relating to the creation,
production and acquisition of the Films to the extent the
same are acquired by Debtor pursuant to the terms of the
Agreement, including without limitation all agreements and
understandings with third parties producing the Films or
furnishing services and/or rights relating to the develop-
ment, production, completion, delivery and/or acquisition of
Films or to any of the Physical Properties, Literary Prop-
erties or Copyrights.
Notwithstanding the foregoing, Secured Party's security
interest in the Collateral described in subparagraphs (ii)
through (vii) above (the "Secondary Collateral") is a
nonexclusive (except as provided for in subparagraph (iv))
security interest and is limited to Debtor's right, title
and interest in and to such Collateral solely to the extent
provided in the terms and conditions of the Agreement.
(d) Rights of Secured Party. With respect
to the security interests hereby granted to Secured Party
<PAGE>
Page 4
and granted to the Secured Party pursuant to the Copyright
Mortgages and Assignments, Secured Party and any of its
successors or assignees shall at all times be entitled to
exercise in respect of the Collateral all of the rights,
remedies, powers and privileges available to a secured party
under all applicable laws, including without limitation, the
United States Copyright Act, the Uniform Commercial Code of
the States of California and New York in effect at the time
which shall be applicable for the purpose of establishing
the relative rights of Secured Party and of Debtor, and to
those procedures to be followed thereunder in the event this
subparagraph 1(d) shall become operative, including the
right to sell the Collateral or any portion thereof, and, in
addition thereto, to the rights and remedies provided for
herein and under the Loan Agreement and to such other rights
and remedies as may be provided by law or in equity.
(e) Exercise of Rights. Secured Party
shall not exercise any of its rights hereunder in any manner
that would interfere with the production, completion,
delivery or exploitation of the Films (so long as the
exploitation of the Films does not violate the Secured
Party's rights). Subject to the immediately preceding
sentence, Secured Party or any of its successors or
assignees shall be entitled to exercise any or all of the
rights granted hereunder with respect to the Collateral in
the event Debtor (or any person or entity acting on Debtor's
behalf or in its place and stead) (i) rejects or attempts to
reject or wrongfully terminates or wrongfully disaffirms the
Agreement, the Loan Agreement or this Security Agreement or
(ii) breaches or defaults, in any respect that would
substantially prevent, hinder, impair, infringe or delay
Secured Party's enjoyment of the Secured Party's Rights, in
the payment or performance of any of the Secured Obligations
and Rights and fails to remedy such breach or default within
30 days after receipt of written notice thereof from Secured
Party if such breach or default is capable of being cured
within such time period. If the Debtor shall breach any of
its material obligations under the Loan Agreement, the
Agreement or this Security Agreement, the Secured Party,
after giving notice of its intention to do so, may take any
reasonable action which it may deem necessary for the
maintenance, preservation, and protection of any of the
Collateral or its security interest therein.
(f) Further Documents. Debtor hereby
agrees to execute and deliver to Secured Party all such
financing statements or similar documentation for all
jurisdictions designated by Secured Party (collectively, the
"Financing Statements"), one or more Copyright Mortgages and
Assignments in form and substance reasonably satisfactory to
Secured Party, and such other documents, agreements or
instruments as Secured Party shall reasonably request and
<PAGE>
Page 5
are reasonably required to better perfect, protect, evi-
dence, renew and/or continue the security interest in the
Collateral granted hereunder and/or to effectuate the pur-
poses and intents of this Security Agreement (collectively,
the "Security Documents"), to file, register and/or record
the same under (i) the Uniform Commercial Code, and all
other similar applicable laws of the States of California
and New York and under the laws of any other jurisdiction
where such filing, registration and/or recordation may
reasonably be required by Secured Party, and (ii) the United
States Copyright Act. If after the occurrence and during
the continuance of any of the events specified in the second
sentence of subparagraph 1(e) hereof Debtor fails to execute
and deliver to Secured Party any of the Financing State-
ments, the Copyright Mortgages and Assignments, or any other
Security Documents on request of Secured Party, Debtor
hereby appoints Secured Party its irrevocable attorney-in-
fact to sign any such document for Debtor, and agrees that
such appointment constitutes a power coupled with an inter-
est and is irrevocable throughout the Term of the Agree-
ments, the Loan Agreement and this Security Agreement;
provided, however, that Secured Party shall be liable to
Debtor and Debtor's successors, licensees and assigns for
any damages resulting from inaccuracy or failure to conform
to this Security Agreement in any Financing Statement,
Copyright Mortgage and Assignment or other Security Document
so signed by Secured Party as Debtor's attorney-in-fact.
Debtor hereby authorizes the Secured Party to file one or
more financing or continuation statements, and amendments
thereto, relative to all or any part of the Collateral
without the signature of the Debtor where permitted by law.
A carbon, photographic or other reproduction of this Secu-
rity Agreement or any part thereof shall be sufficient as a
financing statement where permitted by law.
(g) Term of Security Interest. The security
interest created hereunder and under the Copyright Mortgages
and Assignments shall commence as of the date of this Secu-
rity Agreement and shall terminate upon the expiration of
the Term of Secured Party's Rights under the Loan Agreement,
at which time Secured Party, on Debtor's request and without
further consideration, shall execute and deliver to Debtor
termination statements releasing and terminating the
Financing Statements, the Copyright Mortgages and Assign-
ments, and the other Security Documents, all without
recourse upon or warranty by Secured Party and with filing
thereof at the sole cost and expense of Debtor.
(h) Priority of Security Interest. The
security interest by Secured Party in and to the Collateral
shall be a first priority security interest.
<PAGE>
Page 6
(i) Continuing Security Interest. This
Security Agreement shall create a continuing security
interest in the Collateral and shall (a) be binding upon the
Debtor, its successors and assigns and (b) inure to the
benefit of the Secured Party and its successors, transferees
and assigns.
7.8 DEBTOR'S WARRANTIES AND REPRESENTATIONS
AND AGREEMENTS.
Debtor confirms, warrants and represents to
Secured Party as follows, which such confirmations, repre-
sentations and warranties shall be deemed to be continuing
until the termination of the Secured Party's security inter-
est hereunder: (a) Debtor has the right to enter into this
Security Agreement and execute and deliver to Secured Party
the Financing Statements, the Copyright Mortgage and Assign-
ment, and the other Security Documents, and (b) Debtor has
not and will not grant or permit to exist on all or any
portion of the Collateral any lien, security interest or
encumbrance (other than the security interest granted by
Debtor to Secured Party hereunder), which does or may in any
way conflict or interfere with or have priority over the
security interest granted by Debtor to Secured Party; pro-
vided, however, that in no event may Debtor grant or permit
to exist on all or any portion of the Collateral described
in subparagraphs 1(c)(i) through (iii) any lien, encumbrance
or security interest, and (c) no agreements, understandings
or other arrangements have been or will be made or entered
into by Debtor which do or may in any way conflict or
interfere with the full, complete and unfettered exercise by
Secured Party of the Secured Party's Rights or any other
rights granted by Debtor to Secured Party in this Security
Agreement or any of the other Security Documents or in the
Loan Agreement. Debtor will not sell, offer to sell,
hypothecate or otherwise dispose of any Collateral
(including proceeds) subject hereto, or any part thereof or
interest therein, except subject to the security interest
granted to Secured Party hereunder.
7.9 EVENTS OF DEFAULT. The occurrence of any one
or more of the following events shall constitute a "Default"
hereunder.
(a) failure of Debtor to perform its obliga-
tions under the Loan Agreement;
(b) any material default by Debtor under the
Loan Agreement or the Agreements;
(c) any person shall levy on, seize, or
attach the Collateral;
<PAGE>
Page 7
(d) any person, including without limita-
tion, Debtor interferes with Secured Party's quiet enjoyment
of Secured Party's rights as a secured party hereunder;
(e) bankruptcy of Debtor.
7.10 GOVERNING LAW. This Security Agreement and
the other Security Documents shall be governed by the laws
of the State of New York applicable to agreements wholly
executed and performed therein, and without giving effect to
the principles of conflict or choice of laws thereof.
7.11 ANY LEGAL ACTION. All of the parties hereto
(a) agree that any legal suit, action or proceeding arising
out of or relating to this Security Agreement may be insti-
tuted in a State or Federal court in the City of New York,
State of New York, (b) waive any objection which they may
have now or hereafter to the County of New York as the venue
of any such suit, action or proceeding, and (c) irrevocably
submit to the non-exclusive jurisdiction of the United
States District Court for the Southern District of New York,
or any court of the State of New York located in the City of
New York in any such suit, action or proceeding and any
summons, order to show cause, writ, judgment, decree, or
other process with respect to any such suit, action or
proceeding may be delivered to Debtor personally outside the
State of New York, and when so delivered, Debtor shall be
subject to the jurisdiction of such court, and amenable to
the process so delivered as though the same had been served
within the State of New York, but outside the county in
which such suit, action or proceeding is pending.
7.12 NOTICES. All notices or other documents
which any party shall be required or shall desire to give to
the other hereunder shall be given in the manner provided
for in the Loan Agreement.
7.13 AMENDMENTS AND WAIVERS. No amendment or
waiver of any provision of this Security Agreement nor con-
sent to any departure by the Debtor herefrom shall in any
event be effective unless the same shall be in writing and
signed by the Secured Party, and then such waiver or consent
shall be effective only in the specific instance and for the
specific purpose for which given.
<PAGE>
Page 8
By signing in the spaces provided below, the
parties hereto have agreed to all of the terms and condi-
tions of this Security Agreement.
DEBTOR:
Orion Pictures Corporation
By:
Leonard White, President
SECURED PARTY:
MetProductions, Inc.
By:
Arnold L. Wadler,
Senior Vice President
